HC maintains overweight rating on Orascom Development stock

ODE stock takes hit due to tourism sector exposure, despite impressive real estate operations

HC Securities and Investment has maintained its overweight rating on Orascom Development Egypt's (ODE) stock on the steep drop in share price, despite the ongoing coronavirus (COVID-19) pandemic.
"Tourism exposure takes a toll on the company's operations and share performance," said Mariam Elsaadany, real estate analyst at HC Securities and Investment. "The company's tourism exposure, about 32% of 2019 revenues and about 30% of 2019 earnings before interest, taxes, depreciation, and amortization (EBITDA), has led to a steep decline in its share price."
Elsaadany noted that share prices are down about 50% year-to-date (YTD) against only about 26% for the EGX30. This is on the back of investor perception that it is amongst the most badly hit by the ongoing pandemic and the restrictive measures taken to combat it.
She said, "Across our coverage, ODE is the company with the highest tourism exposure, which warrants a significant downward revision in 2020e earnings."
Accordingly, Elsaadany expected that the 2020e hospitality revenues and town management to drop by about 56% year-on-year (y-o-y) and about 68% y-o-y, respectively.
Despite the government's 15 May announcement on the reopening of hotels and resorts todomestic tourism, HC remains conservative in their assumptions for 2020e. This is especially as hotels will only be permitted to operate at a maximum capacity of 25% for the remaining months of the second quarter (2Q) of 2020, and at only at 50% by July, which justifies the downward revision in 2020 estimates.
HC expected the real estate sector to suffer further from weak presales due to the outbreak, but believes the risk of a steep increase in cancellations is low.
"We expect demand for the second homes segment to suffer the most, in our view, which affects the real estate operations of ODE's destinations, El Gouna, Makadi, and Fayoum," Elsaadany noted. "We perceive O West as a successful project as it captured EGP 5.31bn in sales since its launch and up to 1Q 2020."
Elsaadany added that HC believes the company's execution capacity on such a large scale project will be tested in 2020e. The brokerage firm also believes O West can capture a decent market share due to the strength of the developer's name and superior West Cairo location.
"Despite our general positive outlook for O West, we expect ODE's total real estate sales to drop about 33% y-o-y in 2020e on the back of lower volumes," Elsaadany said.
HC estimates 2020e-2021e occupancy rates will average about 62% in El Gouna, compared to about 82% in 2019, and about 36% in Taba Heights compared to about 48% in 2019. Average occupancy rates for Fayoum are anticipated at about 27% compared to about 29% in 2019.
HC forecasts a gradual recovery in occupancy rates, following a steep drop in the first half of 2020e, on the back of the government decision to promote local tourism.
This reduces total hospitality revenues by about 56% y-o-y in 2020e, which will then see an increase by about 63% y-o-y in 2021e, mainly on base effect.
"Our forecasts point to total collections of EGP 84.0bn over 2020e–2034e, adjusted for ORHD's share of O West collections, against Capital expenditure (CAPEX) of EGP47.6bn, including New Urban Communities Authority's (NUCA) in-kind stake of O West," Elsaadany said. "Additionally, HC expects total 2020e–2023e revenues of EGP 29.2bn against costs of EGP 21.3bn, implying an average gross profit margin of about 27%."
El Saadany added, "We reduce our target price (TP) by about 33% despite accounting for O West in our valuation and maintain our OW rating. We reduce our TP mainly on the back of lower hospitality and town management estimates. This comes despite including O West in our numbers since the project was launched in 2019, and lower risk free rates on the back of the Central Bank of Egypt's decision to cut interest rate by 300 bps in March."