Palm Hills Developments — Update 16 November 2016

Palm Hills Developments — Update 16 November 2016

Palm Hills Developments

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Palm Hills Developments

Strong sales and improving macro outlook

Interim results

Real estate

16 November 2016

Price

EGP2.96

Market cap

EGP6,835m

£1:EGP19.29

Net debt (EGPm) at 30 June 2016

2,656

Shares in issue

2,309.0m

Free float

51.6%

Code

PHDC

Primary exchange

Cairo

Secondary exchange

London International

Share price performance

%

1m

3m

12m

Abs

22.8

12.1

63.6

Rel (local)

7.1

2.5

18.5

52-week high/low

EGP3.00

EGP1.81

Business description

Palm Hills is a developer of residential property in Greater Cairo and Egypt’s Mediterranean and African Red Sea coasts aimed at high- and middle-income buyers. It has a 60% share in a JV with Accor, which owns three hotels in Egypt, a country club in West Cairo and an undeveloped land bank including acreage in Saudi Arabia.

Next events

FY16 results

February 2017

Analysts

Julian Roberts

+44 (0)20 3077 5748

Andrew Mitchell

+44 (0)20 3077 5700

Palm Hills Developments is a research client of Edison Investment Research Limited

The continued strength of the Egyptian residential property market has supported strong Q3 sales for Palm Hills and further residential project launches to come in Q416 are expected to keep the sales pipeline full in the medium term. Commercial real estate has contributed 10% to net profit over the year so far, a growing share of which is now recurring, and three commercial construction projects are due to be completed in FY17. Management plans to securitise up to EGP2.5bn of receivables to help accelerate construction and possibly to repay the syndicated loan earlier than scheduled. We have decreased our 2016 EBIT forecasts to reflect the accounting changes and delivery mix; our overall valuation is only slightly lower due to the reduced scope of three residential projects.

Year
end

Gross sales*
(EGPm)

Revenue
(EGPm)

EBIT
(EGPm)

NAV/share
(EGP)

P/B
(x)

EPS
(EGP)

P/E
(x)

12/14

3,936

2,126

402

2.73

1.08

0.26

11.5

12/15

6,322

3,602

613

2.73

1.08

0.60

4.9

12/16e

7,134

4,733

863

2.64

1.12

0.22

13.5

12/17e

7,736

4,832

973

2.83

1.04

0.20

15.1

Note: *Gross sales is a measure of the value of properties reserved by customers before cancellations. It is a lead indicator of P&L revenues.

The housing market remains strong

Palm Hills stated that it was the highest-selling Egyptian developer in Q3, with EGP2bn of new sales, helped by a strong summer for its North Coast projects. Cancellations were at 8%, below our assumed long-term average of 10%, confirming that the Q2 spike was temporary. The rate of new sales is running ahead of management’s 2016 target of EGP7bn, with further launches to come in Q416 and Q117. In the longer term, the project pipeline is strong and the decision by the Egyptian Central Bank to allow the Egyptian pound to float is likely to be good for the wider economy (see page 3), improving demand for quality housing, although investment in real estate as an inflation hedge may decline.

Reported profit affected by mix and accounting

Although the sales performance was strong, a new revenue recognition method has been adopted in compliance with Egyptian GAAP. This does not affect cash flows, but has deferred some profits to future periods, reducing net profit margins from 20% to 16% in Q316. In addition, 2016 is seeing the delivery of units sold in the aftermath of the 2011 revolution at lower margins than current sales, as well as a higher proportion of apartments being delivered, which have lower margins than houses. Deliveries of units in projects with higher minority interest were also above normal rates. The end of Palm Hills’ tax holiday also had an impact on net profits.

Valuation: Unrecognised value remains

We maintain our previous valuation approach, where we take Q316 reported NAV of EGP2.58 per share and add the potential uplift of EGP1.81 (unchanged) in valuation of undeveloped land and the hotel assets, and then add the NPV of future profits from residential development of EGP1.33 (was 1.60). The decrease in the last component is due to the reduced scale of certain projects and using a slightly higher discount rate. The resulting total valuation is EGP5.73 (was EGP6.14).

Operational progress into a continued strong market

Demand in the upper and middle income brackets of the Egyptian residential property market in which Palm Hills operates remains strong. The company says its own prices have continued to rise, with Q316 land prices up 27% year-on-year and buildings up by 44% for villas and 38% for apartments. Against this favourable background, Palm Hills continues to make strong operational progress, with 9M16 gross sales up 18% (to EGP5.4bn) on the same period last year, reflecting continued strong demand for housing across all regions. Changes in accounting rules (both Egyptian GAAP and IFRS) for revenue recognition have complicated the financial results, although there is no impact on ultimate profitability over time. In addition, shifts in the sales mix meant a greater proportion of deliveries in 9M16 were of units sold at lower prices and margins due to the weak market following the 2011 revolution in Egypt. The changes to our estimates (on an IFRS basis) are modest and we continue to see considerable value to be realised as the company works through its pipeline of developments. In this section, we summarise the underlying trends and operational progress of the group during Q316, leaving a detailed discussion of the financial reporting, complicated by accounting changes, for the financial section.

The housing market remains strong and Palm Hills’ sales particularly benefited from continuing demand for units on the North Coast. Gross new sales reached EGP2bn, the highest of any Egyptian developer in the quarter, according to management.

Net new sales had been affected by an unusually high cancellation rate of 28% in Q2 (8% in Q415 and 12% in Q116), which has now passed. The rate returned to a more normal 8% in Q3. There were two factors behind the cancellation spike. At Capital Gardens, a large new project in East Cairo, some buyers were tempted away by competitive price reductions at a nearby rival project. Management reports that given the ongoing strength of the market it has been able to subsequently re-sell all of the cancelled units at Capital Gardens, mostly at higher prices than the original sales. The other impact on cancellations was driven by the company, which has accelerated its already strict approach to customer late payment/delinquency. In current market conditions this is particularly beneficial, allowing cancelled units to be re-sold at the new, higher market price. Our forecasts assume that cancellation rates remains at a more normal level of 10% (similar to the last three-year average).

Palm Hills continues to build and deliver at an accelerated rate. It delivered 627 completed units to customers in Q316, up 51% from 415 in Q315, and all construction works are reported to be on schedule, with no delays to expected rates of completion in this or following years. Management expects to maintain its accelerated building programme, delivering 1,800 units in 2016, to bring forward revenues and profits, and looks to securitise of up to EGP2.5bn of receivables over three years from Q416 as a means of accelerating the release of cash from this activity. We discuss this in more detail below.

As we discuss in the financials section, accounting changes have reduced the reported EBITDA margin in both GAAP and IFRS terms. This is a timing effect, mainly due to a slower recognition of revenues and profits in respect of land sales, but with no impact on the ultimate profit and no impact on cash flows, some profits have effectively been deferred to future reporting periods. More fundamentally, 9M16 margin was negatively affected by the “first sold/first delivered” policy and a bunching of deliveries of apartments that were sold pre-2011 into a weaker market, resulting in thinner margins.

Masterplans have now been completed for the large 500 feddan co-development project with NUCA in East Cairo (planned launch later in November 2016), and the company is in the final stages of negotiations to acquire 190 feddan in West Cairo from the government. Hacienda Beach on the North Coast is set to launch in early 2017. Management reiterated its sales target of EGP7bn for the year, with over 1,800 units delivered.

In terms of other growth in the land bank, negotiations on the potential 6,000 feddan co-development project in West Cairo with NUCA are continuing and management expects to reach a definitive agreement before year end. Two other land opportunities, in the North Coast area, with a size ranging from 150 to 500 feddan are also under negotiation.

The drive to increase the proportion of profits from recurring revenue streams and commercial real estate towards c 25% by 2020 continues. Activities other than residential construction and development contributed 10% of net profits in 9M16. Sales of commercial units in the Village Gardens Katameya Mall generated EGP226m of revenue; profit levels will be known at the time of delivery next year. Additionally, membership of the Palm Club has increased by c 900 in the year to date, with an increase in the one-off joining fee to EGP150k from EGP100k. There is considerable scope for continuing one-off joining fees, with plans to grow membership from the current c 2,200 to c 10,000 by 2020. As the membership base grows, so will the recurring annual subscriptions of EGP5,000 per member. Three commercial construction projects – the Phase 8 office building and malls at Village Gate and Village Gate Katameya – are expected to be finished this year. Indicative interest has been received to rent 70% of the office space, generating around US$1m a year in rent.

Egyptian currency reform

The Egyptian Central Bank announced on 3 November that it would allow the Egyptian pound to float, having previously pegged it to the US$. The immediate effect was for exchange rates offered by major banks to jump by c 45%, from EGP8.88 to around EGP13.00 to the dollar. The decision had been anticipated to some extent, as one of the conditions of a $12bn IMF loan which was granted on 11 November 2016, with $2.75bn to be disbursed immediately. Other conditions included securing $6bn of bilateral loans, reductions in fuel subsidies, introduction of VAT and optimisation of the public sector wage bill, with the aim of reducing fiscal deficits. In the medium and long term a floating currency should be beneficial to the wider Egyptian economy, relieving constraints on international capital flows, allowing importers to buy foreign goods, making Egyptian exports more competitive and bringing currency trading back into the formal banking sector from the black market (Al Jazeera reports that the black market value of the US$ dropped from EGP18.25 to EGP13.00 overnight following the news). In the short term there will be a considerable rise in inflation as energy subsidies are being cut as part of the same reform package. In anticipation of that, the central bank simultaneously raised interest rates by 3% to 14.75%. Other measures include the abolition of a priority list for imports and phasing out monetary funding of the budget deficit.

The rise in inflation, which was already running at 11%, will affect poorer Egyptians the most, although the IMF has pointed out that many prices already reflected black market exchange rates. The impact on Palm Hills’ customers (who are typically in a higher income bracket) will be less, and may potentially reduce the cancellation rate as payment instalments effectively become cheaper. Palm Hills has taken steps to mitigate the effects of inflation on construction costs:

Management has accelerated the construction programme over the last two years, spending EGP4.5bn from 2014 to the present, in anticipation of a significant devaluation of the currency.

Construction materials that can be bought in bulk in advance have been, including steel and copper cabling.

Payment plans have been front-loaded so that customers pay 35% of total costs within the first 12 months.

Prices were increased by 27% on land, 38% on apartments and 47% on the built sections of standalone units in the first nine months of 2016.

The increase in interest rates will have a more direct effect on Palm Hills by making its debt more expensive. Our forecasts anticipate a rise in finance costs by increasing the average cost of debt from 3.5% to 10%. This takes into account the end of the grace period on the EGP2.1bn Arab International Bank loan, as well as the 3% increase in Egypt’s key interest rates. Our forecasts do not yet take into account any refinancing using proceeds from the securitisation of receivables. Funds from the securitisation will be used to pay down the company’s more expensive debt and we will revisit our forecasts once the first tranche has been securitised.

Management has indicated that in the past, c 20-25% of demand for Palm Hill’s units has come from buyers using real estate as a hedge against inflation. Before the currency floated, periodic devaluations were liable to cause sharp inflation shocks. The floating exchange rate will smooth these and potentially reduce pure investment demand for residential housing. However, with 75-80% of demand coming from underlying population trends and an improved outlook for the economy, we do not expect any negative impact on long term demand.

Overall, we expect the floating of the pound to be of benefit to the Egyptian economy and therefore to Palm Hills as well. The share price rose 1.3% after an initial spike (against 3% for the EGX 30 index, in which the largest sector is banking), possibly reflecting the positive nature of the news, but no market expectation of a large immediate impact.

Financials and estimate changes

A look through the accounting noise

As indicated above, operational progress in the period has been partly masked by changes to Egyptian GAAP and the IFRS basis on which our forecasts are based.

The most significant change affecting both IFRS and GAAP is that revenues from the sale of standalone units, including the associated land (typically 50% of the contract value), are recognised on a percentage of completion method; land revenues and profits had previously been recognised up front. The treatment of apartments is essentially the same, although as a practical matter there is a 100% completion hurdle, meaning that all revenue and cost is recognised when the unit is delivered to the customer. It is very important to note that the changes have no impact on cash flows or ultimate profits, but have deferred some profit recognition into the future. The company has provided a full comparison of the 9M16 results under both old and new GAAP for 9M16 and 9M15, which is replicated below. The effects on IFRS numbers will be similar and we await publication of the IFRS accounts in the next few weeks.

Exhibit 1: Palm Hills’ 9M16 results year-on-year comparison under old and new GAAP

EGPm

9M16 new GAAP

9M15 new GAAP

9M16 old
GAAP

9M15 old
GAAP

Y-o-y change under new GAAP

New sales

5,454

4,618

5,454

4,618

18%

Revenue

3,628

2,586

3,833

2,627

40%

Gross profit

1,106

911

1,354

983

21%

Gross profit margin

30%

35%

35%

37%

(5 pp)

EBITDA

700

592

948

665

18%

EBITDA margin

19%

23%

25%

25%

(4 pp)

Net profit before tax and minorities

682

798

930

871

(15%)

Net profit

404

747

593

820

(46%)

Net profit margin

11%

29%

15%

31%

(18pp)

Source: Company data, Edison Investment Research

Sales (or reservations), as referred to above, are unaffected by the accounting change. Revenues grew strongly under both the old and new methods, at 46% and 40% respectively, with the new method effectively deferring some revenue recognition until future periods.

The 9M15 EBITDA margin is restated at 23% or 2pp below the 25% reported under the old method. For 9M16, the margin under the old basis falls 6pp to 19% under the new GAAP. We think this is a reasonable indication of the mix and first sold/first delivered effects detailed above, particularly the delivery of lower margin apartments sold pre-2011. Hence, the unusually low EBITDA margin of 19% recorded on the new basis includes both the accounting change impacts/profit deferral and the mix effects. Management indicates that the mix effects should erode by the year end and we expect that the gross profit margin, on a GAAP basis, will be in the range of 29-32% for the year as a whole and 36% over the medium term.

Not directly related to accounting changes, 9M16 also saw the anticipated increase in the tax rate (there had been a corporate tax holiday until 31 December 2015), as well as an increase in the share of profits attributable to minorities. The latter reflects the current construction and delivery of projects (such as Palm Hills Katameya Extension) that have a higher minority ownership than is the average across the pipeline.

As indicated above, our estimates are on an IFRS basis (the main difference with GAAP is that provisions are taken as part of general and administrative expenses, reducing EBITDA; the PBT and net profit figures are the same under both regimes) and we are now taking the opportunity to shift these from an old to a new IFRS basis. Although a comparison of old and new IFRS similar to the GAAP analysis above is not available for 9M16, we believe the accounting revenue deferral effects will be similar.

Estimate revisions (new IFRS basis)

Looking forward, we have adjusted our estimates for the new accounting method and for the mix of deliveries in 9M16, which is a temporary effect that management expects to finish before 2017. This has reduced our 2016 EBIT and earnings forecasts, reducing cash, with a concomitant effect on NAV. Our new estimates, on the new IFRS basis, are shown in Exhibit 2. We have not yet included the effects of the securitisation of receivables, meaning that the interest rate rise has increased the cost of borrowing in our estimate for 2017, reducing EPS. Once the pricing and quantum of the first tranche of the securitisation are known we will seek to take it into account.

Exhibit 2: Changes to forecasts

Revenue (EGPm)

EBIT (EGPm)

NAV/share (EGP)

EPS (EGP)

Old

New

Change

Old

New

Change

Old

New

Change

Old

New

Change

2016e

4,280

4,733

11%

1,022

863

-16%

2.86

2.64

-8%

0.28

0.22

-21%

2017e

4,318

4,832

12%

970

973

0%

3.07

2.83

-8%

0.21

0.20

-7%

Source: Edison Investment Research

Cash flow and balance sheet

Having accelerated construction and delivery over the past couple of years, management still aims to complete all construction projects that had been started before 2016 by the end of 2017. In addition to faster recognition of revenues and profits (although, as seen in 9M16, some older projects have slimmer margins) this will free management resources to focus on new projects. In cash terms, having paid a c 10% deposit when reserving a property (a sale for Palm Hills), customers typically pay an additional 10% of the value at contract and the balance in instalments over four to seven years. Accelerated construction increases the outflow of cash (to fund construction and land purchases) relative to inflows and has been the main driver for negative operational cash flow at Palm Hills over the past couple of years, despite (or because of) the strong growth in sales.

In the nine months to October, Palm Hills spent EGP1.5bn on construction and received EGP2.3bn in customer payments. However, there was an operating cash outflow as a result of land payments and general and administrative expenses. The cash balance ended the period at EGP929m, similar to the 2015 year-end position of EGP966m. While we await the IFRS figures, the exact net debt number cannot be determined from the GAAP accounts (because the definitions of various balance sheet items differ between the two sets of accounting standards), but we expect it to be in the region of EGP2.8bn (47% of shareholder equity) compared with EGP2,145m (34%) at the end of FY15. Obviously the dividend distribution is a significant factor, but so was the EGP0.5bn increase in working capital to fund construction, which came from a drawdown of credit. We expect positive operating cash flow to emerge in 2017, in line with our previous forecasts.

To improve gearing and bring forward positive cash flow, Palm Hills plans to securitise up to EGP2.5bn of customer receivables attached to units that have already been delivered, beginning with an EGP350-450m bond in Q416. The bond will be without recourse to Palm Hills and is secured on the delivered properties, so there is no construction risk and some security against default for bondholders. From Palm Hills’ perspective, it is a low-risk source of capital and makes use of what is now its largest balance sheet asset (Exhibit 3).

Exhibit 3: Notes receivable as % of assets (IFRS)

Source: Company data, Edison Investment Research. Note: Notes receivable are customer receivables.

We have not yet included the securitisation programme in our estimates, but we believe the likely cost will be in line with our assumed weighted average cost of capital (21%); this is in line with management indications.

Valuation

As set out in our initiation note of 28 April 2016, we look at the valuation of Palm Hills in three stages:

1.

Existing or last reported NAV, which includes undeveloped land and hotel interests carried at book value.

2.

Potential uplift from book value of the undeveloped land and the hotels.

3.

Net present value of the future profits that we expect to emerge from the current and planned development projects.

Reported NAV per share has reduced by EGP0.15 in 9M16, driven largely by the EGP0.15 dividend paid in April. The potential uplift to the carried value of land and hotels as guided by management is given in Exhibit 4, and is unchanged since our initiation note. For undeveloped land we have compared management guidance with recent transactions near each plot to give an estimated market value per square metre and the hotels are valued at replacement cost per room, again using management guidance corroborated with publicly available transaction information.

Exhibit 4: Potential value uplift to Palm Hills’ undeveloped land bank and hotels according to management guidance

Asset

Book value

(EGPm)

Area (000sqm)

Carrying value (EGP/sqm)

Mgmt guided Market value (EGP/sqm)

Mgmt guided market value (EGPm)

Potential Gain (EGPm)

Tax rate (%)

Gain after tax (EGPm)

Gain per share (EGP)

Botanica

212

7,138

30

380

2,712

2,500

22.5%

1,938

0.84

KSA

135

2,550

53

430

1,097

962

22.5%

745

0.32

Galala

58

487

119

1,350

657

599

22.5%

465

0.20

Red Sea

114

92

1,236

1,500

138

24

22.5%

19

0.01

Commercial

859

337

2,548

5,786

1,950

1,091

22.5%

846

0.37

Sub-total

1,378

10,604

9,986

6,555

5,177

4,012

1.74

Hotels

106

318

212

22.5%

164

0.07

Total

1,484

6,837

5,389

4,177

1.81

Source: Company data, Edison Investment Research. Note: *Botanica’s estimated market value assumes obtaining the zoning consent; all other estimated market values are based on the current land conditions without further planning or zoning consents.

Our method for estimating the NPV of future profits remains unchanged but we have increased our discount rate from 18% to 21% to reflect the rise in interest rates. Future profits are not affected by the new accounting treatment as explained above, but the parameters of the calculation have evolved over the period: the scope of the 500 feddan project, Palm Hills largest planned development, has been reduced as the masterplan has been finalised to take account of site topography, reducing the overall value of the project by EGP3.7bn, equivalent to c 12% of estimated future residential construction revenues. Our construction costs are reduced by an equivalent amount, but because the project’s footprint remains the same, our infrastructure cost estimate has not been reduced, so the overall project margin has come down slightly. The much smaller Smart Village Residence will no longer go ahead because the Ministry for Telecommunications has decided it will be exclusively commercial in usage. Hacienda Beach has also been reduced slightly in scope. These effects and the increase in the discount rate used to calculate the NPV to 21% from 18% brings our NPV of future profits to EGP1.33 per share, an overall reduction of 16.8% from EGP1.60 previously. Therefore, our updated value per share including all the components discussed above decreases to EGP5.73 from EGP6.14 (Exhibit 5).

Exhibit 5: Sum of the parts valuation

EGP/share

New

Old

Change

Remarks

NAV per share

2.58

2.73

-5.3%

As reported

Uplift to land values

1.74

1.74

0.0%

Unchanged

Uplift to hotel values

0.07

0.07

0.0%

Unchanged

NPV of future profits

1.33

1.60

-16.8%

Reduced scope of 3 planned projects

Total

5.73

6.14

-6.7%

Source: Company data, Edison Investment Research

Exhibit 6 illustrates the sensitivity of our valuation to different discount rates. For example, if we were to keep our discount rate unchanged at 18%, the corresponding NPV would have been EGP1.42 per share, resulting in an overall valuation of EGP5.81. We note that Bloomberg shows a weighted average cost of capital for Palm Hills of 18.6% as at 8 November 2016.

Exhibit 6: Valuation sensitivity to discount rates

Discount rate (%)

NPV/share of future profits (EGP)

Total value per share (EGP)

22

1.30

5.70

21

1.33

5.73

20

1.36

5.75

19

1.39

5.78

18

1.42

5.81

17

1.44

5.84

Source: Edison Investment Research

No updated NAV data has been published for most of Palm Hills’ peer group since our initiation, so comparison of price to book values is difficult. In Exhibit 7 we show Palm Hills’ share price compared to its four most liquid peers: TMG, 6 October, Madinet Nasr and Amer Group.

Exhibit 7: Palm Hills vs peers

Source: Bloomberg. Note: Rebased to 27 October 2015.

Sensitivities: Largely unchanged

Palm Hills’ sensitivities have changed little since our initiation note although some possible factors are now more immediate, including the launches of new projects, the signing of an agreement with NUCA and the sale of the Saudi land. The successful securitisation of the first tranche of receivables can be added to these. All those factors could see Palm Hills break the close correlation shown to peers in Exhibit 7.

The wider outlook for the Egyptian economy has brightened with the floating of the pound and associated reform measures. That decision also brings closer the potential loan from the IMF announced in August. A staff-level agreement has been reached, which is contingent on IMF board approval and Egypt raising up to $6bn from bilateral partners. The Governor of the Egyptian Central Bank expects to be able to present the reforms to the IMF in the near future and hopes to secure the loan package soon. A successful closure of the deal would likely increase the longer-term benefit to the economy and to Palm Hills.

Exhibit 8: Financial summary

EGPm

2013

2014

2015

2016e

2017e

Year-end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Residential construction revenues

1,198.5

2,087.0

3,530.4

4,653.2

4,710.5

Other revenues

23.5

39.1

72.1

79.7

121.7

Total revenue

1,222.0

2,126.1

3,602.5

4,732.9

4,832.1

Costs attrib. to development

(898.3)

(1,353.5)

(2,291.7)

(3,164.2)

(3,014.7)

Total other costs

(25.0)

(24.7)

(38.5)

(54.2)

(77.9)

Total costs of goods sold

(923.3)

(1,378.1)

(2,330.1)

(3,218.3)

(3,092.6)

Gross profit/(loss)

298.7

747.9

1,272.4

1,514.5

1,739.6

Selling and admin expenses

(165.1)

(345.9)

(659.5)

(651.2)

(767.0)

EBIT

133.6

402.1

612.9

863.3

972.6

Net finance income/(expense)

76.6

(103.7)

14.2

(89.2)

(408.7)

Other income/(expense)

38.0

83.7

475.1

53.9

49.1

Profit (Loss) before income tax & non-controlling interests

248.2

382.1

1,102.2

828.0

613.0

Income tax expense

(0.5)

(8.8)

(37.7)

(193.6)

(137.9)

Non-controlling interests

(10.9)

(20.0)

(32.9)

(126.4)

(23.8)

Net attributable profit

236.8

353.3

1,031.5

508.1

451.4

Basic and fully diluted average number of shares (m)

1,100.7

1,375.2

1,705.0

2,308.9

2,308.9

EPS (EGP)

0.22

0.26

0.60

0.22

0.20

DPS (EGP)

0.00

0.00

0.15

0.00

0.00

BALANCE SHEET

Investment property

1,439.1

1,943.4

1,713.3

1,801.0

1,801.0

Property and equipment

332.2

312.5

334.6

344.5

353.5

Advance payments for investment acquisitions

178.2

224.5

204.7

184.3

184.3

Investment in associates

53.7

56.8

58.1

56.6

56.6

Notes receivable

1,429.4

2,660.4

4,546.3

6,183.9

7,315.8

Deferred tax asset

-

4.0

11.9

77.7

77.7

Total non-current assets

3,432.6

5,201.5

6,869.0

8,647.9

9,788.9

Notes receivable

1,273.4

1,571.8

2,371.0

3,044.1

3,601.3

Accounts receivable and prepayments

2,128.9

1,719.1

1,437.4

1,808.5

1,808.5

Cash

111.1

194.9

965.7

1,731.2

2,661.1

Financial assets at fair value held for trading

69.4

56.9

67.1

61.6

61.6

Financial assets held to maturity

-

19.7

613.0

113.7

113.7

Development properties

3,667.6

2,769.0

2,243.4

1,878.8

1,316.7

Total current assets

7,250.4

6,331.4

7,697.7

8,638.0

9,563.0

TOTAL ASSETS

10,683.0

11,532.9

14,566.7

17,285.9

19,351.8

Term loans

801.5

1,461.9

2,918.3

3,127.1

2,907.7

Land purchase liabilities

403.2

350.4

268.2

194.1

255.7

Notes payable

762.2

536.5

148.5

493.1

493.1

Other non-current liabilities

334.4

395.4

485.6

590.3

590.3

Deferred tax liability

5.8

-

-

-

-

Total non-current liabilities

2,307.1

2,744.3

3,820.7

4,404.6

4,246.9

Bank overdrafts and credit balances

283.7

39.2

111.3

120.0

120.0

Term loans

215.1

174.4

80.8

489.4

455.1

Land purchase liabilities

197.8

216.6

263.3

309.6

408.0

Accounts payable and accruals

1,594.9

1,515.4

1,139.6

1,258.3

1,258.3

Current notes payable

726.6

805.2

473.7

686.4

686.4

Advances from customers

89.1

116.1

265.4

749.0

736.5

Billings in excess of costs

1,697.3

1,713.6

1,780.8

2,626.3

4,323.3

Income tax payable

65.3

84.0

46.6

156.7

156.7

Total current liabilities

4,869.8

4,664.4

4,161.6

6,395.7

8,144.2

TOTAL LIABILITIES

7,176.8

7,408.7

7,982.2

10,800.3

12,391.2

NET ASSETS

3,506.1

4,124.2

6,584.5

6,485.6

6,960.7

Non-controlling interests

284.7

256.0

270.8

393.0

416.8

SHAREHOLDERS' EQUITY

3,221.4

3,868.3

6,313.7

6,092.5

6,543.9

NAV per share (EGP)

2.93

2.73

2.73

2.64

2.83

CASH FLOW STATEMENT

PBT

248.2

382.1

1,102.2

843.1

613.0

Adjust for:

0.0

0.0

0.0

0.0

0.0

Depreciation and impairment of property and equipment

26.5

21.5

21.9

18.0

11.0

(Gain)/losses on disposal

-14.1

-36.2

-432.9

-2.7

0.0

Net finance (income)/expense

-76.6

103.7

-14.2

89.2

408.7

Share of loss (gain) of associates

1.5

-3.1

-1.3

1.6

0.0

Cash flows from operating activities before working capital adjustments

185.4

468.0

675.7

949.1

1,032.7

Working capital adjustments

(420.0)

(1,154.5)

(2,924.9)

(474.8)

657.4

Cash flows from operations before tax and financing costs

(234.6)

(686.5)

(2,249.3)

474.3

1,690.0

Interest paid

(58.6)

(76.1)

(38.5)

(80.5)

(352.5)

Tax paid

(0.1)

(0.0)

(83.0)

(94.0)

(137.9)

Net cash flows from operating activities

(293.2)

(762.6)

(2,370.8)

299.7

1,199.6

Cash flows from investing activities

(8.9)

(119.7)

58.7

413.4

(16.0)

Proceeds from share issuance

-

600.0

1,648.0

-

-

Dividends paid in period

-

-

-

(368.6)

-

Proceeds from borrowing and other financing

22.1

(9.1)

-

(205.2)

-

Cash flows from financing

22.1

590.9

1,648.0

(573.8)

0.0

(Increase)/decrease in net debt.

(280.1)

(291.4)

(664.1)

139.4

1,183.6

Opening net (debt)/cash

(909.2)

(1,189.2)

(1,480.6)

(2,144.7)

(2,005.3)

Closing net (debt)/cash

(1,189.2)

(1,480.6)

(2,144.7)

(2,005.3)

(821.7)

Source: Company data, Edison Investment Research

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Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Palm Hills Developments and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2016. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

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Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Palm Hills Developments and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2016. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Research: Investment Companies

Heliad Equity Partners — Update 16 November 2016

Heliad Equity Partners

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