Egyptian Resorts Company (ERC) released its financial results for 2Q18. Revenues were weak, missing our estimate by c33% due to lower operating revenues, including limited land and units’ sales. GPM was pressured, shrinking by 6pp Y-o-Y on higher contribution of revenues from services to total revenues, while margins for villa sales were down 16pp Y-o-Y. EBIT was further weighed down by rises in G&A costs and other operating expenses. The company booked net loss of EGP8.3mn in 2Q18 (2Q17: EGP4.4mn; 1Q18: EGP0.64mn), compared to EFGe of EGP7.5mn, mainly due to the top-line miss and weak land sales, both of which translated into shrinking margins. 
 
Key highlights:
 
        Total revenues up 6% Y-o-Y in 2Q18, at cEGP30mn, on higher revenues for rendered services (+28% Y-o-Y), yet down 9.1% Q-o-Q. Revenues from land and units sales dropped 29% Y-o-Y and 52% Q-o-Q. Total revenues in 1H18 came in at EGP63mn (-53% Y-o-Y) on 77% decline in land and units’ sales revenues (89% drop in land sales). Management attributes the insignificant land sales to the decision previously taken to control its land bank supply and carefully select new developers. ERC has entered active negotiations with several investors and developers that expressed a serious interest in investing in Sahl Hasheesh, with negotiations expected to conclude positively in the coming period regarding a number of sizable plots.
        Gross loss of EGP5.5mn (vs. EGP3.7mn in 2Q17 and EGP8.2mn in 1Q18), with the higher contribution of services segment to total revenues weighing down on GPM; it is worth noting, however, that the segment saw narrowing loss margins of 37% (vs. 49% in 2Q17 and 54% in 1Q18). This brings 1H18 gross loss to EGP13.7mn, compared to gross profit of EGP65.6mn in 1H17.
        EBIT loss of EGP28.3mn (vs. EGP22.7mn in 2Q17 and EGP18.4mn in 1Q18), further driven down by: i) G&A increases of 9% and 15%, Y-o-Y and Q-o-Q, respectively; and ii) increases of 2.0x Y-o-Y and 6.0x Q-o-Q in other operating expenses.
        Net loss of EGP8.3mn (2Q17: EGP4.4mn; 1Q18: EGP0.64mn), vs. net profit of EGP7.5mn in EFGe, mainly due to lower-than-estimated land sales, which also dragged down margins. Earnings were helped by EGP11.9mn booked in deferred income. Net loss in 1H18 totalled EGP8.6mn, compared to net profit of EGP42.9mn in 1H17.
 
Management indicated that, as part of its long-term strategy, the company will continue to focus on diversifying and expanding its offerings across the real estate value chain to create sustainable growth. The company aims to maximise the value of its current land bank of c3.4mn sqm by both investing in new developments (such as hotels and commercial and retail spaces), while also working towards optimising the value of its existing assets. As such, ERC has devoted significant resources towards the development of its recurring income assets in the Old Town area, which is considered Sahl Hasheesh’s flagship commercial and residential district. ERC has also focused its efforts on further developing its state-of-the-art power generation and distribution, water/sewage treatment and fibre optic communications facilities, which have positioned ERC as the exclusive utilities and services provider – a model that generates recurring cash flows. The company has also begun to implement a cost-control policy, which is expected to reduce operational expenses by cEGP30mn per annum. On another note, management is aiming to increase its collection over the coming period and is currently in active negotiation with investors and developers to reach settlements of up to EGP600mn. 
 
Egyptian Resorts: EGP1.72 as of 9 Aug. 2018, Rating: Neutral, TP: EGP1.32/share, MCap: USD101mn, EGTS EY/EGTS.CA
Mai Attia, Karim Sherif