Momentum lost on land sale activity, as expected 
Momentum was quickly lost on new land sales in 2Q17, in line with our expectations, with no meaningful land reservations/contracted land sales taken place, after EGP168mn worth of land reservations and contracted sales reported in 1Q17. On a more positive note, no land returns were booked in 2Q17; total cancellations were EGP0.8mn in 1H17, all booked in 1Q17.  We expect EGP150mn in contracted land sales in 2017 (1H17 figure is inclusive of reservations) and EGP192mn in 2018.
 
Reported losses, on minimal recognition of land revenue 
2Q17 revenue was EGP28.3mn (2Q16: EGP5.9mn, 1Q17: EGP121.3mn, EFGe: EGP50mn), with minimal land/unit revenue being recognised (due to weak new sales and slow cash collection). 1H17 revenue was EGP149.6mn (1H16: EGP16.2mn) on a relatively strong 1Q17. There was a big jump in revenue from the non-land segment (namely: rental revenue from shops & hotel apartments, utility income and maintenance revenue), as a result of higher occupancy rates and improved collections from hotels, according to management. Revenue from services totalled EGP17.4mn in 2Q17 (+67.6% Y-o-Y, +37.1% Q-o-Q) and EGP30.1mn in 1H17 (+49.6% Y-o-Y), but the segment continued to be loss-making, despite the reported revenue growth. ERC reported a gross loss for the quarter, coming in at EGP3.5mn in 2Q17 (2Q16: gross loss of EGP17.9mn, 1Q17: gross profit of EGP86.8mn). Net loss for the quarter came in at EGP4.4mn (2Q16: EGP35.0mn net loss, 1Q17: EGP60.7mn net income, EFGe: EGP1.0mn net income).  
 
Stock is fairly valued, in our numbers 
The improvement in operational and reporting performance seen in 1Q17 did not continue in 2Q17, which was in line with our expectations, pending more meaningful improvement in economic conditions and tourism activity. An improvement in the aforementioned market fundamentals would encourage more steady land payments as well as the return of investment back into the sector. We believe the current market valuation reflects a fair set of assumptions, with the market price hovering around our TP. The repossession of the company’s phase III land plot represents an upside risk to our valuation and a major stock trigger.

Sara Boutros

Mai Attia