Palm Hills Developments (PHD) management (Tarek Abdel-Rahman, Co-CEO; Ali Thabet, CFO; Mamdouh Abdel-Wahab; IR & Investment Director) held a conference call to discuss the 2Q16 results. Below are the main highlights from the call.
• Market is healthy despite increased cancellations Management indicated that strength in the demand for housing continues, allowing for decent price increases across the portfolio. Price sensitivity is the highest within the middle segment, to which PHD’s only exposure is through Capital Gardens. The project brought-in one third of the quarter’s cancellations, which were all fully resold after the quarter’s close. The remaining two thirds of the cancellations, which came mainly from Hacienda and Palm Hills Katameya, were triggered by management on a stricter cancellation policy, in an attempt to maximise value. Management estimates investment demand to not exceed 20-25%; fairly unchanged for a number of years.
• Progress expected for two NUCA projects; Hacienda West pushed to 1Q17 The master plan for the new co-development project with NUCA is finalised, with the project set to be launched in 4Q16 (2017 in our numbers), while an agreement for the 6,000-acre project with NUCA in West Cairo is set to be signed before year-end. Hacienda West’s launch is postponed to 1Q17 from 3Q16, with a view to focus on the existing projects/inventory to limit the risk of cannibalisation (North coast saw a significant uptick in July and early August). Management reiterated guidance for EGP7bn in gross sales in 2016e (EGP6.5bn in our numbers, on net basis). No progress on Saudi land negotiations, given the slowdown caused by seasonality.
• Balance sheet deleveraging exercise underway The plan is to monetise receivables of up to cEGP2.5bn, over 2-3 years, including a securitised bond issuance of up to EGP1bn. The first tranche is planned to close in 4Q16, for a total size of EGP350-400mn. Management expects a haircut of 5-7% from the receivables’ value.
• Contribution from the rental portfolio is growing Contribution has reached 14% of net income in 1H16, up from 11% in 1Q16, implying c19% in 2Q16. The growth was driven by higher income from Palm Hill Club and improved performance of the hotel portfolio. We note that PHD completed EGP230mn in contracted sales from shops at the VGK Mall, which are set to be delivered in next year. Management has announced that its office building in Golf Views is set to be operational in 2017, with plans considered to include another office building. PHD plans to achieve 25% in net income from recurring sources before 2020.

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