• 1Q16 reported profits under pressure, but sales numbers were robust  Revenue grew 44% Y-o-Y to EGP1,072mn in 1Q16 (+29.2% versus EFGe). Gross profit was EGP308mn, translating into a GPM of 28.7% (-13.4pps Y-o-Y), attributed to: i) the delivery of units, sold at distressed prices in 2011-12, post the 2011 uprising; and ii) an unfavourable delivery mix with a bias to lower-margin apartments. Net income was EGP105mn (-43% Y-o-Y, -48% versus EFGe), pressured by: i) narrowed margins; ii) expiry of tax exemptions on a number of projects in 2015; and iii) higher revenue recognition from non-fully owned projects, implying a higher minority income. PHD booked strong gross sales figures for 1Q16, totalling EGP2.2bn (+62% Y-o-Y, +28.4% Q-o-Q), driven by sales from Palm Valley and Capital Gardens.
• Slight revision to our FV on higher policy rates, but remain buyers We lowered our FV to EGP3.25/share (-6%), to mainly accommodate 100-200bps higher discount rates to our forecast FCF from projects, post the latest 150bps hike in policy rates. We also removed all applied tax exemptions off all projects, upon the expiry of tax breaks and pushed the launch of the smart village project for one year to 2017. Our discount-to-NAV is also unchanged at 40%, subject to reduction when concrete steps are taken on monetisation of the residential land bank, and with further milestones taken towards the construction of the planned investment portfolio. We also adjusted our assumptions to accommodate the change in accounting policy in 1Q16 pertaining to the recognition of revenue from standalone units, as per the recent amendments in the Egyptian Accounting Standards (EAS). Moreover, we adjusted the reported figures following the expiry of tax breaks on a number of projects.
• Bear case implies 31% downside potential We introduce bull-bear case scenario analysis. Our bull case (EGP4.40/share) assumes launch of Botanica in 2017, faster sales pace and lower discount-to-NAV (20%). Our bear case (FV: EGP1.70/share) assumes weaker operating environment; hence, the failure to launch a number of planned projects and lower value to PHD’s investment portfolio and residual land, in addition to higher discount-to-NAV of 60%.

Mai Attia
Sara Boutros