• Initiate with a Buy rating; our FV is set on 0.6x 2016e NAV We re-initiate coverage on Palm Hills Developments (PHD) with a Buy rating, setting our fair value (FV) at EGP3.45/share, offering an upside potential of 52.1%. The stock had outperformed peers in 2015 reflecting the company’s turnaround story and positive newsflow, especially related to new land acquisitions and contracted sales. Our valuation is driven by the company’s development properties and the market value of its planned investment portfolio and residual land bank. We would lower our assigned discount to NAV once we see concrete steps with regards to the monetization of the residual land bank (launch of Botanica and/or sale of the land in Saudi). In addition, major milestones taken with regards to the construction of the investment portfolio and start of lease would create an upside to our valuation.
• We expect a surge in contracted sales; leveraging on the growing land bank We are encouraged by the significant improvement in PHD’s operational metrics in the years 2013 through 2015, including contracted sales, construction outlays, cancelation rates, and deliveries. Going forward, we have strong visibility of future cash flow and earnings for the company’s projects, supported by the company’s regained market presence, its growing land bank and the prevailing strong operating environment. Our numbers incorporate an average of EGP7.0 billion in gross sales for 2016-18e (+55% higher than 2015), with reported revenue growing by a CAGR of 12.5% in 2015-18e, gross margins expanding c510 bps to 38.8% in 2018e.
• Leading peers in revenue-sharing agreements; cautiously monitor execution PHD is leading its peers when it comes to revenue-sharing agreements. Four revenue sharing agreements have been signed over the last three months, adding c3.2 million sqm to PHD’s land bank. We appreciate the rapid land bank build-up and the waiver from a bulky up-front cash outflow in land associated with the revenue-sharing agreement, but, given the novelty of the concept and the association with the government in the largest-of-the-four projects, we shall cautiously monitor the smoothness of the execution of the projects.

Mai Attia
Sara Boutros