Rating: Buy
Target Price: EGP3.63
Closing Price: EGP3.09

Management Palm Hills Developments (PHD) management, Yaseen Mansour, Chairman; Tarek Abdel-Rahman, Co-CEO; Ali Thabet, CFO; Mamdouh Abdel-Wahab, IR & Investment Director held a conference call to discuss the 2Q17 results. Below are the main highlights from the call: 
 
Management continues to be positive on the market indicating it might beat sales guidance for the year
Selling prices have increased by 68% Y-o-Y in early 2017 for the built-up area (BuA) of standalone units, 47% for BuA of apartments, and 37% Y-o-Y for land. Price increases were higher for BuA to accommodate for the increase in construction costs. Sales volumes have grown as well (1,227 units sold in 1H17, +54.5% Y-o-Y), which reflects positively on the health of the market. The increase in volumes is also an indicator that the company has been gaining market share. More interest is seen from Egyptians abroad; a year ago, Egyptians abroad contributed 8-9% of total sales, which has doubled in recent quarters. Management has indicated that July has been strong and that its target of EGP9.5bn will likely be beaten, with contracted sales likely reaching EGP10.5-11bn for the year. Management also indicated that it is confident about its ability to pass on more price increases in the future. 
 
Margins will continue to improve in short and medium term 
Construction costs have increased from an average of EGP3,200/sqm in Dec-16 to EGP4,300/sqm in Jun-17. Also, the partial lift of subsidy on fuel prices (which took place in Jul-17) has resulted in another rise in construction costs. Nevertheless, average selling prices have increased from an average of EGP5,380/sqm to EGP9,100/sqm over the same period. This will translate into gross profit margin expansion, according to management, when those sales start being recognised on the income statement. Management expects interest and inflation rates to ease-off over the coming period, resulting in normalised increases to construction costs. Gross profit on new sales are estimated at 37% in 1Q17 and 43% in 2Q17, while for commercial units they exceeded 60% (Palm Valley Mall: 84%, Palm Central: 64%). 
 
No major change to payment plans recently 
Payment terms for all new projects in Cairo have been set at seven years, with the exception of The Crown for which payment terms have been set at eight years (in line with payment terms for the land being purchased from the government). Hacienda West’s first phase was launched with a ten-year payment plan; the second phase is planned to be launched with an eight-year plan, with subsequent launches expected to have seven-year payment terms.