Stock trading at significant premium to peers; downgrade to Sell following recent rally 
We downgrade our rating on Porto Group to Sell following the stock’s recent outperformance (+56% over the past three months) vs. its peers (+5.4%) and the HFI (+9.2%). The stock is trading at 1.1x our calculated NAV of EGP0.36/share, vs. its peer average of 0.4x, in our numbers. We expect the company to benefit from an increased focus on the secondary home segment, which has so-far-proven to be resilient for both the company and its peers, overshadowing its recent structural operational underperformance vis-à-vis its peers (mainly primary home space). While this strategy will help its contracted sales numbers in 2017-18e, we believe that it is more-than-priced-in by the market. 
 
Operational challenges to persist in the primary home market space 
We keep our broad assumptions mostly unchanged and hence maintain our TP of EGP0.25 (adjusted from EGP0.27 to reflect a 10% bonus share distribution, which took place earlier this month). Despite continued market interest in its second home offerings, we are worried about its inability to fully pass-on the rise in construction costs to end buyers (unlike its peers), which could place negative pressure on overall projects’ profitability. The company has also extended payment terms to support sales, which may negatively impact cash flow visibility. 
 
What we expect in 2017-18e? 

 - Contracted sales to see strong growth in 2017-18. We expect its summer home projects along with increased sales pace in its commercial offerings to drive sales growth; both should overcome what we expect to be weak sales in projects targeting primary homes. We forecast annual sales of EGP3bn, on average, in 2017-18; up from EGP2.2bn in 2016. 
 
- Increased deliveries in Porto New Cairo and Porto October to result in revenue rising 26.2% in 2017 and 21.4% in 2018, while 2017-18e average gross profit margin will be slightly pressured (c29%, vs. 32% in 2016) by higher construction costs on existing sales backlog that are planned for delivery 
 
- Margin improvement in 2019-20e with higher contribution from commercial units’ deliveries
 
- The company’s strategy to accelerate construction pace given high-inflationary environment will continue to pressure cash flow from operations in 2017-18; hence, our assumption of no dividend distribution. 

Sara Boutros

Mai Attia