• Set our FV at EGP0.28 on 0.7x 2016e NAV; initiate with Neutral We initiate coverage on Porto Group (Porto) with a fair value (FV) of EGP0.28 based on 0.7x 2016e NAV, implying 13% upside potential; hence, our Neutral rating. We calculate our NAV from assigning values to its ongoing projects in Egypt and Jordan using DCF. Our numbers do not include projects yet to be launched (Porto Saeed and Porto Agadir), given the uncertainty around the timing of their launches. An exception to this is Porto Heliopolis, for which management has guided that it would be launched in 2016, as planned. Our numbers reflect healthy contracted sales for 2016-19e, averaging EGP3.3bn per year, driven by sales from Porto October, Dead Sea and Heliopolis. Our assigned discount-to-NAV (30%) is the second lowest amongst our Egypt property coverage, after SODIC, given the full reliance on ongoing development projects to derive our valuation and our relatively strong cash flow visibility.
• Lack of long-term visibility undermines potential growth story We believe the stock offers a less attractive investment opportunity versus its local peers, given its: i) full reliance on property sales, in the absence of a recurring source of income, albeit geographically diversified between Egypt and Jordan; ii) depleting land bank, particularly in Egypt, which increases the uncertainty around its long-term prospects; iii) valuation concentration risk, with Porto October project contributing roughly 75% of its valuation; and iv) rising affordability concerns in Porto’s target segment. We think that the market price reflects such concerns, with the stock underperforming its peers YTD and losing 33% of its value since its listing in October 2015.
• Market valuation more skewed towards bear case We introduce our bull-bear scenario analysis to gauge how our FV fares under different market conditions. Our bull case assumes the return of the strong sales momentum seen in 2013-14, with sentiment around the sector improving, allowing for more successful/rapid project launches with higher sales volumes and selling prices. We apply a 10% discount to NAV, which yields a FV of EGP0.51/share. Our bear case assumes a tougher operating environment, warranting a lower sales pace, price escalations and a higher discount-to-NAV of 40%, yielding EGP0.22/share.

Mai Attia
Sara Boutros