No surprises with contracted sales; unchanged Y-o-Y in 1H17
Porto Group (Porto) reported its financial and operational results for 2Q17. Contracted sales figure was decent (EGP575mn, -8.4% Y-o-Y), bringing the total contracted sales figure for 1H17 to EGP1,076mn (unchanged Y-o-Y). We note that c40% of the contracted sales figure in 2Q17 was from sales at Porto October. Primary homes brought in 53% of total contracted sales, secondary homes: 27% and commercial segment: 20% in 1H17. We expect contracted sales numbers for 2017 to come in at EGP2.7bn (+21.0% Y-o-Y) on a stronger 3Q17 driven by increased sales in the company’s projects at the North Coast.
 
Reported figures boosted by increased deliveries at Porto New Cairo, albeit at low margins 
Reported revenue was strong (EGP809mn in 2Q17, +251% Y-o-Y; EGP1.23bn in 1H17, +193% Y-o-Y) on bulk deliveries at New Cairo (explains c80% of revenue in 2Q17 and 1H17). This, however, has come at the expense of margins (GPM in 2Q17: 23.5% vs. 35.4% in 2Q16 and 26.8% in 1H17 vs. 35.5% in 1H16). EBIT came in at EGP143.1mn (+684% Y-o-Y, +38.6% Q-o-Q), implying an EBIT margin of 17.7% in 2Q17 (2Q16: 7.9%, 1Q17: 24.2%) and 19.9% in 1H17 (1H16: 10.5%). Interest expenses rose significantly, coming in at EGP17.3mn in 2Q17 and EGP20.2mn in 1H17, vs. EGP0.5mn in 2Q16 and EGP1.8mn in 1H16, reflecting increased borrowings (EGP90mn in Jun-17 vs. EGP5.0mn in Jun-16), to fund the company’s accelerated construction strategy. We adjust our reporting numbers to account for the higher-than-expected revenue in 2Q17. We raise our 2017 revenue estimate by 38% to EGP2.1bn and net income by 95% to EGP290mn. 
 
Expected strong operational performance (2017-18e) is overpriced by the market
The stock is trading at 1.17x our calculated NAV of EGP0.36/share vs. its peer average of 0.4x, in our numbers. We expect the company to benefit from its increased focus on the secondary home segment (which has so-far-proven to be resilient for both the company and its peers). This strategy will help Porto’s contracted sales numbers in 2017-18e (+21% Y-o-Y and +23% Y-o-Y, respectively), overshadowing its recent structural operational underperformance vis-à-vis its peers in the primary home space. That said, we believe that such outperformance is more than priced in by the market, hence, our Sell rating (downside potential: 40%).