The continued strength of the Egyptian residential property market has supported strong Q3 sales for Palm Hills Development Company (CA:PHDC) and further residential project launches to come in Q416 are expected to keep the sales pipeline full in the medium term. Commercial real estate has contributed 10% to net profit over the year so far, a growing share of which is now recurring, and three commercial construction projects are due to be completed in FY17. Management plans to securitise up to EGP2.5bn of receivables to help accelerate construction and possibly to repay the syndicated loan earlier than scheduled. We have decreased our 2016 EBIT forecasts to reflect the accounting changes and delivery mix; our overall valuation is only slightly lower due to the reduced scope of three residential projects.
The housing market remains strong
Palm Hills stated that it was the highest-selling Egyptian developer in Q3, with EGP2bn of new sales, helped by a strong summer for its North Coast projects. Cancellations were at 8%, below our assumed long-term average of 10%, confirming that the Q2 spike was temporary. The rate of new sales is running ahead of management’s 2016 target of EGP7bn, with further launches to come in Q416 and Q117. In the longer term, the project pipeline is strong and the decision by the Egyptian Central Bank to allow the Egyptian pound to float is likely to be good for the wider economy (see page 3), improving demand for quality housing, although investment in real estate as an inflation hedge may decline.
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