Heliopolis Housing (HELI EY/.CA) - A Massive "Return" Window Ahead

We decided to currently focus the spot light on the giant turn around “Heliopolis housing” as it looks like gearing up for a makeover, which looks imminent after awarding master plans and setting launches deadlines.

... Presenting Heliopolis Housing upside potential in a speed round, as we found it at least exceeding the 100% return, purely based on Net Asset Valuation which was fully discounted at the cost of equity plus c. 4% estimated from our risk matrix for time line implementation, visibility and commitment risks. We also added the anticipated valuation contribution from the currently under-development 655-acres by SODIC, on a DCF basis. We will be initiating our coverage for Heliopolis Housing soon, as we are trying to sit with the management for reassurance concerning the development plan for the massive land bank.

Still, on a first look we see the valuation heading towards EGP 54.9/Share, providing an upside of 113% over yesterday`s closing. We have been really conservative in our preliminary valuation round for Heliopolis, discounting at 4% over the cost of equity, while applying massive discounts to the estimated land prices, almost 50% of the currently auctioned in New Cairo. Hence, after we fully make up our minds concerning the risks and concerns we are worried about, we believe that our preliminary valuation might for sure be exceeded.

After Scrutinizing, i found that the company`s current remaining net land including dedicated yet un-utilized for utilities stands at 29.68mn Sqm, out of which 3.33mn Sqm represent the encroachments in New Heliopolis City, in addition to 0.02K Sqm already taken by the airport, and 2.26mn of land in Heliopolis Suburb being prohibited from any construction activity for the Airport security with no yet announced compensation. Hence, we believe Heliopolis Housing currently has 24.09mn Sqm of net land bank. Out of such land bank (24.09mn), 2.75mn is currently co-developed with SODIC, located within the New Heliopolis City, valued on a DCF basis, considering our previous valuation and estimation for the project, while 21.34mn Sqm have been valued on a NAV basis, assuming 5-years of equal area sale, and minimum escalating prices.

A sum up to our reasonable conservative estimates for drawing HELI`s preliminary value; Valuing Heliopolis Suburb available net land of 0.23mn Sqm at an average of EGP 2.76K/Sqm in 2017-2021, which yielded a total un-discounted proceeds of EGP 0.62bn, New Heliopolis City residual net land of 16.76mn Sqm after deducting the under-co development portion of 2.75mn Sqm, at EGP 1.8K/Sqm which yielded total proceeds of EGP 30.7bn in 2017-2021. However, we valued the residual available land in Al Obour city at an average price of EGP 0.98K/Sqm, as its mostly utilities and lower priced commercial dedicated plots. Lastly we valued the massive Heliopark project net land of 4.23mn Sqm, at an average price of EGP 3.2K/Sqm which yielded total proceeds of EGP 13.6bn, definitely subject to a probable upgrade in the range of 50% addition, which might still be considered below NUCA`s most recent offering in the region.

The total conservatively expected proceeds from monetizing Heliopolis Housing outstanding net land bank of 24.09mn Sqm stands at EGP 45bn, which is subject to a huge increase in case the company proceeded with actual development implementation. We also believe that the current encroachments of 5.9mn Sqm that we exclude from valuation, might add a huge upside to the company`s land bank and valuation in case final court rulings came in Heliopolis favor, or government compensation were provided just as the case with the comparable Madinet Nasr for Housing Company.

We also add to the land monetizing proceeds EGP 7.5bn of proceeds from the residential component in the 655-acres currently set for development by SODIC and launch by 2H2017, adding EGP 785.6mn to Heliopolis Valuation as the project is estimated to take place in 2017-2031 as per our estimates. While, we estimated the project`s total expected commercial component land area of 275K Sqm, from which Heliopolis valuation is believed to gain c. EGP 205.2mn on a NAV basis. Hence, on a preliminary basis we find Heliopolis housing on FCFE-SoTP basis equivalent to EGP 23.95bn, providing over a 100% return to capture, so we advise all our readers and investors to start considering the window before tightening until we provide a full analysis round.

We still believe that the main risk to our valuation is the company`s ability to proceed with developing and hence monetizing its land bank; a risk we account for through the highly discounted pricing we applied vs. the market rates currently available in addition to the higher discount factors applied.