FFA Private Bank revises Solidere share

FFA Private Bank has set a $20 target price on Solidere shares, down from $22 previously, saying Lebanon’s real estate giant holds significant value for the long-term investor provided that the political and security situation stabilizes. Solidere A and B shares, which closed Wednesday at $13.06 and $13.02 respectively, have recently been impacted by a slowdown in the real estate market due to rising local political uncertainty and a deteriorating security situation, coupled with the risk of spillover from neighboring Syria. “We like Solidere’s longer term outlook as land sales drive solid margins, profitability and cash flows. However, we are concerned in the shorter term as Solidere continues its capital intensive program against an uncertain economic and political backdrop influencing the real estate market,” FFA’s equity research report said. Solidere’s profits plunged by 16.9 percent in 2011 compared to 2010 and gross revenues declined 23 percent year over year to $296.3 million, down from $382 million, with the bulk of the 2012 income being generated from four land sales in the waterfront area and the remainder from property rental. In the short term, FFA’s research division forecast Solidere’s land sales to remain moderate and expects the company’s management to intensify its efforts in 2012 to complete the sale negotiations of four plots in the waterfront area and two plots in Beirut Central District’s traditional area. Provided that the security situation remains stable and land sales take place, revenues are estimated at $115 million, accounting for the bulk of the forecasted 2012 revenues at $169 million, a 50 percent drop from 2011. However, a deteriorating security situation could hinder land sales and leave Solidere with no option but to borrow money to continue funding the completion of infrastructure and real estate developments, Nadim Kabbara, head of research at FFA Private Bank, told reporters at a Q&A session. Solidere’s net debt levels increased to $389.5 million in 2011, from 308.6 million in 2010, mostly due to a new $50 million bank facility to bridge cash flow requirements. The net debt to total capitalization stood at 17.3 percent, up from 14.9 percent in 2010. FFA’s research expected Solidere to increase its borrowings over the medium term as it continues to support its growth strategy, dividend program and investments in its infrastructure. Despite Solidere’s increasing debt level, Kabbara said the Lebanese real estate developer remains in line with its regional peers, such as Emaar Properties and Sorouh Real Estate. According to FFA’s report, Solidere will also face margin pressure over the next few years as it registers less high margin land sales. Gross margins on land sales are forecasted at 76 percent in 2012, compared to 84 percent in 2011, while net profits and EPS (earnings per share) are estimated at $79 million and $0.5, down from $162.6 million and $1.05 in 2010. FFA’s report highlighted that the company’s main focus in the long term is to diversify its revenue mix and lower its dependence on land sales in light of its depleting land bank by developing additional streams. The diversification strategy should lead to an increase in recurring income streams, mainly doubling its rental income to $100 million by 2014, and stabilizing land sales in the low to mid-80 percent range of total revenues. FFA has forecasted revenues from land sales to account to 81 percent, down from 88 percent in 2010, and income from property rentals to account to 17 percent in 2014, up from 11 percent in 2010. In an attempt to further diversify its income stream, Kabbara said Solidere is expected to seek expansion opportunities via Solidere International, a subsidiary fully owned by the company, in an effort to expand real estate developments outside the Beirut Central District. FFA valued Solidere’s shares at $20 each, taking into consideration the value of the land bank of 1.9 million square meters of built up area at a selling price of $3,900. A discount of 55 percent was applied to the estimated land bank Net Present Value to reflect the uncertainty regarding the macro-political environment in Lebanon, the cyclical nature of the real estate sector and its inherent risks, including operational, credit and liquidity risks. The report also valued the investment properties and management services income, using a discounted cash flow approach, with weighted average cost of capital of 14 percent and a terminal growth rate of 5 percent. At the current price of $13.1, the report found Solidere to be trading at a discount of more than 10 percent of its fair value estimate. Solidere, the largest company in Lebanon in terms of size and market value, saw its shares reach $42 following the formation of former Prime Minister Saad Hariri’s government in May 2008.