A recent report issued by MubasherTrade said that the current shareholders of Sixth of October Development and Investment Company (SODIC) will benefit from the potential financial synergies that will result from converting two big competing entities into a new big and integrated real estate developer.
The report is recommending buy with “Low Risk” on SODIC’s stocks with a price target (PT) of EGP 33.5 per share.
SODIC announced that its board of directors has agreed to launch a mandatory tender offer (MTO) on the shares of Madinet Nasr for Housing and Development (MNHD) through a direct share swap.
This will allow MNHD to remain listed on the Egyptian Exchange (EGX).
The swap ratio is preliminarily set at 2 shares of MNHD for one share of SODIC, provided that SODIC acquires a percentage not less than 51% of MNHD’s shares.
The declared acquisition will be conducted through direct equity swap only.
The new SODIC will be comprising of the two entities old SODIC and MNHD based on the stake that will be acquired by SODIC which will range from 51% to 100% if the MTO has been accepted by MNHD.
SODIC will not resort to a normal way of capital increase but rather it will issue new shares certificates only for the shareholders of the target company, who will have to decide whether to accept or reject the Mandatory Tender Offer (MTO) based on the declared ratio, they will have their shares of MNHD converted into shares of SODIC.
The current shareholders of SODIC should not suffer any dilution as the targeted company will be consolidated with SODIC.
Meanwhile, another research note issued by Shuaa Capital said that Palm Hills Developments (PHDC) which is down 44% YTD, underperforming the EGX 30 (-9% YTD) by far. At these levels, exhibits a favourable risk-reward ratio.
Moreover, the report noted that there is a debate over whether the real estate sector in Egypt is experiencing some imbalance between demand and supply.
“The question is whether the supply is larger than demand or, in other words, is there a bubble in the making? If history is any guide, real estate prices do not usually fall in Egypt but can stagnate whenever there is an imbalance,” the report added.
Meanwhile, demand seems to be slowing down due to a weaker purchasing power due to the high inflation environment.
The report added that PHDC has long suffered from having a highly-leveraged balance sheet. However, it sees this risk starting to fade away recently with PHDC’s management efforts to raise cash from securitization by discounting a considerable part of its receivables to secure a sustainable cash flow source for its operations.
Recently, PHDC and Arab African International Bank concluded a discounting transaction of EGP316mn receivables portfolio relating to 181 delivered units in some of the former’s projects, thus securing EGP223mn in cash for PHDC’s operations.
“We believe such deals, as well as debt reduction efforts, can ease the company’s leverage in the long run.”