TAIB Securities revises neutral rating to overweight on MCDC

24/01/2011 00:00 AST

According to a research by Bahrain-based TAIB Securities research, Makkah Construction & Development Co. (MCDC) has made a 32.2 percent increase in activity revenues to SR191.86 million for the first half of 2011 from SR145.18 million. Its net profit jumped 43.3 percent year on year (YoY) to SR161.42 million. "We are revising our FY2011E net profit from core business activities by 21 percent to SR310.63 million and overall net profit by 22.5 percent to SR303.87 million. "We are also revising our earlier neutral rating to overweight with a revised DCF target price of SR35, implying an upside of 14.8 percent," the study said.

Activity revenues jumped 32.2 percent to SR191.86 million during the first half of the year from SR145.18 million in the first half of 2010. Activity expenses were down 3.8 percent to SR10.20 million, compared to SR10.60 million during the same period in the prior year. In addition, depreciation expenses fell 2.9 percent to SR13.60 million from SR14.01 million. On the other hand, general and administrative (G&A) expenses remained flat at SR5.58 million.

Gross profit soared 35 percent to SR181.67 million from SR134.58 million due to higher activity revenues. Profit from main activities increased 41.3 percent to SR162.48 million from SR114.99 million, attributable to strong top-line growth.

Further, miscellaneous income jumped 98.4 percent to SR1.32 million from SR0.67 million in the earlier year. As a result, net profit advanced 43.3 percent to SR161.42 million from SR112.63 million. Consequently, adjusted annualized EPS rose to SR1.96 from SR1.37 in the first half of 2010.

The study also made the following observations:

If the sector's short- to medium-term growth prospects change due to an accelerated economic recovery, or a further slowdown, it may call for a revision of our rating. We have used the DCF valuation method to arrive at the fair value of MCDC, as explained below:

Assumptions: Risk free Rate of 3.18 percent, equivalent to 12-months average yield on a 10-year US T-bill; levered beta of 0.78; and terminal growth rate of two percent. Based on the above and using the Capital Asset Pricing Model (CAPM), we have arrived at a Cost of Equity of 7.78 percent and a WACC of 7.78 percent.

MCDC is engaged in real estate investment, property development and management, and ownership and management of hotels and shopping malls. Most of MCDC's properties and development projects are located in Makkah. Therefore, the properties are not only shielded from downturns, but also benefit from development spending.

Moreover, according to industry experts, real estate investment in Makkah and Madinah accounts for 40 percent of total real estate investments in Saudi Arabia, because land prices in the holy cities are the highest in the world, ranging between $70,000 and $110,000 per sq. m. Prices hit $133,000 per sq. m. in Makkah during 2010.

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