Solidere is a Lebanese real estate development company established in 1994 and listed on the Beirut Stock Exchange. Solidere is a single purpose company exclusively responsible for the reconstruction and the development of the Beirut Central District.
The company is also engaged in real estate development outside of Lebanon through its associate Solidere International. In 2006, Solidere management obtained shareholder approval to venture into urban planning and real estate development outside Lebanon, in an effort to expand master development activities overseas. As a result, Solidere founded Solidere International (SI), becoming managing shareholder with 37.2 percent ownership.
Solidere’s long-term strategic objective is to diversify its revenue mix to compensate for the erosion of its finite land bank in Beirut City Center. Therefore, since 2007, Solidere has embarked on a bold expansion plan with a view to securing new revenue streams. The core aspects of Solidere’s long-term strategic objective encompasses the following:
• International growth strategy with SI
• Increasing rental income up to $100 million
• Increasing revenues generated from consulting services
We have performed an estimation of land and property prices per square meter of built-up area (BUA), based on management data and independently collected recent land sales figures. In order to be on the conservative side, we have adjusted the data. The resulting estimated net asset value per share is $48.55.
Solidere’s recognized revenues in 2007 amounted to $310 million resulting mainly from land sales, most of which came from contracts signed in previous years. Total revenues grew by 33 percent, eight percent and 12 percent in 2005, 2006 and 2007 respectively to reach $310 million by the end of 2007. This increase in total revenues was primarily driven by a surge in land sales. We believe this trend can be sustainably driven by the projected revenues from land sales, expected to increase drastically with the near completion of the infrastructure in the reclaimed area (1.4 million square meters of BUA) and the depletion of the traditional area (0.45 million square meters of BUA). Solidere’s total revenues are expected to steadily increase from $310 million in 2007 to $630 million by end 2012.
Solidere is expected to record an increasing net income, which is projected to reach $237 million in 2009 and $435 million in 2011. The resulting compounded average growth rate (CAGR) of net income from end 2007 until end 2012 should be equal to 16.8 percent.
Solidere has adequate cash reserves. The company’s cash position at end 2004 stood at $116 million, rising to $328 million at end 2007. Its accounts and notes receivables grew in parallel from $211 million at end 2004 to $319 million during the same period. All in all, the company has increased its liquid assets/total assets ratio from 16 percent by end 2004, up to 27 percent by end 2007, implying a good liquidity position.
We have decided to pursue a DCF valuation for Solidere (standalone) and have assumed the NPV of Solidere’s share in SI to be equal to its book value.
We believe this methodology properly reflects the fair value of Solidere as it is too early to envisage accurate future cash flows for SI due to its nascent status and the unstable regional real estate scene.
Our fair value estimate, derived from the discounted cash flow of solidere standalone projections, in addition to the book value of SI, amounts to $29 per share, resulting in an important upside potential. It is worthwhile to note that any positive outcome from Solidere International would have an important impact on the Solidere share price.
Marwan Salem is head of research & advisory and Raya Freyha is financial analyst at FFA Private Bank
