The CEO believes ODH is undervalued. Is he right?
To test this claim, we will take a deeper look at the Swiss company, its history, its founder, its financials and at everything that could have an effect on the stock price. And, we will never stop asking. The easiest way to start the research with is probably to quote the CEO and try to find out if he is right or not.
It was Sunday evening, October of last year, when Khaled Bichara, the CEO of a unique town builder called Orascom Development Holding (ODH), and his team published a press release. Months before, they hired an external property valuator to value their assets in one of their operational destinations called 'El Gouna'.
"We believe our assets are not adequately reflected in ODH's stock price."
CEO Khaled Bichara (Sunday, 21 October 2018)
The outcome of the report was not that much of a surprise for many long term shareholders since it was always clear that the company owns many assets with substantial value. However, the extent of it was for many investors still a peachy surprise. The remaining land, CBRE wrote, is worth USD 1.82 billion and therefore 170 times its current book value.
Stock price should be up 4.1 times to reach fair value
Here is Khaled Bichara's full quote:
"I am pleased with the completion and publication of this valuation report performed by CBRE. The report reiterates our earlier conviction that our Group owns many assets with substantial hidden value kept at book value in our financial statements. Moreover, we believe our assets are not adequately reflected in ODH's stock price. The 17 hotels in El Gouna alone plus the remaining land would make up more than 4.1 times the current market capitalisation, using CBRE's market value."
CEO Khaled Bichara (Sunday, 21 October 2018)
Since 1989, Orascom is building entire towns which include marinas, hotels, villas, golf courses, shops, businesses, restaurants and everything a town requires. The company owns the land and controls everything on it. In the destination of El Gouna thousands of people are living permanently in the city and the company earns on every dollar what the residents and tourist spend there.
The CBRE report was only covering the town of El Gouna in Egypt. However, CBRE will look at the other 8 operating destinations, too:
How is it possible that the remaining land and hotels at one single destination, El Gouna, could exceed the market cap of the entire company by a factor of four?
Fortunately, there are indicators we can look at to better understand why ODH is trading at such low levels.
The Sawiris Dynasty
Orascom Development Holding is headquartered in Switzerland, trading mainly at the Swiss Stock Market and also at the Frankfurt Stock Exchange in Germany, with fairly low volume. Despite trading at exchanges in mainland Europe and several European operations, ODH fundamentally remains an Egyptian company, with its roots in the country, and most of its revenue still coming from there.
Behind the company is a business man and billionaire called Samih Sawiris. He founded the company exactly 30 years ago, is a Coptic Christian, and comes from a very wealthy family.
Samih Sawiris's father, Onsi Sawiris, was born in 1930 and has three sons that now run his legacy business:
The Sawiris dynasty is very influential in the country, and although they own and control some of the biggest corporations in the region, it is said they are very well respected throughout the nation.
Born in Cairo in 1957, Samih Sawiris studied in Berlin and is fluent in German. Father Onsi Sawiris was making sure that all of his sons could benefit from a decent education and sent them to international high schools in Cairo, and later, abroad for studies in Switzerland, Germany and the United States.
Back in Egypt, Samih Sawiris created his first company in his twenties with a loan of around USD 50k from his family. He was selling newly upcoming fiberglass boats and enjoyed a juicy first mover advantage and a monopoly for quite some time.
Speaking about his past he says that it was a huge help that he could use the well-established Orascom brand from his father which opened him many doors at the beginning.
Sawiris can't collect taxes, but fees
His passion for boats then lead him to the idea of finding a quiet and peaceful spot on the red sea coast to build a second home for his family, friends and himself to enjoy time at sea and away from the noise of Cairo.
From here, his next move was to found a quiet, seaside town called El Gouna. It is Orascom's flagship destination and looks a little bit like a tropical Venice. Today, well over 20k residents and tourists are permanently living in a place what only 30 years ago was nothing but desert.
Orascom Development Egypt, which is 84,79% owned by Orascom Development Holding in Switzerland, owns and controls everything inside the destination. This ranges from hotels, golf courses, schools, shops, businesses, a hospital and even its own football club in the Egyptian Premier League. There is an international film festival happening once a year, an international squash tournament and entertainment all year round.
Since they can't collect taxes, they are free to collect fees. Shops and businesses have to pay fees and Orascom Development earns on everything from electricity to its waste management service.
Since it is run more efficiently than other towns in the country, El Gouna has lately turned into a startup hub where new ideas can be tested more quickly compared to other cities.
Orascom is in full control of its destination and currently won't allow fast food chains to enter the town. Sawiris also makes sure to not only attract the rich, but also a good mix of people from all classes and countries.
Samih Sawiris repeatedly needs to remind admirers of his creation that the successful development of El Gouna was nothing but planed. He started small and added part for part, step by step. And as El Gouna quickly grew and became successful, Sawiris then became an expert in building towns, and from there, used his expertise to build more successful towns across the world.
Buy land for nothing and start building
The strategy is similar in almost every country he steps in.
He buys land for almost nothing, usually a symbolic dollar per square meter somewhere remote but in a beautiful landscape. The place must be within a 2 hour reach to an airport - one of his few essential requirements.
Then, he starts building basic infrastructure: A hotel, real estate, villas, a marina, shops, a golf course and leisure facilities. The cash flow from operations is reinvested into the town, which, in turn, makes it more popular, attracts more visitors and increases real estate demand. Average selling price per sqm goes up, and what once was a worthless piece of land slowly becomes increasingly and exponentially valuable. And the bigger and more attractive the town gets the more valuable the land becomes.
According to the CBRE report, the land is now worth 170 times what it's currently worth in the books.
So, how much is the land worth today? Well, that is difficult to nail down since for many years Samih Sawiris simply didn't care too much. The land was not for sale and his vision and business model is for the next generation. This all started to change in the last couple of years. During the Arab spring and the fight for survival, ODH needed to sell land for cash. And last year, the management actively approached a property valuator to conduct a fair market value study with the goal to show investors how many assets they actually own. Here it is again:
"Orascom Development Holding (ODH) assigned CBRE Group Inc, one of the best-known international property valuators with more than 450 offices worldwide, to conduct a fair market value study for its remaining land bank and its 17 hotels with 2,654 guestrooms in El Gouna, Egypt.
CBRE's report valued the remaining 22.9 million sqm of undeveloped land in El Gouna at an aggregate market value of USD 1.82 billion, 170 times its current book value which stands at USD 10.7 million."
Press release (Sunday, 21 October 2018)
Why these numbers are not in the books?
If they would put these new numbers from the valuation report into the financial statements, it would result in massive gains and would therefore be taxed heavily. For ODH, and its daughter company ODE, it is not exactly a good time to realize these gains now since they need the cash to pay back debt and invest into the destinations. Therefore, the management decided to leave it hidden in the books. Investors looking at the balance sheet won't see it directly but it is real value inside the company and should therefore be taken into account when valuing the company.
IPO price at CHF 152.-
Historically, most destinations and therefore most of the revenue and profit came from Egypt. However, Samih Sawiris always had a conservative approach and tried to avoid risk and debt. When the massacre in Luxor killed 62 people in 1997, Orascom survived. Having no debt at the time of the attack saved him even though the Egyptian tourism market dried out.
In 2008 he took the company public through an IPO at the Swiss Stock Exchange. The IPO price was set at CHF 152.- and went up to CHF 175.- during the first couple of days. The goal was to finance the international expansion, to de-risk the business model through geographic diversification, and to better protected his assets from governments. A wise step that probably saved the company from losing land a couple of years later during the Arab spring.
But let's take a step back again, to 2008, when things turned very ugly for the company.
Disasters of biblical proportions
The business model of ODH is extremely long term. It may take up to 10 years until a destination is profitable. In the very first years, planning is costly and infrastructure has to be built first before people can settle down.
Right after the IPO in year 2008, and just when they kick started new projects outside of Egypt, ODH and its share price faced substantial pressure during the big financial crises that crashed real estate markets worldwide and heavily challenged emerging markets like Egypt.
Only three years later, in 2011, the Arab spring happened. The first wave of the revolution dried out the tourism sector, putting heavy pressure on earnings and consequently also on the stock price, again.
ODH's flagship destination El Gouna in Egypt was still profitable during those times, showing how robust the business model actually can be when not reliable entirely on tourism but also on permanent residents living in the destinations and spending money year-round.
Selling land to save the company
But since many destinations abroad were in the ramp up phase, cash from Egypt could not be sent to the new projects anymore as ODH's cash cow was severely hit. The new destinations in Montenegro, Switzerland and Oman desperately needed money to keep building their towns. To perform and to be able to contribute revenue to the group, it was crucial for them to quickly reach critical mass.
The holding company and its daughter companies suddenly found themselves in massive trouble. One solution in those years was to sell land, something that Samih Sawiris and Orascom Development generally tried to avoid, believing that value creation on their own is clearly more valuable for shareholders.
Arab spring, first revolution, second revolution
Just when tourism was about to recover and the share price finally was picking up again, the second wave of the Egyptian revolution in summer 2013 again put heavy pressure on the tourism sector. When Mohammed Mursi was removed, Abdel Fatah al-Sisi came to power.
The chaotic weeks and months before and after these events sent shockwaves through the entire world. Orascom Development found itself in even bigger trouble. When debt on the balance sheet grew to unhealthy and dangerous levels, investors bolted. The Billionaire Sawiris became a one-man bank, self-funding his sinking ship, as banks became wary of funding his projects.
In 2014. the losing streak continued when first a bomb exploded inside a tourist bus in the region of Taba Heights, very close to one of the Orascom destinations, killing Korean tourists. Later heavy flooding destroyed some Orascom hotels also in Taba Heights and forced the group to shut down most operations, a destination that was once the second biggest revenue contributor to the group, right after El Gouna.
However, it did not have a major effect on ODH's financials, as these destinations had good insurance coverage. And as the tourism industry was in a depression anyways, for ODH it was almost a relief that the flooding occurred at that time and not once tourists were back in full numbers.
Russian airliner crash over Sinai in 2015
But with other destinations still desperately in need for cash, Samih Sawiris took over the CEO position in 2014 from Gerhard Niesslein, an international manager he hired only three years earlier. Leaving the board of directors to manage the daily business again himself is not something Sawiris is good at or enjoys, a statement that comes from Samih Sawiris himself.
Four years after the initial spark of the Arab spring and after many years of reported losses, some of them over hundred million dollars, tourism in Egypt finally rebounded. At the same time destinations outside of Egypt started to slightly mature. But the long-sought tourism recovery wasn't supposed to happen yet.
A Russian airplane leaving a popular tourist destination of Sharm El Sheik, close to the Taba Heights destination, was shot down by terrorists on the Sinai Peninsula, killing all 224 people on board. Almost every country announced travel bans, often applicable for the entire country of Egypt, and today some countries have yet to lift their bans on the southern Sinai Peninsula.
The following year was devastating for the Taba destination and the biggest tourism crises Egypt has ever faced. In 2016, the company started the year with a new CEO. Khaled Bichara took over and the share price in the following months fell to as low as CHF 4.40.-, bringing the market cap down to around CHF 200 million (USD 200 million).
Considering this, the company at that time was still controlling the 100 million sqm of land spread over various countries and with infrastructure and marinas in place, or under construction, at many destinations.
Europe’s largest leveraged buy-out
Ironically, Samih Sawiris hired Khaled Bichara in January 2016 to clean up his own mess when stepping down as the CEO and moving back to the Board of Directors.
Bichara might not be very well known internationally, but he does have an impressive track record. Samih Sawiris knew that very well as Bichara has worked for Samih's brother Naguib at Orascom Telecom Holding.
In contrast to Samih Sawiris, who is very conservative and tries to avoid risk if possible, Naguib Sawiris is not afraid of risks. He is constantly looking for opportunities to expand his empire, sometimes in some of the most dangerous places on earth like Iraq and Pakistan.
In 2005 he found a target in Italy to expand his Orascom Telecom Holding by acquiring Wind Telecomunicazioni for about 15 billion dollar, at that time one of Italy's leading telecommunication providers. Two-thirds of the transaction was financed by debt, and the deal ranked as Europe’s largest leveraged buy-out in history. The corporate world took a second-glance at this deal because, usually, it is Europe buying in Africa. This time the Egyptians went shopping in Italy.
After the takeover, Naguib Sawiris installed about five Egyptian managers. Bichara was executive chairman of Orascom Telecom Holding and became chairman of Wind Telecommunication in Italy. He revitalized the company in just three years.
When Russian operator Vimpelcom agreed to acquire most of the telecoms assets in a $6.5 billion deal, creating the world’s fifth largest mobile network operator (MNO) by subscriber base, Bichara became the president and COO of VimpelCom Ltd.
Three Pillar Strategy
Today, it looks like Khaled Bichara has revitalized Orascom. For three years, between 2016 until 2019, much of his salary was directly linked to the ODH share price. Now, as it became obvious that the compensation plan was fairly explosive, and could have cost the company a substantial amount of money if the share price had sky-rocked to old levels, Sawiris made a new deal with his CEO.
The share-based compensation will take the form of restricted share awards, which provide for a staggered allocation of a total of 2.5% of the outstanding ODH shares over five years.
At the same time, Khaled Bichara will be awarded 2.5% of the outstanding ODH shares in a private transaction from the holdings of majority shareholder Samih Sawiris. These shares are subject to a five-year lock-up period.
ODH press release
After spending three years at the company Bichara seems to have gained the full trust of Samih Sawiris as he basically becomes a partner during the next five years. He was hired to clean up the company and transform it from an Egyptian company to a well structured international company.
And after three years with Bichara at the steering wheel, Sawiris, who owns 70% of the Group through himself and his family, seems to be very confident that he has found the right man for this job.
Three years earlier, in June 2016, the new management communicated a three pillar strategy to the market:
He wanted to take out the necessary impairments on the investments that did not generate value, reduce the debt balance in Egypt, restructure the company’s debt in other destinations and monetize non-core assets and minority stakes in certain destinations.
He himself wanted to enter the first home market in Cairo, a project that he was very convinced would be a great success. He pitched it to the ODH board of directors and got approval. He moved and installed some of the company's best managers to develop the destination with the name 'O-West'.
Three years later, O-West's pre-launch phase was completely sold out in a matter of weeks and, a few months ago, the first phase of the launch was reported as almost sold out. As revenue recognition will start to kick in during the beginning of 2020 it is already one of the biggest destination in the Orascom portfolio.
Bichara has ticked almost every box of the earlier mentioned three pillar strategy. And last year he communicated a new goal:
"The next goal is to focus on shortening timeline to profitability"
ODH presentation (2018)
In the first quarter of 2019 Orascom Development Holding reported a net profit of CHF 1 million. However, for shareholders it was still a loss.
He put his house at stake
Early in his career, in the 90's, Bichara asked the banks for a loan to start his internet venture. The bank had so little faith in his startup’s venture that he had to take a loan for the business out against his house. Bichara co-founded LinkDOTnet, the first internet service provider in Egypt.
"Starting a business around the internet, people weren't sure if it would be something. It took us a whole year and a half as a company to do our first transaction."
When it comes to management skills or managers he looked up to when he was studying in the United States he mentions the legendary General Electric CEO Jack Welch. Bichara describes himself as a team player that is very result oriented, gives power to his team, but expects results in return. His strengths are said to be his analytic skills and his focus on numbers. Something that Orascom Development was lacking in all the years before.
Khaled Bichara himself told a Swiss newspaper that he is not as kind as Samih Sawiris was as a CEO, referring to the Orascom destination managers who could ask for more money whenever they needed more - and usually got it somehow.
He and his team are strictly following the path towards profitability, and budget discipline is one big part of it. After three years with Bichara in power, financial results are starting to shine, with 2019 targets well on track.
Floating of the Pound
In 2016, during Bichara's first year in charge at Orascom, Egypt's central bank floated the pound in an attempt to stabilize its economy. Almost overnight the pound lost 50% of its value. Orascom's balance sheet was still overloaded with debt, unfortunately mainly due in USD. The run of bad luck for ODH continued and Bichara needed to act fast.
In 2016 and after almost a decade of trouble, Net Debt to Adjusted EBITDA was at a factor of 14.5 (!). Bichara then sold non-core assets and restructured debt. In September 2018 it was down at a factor of 3.5.
On a positive note, the low prices for holidays in Egypt have attracted many tourists during the last three years. Today, El Gouna and Orascom Development Egypt is reporting the most profitable year in the history of the company as visitor numbers are increasing and the town is growing fast with real estate sales also at record levels.
Yet, hotel room prices in USD have not reached old levels and have therefore still room to grow to heights before the EGP was floated. This would further increase ODH's margins and profits.
Ferociously, step by step
After all trouble-filled years, something has happened that many investors might not fully realize yet. Orascom Development Holding has ferociously worked on its diversification. The projects that were launched in Oman, Montenegro and Switzerland in the years before and after the IPO are now contributing revenue to the group's results. Many destinations are already profitable or at the brink of it.
The resort of Hawana Salalah and Jebel Sifah in Oman have contributed almost 32% to the revenue of the group in the first quarter of 2019, while Egypt still accounts for a little over 50%.
Last year, the new destination in Montenegro contributed already 10% to the group's revenue. Even the Swiss destination will finally be consolidated in the course of the next two years, adding more revenue and maybe future profits to the holding company.
Looking at the growth rate in the last couple of quarters, something to mention is that the quarterly revenue growth is at about 30% and has been so for quite some time now. Tourism has almost dried out, and therefore this growth comes from very low levels.
Some of the revenue growth is not visible in the financials of the holding company because the devaluation of the EGP has resulted in lower numbers in CHF. However, there is a fair chance that we will see a growth rate in the range of 20-30% or more for another couple of years.
At this point, even though a market capitalization of CHF 660 million looks extremely low for a company of this proportion the number to look at is the enterprise value since it is equally important to look at the debt side of the balance sheet, too. And with around CHF 400 million there remains still a lot of costly debt on the ODH balance sheet.
So far, CBRE has only taken a closer look at two destinations.
Today, ODH owns 49% of ASA, the company behind the Andermatt project, but will buy back 1% and one share to consolidate it during the next two years. Samih Sawiris will forgive CHF 150 million in debt that ASA currently owes him.
Since he is, with about 70%, majority shareholder of ODH he will 'only' lose around 20 million, something he said in an interview with the Swiss financial portal 'cash.ch' he is ready for since it brings clarity to ODH shareholders about the future of the project, something that will lead to a stock price boost and benefits him financially as well.
"The transaction would take place at a purchase price of CHF 3.2 million, valuing ASA equity at CHF 320 million. This enterprise value was determined by way of an independent third-party valuation."
Press release (09 January 2019)
Let's do the math
Orascom Development Holding owns:
More value from other destination to be added on top
Alone the remaining land in El Gouna and the hotels that CBRE looked at are worth 3x the current market cap. CBRE did not value other buildings or assets Orascom owns inside the destination.
At this point, we have to remind ourselves that ODH owns and controls an entire city with hundreds of building, its own infrastructure and everything that comes with it when over twenty thousand people (permanent residents and visitors) are living there all year round.
I expect that the valuation of remaining land and hotels in many other destinations of the Orascom portfolio will add at least another billion on top of the current valuation, with more hidden value still hiding inside the towns.
If ODH keeps growing the towns, the remaining land and its assets will become even more valuable over time. CBRE might have to look at it again in 10-20 years.
Business model in a nutshell:
In the 2009 annual report, the company described the business strategy as follows:
"The Group controls the entire value chain, exercises influence on prices and profit margins and is able to deliver stability through its unique business approach and has therefore a much stronger position than any regular real estate developer. Since Orascom Development manages each building phase, planning will be in line with client demand and, more generally, demand will meet supply and prices will remain well controlled.
This is achieved by securing vast stretches of undeveloped land at low cost, thereby limiting the financial risk, via purchases, leases and options, against relatively small amounts of money which is then developed into a year-round destination. The main advantage of such a procedure is to limit the related carry cost of an undeveloped portion of land bank, given the relatively low price paid, which limits the revaluation downside but at the same time provides a buffer for a high revaluation upside.
To illustrate, the value in El Gouna increased from approximately CHF 2/m2 in 1989 to at least CHF 68/m2 in mid-2008, according to international real estate realtor ERA. "
ODH Annual Report 2008
In 2018, the CBRE report valued the remaining land already at USD 80.- per square meter.
And this is of course only the average, while some plots closer to town or the beach will be sold for a multiple.
While this may sound too good to be true there is also the risky side of it.
As we have seen over the last decade, the tourism sector is a fragile plant that can grow very fast but, in the wrong conditions, shrink even faster. A terroristic attack or any problems in Egypt could bring real estate sales and tourism numbers down again.
If we then look at the CBRE report and the valuation, we could not argue anymore that anybody would be ready to pay USD 1.82 billion for land and hotels where nobody wants to be anymore. Valuation is always just a number. If anybody is ready to pay for it when it matters is a whole different story.
Theoretically, Sawiris could give the green light to his management to start liquidating core assets or land reserves. This would fill up the companies bank accounts very quickly and would send share price sky high. However, it is probably not going to happen. For the company and its shareholders it is more attractive to control the entire destination and make use of the increased land prices later.
There is an unprecedented amount of hidden value in ODH's company valuation. For many years a combination of bad luck and company errors have ruined almost every bit of hope and trust that was left.
All the land that has quietly increased in value over the last decade since infrastructure was put in place is not adequately reflected in the balance sheet. Therefore, the true value of the company is currently not being represented, neither in the financial statements, nor in the stock price.
It is very hard to argue that the company is worth so much less compared to the last decade when ODH has been building so much and diversified to different countries, ultimately de-risking the business model in the process.
Comparing 2007 and 2019
Full year (Target) 2019:
"We believe our assets are not adequately reflected in ODH's stock price."
CEO Khaled Bichara (Sunday, 21 October 2018)
Share price today at 25. June 2019:
CHF 13.70 (Zurich, Switzerland)
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