Sobha fair value target price R310

REVENUES were down 42% y-o-y largely as sales from existing projects remained weak and only part of Dream Acres reaching revenue recognition during the quarter. The Ebitda margins, however, improved to 27.9%, up 1.4 points on a Q-o-Q basis attributable to higher margin Dream Acres project.

The Thrissur mall commenced operations during the quarter and is expected to be a source of long term revenue generation. The company expects its topline to improve over next few quarters with more projects reaching revenue recognition.

Out of 12/13 wings of the Dream Acres project in phase 1, construction in 4 wings is now in full swing but the project might not contribute substantially to the P&L until 1Q FY17. The company has even opened booking for 2 towers in phase 2 of the project.

The 3.2msf Gurgaon group housing project is likely to be launched in late February. Besides, there are more launches lined up - Cochin project and a couple of smaller projects.

Sobha was able to tighten its cost during the quarter reflected in lower overall construction spend. Net debt to equity ratio improved slightly to 0.81.

Based on its ongoing projects, we expect Sobha to generate R58 billion of free cash flows over the next four years, amounting to about 119% of its current enterprise value.

We are cautious on Sobha achieving its full year guidance as it will highly depend upon new launches.

We calculate a 12m fwd fair value by applying a 38% disc. at 0.5SD below mean to our NAV estimate of R566. The 12m fair value is then discounted back by one year to reflect the current fair value target price of R310.