ODHN's amicable settlement with Falcom Hotels

Naeem Analysis Orascom Development
	Egypt Ÿ 23 June 2014

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Orascom Development's cordial settlement with Falcon Hotels, likely to reverse CHF56m provisions ►      Orascom Hotels and Development (ODHN) has reached an amicable settlement with Falcom Hotel, regarding the purchase and development of the Cape Citadel project and hotel ►      The settlement is likely to result in the reversal of CHF54m worth of provisions, all of which were booked by ODHN earlier on account of the dispute ►      As part of the overall settlement, effective immediately, Falcon Hotels SAE and its controlling shareholders have recognized the entitlement of Orascom Development, its partners and subsidiaries to receive all revenues from the Cape Citadel Hotel's operations Background of the case: ►      In 2008, ODHN entered into a transaction with Falcon Hotels for the purchase and development of the Cape Citadel project and hotel. This transaction later resulted in multiple disputes between Falcon and Orascom Development, its partners and subsidiaries ►      The disputes included numerous litigation procedures as well as four major arbitration proceedings in two different jurisdictions, and also resulted in ODHN to book one-time provisions ►      Cape Citadel is a five-star hotel with 514 rooms located in Sahl Hasheeh, south of Hurghada. The hotel generated a net profit from operations of CHF4.2m during 2013 Our take - Positive ►      The one-time gain of CHF54m, which is about 80% of the previously booked provisions, is likely to boost ODHN's bottom-line, most likely in 2Q14 ►      This should also help ODHN to strengthen its hospitality portfolio in Egypt, where we are expecting recovery in tourism activity in 2H14 ►      Important to note that Shal Hasheesh, Hurghada and El Gouna, where ODHN owns most of its assets, witness relatively healthy/stable tourist activities compared to Sharm El Shaikh; as the latter has suffered a lot on security concerns due to proximity to Sinai Going forward - 1H14 to still be subdued, while improvements to follow in 2H14 ►      ODHN's monetization and cost saving initiatives should help the group manage its expenses, and improve balance sheet. Therefore, we might see improvement in financials at the operating cost level in 2014. However, for the company to return to the growth trajectory, we believe that the overall tourism situation needs to improve in Egypt. ODHN recently agreed to sell some of its non-core assets in Egypt to Egyptian Resorts Group (EGTS, owned 4.5% by ODHN) for EGP1bn. Whilst we view this as a positive move, we still await more clarity on the deal before incorporating the same into our valuation; given that EGTS is expected to incur a capital increase to fund the EGP1bn payment and, ODHN may receive the payment partly in shares in case EGTS fails to attract 100% subscription to the rights issue ►      Tourism trend still down YoY, but shows improvement MoM. Number of tourists visiting Egypt till April 2014 YTD is down 28% YoY to 4m. However, tourist arrival numbers have been improving every month with March and April numbers depicting 22% and 14% MoM growth, respectively. We believe that 2Q14 would also be challenging to the company (from a top-line perspective). We expect gradual recovery starting 2H14 on the tourism front, given completion of the presidential elections. Smooth transition to a newly elected government should help a lot to stabilise the overall tourism industry in Egypt, and in-turn, helping ODHN to bounce back We continue to recommend an ACCUMULATE on ODHN

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