Equity Analysis /

Egypt Aluminum: 3Q18/19 – Strong headwinds weigh on performance

    Mark Adeeb
    Mai Ayoub

    Aluminium prices weigh on top line 

    EGAL reported 3Q18/19 revenue of EGP 2.922mn, down 19% y/y and 14% q/q. Top line declined on the back of 1) declining aluminium prices to USD1,883/ton in 3Q18/19 (down 12.8% y/y and 4.6% q/q), and 2) 1.78% EGP appreciation against the USD in 3Q18/19. Gross loss margin recorded 4% in 3Q18/19 vs. a GPM of 22% in 3Q17/18 and 4% in 2Q18/19. On an annual basis, margins declined due to rising electricity tariff amounting to EGP1.11 /KWh (up c.43% y/y). The company attained a net loss of EGP43 mn in 3Q18/19 vs. a net profit of EGP 715mn in 3Q17/18 and 2Q18/19 EGP289mn. 

    Performance to remain depressed on rising electricity tariff; Solar energy is a source of hope

    In light of the government’s plan to phase out subsidies on energy, we expect margins to decline further, given that electricity contributes c.48% to COGS. We factor in 20% electricity hike in FY19/20 and we expect electricity prices to reach EGP1.62/KWh by FY22/23. If EGAL was able to construct the 300MW solar power plant on a build-own-operate (BOO) basis, this could offer respite assuming that EGAL could purchase electricity at USD0.06KWh or lower. It is worth noting that solar production would satisfy only 11% of EGAL’s electricity consumption, assuming that the company will proceed with the expansion plan (250 k per annum).  

    Likely to miss our FY18/19 estimates; Maintain UW

    In light of the current market dynamics namely 1) lower than expected aluminium prices, 2) stronger than expected EGP, and 3) rising electricity tariff, we expect the company to miss our FY18/19 estimates. We have an UW recommendation.