Equity Analysis /
Egypt

ACGC: Valuation update: In search of recovery; downgrade FV

    Al Ahly Pharos Securities Brokerage
    10 December 2019

    We update our valuation and revise our FV to EGP1.60/share (down from EGP3.32/share); Equalweight

    We downgraded our FV as we expect ACGC to continue its negative performance in FY19/20 on the back of 1Q19/20 net loss recording EGP30 million as a result of increased cost pressure and higher interest expense. We also rolled over our model for 1 year and incorporated revised FX rates and risk-free rate. We are currently awaiting further developments regarding efforts to ensure higher efficiency in the coming periods. ACGC is trading at an EV/EBITDA20 of 8.8x, which is higher than EM peers’ average EV/EBITDA20, in light of the high debt accumulated in September 2019.

    Efficiency & sector catalysts drive slow recovery 

    In FY18/19, management have put in efforts to ensure higher efficiency to make up for increased cost pressures. Spinalex (SPIN), an affiliate of ACGC, announced that 4 bids have been submitted to acquire their fully depreciated yarn production lines and are currently being studied. Also, SPIN announced that it has reached an agreement to sell part of its unutilized 22,000m2 land in Al-Nozha Alexandria for EGP210 million following a reported net loss of EGP62.5 million in FY18/19. This was mainly driven by an early-retirement scheme for 603 employees to cost EGP38.2 million as well as 47 additional employees in September 2019. As for sector-specific updates, private cotton companies, including ACGC, will participate in the new cotton auctioning mechanism by FY20/21. The Holding Company for Spinning and Weaving decided to put aside selling cotton exports at a minimum price as cotton exports were sold at different prices to different clients with a goal to remain competitive globally. All these catalysts, if implemented, should support margins to recover to pre-2016 floatation levels. 

    Margins to recover gradually following gloomy FY19/20

    With consensus forecasts of stable global cotton prices, we project FY19/20 to record a net loss of EGP10 million along with increased debt, which will result in a high interest expense payment of c.EGP149 million. As debt levels and interest rates dwindle over our forecast horizon, we should see profitability grow at a CAGR of 48% over FY20/21 to FY23/24. We also believe that margins could be slightly enhanced by the anticipated EGP/USD depreciation starting from FY21/22 as ACGC take advantage of increased cotton exports.