Earnings Report /
Egypt

Alexandria Containers and Cargo: H1 19/20 results: Weak performance on EGP strength and lower volumes

    Al Ahly Pharos Securities Brokerage
    4 February 2020

    Revenues decline on EGP strength and lower volumes

    ALCN reported 1H19/20 revenues of EGP1.25 billion, compared to EGP1.41 billion in 1H18/19; a decline of 11.3% YoY. Number of containers handled dropped to 440.5k containers in 1H19/20; a decline of 5.9% YoY. Although USD denominated service fees increased by c.3.4% YoY in 1H19/20 on the back of the upward revision of service fees effective March 2019; it was not enough to offset a stronger currency. Higher USD service fees were not enough to offset a stronger EGP that appreciated to reach an average of EGP16.26 in 1H19/20 (-9.7% YoY), lower than 1H18/19a average exchange rate of EGP17.84. 

    We have accounted for a constant annual increase of 3.0% in USD denominated service fees per container – despite an expected annual 3-5% increase post revision of service fees upwards – to account for any potential unfavourable shift in revenue mix or future discounts offered to shipping lines that usually drag down blended USD service fees. Despite increasing annually by 3.0% over FY19/20 to FY23/24, higher USD service fees are not enough to offset a stronger EGP that is strengthening to a FY19/20 YTD average of EGP16.19 (-8.4% YoY), lower than FY18/19a average exchange rate of EGP17.55, and strengthening to EGP15.74 as of 4 February 2020. 

    Tighter margins on unfavourable revenues and Rev/COGS currency mismatch 

    ALCN continue to report tighter operating and bottom line margins due to the fact that revenues are USD driven, and continue to be held back by the EGP/USD appreciation, and costs are mostly EGP denominated. Since COGS grew by 4.3% YoY in 1H19/20 and revenues declined by 11.3% YoY; accordingly, GPM dropped to 61.2% in 1H19/20, down from 67.0% in 1H18/19, a YoY decline of c.5.8pps. Faster growing COGS than revenues pressured profitability and tightened margins. 

    We expect costs to grow by an average of 10.0% per year over the forecast horizon, facing inflationary increases when revenues are not growing as much because they are driven mostly by the exchange rate which is not weakening enough to cover these costs over the forecast horizon. However, we expect ALCN to miss our revenue and profitability estimates on stronger-than-expected exchange rate. 

    Lower profits on lower revenues, tighter margins and FX losses 

    ALCN reported net profits of EGP740.0 million in 1H19/20, compared to EGP963.0 million in 1H18/19; a decline of 23.2% YoY. Accordingly, NPM dropped to 59.2% in 1H19/20, down from 68.4% in 1H18/19; a YoY drop of c.9.2pps. The sequential deterioration in profitability is driven by lower revenues, tighter operating margins on revenues and COGS currency mismatch and FX losses. ALCN reported FX losses of EGP62.3 million in 1H19/20 (we have accounted for c.EGP172.4 million FX losses in FY19/20f). 

    Despite being pressured on the top line and bottom line levels, ALCN continues to be a dividend play offering a consistent payout ratio of more than 60.0%. We expect ALCN to maintain a payout ratio of 67% over the forecast horizon. We expect FY19/20 DPS of EGP0.78 per share and implying FY19/20 DY of 7.9%. 

    EGP strength threatens FV

    ALCN’s operational performance mirrors exchange rate movements and is negatively impacted by the witnessed exchange rate appreciation. Despite the company’s efforts to drive recovery through the upward revision of service fees and expansion plans that will eventually drive growth, it is not enough yet to offset the negative impact of EGP appreciation. FV is subject to a downgrade if EGP continues to strengthen without being offset by solid growth in number of containers handled and higher USD service fees (check table 2 in full report). We downgrade ALCN to Equalweight with an unchanged FV of EGP13.50/share. ALCN currently trades at FY19/20 P/E of 8.5x, broadly in line with its 5-year and 9-year average of 8.7x and 10.1x, and below global peer average of 15.3x.