Lower revenues despite strong volume growth
ALCN reported strong growth in the number of containers, handling c.974k containers in FY18/19, up from c.871k in FY17/18; an increase of c.12% YoY. However, a decline of 4.2% in revenues was witnessed in FY18/19, recording EGP2.89 billion in FY18/19, compared to revenues of EGP3.01 billion in FY17/18; slightly higher than our estimates of EGP2.87 billion. USD denominated service fees per container dropped to USD168.5/container, from USD194.2/container; a decline of 13.2% YoY, leading to lower revenues and offsetting the witnessed growth in volume.
On the bright side, the impact of the upward revision in service fees has led to a lower decline YoY in USD service fees, by 13.24% in FY18/19, less than the decline of 14.54% in 10M18/19. The upward revision in fees should positively impact FY19/20 and FY20/21 operations and push upwards our FV to EGP15.43/share ignoring the impact of EGP appreciation.
Tighter margins pressured profitability
Faster growing COGS than revenues pressured profitability and tightened margins. COGS grew by 13.4% in FY18/19, reaching EGP955 million, compared to EGP842 million in FY17/18. Accordingly, GPM dropped to 67% in FY18/19, down from 72% in FY17/18, a YoY decline of 5.1pps.
Lower interest income on a lower cash balance and higher FX losses on EGP appreciation lead to a 26.3% YoY decline in bottom line, dropping to EGP1.80 billion in FY18/19, compared to EGP2.45 billion in FY17/18. Bottom line came slightly below our expectations of EGP1.99 billion on tighter margins and lower than estimate service fees.
ALCN was historically driven by EGP depreciation and high interest rate environment since ALCN service fees are denominated in USD and the company enjoys a healthy cash balance. Currently, a lower cash balance as well as the witnessed EGP appreciation led to weaker profitability and further margin contraction, despite the recovery in volume growth after the import restrictions eased and with improved trade activity, which where historically our concerns on operations.
FY19/20 and FY20/21 outlook
- Impact of current upward fees revision should appear on a monthly basis and lead to faster revenue growth and profitability, which might be slightly diluted by EGP appreciation and a possible shift in volume mix.
- Completion of Terminal 96 deepening project phase 1 is expected to be completed by the end of the current calendar year (Nov-Dec 2019) would allow ALCN to maintain an annual growth rate of 12% on average in the number of containers handled.
- Deepening project phase 2 will commence post the completion of phase 1 and will last for 1.5 years
Upward revision of service fees and planned expansion should drive revenue growth and boost profitability. Impact of upward revision of service fees started to appear MoM and should lift pressure on margins going forward. We expect revenues to grow by 5.1% in FY19/20 and by 21.4% in FY20/21 post the completion of expansion projects.
We reiterate our Equalweight recommendation on ALCN with an unchanged FV of EGP14.50/share. ALCN is currently trading P/E 2018/2019 of 10.0x, and EV/EBITDA 2018/2019 of 8.2x.