Earnings Report /
Egypt

ACGC: Q4 18/19: Profitability bottoms out; downgrade to Equalweight

    Mohamed Hamza
    Al Ahly Pharos Securities Brokerage
    15 October 2019

    Cotton trading hits top line performance

    ACGC recorded Q4 18/19 revenues of EGP159mn, down 65% yoy and 77% qoq. ACGC also recorded FY18/19 revenue of EGP1,660mn vs EGP2,028mn, dropping by 18% yoy. The annual drop came on the back of the unstable local cotton pricing policy, as well as the decline in global cotton prices due to the US-China trade war, which had a direct negative impact on all the activities of the company and its subsidiaries, especially Modern Nile Company, whose main revenue stream is the exportation of finished-cotton.

    Operating margins slashed

    Sequential and annual Q4 18/19 GPM witnessed a 9.7ppts and 6.5ppts improvement, respectively as a result of an aggressive drop in sales activities. On the other hand, FY 18/19 GPM dropped by 0.8ppts yoy to record 14.9% on account of revenue drop (-18% yoy) outpacing COGS drop (-17% yoy). We note that around 66% of total FY 18/19 COGS is attributed to cotton purchases (which has declined by 26% yoy) whereas cotton trading revenue (48% of total revenue in FY 18/19) decreased by 47% yoy. 

    Weak quarterly top line operations steered to negative EBITDA figure of EGP8mn. In contrast, full-year EBITDA margin recorded 9.4% vs 11.2% in FY 17/18 (-1.8ppts yoy). Both quarterly and full-year EBITDA margins dropped due to SG&A expenses rising by 54% yoy in Q4 18/19 and 13% yoy in FY 18/19, respectively. 

    FY 18/19 attributable NPM recorded 0.1% vs 8.2% in FY 17/18 on the back of an early-retirement scheme for 603 employees for an amount of EGP38.2mn as well as an increase in interest expense by 42% yoy (primarily attributed to Modern Nile Company’s increased interest expense of EGP46mn). 

    Stock needs catalysts, downgrade to Equalweight

    With consensus forecasts of higher global cotton prices in 2020/2021, we should expect ACGC’s profitability to recover gradually over the next two years. According to Bloomberg consensus, global cotton prices should go up to 69.95 cents/lb by FY 20 and 69.90 cents/lb in FY 21 versus 66.5 cent/lb in FY 19. Current average export prices stands at an average of EGP2,173 per quintal, with an expectation to rise to EGP2,342 per quintal in FY19/20. 

    Saudi Egyptian Industrial Investments Company (SEII) acquired a 8% stake in ACGC. SEII intends to join the board of directors and submit a plan to restructure company affiliates. With management’s effort to improve efficiency, it was announced recently that SPIN, an affiliate of ACGC, decided to offer fully discontinued and consumed yarn production lines for sale.

    Due to weak operating indicators, we downgrade our recommendation to Equalweight, pending a review of assumptions. ACGC is trading at an EV/EBITDA19/20 of 6.4x and P/E19/20 of3.8x, which is higher than EM peers’ average EV/EBITDA19 of 5.2x and lower than EM peers’ average P/E19 of 7.0x, in light of the high debt accumulated (EGP893mn) in FY 18/19 to purchase high stock of cotton. Management approved a DPS of EGP0.1/share (DY 5.6%).