Equity Analysis /
Egypt

Cement sector Q1 19 wrap up: Margins depressed on declining demand

    Mark Adeeb
    Mai Ayoub

    Margins pressured on waning demand

    On a quarterly basis, top line was either flat for companies that export or declined for companies in upper Egypt and close to the army’s new plant in Beni Suef. Margins remained pressured amid excess supply coupled with declining local demand and exports (12.3mn tons in 1Q19, down 9.0% y/y). 1Q19 selling prices fell 5.3% q/q and 13.8% y/y. Looking ahead, we expect prices to remain weak in 2Q19 on the back of weakening demand during Ramadan and excess supply. Excluding unusual items, fx gains, and capital gains, we expect the sector to remain in negative territory and margins to remain pressured.

    The way out

    We reiterate our views that improvement will be driven by 1) sector consolidation, 2) rebounding demand, and/or 3) more players exit the market. Otherwise, performance will remain weak.

    ARCC: FX gains spare bottom line

    1Q19 revenue stood at EGP828mn, down 9.4% y/y and up 0.3% q/q. The decline in average selling prices on an annual basis led to both top line decline and margin contraction. 1Q19 GPM recorded 5.3% vs 26.1% in 1Q18 and 4.0% in 4Q18. The company reported attributable net income of EGP6mn, thanks to booking an fx gain of EGP24mn during the quarter. If we mute this gain, attributable net loss came in at EGP18mn.

    Exports down in tandem with strengthening EGP

    Exports contribution to volumes fell to 6.5% versus 10.0% in 4Q18. Looking ahead, we expect exports to decline further in tandem with strengthening EGP against the USD and the company could likely attain gross loss on cement exports. ARCC is currently trading at FY19 P/E of 12.0x, EV/EBITDA of 4.7x, and EV/ton of USD31.

    MBSC: Interest income drives profitability 

    1Q19 revenue came in at EGP436mn, down 29.6% y/y and 19.1% q/q. Volumes likely declined due to the plant’s close proximity to the army’s plant in Beni Suef. Net cash position bolstered bottom line as the company reported net interest income of EGP28mn and bottom line of EGP30mn. Net cash currently stands at 72% of market cap and MBSC is trading at FY19 P/E of 9.0x, EV/EBITDA of 1.5x, and EV/ton of USD8.

    MCQE: Margins paradoxically higher than average 

    MCQE reported paradoxically higher than expected margins. GPM recorded 14.4% vs 24.7% in 1Q18 and 15.8% in 4Q18. Bottom line came in at EGP11mn, down 79.3% y/y and 41.3% q/q. Looking ahead, we expect margins to deteriorate further. MCQE is currently trading at FY19 P/E of 16.5x, EV/EBITDA of 4.4x, and EV/ton of USD29.