Equity Analysis /
Egypt

Ceramics Sector: Tiles in the time of unaffordability

    Mark Adeeb
    Mai Ayoub

    Purchasing power headwinds in sight

    We expect the sector’s top line to grow modestly on the back of weak purchasing power coupled with an inability to fully pass on surging costs. Additionally, EGP stability will weigh on export sales, especially for Lecico which is an export-driven company, with exports amounting to c.48% of its total revenues, affecting its top and bottom line performance. Looking ahead, we expect 1) Gemma to record a top line growth of 7.5% y/y in FY19 and a FY19-23 revenue CAGR of 12%, and 2) Lecico to report revenue growth of 12% y/y and a revenue CAGR of 11% over our forecast horizon.

    Bottom lines in negative territory

    We expect margins of both companies to decline in tandem with weak sales and rising costs. In our view, Gemma’s GPM will go down by c.4 pps reaching 17.1% in FY19 and gradually recover to 22.3% by the end of our forecast horizon. Based on our estimates Gemma will likely report a loss of EGP18mn in FY19 and swing into positive territory afterwards, owing to the improvement in terms of volumes and pricing. For Lecico, we expect blended GPM to decline to 15.1% in FY19 compared to 17.4% in FY18 and gradually recover to 20.4% by the end of our forecast horizon. Lecico will likely remain in negative territory in FY 19 and FY20, given current market dynamics and the company’s net debt position. A possible improvement afterwards will be on the back of cutting production and the associated costs in Lebanon and having products supplied by Egypt where production is much cheaper. The restructuring plan will supposedly help reduce manufacturing costs by c.USD 2.6 mn a year.

    Cut Gemma’s FV to EGP7.50; Reiterate Underweight

    We reiterate our UW recommendation on Gemma while cutting our FV to EGP 7.50/share on declining margins and weak recovery in the purchasing power. Gemma is currently trading at FY19 EV/EBITDA of 13.3x. We believe that the stock price is unjustifiably high.

    Underweight LCSW on a FV of EGP3.00; Potential alpha in land monetization

    We recommend UW on LCSW on a FV of EGP 3.00/share. LCSW is currently trading at FY19 EV/EBITDA of 9.2x. It is worth noting that the company is currently selling 28k sqm of industrial land in Lebanon, which we do not account for in our FV. The Land plot could be worth from EGP1.5- EGP6.2 per share, depending on the time of sale and land value (see Land Plot Valuation table).