Equity Analysis /
Egypt

Alexandria Containers and Cargo: Valuation update: Stronger currency undermines potential recovery

    Al Ahly Pharos Securities Brokerage
    28 October 2019

    A Stronger Currency Faded out Potential Recovery

    ALCN’s operational performance was massively hammered by EGP appreciation, FX losses, discounts on USD denominated service fees per container, lower cash balance and a declining interest rate environment. 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. ALCN currently trades at FY19/20 P/E of 9.2x and EV/EBITDA of 8.0x, compared to global peer average of 15.1x and 8.4x. We upgrade our recommendation from Equalweight to Overweight because of the recent share price slump, despite the fact that we lowered our FV from EGP14.50 to EGP13.50; since we incorporate:

    1. lower EGP/USD exchange rate assumptions, with EGP/USD 17.21 into perpetuity compared to EGP/USD 22.07 previously,
    2. the upward revision of USD denominated service fees (effective March 2019) post discounts offered,
    3. lower volume growth in FY19/20 and FY20/21, due to deepening project extended timeline and keeping our post completion previous assumptions of 10.0% annual growth in number of containers starting FY21/22,
    4. tighter operating and profitability margins, given the fact that revenues are mostly USD driven, with no significant depreciation in the EGP/USD FX rate and costs are mostly EGP denominated. Costs are expected to grow by an average of 10.0% per year over the forecast horizon, therefore costs face inflationary increases when actually revenues are not growing as much because they are driven mostly by the exchange rate which is not weakening significantly over the forecast horizon.

    However, ALCN continues to be a dividend play with more than 60.0% payout ratio and FY19/20f DY of 7.3%.

    Negatives Cancel Out Positives

    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. We expect the total number of containers to grow by a CAGR of 6.9% between FY19/20 and FY23/24, post the completion of the planned expansion projects and trade activity pick-up. We expect the number of containers to grow by 10.0% per annum starting FY21/22, post the completion of expansion projects and after minimally growing by 2.0% and 3.0% in FY19/20 and FY20/21.

    Given the current monetary easing and removing import restrictions, we believe that Egypt’s imports and exports each would grow by a CAGR of 10.0% over FY18/19-FY22/23. The Impact of current upward fees revision should appear on a monthly basis and lead to faster revenue growth and profitability, but will be faded out by EGP appreciation and with a possible shift in revenue mix (Imports vs Exports Handling mix). Hence, faster growth in number of containers handled and higher services fees collectively drive revenue growth; but might not necessarily offset a stronger currency