Earnings Report /
Egypt

Egypt Cement 2Q wrap: Depressed volumes hammer revenues, yet losses averted

  • Challenging quarter for cement demand and prices, ARCC: Loss induced by FX losses; top line pressured by lower volumes

  • MBSC: Bottom line supported by tax savings, Top line hit by lower volume, Cash is king

  • MCQE: Lower finance costs saves bottom line; Revenues get hit but margins withstand storm

Al Ahly Pharos Securities Brokerage
16 August 2020

Challenging quarter for cement demand and prices on seasonality, global markets and regulatory changes

Total cement sales (local + exports) stood at 10.1 million tonnes in 2Q20, down 12.0% YoY and 61.4% QoQ and utilization rates recorded 59% in 1H20 and 55% in Jun-20. 2Q20 was definitely a challenging quarter for the cement sector’s sales performance since it included the peak of the pandemic lockdowns and the narrow window for construction between Iftar and the curfew during Ramadan  (less than 3 hours), and the decision to cease new building permits in capital cities of governorates for 6 months. 

Looking ahead, we expect sales volume to witness some soft recovery in 3Q20 and to gradually improve in 4Q20 when private demand for building materials is projected to recover sequentially, especially with the resumption of issuing building permits, if it happened. Average retail prices in 2Q20 reached EGP764/tonne, down 5% QoQ, and 9% YoY, and currently, prices are in the neighborhood of EGP740/tonne which is better than the EGP725/tonne seen in Jun-20. We expect prices to slowly revert to the pre-pandemic levels which were still suffering, nonetheless. The margins of key cement players were affected by the weak pricing environment during the quarter, yet the EGP0.10 enacted electricity cut imposed during 2Q20 acted as a cushion for margins and kept the impact in check.

ARCC: Loss induced by FX losses; topline pressured by lower volumes

ARCC topline stood at EGP621 million, down 19.6% YoY, and 11.6 % QoQ. The company beat our 2Q estimates on prices where Average realized price/tonne exceeded the EGP608 mark decreasing by 8% YoY and 1% QoQ. Yet the slump in revenue is mainly attributed to a hit in 2Q20 volumes by 3.8% YoY and 52.9% QoQ.

2Q20 attributable net losses came in at EGP22 million (only higher than our estimates by EGP2 million) compared to a net profit of EGP19 million in 2Q19 and a net profit of EGP16 million in 1Q20. The bottom line turned into losses owing to weaker sales and lower margins but was heavily hit by FX losses in tandem with the depreciation in the exchange rate that happened in the quarter which amounted to EGP16 million versus an FX gain of EGP26 million in 2Q19 and EGP 15million in 1Q20.

Gross profit came in at EGP35 million, down 33.2% YoY, and 25.5% QoQ. GPM dropped slightly to 5.6% compared to 6.8% in 2Q19 and 6.7% in 1Q20. EBITDA recorded EGP76 million, down 14.2% YoY and 16.2% QoQ. EBITDA margin came in at 12.3% versus 11.5% in 2Q19 and 13.0% in 1Q20.SG&A spending was EGP20 million, down 20% YoY, and up 5% QoQ. SG&A/Sales remained flat at 3.3% compared to 2Q19 but rose from 2.8% in 1Q20.

Net debt rose to EGP732 million as of June 20 end, from EGP728 million in June 2019 and was up from EGP243 million in March 2020, owing to higher cash burn during the quarter as the cash balance decreased to EGP108 million in June 2020 from EGP485 million in March 2020. ARCC is currently trading at an FY20E P/E of 165.5x, EV/EBITDA of 5.9x, and EV/Tonne of USD27.6.

MBSC: Bottom line supported by tax savings, topline hit by lower volume, cash is king

MBSC 2Q20 revenue came in at EGP216 million versus EGP454 million in 2Q19 and EGP405 million in 1Q20 locking in a drop of 52.4% YoY and 46.6% QoQ. The weak top line is mainly attributed to a hard blow to 2Q20 volumes by 73.2% YoY and 52.6% QoQ. We would like to highlight that the top line was almost perfect in line with our estimates of EGP223 million variance of only 3%.

2Q20 attributable net income came in at EGP29 million, as opposed to a net profit of EGP16 million in 2Q19 (83.3% up) and a net profit of EGP59 million in 1Q20 (50.5% down). The company significantly beat our bottom-line estimates on the back of immense tax savings as 2Q20 tax expense was EGP2 million compared to EGP19 million In 2Q19and EGP8 million in 1Q20, implying an effective tax rate of 6% in 2Q20 versus 54% in 2Q19 and 26% in 1Q19. Additionally, the company has cut its SG&A spending and had a high investment income and other revenues.

Gross profit came in at EGP11 million, down 28.0% YoY, and up 2.3% QoQ. GPM increased to 5.3% compared to 3.5% in 2Q19 and 2.8% in 1Q20. The increase in margins is mainly driven by electricity savings and stable prices due to the company's ability to sell its products in the upper Egypt area, where prices are generally higher than other governorates. EBITDA recorded EGP41 million, down 33.3% YoY and 27.3% QoQ mainly due to lower D&A expenses. EBITDA margin came in at 19.0% versus 13.6% in 2Q19 and 14.0% in 1Q20.SG&A spending was EGP5 million, down 20% YoY, and 25% QoQ. SG&A/Sales, however, rose to 2.2% compared to 1.3% in 2Q19 and 1.5% in 1Q20 due to the weaker top line.

MBSC continues to reflect a "cash is king" pick as net cash recorded a robust balance of EGP925 million as of June 20 end (EGP12.33/Share) and (Net cash + investments of EGP14.6/Share), from EGP876 million in March 2020 and EGP1,026 million in June 2019. MBSC is currently trading at FY20E P/E of 11.2x, negative EV/EBITDA of 0.74x, net cash & investments representing 1.10x the market cap resulting in negative enterprise value. We expect FY20 DPS of EGP2/share implying a generous DY of 15.0%.

MCQE: Lower finance costs saves the bottom line; revenues get hit but margins withstand the storm

MCQE topline stood at EGP530 million, down 27.5% YoY, and 35.0 % QoQ. The drop in revenue is mainly attributed to a huge hit in 2Q20 volumes by 19.5% YoY and 65.9% QoQ.

2Q20 attributable net profit came in at EGP14 million compared to a net profit of EGP5 million in 2Q19 and a net profit of EGP38 million in 4Q19, up 165% YoY and down 61.9% QoQ. The bottom line remarkably improved in comparison to 2Q19 mainly on the back of savings resulting from 42.5% lower net finance costs due to the lower interest rate in 2Q20 after the CBE has cut interest rates multiple times from the levels of Feb 2019.

Gross profit came in at EGP88 million, down 24.5% YoY and 32.8% QoQ, nevertheless, GPM improved slightly to 16.7% compared to 16.0% in 2Q19 and 16.1% in 1Q20. The improvement in margins is driven by electricity cuts which took place by the end of March 2020.

EBITDA recorded EGP87 million, down 14.6% YoY, and 36% QoQ. EBITDA margin came in at 16.4% versus 13.9% in 2Q19 and 16.7% in 1Q20.SG&A spending rose to EGP42 million, up 21% YoY and 20% QoQ. In the meanwhile, SG&A/Sales rose to 7.9% from 4.7% in 2Q19 and 4.3% in 1Q20.

Net debt declined to EGP966 million on June 30, 2020, from EGP1,018 million on June 30, 2019, and was up from EGP861 million on March 31, 2020, owing to higher cash burn during the quarter as the cash balance decreased to EGP150 million in June 2020 from EGP 302million in March 2020.

MCQE is currently trading at an annualized 1H20E P/E of 6.1x, EV/EBITDA of 5.7x, and EV/Tonne of USD28.5.