Equity Analysis /

Egypt Cement 4Q19 Wrap – Volumes drive revenue; margins improve on cost savings

  • FY19 demand recorded 49.8mn tons, down 0.8% y/y

  • Average realized prices declined EGP11/ton q/q in 4Q19

  • ARCC – Overweight with a fair value of EGP 5.50 | MBSC – Overweight with a fair value of EGP 22.00

Al Ahly Pharos Securities Brokerage
1 March 2020

Efficient players report better margins on favorable cost structure

FY19 total sales volume (local + export) slightly declined to 49.8mn, down 0.8% y/y and above our estimate of 48.5mn. On a sequential basis, sales volume grew 9.8% on the back of 1) increased wholesaler purchases towards the year-end to qualify for incentives and rebates and 2) Eid vacation in 3Q19. While average realized prices declined by EGP11/ton during the quarter, efficient companies such as ARCC were able to improve their margins, thanks to integrating higher local pet coke into the energy mix.

Looking ahead, we expect sector performance to remain weak in FY20 unless 1) the government intervenes by setting a price floor for cement, and/or 2) inefficient players exit. We believe that even if demand grew in the coming 2-3 years, it will not be able to absorb the supply/demand gap.

ARCC: Margins improve on pet coke integration and solar energy

4Q19 revenue came in at EGP757mn, down 8.3% y/y and up 1.6% q/q on the back of lower realized prices and despite achieving 7.6% q/q growth in sales volume. 4Q19 EBITDA margin improved to 14.3% vs. 12.0% in 3Q19 and 9.7% in 4Q18. The improvement was entirely driven by achieving 50% local pet coke mix into the energy mix along with the solar power plant the company recently built. Attributable net loss recorded EGP4mn which came on the back of booking interest expense related to the licenses of EGP15mn during the quarter. ARCC is currently trading at FY20 P/E of 27.6x, EV/EBITDA of 5.3x, and EV/ton of USD26.

MBSC: Solid balance sheet bolsters performance

4Q19 revenue came in at EGP443mn, down 17.8% y/y and 6.9% q/q. The sequential decline was driven by both lower realized prices and 5.4% decline in sales volume. EBITDA margin came in at 13.5% vs. 8.4% in 4Q18 and 13.7% in 3Q19. Net income came in at EGP13mn, up 257% y/y and down 38.8% q/q. MBSC is currently trading at FY20 P/E of 23.2x, EV/EBITDA of 0.9x, and EV/ton of USD2.6.