Flash Report /

Egypt Kuwait Holding: Management webinar key takeaways

  • On-the-ground updates on 2020

  • NileWood MDF project

  • Future outlook

Al Ahly Pharos Securities Brokerage
19 January 2021

On-the-Ground Updates on 2020

  • Management is anticipating flat YoY growth of attributable net profit in 2020, with figure anticipated at USD 115-116 million.

  • Management also expect to report solid FY2020 performance across all business lines. However, strong growth in topline my not filter down to the profit level on the back of weak interest income contribution post the CBE’s cuts in rates.

  • Recent updates include: 1) Raising stake in AlexFert to 45.3% from 38%; 2) Nile Wood (MDF project) is now a reality and under construction; 3) The insurance line of business is starting to become a dedicated segment as EKHO bumped their stake in Delta Insurance from 55% to 61.5% and acquired a 24.9% stake in Mohandas Life Insurance Co, signaling EKHO’s intent to unlock the value embedded in the Egyptian insurance market.

Nat Energy

  • In association with EGAS, NatGas managed to renew its exclusive natural gas distribution concession to a sizeable 15 years, giving management revenue visibility until FY2035.

  • NatGas reported slight drop in its number of installations in 9M20 vs 9M19 on the back of   operational restrictions caused by the lockdowns/pandemic. However, clients missing on converting from cylinders to natural gas will be added to NatGas’s network sooner rather than later.

  • Management also communicated ambitious plans regarding NatGas’s possibility of adding c.1.6 million households to its existing universe of 1.7 million.

  • Kahraba, was not able to deliver on its plans to install a further 40MW of generation capacity in 2020, settling on 20MW in 2021 while adding the remaining 20MW in 2021 and expects to reach its current maximum generation capacity of 115MW in 1H21.

  • Currently, due diligence and studies are being conducted regarding entering the CNG fueling stations field and making use of the government’s CNG initiatives.

  • Nat Energy is expected to close FY2020 with attributable net profit of USD38 million and USD47 million in 2021, driven by 5-7% increase in gas distribution volumes and electricity utilization rates.

Sprea Misr

  • According to management, Sprea’s local market presence has and continues to remain resilient. However, weak exports activity has hindered its strong performance as export activities shrunk in 2Q20 and 3Q20.

  • With regards to its main feedstock, methanol, the commodity has been steadily gaining price momentum on the back of recovering oil prices and a booming Chinese economic recovery.  Management are adamant that such gains are not expected to bite into Sprea’s margins as the company has the ability to pass cost increase to its customers, using a cost-based pricing formula.

  • Sprea is expected to close FY2020 with attributable net profit of USD38 million and USD46 million in 2021. This will be driven by 1) In 4Q20, according to management, export activity seems to be gaining momentum which may well continue into 2021. 2) 4Q20 improvement in its SNF line of business is considered a major boost to sprea’s earnings. 3) Ant-dumping fees imposed on imported Russian and Chinese SNF.

  • The Sulphuric acid project which is expected to commence operations in 1H22 will produce c.132k/mtpa which would cover the needs of Sprea with the rest sold to AlexFert.

  • The Sulphuric acid project is expected to come at an investment cost of USD18 million and will be self-financed from Sprea’s healthy net-cash position of EGP1,500 million.

  • The project will add USD4-5 million in attributable net income to Sprea in 2H2022.

Alex Fert

  • Despite being a commodity driven line of business, management remain bullish on Alex Fert’s future prospects given the potential upside that may arise from the liberalization of the local market, potential cuts in feedstock prices and the potential of classifying Alex Fert as a free zone entity thus potentially exempting it from future tax-bills and result in yearly cost savings of around USD9-10 million (USD4-5 million in attributable net income).

  • Alex Fert is expected to close FY2020 with attributable net profit of USD17-18 million and USD18-19 million in 2021. This is based on average Urea prices of USD250/ton and gas cost of USD4.50/mmbtu.

  • Management disclosed that they are considering increasing their stake in Alex Fert beyond 45.3% in an effort to unlock further value from the subsidiary.

Offshore North Sinai (ONS) 

  • As of 3Q20, ONS currently has six operative wells.

  • With regards to reservoir management, it was decided that ONS will not engage in exploring new layers in its wells but will ensure maximum utilization of the wells’ layers. This is reflected in ONS’ decline in production which reflected on its slightly declining topline and margins in 3Q20.

  • ONS is expected to close FY2020 with attributable net profit of USD22 million and USD28-29 million in 2021.

  • With regards to the monetization “Deep target” well, management disclosed that ONS have teamed up with an investment bank to begin investment roadshows to identify an investor(s) and are hopeful to announce reaching an agreement by April-May.

NileWood MDF Project

  • Management has disclosed that the MDF project is on track to be inaugurated in 1H-2022 with a preliminary capacity of 600m3 /day (one production line) and the capacity should be doubled (second line) after 1.5 years of operations.

  • The MDF project is expected to cover north of 400,000 m3 of Egypt’s yearly MDF import needs.

  • Project cost is EGP1.4 bn.

  • Management has also disclosed that they have obtained an EGP793 million line of credit from NBE at a competitive 8% rate and a tenor of 8 years.

  • Management anticipates that each production line will contribute around USD8-9 million to EKHO’s bottom line per year.

Insurance Segment

  • With EKHO upping their stake in Delta Insurance and Mohandes Insurance, management have identified a lucrative prospect in the insurance market in Egypt.

  • Methods to form ambitious synergies between EKHO’s gas business and insurance business are being studied at the moment; one idea is to use NatGas’ existing pool of 1.7 million clients and sell them innovative insurance products and services.

  • Insurance segment will add USD8 million to EKHO’s profit in 2021 and USD11-12 million in 2022.

Future Outlook

  • Management expressed their bullish sentiment on 2021 across their multiple lines of business, with major catalysts on the horizon and are expecting an attributable net profit figure for 2020 at USD115-116 million.

  • USD180 million has been earmarked for capital expenditures this year, with the funds channeled to ONS (USD80 million), MDF (USD80 million), Nat Energy’s Kahraba (USD10 million) and Sprea’s sulphric acid project (USD18 million).

  • The company has been embarking on a share buyback program that should conclude on Feb 28th , 2021.

  • In an effort to boost share liquidity, EKHO has announced a 10:1 bonus share scheme that they aim to conclude by Feb-March 2021. Management is also considering other avenues to boost liquidity such as converting the company’s share trading currency to EGP (subject to BoD and shareholders’ approval).