Tiles & Sanitary ware producers faced a very healthy quarter, supported by both prices and volumes. Exports did not shine like the previous quarter, due to supply chain disruptions, resulting from the current energy crisis. The latest gas price hikes are expected to pressure margins and affect competitiveness in the export markets.
ECAP: Government Projects Drives Local Demand; Gas Prices Rise Still in Favour
ECAP continued to show outstanding performance in 3Q21 – 9M21 results. The bottom line continued its upward trend by recording EGP31 million for the quarter, compared to a net loss of EGP8 million recorded in 3Q20, and EGP13 million recorded in 2Q21, a QoQ rise of 130%. NPM recorded 8.7%, versus a NLM of 3.1% in 3Q20 and a NPM of 4.1% the previous quarter. It is notable that 2021 witnessed the highest quarterly profit margins since 2017 (11.9% in 1Q21 & 8.7% in 3Q21).
Topline stood at EGP358 million, climbing YoY by 31.4% from the recorded EGP272 million, and QoQ rise of 8.2% from the EGP331 million of 2Q21. This surge in sales came from a rise in both local and export sales, were local sales achieved EGP309 million, rising by 41.5% YoY and 8.5% QoQ. Export sales came in at EGP49 million, dropping by 9.5% YoY, but rising sequentially by 5.8%.
That strong boost in sales was supported by the ongoing government development projects, pushing ceramics sales forward. ECAP’s local sales formed 86% of total sales in 3Q21. Despite the disruption in global trade and supply chains, ECAP was able to benefit from the surging global gas prices and compete with global peers, as ECAP’s gas cost is currently (USD4.75/mmbtu) still below that of competitors' globally (USD5.70/mmbtu).
Despite the rise in COGS, gross profit was able to move positively both annually and sequentially by recording EGP106 million, a surge YoY of 79.5% from the previous EGP59 million in 3Q20 and a solid rise of 19.8% from the recorded EGP89 million in 2Q21. GPM reached 29.7%, stronger than 21.7% of 3Q20 and 26.8% of 2Q21. EBITDA recorded EGP56 million, up from EGP14 million in 3Q20 and EGP41 million in 2Q21 (+291.1% YoY, +35.2% QoQ). EBITDA margin came in at 15.5%, showing a YoY rise of 10.3pps and a 3.1pps QoQ. The rise in EBITDA came despite the rise in SG&As both annually by 12.9% and sequentially by 9.4%. However, its percentage to sales dropped YoY by 2.8pps and a slight rise of 0.2pps.
Net debt recorded EGP259 million as of September 2021 end, dropping by 9.6% from the EGP286 million recorded in September 2020 end.
After the recent gas price rise, we revised our valuation for ECAP, dropping the FV from EGP18.7/share to EGP12.7/share, maintaining our Overweight recommendation. The revision for FV came supported by the inevitable rise in cost due to the rise in energy prices, inability to compete in the exports in the medium-term once gas prices globally matches Egypt’s prices, as well as purchasing power being affected by inflation and in turn, affecting local volumes.
ECAP is currently trading at 2022 P/E of 5.3x and EV/EBITDA of 4.7x.
LCSW: Price Rise Offsets Costs Inflation; Profitability Pressured Looking Ahead
3Q21 bottom line witnessed a slight drop sequentially, recording losses of EGP9 million, compared to a net loss of EGP7 million in 2Q21, deepening losses by 27.1% QoQ. However, above 3Q20 losses of EGP45 million by 80.9%. NLM came in at 1.3%, versus a NLM of 1.1% in 2Q21, and a NLM of 8.1% in 3Q20.
LCSW 3Q21 revenues reached EGP680 million, moving positively both annually and sequentially supported by a rise in prices and volumes. Revenues showed a YoY rise of 21.1% from the recorded EGP561 million in 3Q20, and a QoQ rise of 6.9% from the recorded EGP636 million in 2Q21.
While sanitary ware segment remains their star segment, however brassware segment showed remarkable performance during 3Q21. Brassware sales came in at EGP40 million, compared to EGP22 million in 3Q20 and EGP23 million in 2Q21, a YoY climb of 79.5% and QoQ of 72.5%.
That rise came supported mainly by volumes rather than prices, as volumes witnessed a YoY rise of 79.1% YoY and 105.7% rise QoQ. Gross profit for the segment reached EGP17 million, compared to EGP7 million in 3Q20 and EGP5 million recorded in 2Q21 (+129.2% YoY, +236.7% QoQ). GPM achieved 41.8%, versus 32.7% in 3Q20 and 21.4% in 2Q21.
Sanitary Ware segment showed a strong move forward, recording sales of EGP430 million in 3Q21, compared to EGP334 million in 3Q20, a YoY rise of 28.5%, and compared to EGP412 million in 2Q21, a QoQ rise of 4.3%. The movement came supported by both prices and volumes. ASP/piece recorded EGP330.9, a YoY rise of 9.4% and QoQ of 0.4%. While volumes recorded 1.3 mn pcs, upward by 17.5% YoY and 3.8% QoQ. Exports participation to volumes reached 76.3%, rising YoY by 5.3pps however, dropped by 4.3pps QoQ, backed by disruptions in supply chains and trading activities. The segment’s gross profit reached EGP65 million, versus EGP15 million in 3Q20 and EGP69 million in 2Q21. Leading to a GPM of 15.2%, above the 4.6% recorded in 3Q20, but below the 16.8% recorded the previous quarter.
Tiles segment moved within the same positive direction of its counterparts, recording EGP211 million, compared to EGP205 million in 3Q20 and EGP201 million in 2Q21 (+2.7% YoY, +4.7% QoQ). Prices moved positively both annually and sequentially, rising by 6.1% YoY and 4.1% QoQ to average at EGP42.2/sqm. Volumes however, witnessed a drop of 3.2% YoY, but moved upward 0.5% QoQ. Exports contribution to volumes came beneath 3Q20 of 22.3% and 2Q21 of 31.4%, to reach 20.2% in 3Q21. The segment’s gross profit reached EGP46 million, rising YoY by 12% and 19.9% QoQ. GPM hit 21.7%, versus 19.9% in 3Q20 and EGP19.0% in 2Q21.
The global supply shortage and energy crisis, pushed additional demand for LCSW’s products, while pressuring costs as well, by rising raw materials prices, affected by supply chains disruptions rallying energy prices. The company was able to offset the cost inflation with price increases, as well as cost-cutting initiatives when it comes to raw materials and packaging changes. LCSW’s results came highly in line with our expectations of EGP653 million in revenues, and a net loss of EGP8 million. Margins and sales are expected to be negatively impacted during 4Q21 by the continuous disruptions in supply chains caused by the energy crisis, affecting sales volumes, as well as a rise in costs by the recent gas price rise.
The latest uprise in gas prices led us to drop our fair value for LCSW from the previous EGP5.8/share to the current FV of EGP2.4/share, and drop our recommendation to Underweight. That revision came supported by the rise in energy costs LCSW will be facing, affecting their profitability and their ability to compete globally.
LCSW is currently trading at 2022 P/E of 20.6x and EV/EBITDA of 5.3x.