Equity Analysis /
Egypt

EK Holding: Steady as a rock; Raise FV, Maintain Overweight

    Myss Semeida
    Al Ahly Pharos Securities Brokerage
    8 August 2019

    Unwavering overall performance; topline shored up by Nat Energy

    EK Holding reported 2Q19 results, recording operational revenue of USD133.0 million (-1.4% QoQ, +18.8% YoY). Both the QoQ topline stability, and YoY sales growth are mainly owed to Nat Energy’s impressive performance.

    Gross margin for the quarter fell to 31.5% (-1.6pps QoQ, +2.4pps YoY) mainly on the back of Nat Energy’s 8.5pps margin drop this quarter due to one-off costs. With net income post minority and employee profit share at USD47.7 million (-9.8% QoQ, +12.2% YoY) for 1H19, we are confident that EK Holding will be able to reach our estimate of USD104.0 million for 2019.

    Alex Fertilizers: Margins hold steady despite overhaul time

    Alex Fert reported revenues of USD50.7 million (-6.6% QoQ, +15.8% YoY). The quarterly sales drop was mainly caused by a 6.0% drop in total volumes sold following an 18-day stoppage to overhaul the ammonia plant. Urea export prices for 2Q19 remained at USD265.5/ton (-1.6% QoQ, +10.1% YoY). The significant YoY sales growth was both price and volume-driven. 

    Thanks to steady prices, Alex Fert managed to maintain its gross margin at 29.2% (-0.1pps QoQ, +6.1pps YoY). On the bottom line level, net income came in at USD10.3 million, translating to a net margin of 20.4% (-0.8pps QoQ, -2.3pps YoY). The company’s net profit for 2Q19 was bolstered by USD1.1 million of interest income. 

    We expect Alex Fert’s performance to improve slightly in 3Q19 on the back of higher global prices for urea; the Egypt Urea Spot Index averaged USD273.5 (+4.5% QoQ, +9.9% YoY) for 2Q19. Overall, Alex Fert is on track to achieve our estimate of USD18.7 million in attributable net income to EKH for 2019.

    Sprea: Methanol downturn still boding well for margins

    Sprea’s revenues recorded USD31.2 million (+1.4% QoQ, -3.1% YoY). Sales remained relatively steady on a QoQ basis on stable volumes and pricing. The YoY drop in sales was mainly the result of slightly lower volumes sold. 

    Gross margin remained at 32.3% (+0.1pps QoQ, +3.6pps YoY) supported by the continued rundown in global methanol prices, as well as a more profitable product mix.  The company reported a bottom line of USD8.4 million in 2Q19, translating to a net margin of 26.9% (-1.4pps QoQ, +4.2pps YoY).

    We are confident that Sprea will meet our estimates for this year, particularly with YTD methanol prices at an average of USD276.1/ton, vs. USD382.1/ton in 2018. We also expect Sprea’s last Formica sheets expansion to start reflecting on sales in 2H19.

    Nat Energy: Notable growth; margins contract on one-off cost 

    Nat Energy delivered robust topline growth this quarter, with sales recording USD32.3 million (+21.4% QoQ, +88.3% YoY). The QoQ growth was primarily driven by the company’s increased focus on unsubsidized gas installations, while awaiting revision of the subsidized fee. On an annual basis, the whopping 88.3% sales growth came on the back of higher volumes and prices of electricity at Kahraba, as well as a greater number of unsubsidized installations. 

    On the downside, Nat Energy’s gross margin dropped significantly QoQ to reach 31.1% (-8.5pps QoQ, -4.4pps YoY). Management have clarified that the margin contraction came on the back of one-off costs of c.USD8 million in other operating expenses, related to a change in the accounting treatment of Work In Progress. The company’s bottom line was subsequently pressured to reach USD8.7 million, translating to a net margin of 27.1% (-13.5pps QoQ, -14.1pps YoY).

    We expect Nat Energy’s margins to bounce back to normal levels in 2H19, as we estimate a gross margin of 39.2% for the company in 2019. We also expect Nat Energy will witness further sales growth in 2H19, primarily as Kahraba reaps the benefits of the July 2019 energy subsidy cuts. The company is expecting a capex outlay of c.USD10 million during 2H19, and another USD10 million during 2020 for the last 40MW expansion at Kahraba, which should kick in starting 2021.

    ONS: Delays necessary to increase recoverability ratio

    As anticipated, at ONS, revenue dropped to USD6.8 million (-22.5% QoQ, -26.9% YoY). The company announced it decided to temporarily delay the development of the Kamose field, in order to maximize the Tao field’s production profile. EKH had previously indicated that overall production ramp-up is not expected before 4Q19. 

    We estimate ONS will end the year with a bottom line of USD20.4 million, provided production ramps up significantly towards the end of the year. ONS’ net income for 1H19 stands at USD7.1 million.

    Raise FV to USD1.50/share; Maintain OW Recommendation

    We upgrade our FV of EK Holding from USD1.27/share to USD1.50/share as we incorporate 1) shallow layer reserves of c.382bcf at ONS, vs. 218bcf initially, 2) a more bullish outlook for Nat Energy’s gas installations revenue stream, and 3) higher selling prices at Alex Fert, and hence higher margins.

    We value ONS using a net asset valuation for 282bcf, and arrive at a FV of USD0.23/share, implying an EV/boe of 5.10x. We then use this implied multiple to incorporate a further 100bcf at 0.08/share. Therefore, all in all, we value ONS’ total shallow layer reserves of c.382bcf at USD0.32/share.

    Nat Energy’s outstanding performance for 1H19 compelled us to revisit our assumptions for the company, particularly for its most major revenue stream: gas installations. For 2019, we assume Nat Energy will end the year with 190,000 installations, 65% of which are infill clients. We also account for a higher cap of 250,000 installations per year, vs. 200,000 initially. Finally, we assume Nat Energy will continue to make installations beyond its concession size, but at a much lower rate to account for population growth. Our revised assumptions increased our FV of Nat Energy from USD0.30/share to USD0.40/share.

    In line with our outlook on local nitrogen fertilizer players, we update our view on Alex Fert to incorporate higher urea prices. We assume Alex Fert will continue to export urea at its average historical premium of c.8% to the Black Sea Urea Index, which leads us to an export price of c.USD300/ton into perpetuity. With the higher price-driven margins at Alex Fert, we now value the company at USD0.31/share, instead of USD0.25/share.

    It is also important to note that we now account for EKH having a 73% stake in the MDF project, vs. 100% initially, as the company has signed a non-binding agreement with a technical equity partner to hold a super-minority stake of 27%. Progress towards the MDF project has been slow, hence we push its operations start date to mid-2021, instead of our initial estimate of mid-2020. We value EKH’s stake in the MDF project at USD0.14/share out of its total fair value of USD0.20/share.

    We remain bullish on EK Holding, and we remind you that there is still room for further upside, as we await developments on 1) ONS’ deep layer reserves, 2) the new electricity distribution business model at Nat Energy, and 3) the potential acquisition of Emisal Salts. EK Holding is currently trading at a 2019e PE of 13.1x, versus a historical average of 14.0x.