Healthy operational growth; 2019 bottom line meets expectations
EK Holding reported 4Q19 results, recording operational revenue of USD130.8 million (+4.5% QoQ, +6.3% YoY). The QoQ sales growth came mainly as improvement witnessed at all of Alex Fert, Nat Energy, and ONS, offset the sales drop at Sprea. On a YoY basis, the increase in topline was driven by robust growth at both ONS and Nat Energy. EK Holding ended the year with total operational revenue, excluding diversified investments, of USD465.6 million (+10.3% YoY), slightly below our estimate of USD476.9 million mainly as a result of the slowdown at Sprea.
On the gross profit level, EK Holding’s margin settled at 32.0% (+4.0pps QoQ, +0.1pps YoY). Sequentially, the improvement was again owed to margin expansion at all of Alex Fert, Nat Energy, and ONS, offsetting margin contraction at Sprea. Margins were maintained on an annual basis as growth at the Energy and Energy-Related segment offset weakness at the Fertilizers and Petrochemical segment. EK Holding’s 2019 net income excluding diversified investments amounted to USD106.1 million (+18.4% YoY), meeting our bottom-line estimate of USD106.5 million.
Alex Fert: Capacity expansions counter some urea price losses
Alex Fert reported revenues of USD45.6 million (+3.6% QoQ, -13.8% YoY). On a quarterly basis, the company’s sales volumes ramped up by 9.4% following the plant overhaul end of 2Q19, offsetting urea price losses of 7.1%. However, Alex Fert’s urea export prices of USD240.8/ton (-7.1% QoQ, -21.9% YoY) for this quarter fell massively behind 4Q18’s selling prices, in tandem with weak global pricing, which resulted in topline contraction.
Gross margin recovered QoQ to 26.1% (+4.6pps QoQ, -7.8pps YoY). We assume the sequential margin expansion came as a result of increased efficiencies following the overhaul, and economies of scale given the volume ramp-up. Despite this, margins remained down YoY on weak urea pricing.
On a full-year basis, Alex Fert’s net income attributable to EKH came in at USD16.9 million (-7.5% YoY), more or less meeting our expectations of USD16.1 million. We expect performance to remain steady going into 2020 as the company uses its latest capacity expansion to offset price losses. Global urea prices continued to decline to lows of USD230/ton towards the end of 2019, which is indicative of Alex Fert’s current export prices.
Sprea: 4Q slowdown unalarming; Expect volumes to pick up in 1Q
Sprea’s revenues amounted to USD24.6 million (-23.3% QoQ, -4.5% YoY) for 4Q19. Sales took a hit as a result of the usual 4Q demand slowdown which turned out to be more severe than last year’s. Average volumes dropped by 16.0% QoQ and 4.2% YoY. Management clarified that Sprea’s customers usually try to reduce inventory levels at the end of each year, hence orders are pushed to the first quarter inflating 1Q’s volumes.
As a result of the volume slowdown, and an accompanying decline in average prices, gross margins dropped to 29.8% (-2.7pps QoQ, -1.8pps YoY) this quarter. On the plus side, Sprea managed to maintain its profitability on the bottom line level, with net profit amounting to USD6.8 million, a net margin of 27.8% (-0.2pps QoQ, flat YoY), thanks to some USD1.8 million of interest income.
Despite the serious slowdown witnessed in 4Q19, Sprea only missed our 2019 bottom-line estimate of USD34.7 million by a slight margin, recording USD32.8 million (+16.4% YoY). The company also managed to record YoY earnings growth on the back of lower raw material costs given the global downturn in methanol prices.
Nat Energy delivers on every front as price hikes kick in
Nat Energy’s sales jumped to USD28.9 million (+7.5% QoQ, +23.9% YoY) for 4Q19. The QoQ sales growth was mainly price-driven. The July energy subsidy cuts finally reflected on electricity prices, with average prices increasing to EGP1.21/kWh (+13.6% QoQ, +3.4% YoY). In addition, the hike in subsidized gas installation fees from EGP3,500 to EGP3,850 per household also kicked in. On a YoY basis, the impressive growth was primarily driven by Kahraba in terms of both volumes and prices, we well as EGP appreciation of 10% YoY.
Gross margin for the quarter expanded to reach 37.5% (+1.6pps QoQ, +4.7pps YoY). The margin expansion was led by the higher pricing of electricity and gas installations, as well as economies of scale on a YoY basis given the ramp-up in power generation. The company’s net profit amounted to USD10.5 million in 4Q19, translating to an impressive net margin of 36.4% (+2.2pps QoQ, +1.1pps YoY).
On a full-year basis, Nat Energy reported a bottom line of USD36.4 million (+36.8% YoY) in line with our estimate of USD36.2 million. We expect stellar performance from Nat Energy in 2020 as well, with growth potential stemming from a further ramp-up in electricity generation and distribution, as well as higher prices following FY2019/20’s energy subsidy cuts.
ONS: Marginal sales growth unrepresentative of massive ramp-up
ONS recorded sales of USD14.6 million (+3.9% QoQ, +31.3% YoY). ONS’ sales growth both on a QoQ and YoY basis is misleading as the company actually managed to boost volumes by 54.3% QoQ, and 97.5% YoY. The massive volume ramp-up is however not reflected in sales growth given that ONS’ entitlement from production decreases with increasing volumes according to its production sharing agreement with EGPC. Despite not fully reflecting on 4Q19’s sales, ONS’ volume ramp-up will reflect on its topline gradually over the coming period.
We had initially estimated that ONS will end the year with a bottom line of USD19.5 million, and the company managed to slightly exceed our target, as net profit recorded USD20.1 million (+21.0% YoY). ONS’ annual growth was owed to the impressive production ramp-up in 2H19.
Maintain Overweight on FV of USD1.70/share
EK Holding recorded strong earnings for 2019, with operational growth reflected across the board. The company’s BoD proposed dividends of USD 6 cents per share, implying a payout ratio of 61.4% and a dividend yield of 5.0%.
We reiterate our Overweight recommendation on the stock and remind you that we anticipate robust growth for EK Holding in 2020, mainly fueled by organic growth at its Energy and Energy-Related segment. With Nat Energy ramping up electricity generation and distribution, and ONS increasing its production of natural gas, we expect EK Holding will be able to deliver yet another stellar year.