Equity Analysis /
Egypt

EK Holding: Onwards and upwards; Raise FV to USD1.70, maintain Overweight

    Al Ahly Pharos Securities Brokerage
    12 December 2019

    Raise FV to USD1.70/share; Maintain Overweight

    We upgrade our FV of EK Holding to USD1.70/share, up from USD1.50/share, to reflect: 1) the positive impact of the EGP appreciation on Nat Energy’s cash flows as well as Kahraba’s 60MW electricity distribution contract; 2) higher product prices and margins at Sprea; 3) lower capex estimates at ONS; 4) improved performance at Delta Insurance, and 5) a one-year rollover of our forecast horizon. We remain bullish on EK Holding as the company never fails to impress with robust growth across all its subsidiaries. 

    Nat Energy: A beneficiary of EGP strength

    Nat Energy remains front and center in our valuation of EK Holding, as the company continues to contribute the most to our overall valuation (c.30%). We upgrade our valuation of Nat Energy, from USD0.40/share, to USD0.50/share mainly on updated FX rate assumptions reflecting EGP strength against the USD. Since all of Nat Energy’s revenue streams are based in EGP, appreciation of the EGP leads to higher cash flows for the company in USD-terms. We also now incorporate Kahraba’s 60MW electricity distribution contract awarded in the Inshas industrial zone. We anticipate further organic growth at Nat Energy in the years to come as the company continues to reap the benefits of Egypt’s reform programs.

    Sprea booms; ONS to follow suit  

    EK Holding’s other subsidiaries also witnessed notable growth over the past year; some even earned an upgrade. At Sprea (FV USD0.42/share), increasing product prices and Formica sheets production continue to drive sales growth. We expect Sprea to sustain its enhanced profitability in 2020 as weak methanol prices drag on. At ONS (FV USD0.35/share), the ramp-up of operations has only just begun and we believe it will have an immense impact on production next year. Management have also revised down capex estimates for ONS’ 282bcf production profile which helped take our FV up a notch. As for Alex Fert, our valuation remained unchanged at USD0.31/share, as the slump in urea prices offset the capacity increase from the last overhaul. Our FV for the MDF project of USD0.14/share has also remained intact, similar to EK Holding’s plans, which have seen no changes except for pushing the expected start date by another year to begin mid-2022. 

    Untapped upside potential still huge

    Even as we upgrade our valuation of EK Holding, we remind you that there is still room for further upside, as we wait to hear more about 1) ONS’ deep layer reserves, 2) the new electricity distribution business model at Nat Energy, and 3) the introduction of a new product at Sprea. We also remind you that we incorporate EK Holding’s stake in the MDF project at 73%, hence if no binding agreements develop with a technical partner and EK Holding owns 100%, this alone would add another 5 cents to our valuation.