Equity Analysis /
Egypt

Gemma: Margins improve, but at the expense of volumes

    Mark Adeeb
    Mai Ayoub

    Margins improve on price hikes

    Gemma reported 1Q19 revenue of EGP257mn, down 1% y/y and up 5% q/q. The GPM declined on an annual basis to 23.9% in 1Q19 versus 25.3% in 1Q18, on quarterly basis however, the GPM rose by 8pps. The quarterly improvement could be attributed to increasing selling prices while losing volumes. The company reported net income of EGP10.7mn versus EGP11.4mn in 1Q18 and a net loss of EGP13.6mn in 4Q18.

    Market dynamics to weigh on performance

    The bottom line growth could be attributed to the company’s strategy to improve margins through raising prices and at the expense of volumes. However, we expect subsidy cuts, inflationary pressures, weak exports sales due to the strengthening of EGP against the USD, and weak purchasing power to weigh down on performance.

    Reiterate Underweight; Gemma trades at unjustifiable multiples

    We reiterate our UW recommendation on a FV of EGP9.00/share. Gemma is trading at FY19 P/E of 13.1x and an EV/EBITDA of 13.2x given our assumptions about FY19 top and bottom line performance.