Equity Analysis /
Egypt

Lecico: 1Q19 – Margins improve, but bottom line remains in negative territory

    Mark Adeeb
    Mai Ayoub

    Losses shrink sequentially on margin expansion

    Lecico reported 1Q19 revenue of EGP637mn, down 2.4% y/y and 2.9% q/q. Despite the increase in the average selling prices on a quarterly basis by 9.3% and 5.9% in Sanitary Ware and Tiles, respectively, revenues declined on the back of volumes contraction. The GPM came in at 19.6% versus 22.0% in 1Q18 and 14.8% in 4Q18. On a quarterly basis, margins improved in both segments due to better management of the cost structure. The company reported a net loss of EGP28.1mn, versus a net profit of EGP24.4mn in 3Q18 and net loss of EGP92.9mn in 4Q18. We expect this trend to continue in tandem with inflationary pressures and weak purchasing power. 

    Lebanon restructuring and land monetization

    In an attempt to reduce costs, the company is cutting production in Lebanon to a minimum, while shifting volumes to Egypt, where costs of production are much cheaper. The company is currently planning to dispose of real estate assets in Lebanon to generate cash. The company is currently offering 28,000sqm of industrial land for sale in Lebanon that was previously valued for USD30mn in 2016. Land Plot could be worth from EGP1.5-EGP6.2 per share, depending on the time of sale and land value.

    Land monetization is key for debt reduction

    Net Debt rose to EGP1,189.5mn, up by EGP24.3mnq/q. Net Debt/Equity reached 1.38x, vs 1.32x end of 2018. The monetization of the land in Lebanon will be geared towards reducing the company’s debt and accordingly, will reflect positively on profitability going forward. 

    We are currently in the process of issuing a valuation update for Lecico. Therefore we put our recommendation Under Review.