Equity Analysis /
Egypt

Alexandria Containers and Cargo: May 2020 valuation update – Global dynamics hit operations

  • Unfavorable global & macro dynamics cap growth

  • Not immune to the slowdown

  • Downgrade FV to EGP8.70; Maintain Equalweight

Unfavorable gobal & macro dynamics cap growth

Alexandria Containers and Cargo Handling (ALCN)’s operational performance continues to be hammered by macro-dynamics given the witnessed EGP appreciation/ FX losses, unfavorable revenue mix, and declining interest rates. The recent trade tensions along with the Covid-19 pandemic, the related shutting down of factories, and import restrictions created further pressure on the number of containers handled along with a shift in the revenue mix.

We maintain our equal weight recommendation, however, we cut our FV to EGP8.70/share, down from EGP13.50/share. The following changes have been incorporated:

  1. Lower volume growth on an extended timeline for the terminal 96 deepening project and the negative impact of the Covid-19 pandemic.
  2. Slower growth in USD denominated service mix, given imposed import restrictions.
  3. Tighter operating and profitability margins, given an unfavorable revenue/COGS currency miss-match, since revenues are mostly USD driven –with no significant depreciation in EGP- and COGS –EGP denominated and inflation-driven.

Despite operational challenges, ALCN continues to enjoy a strong balance sheet with a debt-free capital structure that enables the company to maintain a high payout ratio of 67% over the forecast horizon. ALCN currently trades at 20/21f P/E of 7.6x, below its historical 5yr and 9yr average of 10.2x and 8.8x, respectively.

Not immune to the slowdown

The trading activity in Egyptian ports has been naturally impacted by the COVID-19 pandemic. ALCN’s number of containers handled declined c.5.7% YoY in 10M19/20, which factors in the agricultural exports season in Egypt and the long-term contracts locked in before COVID-19 hits volumes. Going forward, we believe that the number of containers handled will drop by c.6.9% in 19/20e and drop again by 5.0% in 20/21f.

The number of containers is expected to aggressively decline in 1H20/21 due to the continuous potential negative impact of the Covid-19 pandemic on trading activity, followed by a slight pick-up and gradual recovery by FY21/22f, once economies reopen and governments ease lock downs and movement restrictions. Therefore, even though ALCN is expected to witness a decline in volumes that could probably hurt 19/20 and 20/21, we expect that volumes will eventually grow after economies reopen.