Earnings Report /
Egypt

MM Group: Bottom-line picks up on margin improvement despite muted revenue growth

    Al Ahly Pharos Securities Brokerage
    6 November 2019

    Healthy annual sales growth despite muted sequential revenues

    MTIE reported Q3 19 revenues of EGP2.39bn, compared to EGP2.06bn in Q3 18 and EGP2.45bn in Q2 19. Revenue growth in Q3 19 came at 16.1% yoy and a decline of 2.4% qoq. Annual sales growth is mainly driven by the consolidation of Qanawat and auto segment strong growth on lifted European products customs. Muted quarterly revenue growth is mainly attributed to:

    • Lack of new Samsung mobile models, which accordingly muted Qanawat mobile sales contribution to MTIE consumer and electronics segment.
    • Slow summer Consumer and Electronics sales. 

    However, strong auto segment sales (driven yoy by lifted customs tariffs and qoq by delayed Q2 19 auto sales) have partially offset relatively weaker performance from the consumer and electronics segment. Still, the consumer and electronics segment continue to lead revenue contribution in Q3 19, with 69.0% of total revenues, followed by the auto segment, contributing 15.5% to total revenues, telecommunications (15.2%) and pipes and tractors (the least to total revenues with 0.3%).

    MTIE recorded 9M 19 revenues of EGP7.73bn (up 40.6% yoy), which makes it challenging for the company to reach its 2019 sales target of EGP11.0bn. On the bright side, MTIE will exceed our expectations on operating and profitability levels. MTIE reported 9M 19 GPM of 8.8% vs our 2019 estimates of 7.6%. Net attributable profit came in at EGP357.1mn in 9M 19 with net attributable profit margin of 4.6% vs our 2019 estimates of EGP380mn and 3.4%. Margin improvement can be attributed mainly to higher-than-expected revenue contribution from the auto segment (high relative margin) and lower-than-expected revenue contribution from the consumer and electronics segment (low relative margin).

    Weak electronics sales mutes revenue growth

    Consumer & Electronics: Revenues came in at EGP1.65bn in Q3 19, compared with EGP1.46bn in Q3 18 and EGP1.94bn in Q2 19, a moderate increase of 12.6% yoy and a decline of 14.9% qoq. The yoy growth came from the consolidation of Qanawat and the inclusion of Bosch brand to MTI’s distribution lines; the qoq decline is mainly attributed to lower Samsung mobile sales on lack of new models offered to the market, which has negatively impacted Qanawat’s contribution to MTIE’s consumer and electronics business line.

    Telecommunications: Revenues came in at EGP363mn in Q3 19, compared with EGP386mn in Q3 18 and EGP361mn in Q2 19, a decline of 6.1% yoy and a minimal increase of 0.6% qoq. The annual decline can be attributed to: (i) lower penetration rate (ii) mobile market saturation, and (iii) lower scratch cards sales, mainly due to e-payments platforms and credit top-up replacements. We expect the telecom business line contribution to revenues to decline from 13.6% in 9M 19 to 8.5% in 2023f. 

    Automotive: Revenues recorded strong annual and quarterly growth, growing to EGP369mn in Q3 19, up from EGP201mn in Q3 18 and EGP141mn in Q2 19, implying an increase of 83.4% yoy and 161.6% qoq, respectively. The witnessed growth in the auto segment sales can be attributed annually to auto sales recovery post the lifting of tariffs on European models. On a qoq basis, growth came from a weak quarter previously, where the sales of 160 cars were delayed due to the new auto regulation introduced in May 2019 regarding the Satellite Navigation function to be fitted in all imported cars. 

    MTIE recorded 9M 19 auto sales of EGP932mn, which makes it very easy to reach its 2019 auto sales target of EGP1.0bn. Thus, we expect the auto business segment to report a significant step up in volumes sold, mainly on lifted custom tariffs on European cars. The number of cars sold should grow by 100% to reach c725 cars at an average selling price of EGP1.55mn, bringing total auto sales to EGP1.13bn in 2019f, an increase of 45% yoy and growing by a CAGR of 14% over 2018-23f.

    Pipes and Tractors: Pipes and tractors business line is the lowest revenue contributor, with Q3 19 revenues of EGP7.4mn , compared with EGP5.2mn in Q3 18 and EGP8.9mn in Q2 19, a growth of 44.3% yoy and a decline of 16.7% qoq. We expect pipes and tractors to grow steadily by 4% per annum, with contribution not exceeding 0.4% over 2019-23f.

    Auto segment drives margin improvement

    MTIE continued to show improved margins on both operating and bottom line levels, achieving a GPM of 9.1% in Q3 19, up from 6.1% in Q3 18 and 7.9% in q2 19 (+3.0ppts yoy and +1.2ppts qoq). Annual GPM improvement came on the back of adding high margin products to MTIE’s consumer distribution lines, along with strong Q3 19 auto sales.

    Consumer & Electronics GPM came in at 7.0% in Q3 19 from 5.0% in Q3 18 and 7.3% in Q2 19 (+2.1ppts yoy, -0.3ppts qoq). Annual GPM improvement came from the inclusion of Bosch (GPM of 15%) to MTIE’s distribution lines along with the consolidation of Qanawat.

    Telecommunications' GPM has significantly improved on the addition of more franchise shops (currently c84 shops, compared to c60 shops in 2018). The telecommunications business achieved GPM of 7.2% in Q3 19, up from 4.8% in Q3 18 and slightly down from 7.3% in Q2 19 (+2.4ppts yoy and -0.1ppts qoq). The telecom business line showed minimal growth potential on a saturated market characterised by declining penetration rates and number of subscribers. The telecom GPM is expected to gradually stabilise/decline over 2019e-2023f on the potential shift from scratch cards to credit top-up through different e-payments platforms.

    Automotive GPM improved significantly and came in at 19.8% in Q3 19 from 15.7% in Q3 18 and 16.1% in Q2 19 (+4.1ppts yoy and +3.7ppts qoq). Auto margin improvement drove the group’s GPM, given higher auto revenue contribution both yoy and qoq.

    Pipes and Tractors GPM dropped to 15.9% in Q3 19, from 39.0% in Q3 18 and 21.1% in Q2 19. Pipes and tractors business line contribution is minimal and will be capped at 0.4% over our forecast horizon.

    Bottom line picked up on margin improvement despite moderate revenue growth 

    Net attributable profit surged by 39.3% on an annual basis to hit EGP103.7mn in Q3 19, up from EGP74.4 million in Q3 18 and slightly down from EGP118.3mn in Q2 19; declining by 12.3% on a quarterly basis on muted revenue growth. Net attributable profit margin stood at 4.3% in Q3 19, compared to 3.6% in Q3 18 and compared to 4.8% in Q2 19 (+0.7ppts yoy, -0.5ppts qoq). Net profit picked up on the consolidation of Qanawat, solid auto sales along with the witnessed contribution of investment income from Ebtikar.

    MTIE targets sales of EGP11.0bn in 2019, which seems challengeable, but would not be massively off. Outstanding 9M 19 results show that MTIE will meet our estimates and management guidance on the revenue side and will probably beat our estimates on all profitability levels which is mainly due to faster than estimates margin improvement. Despite setting conservative margins, we believe that MTI might offer further growth and unlock further upside post replicating MTI’s model to Qanawat and other positive developments from the NBFS arms.

    Alpha in Ebtikar

    MTIE’s investments in its NBFS arm showed some return during Q1 19 and Q2 19, despite being technically operative post the completion of Tamweel acquisition in June 2019. MTIE reported gain from investments of EGP8.5mn in Q1 19, followed by EGP6.2mn in Q2 19 and EGP12.96mn in Q3 19; bringing 9M 19 investment income from Ebtikar to EGP27.6mn and contributing c7.7% of 9M 19 net attributable profits.

    We believe that Ebtikar complements MTIE’s distribution chain along with offering a great exposure to:

    • E-payments through Bee and Masary
    • Micro-finance through Vitas 
    • Mortgage and leasing through Tamweel

    And plans to establish two consumer finance arms, out of which one will be for auto lending and both will be majority owned by Ebtikar.

    MTIE trading at attractive multiples; maintain Overweight

    MTIE trades at 2020f P/E of 10.6x and EV/EBITDA 2020f of 7.6x. The company plans to commit to a dividends payout ratio of 50%, implying a 2019f DPS of EGP0.43/share, translating into a 2019e DY of 4.1%.