Equity Analysis /
Egypt

MM Group: Q2 19 – Strong annual sales growth, margins improve

    Al Ahly Pharos Securities Brokerage
    31 July 2019

    MTIE reported Q2 19 revenues of EGP2.45bn, compared with revenues of EGP1.81bn in Q2 18 and EGP2.90bn in Q1 19. Revenue growth in Q2 19 came in at 35% yoy, but declined 15% qoq from a relatively stronger Q1 19 and delayed auto sales. Seasonality factors – including the month of Ramadan, Eid and summer – usually cap sales growth, however MTIE’s Q2 19 sales were held back by the new auto regulation that was introduced in May from the authorities regarding the satellite navigation function fitted in all imported cars. 

    The consumer and electronics segment led revenue growth, contributing 79.2% of total revenues, followed by telecommunications (14.7%), automotive (5.8%). Pipes and tractors contributed the least to total revenues at 0.4%. 

    Margins improve gradually on a favorable revenue mix

    MTI showed improved operational performance, achieving a GPM of 7.9% in Q2 19, up from 6.6% in Q2 18 and down from 9.2% in Q1 19. Annual GPM improvement came on the back of adding high margin products to MTI’s distribution lines, while the slight quarterly GPM deterioration was mainly due to lower auto business line contribution to total revenues. 

    Investment income from Ebtikar commences

    MTI’s investments in its NBFS arm started to show some returns with a reported gain from investments of EGP8.5mn in Q1 19, followed by EGP6.2mn in Q2 19, contributing c5.2% to the bottom line. Investment income from subsidiaries is expected to reach EGP30mn in 2019e, growing by an average of 15-20% per annum over 2019-23f. We expect the gain from investments to grow by a CAGR of 20% over 2019-23f. Gain from investments to contribute 7.0% of bottom line on average over 2019-23f.

    Bottom line picked up on strong revenue growth and investment income from Ebtikar

    Net attributable profit surged by 67% on an annual basis to EGP118.2mn in 2Q19, up from EGP70.6mn in Q2 18 and down from EGP135.3mn in Q1 19; declining by 13% on a quarterly basis. NPM stood at 5.0% in Q2 19, compared with 3.9% in Q2 18 and 4.9% in Q1 19 (+1.1ppts yoy, +0.1pps qoq). Net profit picked up on the consolidation of Qanawat, inclusion of high margin products to the company’s distribution lines along with the contribution of investment income from Ebtikar.

    2019 targets and outlook 

    • MTI plans to focus on enhancing profitability by increasing contribution of high margin business lines
    • MTI plans to replicate its business model to its recently consolidated subsidiary Qanwat (with a current ownership of 70.5%)
    • MTI plans to add more shops to Qanawat’s branded “K shops”. Qanawat has around four shops now, plans to add another four in August 2019 and reach 15 shops by end-2019
    • MTI plans to merge its e-payments platforms Bee and Masary by 2020
    • Ebtikar is to be listed in 2-3 years
    • Ebtikar is working to establish its consumer finance arm and capitalise on MTI’s huge consumer and merchant data base. Post establishment, consumer finance arm could increase sales by an average of c20-25%. 

    MTI targets sales of EGP11bn in 2019, which seems achievable and is in line with our estimates. Outstanding Q1 19 and Q2 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-expected margin improvement. Despite setting conservative margins, we believe that MTI might offer further growth and unlock further upside after replicating MTI’s model to Qanawat and other positive developments from the NBFS arms.

    MTI trades at attractive multiples; maintain Overweight

    MTI offers an attractive 2019e ROE of 37%. It trades at 2019 P/E of 12.0x and EV/EBITDA of 9.0x, which is at a decent discount to global peers trading at P/E and EV/EBITDA average of 16.2x and 9.5x. MTI plans to commit to a dividends payout ratio of 50%, implying a 2019f DPS of EGP0.43/share, translating into a 2019e DY of 4.2%.