Equity Analysis /
Egypt

EK Holding: October 2021 Valuation Update – Holding All the Aces; Maintain Overweight

  • Upgrade TP to USD2.03/Share; Maintain Overweight

  • Subsidiaries on solid grounds; Multiple expansions unlock further upside

  • Sound fundamentals and solid outlook drive “High Conviction Buy” recommendation

Al Ahly Pharos Securities Brokerage
18 October 2021

Upgrade TP to USD2.03/Share; Maintain Overweight

We upgrade our valuation for EK Holding to USD2.03/share (up from USD1.61/share). The upgrade factors in: i) Stronger Urea price outlook for Alex Fert, ii) a recovery in Sprea’s export activity post the expected demand recovery within its export markets, alongside incorporating its expected expansion plans including, expanded Formica sheet production, SNF capacity additions and a sulfuric acid product line which is expected to kick in by 2H22,  iii) NatEnergy’s increased electricity generation capacity in tandem with a significant jump in natural gas household installations, iv) Improved visibility on the MDF project cash flow generation. v) a lower than previously estimated daily natural gas production for ONS.

As stated in our previous update, EK Holding managed to navigate the murky waters of the pandemic thanks to its solid and well diversified investments. The company has been able to withstand turbulent market dynamics and is well-positioned to capitalize on growth opportunities across all portfolio companies.

Subsidiaries on solid grounds; Multiple expansions unlock further upside

For Alex Fert, we raised our FV to USD0.50/share from the previous USD0.30/Share as we incorporate an upward revision of Urea price forecasts. Our FV for AlexFert takes into account EKHO’s effective stake increase to 57% from the previous 44%.  For Sprea, we have revised our FV to USD0.63/share from USD0.40/share, to reflect the expected recovery in Sprea’s export volumes, alongside the following: i) the expansion in the Formica sheet product line which should commence operations in 2Q22, ii) an expansion in the SNF production line which is projected to witness an increased capacity of 90 ktpa (50% of which should be up and running by 2Q22 and the other 50% by 2Q23), and iii) the sulfuric acid production line which should produce c.165 ktpa and should begin operations by 2H22.  As for Nat Energy, our FV inched up to USD0.56/share from USD0.44/share, as we account for the expected boost to installation volumes from the Hayah Karema Initiative, alongside the addition of 20MW of electricity generation capacity. Furthermore, the MDF plant’s FV has jumped to USD0.24/share from USD0.14/share with clearer cash flow generation ability. Finally, ONS saw a slight trim from USD0.35/share to USD0.32/share on revised daily production figures over our forecast horizon.

Sound fundamentals and solid outlook drive “High Conviction Buy” recommendation

We reiterate our Overweight recommendation on EKHO on a valuation gap of 54.2%, citing improved financial and operational performance across all subsidiaries. We believe EKHO is on track to record FY21 operating revenue of USD752 million which should be primarily boosted by the fertilisers and petrochemicals segments, as AlexFert reaps the benefit of soaring Urea prices and as Sprea enjoys recovery in export volumes, in addition to the Formica sheets capacity additions as well as realizing the benefits of the SNF anti-dumping fee which was imposed in FY20.

We expect EKHO to report a bottom-line figure of USD193 million. According to our estimates, EKHO is trading at 2021e P/E of 8.6x and 2022f P/E of 7.7x.

For more details, kindly refer to the attached report.