Equity Analysis /
Egypt

OIH: Stable Q1 performance, but stock lacks strategic direction; maintain Equalweight

    Al Ahly Pharos Securities Brokerage
    17 June 2019

    Cables and financial services continue to drive revenue

    OIH released stable Q1 19 results, showing revenues of EGP409mn, compared with EGP409.5mn in Q1 18. Its cables business was the largest contributor to revenue, contributing 52.4% in Q1 19, up from 43.7% of total revenues in Q1 18. The financial services segment was the second largest contributor at 35.4%, but down from 44.2% in Q1 18. Other non-core revenues recorded a steep decline of 90% yoy, dropping to EGP0.7mn in Q1 19, from EGP6.3mn in Q1 18. COGS came in at EGP170.0mn in Q1 19, from EGP178.2mn in Q1 18, a decline of 4.6% yoy. Gross profit showed a slight increase of 0.8% yoy, mainly on lower COGS, leading to a GPM improvement of 0.6ppts.

    Operating profits backed bottom line, despite a surge in net finance cost and FX losses

    OIH reported a net loss after tax from continued operations of EGP78.9mn in Q1 19 (EGP82.4mn in Q1 18), mainly due to operating profits of EGP17.04mn (operating loss of EGP82.41mn in Q1 18). Operating profits turned positive mainly on lower other expenses and provisions at EGP46.5mn, down from EGP66.1mn in Q1 18 – a decline of 29.6% yoy. Lower employee expenses was EGP145.3mn, down from EGP183.4mn in Q1 18, a decline of 21.0% yoy. Net loss narrowed despite a surge of 2.9x and 3.1x in net finance cost and FX losses, respectively. 

    Koryolink impairments continue; investment income from Sarwa commences

    OIH continues to impair Koryolink’s profits as Management have previously reported that they haven't reached any official agreement with the Korean government. On the bright side, OIH booked an investment income of EGP38.36mn from Sarwa Capital in Q1, representing its 30% stake in Sarwa Capital’s bottom line.

    No clear direction; penalised by net debt position and capital increase announcement

    OIH had earlier announced the intention to expand operations in real estate, agri-industries, entertainment and logistics segments, but no clear steps have been taken to achieve these targets yet. Moreover, OIH's current net cash position has changed since our last valuation update from a net cash position of EGP373.2mn (EGP0.07/share, book value as of Q3 18) to a net debt position of cEGP1.32bn (EGP0.25/share)  in Q1 19, which burdens our valuation. 

    Additionally, OIH’s planned capital increase from the Nile Sugar acquisition will massively impact its performance. The capital increase value is cEGP6.25bn (at par with EGP0.42 per share), but with an injected cash of only EGP3.02bn. Thus, OIH will end up issuing cEGP14.88bn worth of new shares, bringing the total number of shares issued to c20.1bn, where each shareholder should subscribe to c2.8 shares from what was originally held to avoid dilution of ownership. 

    OIH will use the EGP3.02bn of newly injected cash in planned expansions in agri, snacks and logistics segments, but the company has not provided any further details. 

    Meanwhile, OIH’s board of directors revealed that it will undertake an updated study and fair value report of the Nile Sugar Company, which will take into account the results of the audited financial statements for 2018. 

    On balance, we will revisit our estimates for OIH fair value once we get a clearer view on: the Nile Sugar operations, the reason behind the drop in OIH cash balance and OIH's expansions using the capital increase proceeds.