Equity Analysis /
Egypt

OIH: 2Q19 - Sequentially weaker operating performance

    Al Ahly Pharos Securities Brokerage
    29 September 2019

    Lower Management Fees and Investment Property Revenues Offset Cables Revenue Growth

    Orascom Investment Holding (OIH) presented a sequentially weaker operating performance in 2Q19, showing revenues of EGP383.39 million, compared to EGP415.08 million in 2Q18; a decline of 7.6% YoY. Cables business (Pakistani Cable, Submarine fiber optic cable operator in Pakistan) was the largest contributor to revenues, with 47.8% in 2Q19, up from 39.3% of total revenues in 2Q18. Financial services segment (Beltone Financial Holding) was the second largest contributor to revenues, with 41.4% in 2Q19, down from 41.5% of total revenues in 2Q18. Management fees recorded a steep decline of 52% YoY, to reach EGP30.3 million in 2Q19. Investment property revenues  (Victor Investment Holding, RE Investment in Sao Paulo, Brazil) dropped by 31% YoY, recording EGP11.0 million in 2Q19.

    Gross profit dropped to EGP215.58 million in 2Q19, down from EGP238.8 million in 2Q18; a decline of 9.7% YoY, mainly on lower revenues. GPM dropped to 56.2% (-1.3pps YoY, -2.4pps QoQ), where COGS did not decline as much as revenues did.

    FX Losses and Net Finance Cost Pressure Bottom Line

    OIH reported net loss after tax of EGP74.6 million in 2Q19, compared to a net profit of EGP41.64 million in 2Q18, mainly due to 2Q19's surge of 9.56x in net finance cost and recording EGP49.76 FX losses in 2Q19, compared to FX gains of EGP8.72 million in 2Q18. This was mainly because of a shift in the net debt position to EGP816.9 million in June 2019, from a net cash position of EGP1.21 billion in June 2018.

    Koryolink Impairments Continue, Investment Income Drops

    OIH continues to impair Koryolink’s profits, since management had previously reported that they haven't reached any official agreement with the Korean government. Additionally, OIH booked net investment income of EGP16.43 million in 2Q19, which is less than 1Q19 booked net investment income of EGP38.36 million. The investment income here mainly relates to OIH’s 30% ownership in Sarwa Capital Holding. 

    Stock Lacks a Clear Strategic Direction; Pressured by Net Debt Position

    OIH has announced before an intention to expand operations in Real Estate, Agri-Industries, Entertainment and Logistics Segments, but no clear steps have been taken to achieve the targets. Moreover, OIH's current net cash/debt position has changed since our last valuation update from a net cash position of EGP373.2 million (EGP0.07/share, book value as of 3Q18) to a net debt position of c.EGP816.9 million (EGP0.15/share)  in 2Q19; which will further burden our SoTP valuation. It is notable that any upcoming expansion plans would either require OIH to call for capital increase or to go for bank financing which would further burden its cash/debt position. We maintain our TP of EGP0.66 and Equalweight stance.