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Pharos Investor Conference: Meeting Minutes – Logistics

    Al Ahly Pharos Securities Brokerage
    23 June 2019

    Damietta Containers and Cargo Handling

    Damietta Containers Handling Company (DCHC) is one of the companies to be listed under the government IPO program in phase 2. DCHC specializes in performing all container handling related operations, also handling and stevedoring different types of general cargo.

    Company Overview

    • DCHC was established in 1986 and is located on the western section of the port of Damietta. In 1990, DCHC began commercial operations, becoming one of the most important container terminals in the Mediterranean Sea
    • DCHC is jointly owned by the Holding Company for Maritime and Inland Transportation (HCMIT) (42%), Damietta Port Authority (25.0%), The Canal Company for Shipping Agency - CSAG (20.0%), Port Said Container and Cargo Handling Company (3%) and private sector/individuals (10.0%)
    • The shipping lines: “HLC, CMA , MAERSK” achieved the highest performance in the ratio of contribution in the activity of a container terminal in Damietta port during FY17/18

    Operational Overview

    • DCHC currently operates close to maximum capacity, since it handled c.1.32 million containers in FY17/18 with a maximum capacity of 1.4-1.5 million containers, operating at c.91% capacity utilization, which provides no room for further growth in number of containers at current stage.
    • Transit container handling contributes c.40-60% of total number of containers handled.
    • Service fees are c.50% lower for exports containers than import containers
    • Post completion of the deepening project and the proposed plan of acquiring two terminals, DCHC port maximum capacity could allow handling a total of 2.8 million containers (up from a current 1.4-1.5 million containers) post deepening completion and allows for 30-35% more volume post the successful acquisition of the two terminals

    Competitive Advantages

    • Very unique geographical location
    • Upon completion of expansion plans by 2020, DCHC will be able to handle all types of containers with its terminal depth reaching 17.5 meters
    • DCHC operates in the free zone area
    • The port of Damietta is located 10Km West of the Nile, and 70km west of Port Said. The port’s basin is connected to the Nile by a canal to facilitate access to inland navigation.

    Financial Overview

    • DCHC issued and authorized capital as of FY17/18 is EGP200 million, distributed on 20 million shares, at par value of EGP10.0/share
    • DCHC is cash rich and enjoys a debt free capital structure, with net cash balance at EGP1.95 billion (EGP97.48/ share)
    • DCHC reported revenues of EGP1.54 billion in FY17/18, up from EGP1.04billion in FY16/17 (+48.4% YoY), GP of EGP1.11 billion in FY17/18 and EGP739 million in FY16/17 (+49.8% YoY) and reported NP of EGP1.16 billion in FY17/18 versus EGP905.7 million in FY16/17 (+28% YoY)
    • DCHC handled 1.32 million containers in FY17/18, up from 1.22 million containers (+8.2% YoY), containers growth can be mainly attributed to improved trade activity and discounts offered to shipping lines
    • DCHC are expected to report stable operational and financial performance during FY18/19, mainly due to a favorable revenue mix
    • Going forward, expansion projects will create room for doubling containers handled.

    Investment Strategy and Capex plans

    • Deepening and Expansion Project:
      • DCHC is currently undergoing a deepening project for its terminal, with a depth of 17.5 meters post the completion of the project, allowing the company to handle all types and sizes of containers.
      • Project capex is estimated at EGP750 million, which is c. 48% capex/sales.
      • Project completion would raise the current maximum capacity from c. 1.4-1.5 million containers to c. 2.8 million containers.
    • Potential Acquisition of two terminals:
      • Aside from the deepening project, DCHC is currently in negotiations with the Port authority to acquire two other terminals that would provide room for 30-35% more volume within container handling.
      • Acquiring the two terminals would bring in revenues of c. EGP500 million and would increase costs by c. EGP120 million per annum.
      • DCHC general maintenance and other capex for the year is EGP570 million.
      • Capex plan to be equity financed given a rich net cash balance of EGP1.95 billion

    Key Risks

    • Pricing pressure from competition on discounts provided to attract shipping lines
    • Further EGP appreciation
    • Trade activity slowdown
    • Narrowed trade balance deficit, since service fees for export containers are less than service fees for import containers

    *Alexandria Containers and Cargo Handling (FV: EGP14.50, EW)

    Management Call Notes

    • The witnessed decline in USD service fees can be mainly attributed to:
    • Shift in containers handled volume mix
    • More empty containers handled (service fees per an empty container are lower than a full container service fees)
    • More exports containers handled (service fees per exports containers are lower than imports containers service fees)
    • Impact of current upward fees revision should appear on a monthly basis, slightly diluted by EGP appreciation and shift in volume mix.
    • Completion of Terminal 96 deepening project phase 1 is expected to be completed by the end of the current calendar year (Nov-Dec 2019), and would allow ALCN to maintain a YoY growth rate of 12% on average in number of containers handled.
    • Deepening project phase 2 will commence post the completion of phase 1 and will last for 1.5 years.

    FY18/19 Earnings Expectations

    • We expect ALCN will achieve:
    • A YoY decline of 4% in revenues, dropping to EGP2.87 billion in FY18/19
    • A decline of 9.2% and 9.6% in gross profit and EBITDA to record EGP1.9 billion and EGP1.7 billion respectively.
    • GPM and EBITDA margin to decline by 4.0pps, to reach 68% and 61%. 
    • A steeper decline of 18.6% in bottom line, dropping to EGP1.9 billion in FY18/19, down from EGP2.45 billion in FY17/18. NPM to decline by 12.5pps, mainly on lower USD-denominated service fees, EGP appreciation and tighter margins. 
    • Despite applying a set of conservative operational and margin assumptions, we believe that ALCN will meet our expectations on the revenue side, however the company will slightly miss our estimates on the operating and bottom line levels, mainly on:
    • EGP appreciation and alternatively FX losses
    • Much lower USD denominated service fees (USD denominated fees showed a decline of c. 14.7% in 10M18/19, compared to our estimates of a decline of 10.0% YoY)
    • Tighter margins

    Sector Outlook

    Since DCHC business model is similar to ALCN’s business model, both operational activities are capped by global trade activity, ability to attract more shipping line contracts and expansion projects, USD service fees imposed, discounts to shipping lines, competition and EGP appreciation.

    Despite ALCN deteriorated performance on shift in revenue mix, we believe that DCHC will report stable neutral performance in FY18/19, mainly on a more favorable revenue mix. Exchange rate as well will play a great role in driving the financial performance, given that service fees are USD denominated.

    Global trade activity, volumes of Egyptian imports along with EGP appreciation are currently the main drivers of the operational performance for all players.

    *Kindly note that Alexandria Containers and Cargo Handling notes are based on our latest management call as they cancelled their participation at the last minute.