Egypt Kuwait Holding (FV: USD1.27, OW)
Company Guidance at the Holding Level
- EKH expects attributable net profit of USD114 million in 2019, versus USD95 million in 2018. The company aims to reach a net profit of USD260 million by 2022.
- The company’s expected net profit of USD114 million in 2019 is split as follows: USD37 million from Nat energy, USD32 million from Sprea, USD22 million from ONS, USD18 million from Alex Fert, and USD5 million from diversified investments.
- Management guided for 2019 capex of USD180 million; USD100 million will go to ONS, USD55 million to the MDF project, and USD25 million for the last 40MW power generation expansion at Kahraba.
Main Growth Driver: Nat Energy’s Kahraba
- EKH will expand Kahraba’s power generation capacity to the cap of 115MW. At 75MW of generation capacity currently, the last 40MW expansion will be added this year, and should be realized in 2020.
- The company’s main focus will now be on electricity distribution to take advantage of excess power generation in Egypt. EKH aims to reach 385MW of distribution capacity by 2022, which should translate to just 1% market share.
- It is worthy to note that electricity distribution is a low-margin business compared to generation. Hence, EKH’s strategy will be more of a volume-play, and blended gross margins for Nat Energy will fall from current levels of 40% to 25-30%.
Offshore North Sinai Concession (ONS)
- Process update - EKH has two options to de-risk the exploration process and maximize value:
- Fast track: EKH can make a partial exit from ONS then use the proceeds to drill an exploratory well in the deep layer.
- Conservative track: The results of an exploratory well drilled at Noor, a neighboring concession, showed gas finds in the same layer where ONS is also hoping to have gas. An appraisal well will now be drilled at Noor, and the results should be announced by March 2020. EKH is opting to wait for the appraisal well results before drilling an exploratory well at ONS. If gas is found, this will increase the probability of recovery at ONS’ deep layer from 30% to at least 60%, enabling the company to sell a stake in ONS at a premium, and mitigate the dilution effect of a partial exit.
- Operational update - EKH guided for 2Q19 production slightly below 1Q19. The anticipated ramp-up should be apparent in 3Q19.
- The company expects USD21-22 million in net profit for 2019 (only accounting for the 250 bcf production profile).
- The company has managed to increase SNF utilization rates to reach 80%.
- Sprea’s last formica sheets expansion is expected to kick in starting 3Q19. The company also plans to add another line with a capacity of 700,000 sheets towards the end of 2019.
- Sprea’s exports currently stand at 28%. The company plans to increase exports beyond 30% of production.
- EKH assigns no growth to Alex Fert, accounting for stable net profit of USD18 million over the next 5 years. Management assumes operations at 100% utilization, with urea prices at USD250/ton, gas cost at USD4.5/mmBtu, and a local quota of 30%.
- EKH has signed a non-binding agreement with a technical equity partner to hold a super-minority stake of 27%.
- The company has planted a large quantity of its own feedstock to supply its potential partner with samples for testing at the external party’s MDF plant abroad.
- EKH has submitted an offer and is currently awaiting the opening of envelopes, which is scheduled for 15 July, 2019.
Qalaa Holdings (FV: EGP3.29, EW)
Egyptian Refining Company (ERC)
- ERC will start commercial operations end of August 2019. The refinery should start off at 60-70% utilization then ramp up to 90% within a month.
- Management expects EBITDA of around USD1 billion from ERC during 2020, translating to an EBITDA margin of 35%.
- QH is still looking to increase its stake in ERC by buying part of Qatar Petroleum’s stake.
- TAQA Arabia to expand its marketing network. With 55 fuel stations currently, the company is aiming to add 8-10 stations per year to reach 100 stations in 4-5 years.
- TAQA’s Gas segment continues to be more focused on gas distribution than installations. The company distributed 5 bcm of gas in 2018, 98% of which was for industrials, and just 2% for households.
- TAQA’s latest addition to the Power segment, the Benban solar power plant has been operational since March 2019, and should be reflected in 2Q19 results.
- QH hopes to IPO the parent company of ERC, Arab Refining Company (ARC) by end of year 2020, as well as TAQA Arabia in 2H20, while maintaining its respective stake in each.
- QH is also still looking to exit Zahana cement, but the sale has been delayed on the back of Algeria’s belated Arab Spring. On the bright side, management believe QH can benefit from further delays in the sale process as Zahana’s new production line is expected to come online by January 2020.
Abu Qir Fertilizers (FV: EGP30.90, OW)
- ABUK’s total capacity is currently more than 2 mtpa of fertilizers.
- The company’s natural gas cost constitutes around 80% of its total operating costs.
- Management guided for the following utilization rates at each plant: Abu Qir 1 at 115%, Abu Qir 2 at 100%, and Abu Qir 3 at 110%.
- The company chooses to sell its current AN production locally, as it is sold at better prices than in export markets.
- ABUK plans to shut down Abu Qir 2 for maintenance in August 2019.
- The company is currently studying two main projects:
- A Calcium Ammonium Nitrate (CAN) plant to be established on ABUK’s land over two phases; the first is to revamp the NPK unit to produce 600 tpd of Ammonium Nitrate (AN) at an investment cost of EGP3.4 billion, and the second is to integrate into CAN, which brings the total investment cost up to EGP5 billion.
- A methanol and CAN plant to be established as a separate entity in Sokhna. The company is currently in talks with Suez Canal Authority to sign a contract regarding the 1 million sqm land plot. The budget for the mega project will be at least USD2 billion. ABUK will hold a stake close to 25%.
- ABUK is planning to establish a new company for phosphoric acid in New Valley based on readily available phosphate rock from the Abu Tartour mine.
- The company still hopes to acquire the Rakta Paper Manufacturing 80 acre land plot, which will be used to establish a water desalination plant, or a soda ash plant that remains under study.
- Management believe market liberalization is highly likely within the next year. ABUK indicated that if prices are liberalized, this could add up to EGP1.8 billion to the company’s bottom line, taking it up to EGP4.8-5 billion.
Egyptian Chemical Industries - KIMA (FV: EGP6.12, EW)
- KIMA 2 will start commercial operations in August 2019.
- KIMA 2’s total investment cost is EGP11.6 billion, funded using: EGP4,465 million of equity, a USD292 million loan, and an EGP920 million loan.
- The company has spent EGP9.4 billion to date on KIMA 2.
- The remaining funds of EGP2.2 billion will be paid to Tecnimont to operate and maintain the plant for 2 years.
- Management indicated that KIMA’s total debt of EGP7,150 million will be repaid over 10 years in equal installments of EGP824 million.
- KIMA expects exports to be around 45% of production. The company has export contracts subject to annual renewal for 260,000 tpa of urea.
- The company says there is no contract in place with the Ministry of Agriculture for an absolute quantity of KIMA’s production yet.
- KIMA will pay a 5% export fee on exports of products that were intended to fulfill its local quota.
- KIMA’s upgraded capacities will include 1,320tpd of ammonia, 578,000 tpa of urea, 220,000 tpa of Ammonium Nitrate (AN), 7,500 tpa of ferrosilicon (mostly exported at a price of c.USD1,400/ton), and 2,500 tpa of silica fume (sold at a local price of EGP4,200/ton, and an export price of USD300/ton).
- The company will receive natural gas at a fixed cost of USD4.5/mmBtu.
- The rehabilitation of KIMA 1 could cost between EGP3-3.5 billion, and must be done within the next 5 years to maintain the new capacities, and raise AN capacity to 300,000tpa. The company indicated KIMA 1’s rehabilitation could be financed using another capital increase in 1 or 2 years.
- KIMA expects revenues of EGP3,625 million assuming urea prices of USD317/ton.
- The company expects net profit of EGP297 million.
Recent Developments and New Projects
- KIMA just won a law suit worth EGP499 million as the Egyptian Electricity Transmission Company’s (EETC) appeal on electricity price differential dues was rejected.
- The company is currently studying two projects. The first of which is to build its own distribution network as a separate entity. KIMA will need to buy 60 trucks at EGP3-4 million per truck. The second project is to establish a plastic bags factory at an investment cost of EGP70 million.
Misr Chemical Industries (MICH)
- MICH has a market share of 30% of the local market for caustic soda and chlorine.
- Management have indicated that a secondary offering is highly likely. The company is currently studying listing 3% of the Chemical Industries Holding Company’s 53.5% stake, to move MICH out of the public sector umbrella and under the private sector.
- The company’s current production capacities stand at 48,000 tpa of caustic soda, and 42,000 tpa of chlorine.
- MICH’s exports have currently reached 25% of production vs. 15% last year.
- Low chlorine demand had been limiting the company’s production of caustic soda as one product cannot be produced without the other.
- This year, the company established new long-term contracts to export chlorine to African countries for use in water treatment. However, global caustic soda market dynamics have shifted from last year’s shortage to a current state of oversupply as new capacity came online.
- Selling prices for caustic soda dropped from EGP12,000/ton last year, to EGP6,000/ton currently. On the other hand, chlorine prices have increased from EGP2,200/ton last year, to EGP2,900/ton at the present time.
- MICH is studying a new project to produce Calcium Hypochlorite at an investment cost of EGP150 million. The project will transform chlorine production to be in the form of pellets.
- The company is however unable to move forward with the project at the moment given that the low demand on caustic soda is limiting utilization rates for chlorine.
- MICH foresees pressure coming from energy subsidy cuts in July 2019, as electricity constitutes c.65% of COGS. They are however open to considering alternative energy sources to obtain electricity at a lower cost.