Earnings Report /
Egypt

Qalaa Holdings: Bottom-line losses continue to signal need for ERC; maintain Equalweight

    Myss Semeida
    Al Ahly Pharos Securities Brokerage
    26 September 2019

    TAQA supports topline; ASEC & Tawazon drag down profitability

    Qalaa Holdings (QH) reported Q2 19 results, recording revenue of EGP3,491.0mn (+1.5% qoq, +8.4% yoy). QH’s topline remained bolstered by TAQA Arabia’s robust performance this quarter both on a qoq and yoy basis. Sequentially, the decline in Tawazon and ASCOM’s sales weighed down on QH’s consolidated revenue growth.

    QH’s EBITDA margin for the quarter settled at 7.3% (-3.3ppts qoq, -4.4ppts yoy) recording a contraction on both a sequential and annual basis due to deteriorating profitability at Tawazon and ASEC Holding. On the other hand, TAQA witnessed margin expansion this quarter as its high-margin solar power project finally kicked in. 

    On the bottom-line level, QH continued to report losses recording a net loss of EGP224.5mn this quarter, including the effect of an FX gain of EGP222.6mn. The company had reported net profit of EGP261.5mn in Q2 18, which was shored up by a one-off gain of EGP919.6mn related to the de-consolidation of Africa Railway’s operational liabilities. We expect QH to record further losses in Q3 19, up until ERC’s first fully operational quarter, Q4 19, to see whether it will be enough to turn an overall profit for QH.

    TAQA: Upward growth trend continues; solar project ramps up

    TAQA Arabia recorded sales of EGP1,805.4mn (+7.5% qoq, +33.4% yoy) in Q2 19. The company’s sequential topline growth was mainly driven by a 50.6% increase in power distributed this quarter, which more than compensated for a drop in the number of installations at the Gas segment. On an annual basis, TAQA’s robust growth was driven by higher prices for petroleum products and electricity, larger volumes of gas and power distributed, and a higher number of gas installations.

    EBITDA margin recorded 8.4% in Q2 19 (+1.3ppts qoq, +1.6ppts yoy). This quarter marked the first fully operational quarter for TAQA’s solar power plant, which recorded an impressive EBITDA margin of 90.5%, resulting in overall margin expansion for TAQA both on a qoq and yoy basis. We assume an EBITDA margin of 60% for TAQA’s solar power plant, hence the plant is off to a strong start exceeding our expectations. 

    We expect a significant boost to TAQA’s performance in Q3 19 on the back of the last energy subsidy cut effective July 2019. Overall, we believe the company is on track to meet our 2019 topline estimate of EGP7,188.1mn, with 1H19 sales at EGP3,484.6mn. We also estimate an EBITDA margin of 8.7% for 2019, which we believe is attainable as we expect TAQA’s solar project, and higher electricity and petroleum product prices to boost margins during H2 19.

    ASEC Holding and Tawazon: The quarter’s weakest links

    Out of QH’s other subsidiaries, ASEC Holding and Tawazon stood out in particular on account of their poor performance this quarter. At ASEC Holding, sales remained relatively steady both qoq and yoy, but significant margin contraction was witnessed with EBITDA margins dropping to 2.5% (-15.8ppts qoq, -14.8ppts yoy). This was mainly due to Al Takamol Cement’s profitability being negatively impacted by a major increase in energy costs in Q2 19. At Tawazon, the company’s sales dropped to EGP100.8 million (-34.8% qoq, -13.8% yoy) following the completion of its UAE project at ENTAG Oman last quarter. The severe topline contraction led the company to record losses at the EBITDA level of EGP1.4mn. QH expects to add new projects to ENTAG’s backlog by the end of 2019.

    On a slightly more positive note, Nile Logistics reported notable improvement this quarter with sales reaching EGP67mn (+40.2% qoq, +85.6% yoy). The sequential and annual topline growth were mainly volume-driven as stevedoring tons handled reached 483,000 tons (+95% qoq, +206% yoy). The company’s EBITDA margin consequently witnessed major expansion to record 29.7% (+16.5ppts qoq, +38.0ppts yoy). However, the improvement witnessed at Nile Logistics was still not enough for the company to turn a profit, as its high depreciation and interest expense ate away at its EBITDA. It is worthy to note that QH’s only subsidiaries that turned a profit on the bottom line level for 2Q19 are TAQA, ASCOM, Gozour, and Grandview.

    Recent developments warrant a downgrade; maintain EW

    As QH continues to report losses over the course of 2019, we await the much anticipated kick-off of ERC to see whether cash flows generated by the refinery will be enough to shore up the fourth quarter’s bottom line. Management have noted that Q4 19 will be the first fully operational quarter for ERC, with the on-spec date in November 2019. We are currently working on downgrading our FV of QH to reflect more conservative estimates for ERC, in line with the company’s latest business plan, as well as QH’s diluted stake of 13.14% in ERC. We had previously noted that the adjustment of the perpetual EBITDA margins down to 16% from 20%, and reducing CCAP’s stake in ERC, would bring down our FV to around EGP2.50/share from an initial EGP3.29/share. Pending revision of our FV, we continue to have an Equalweight recommendation on the stock, as the market price has been plummeting and is currently at EGP2.05/share, almost its 52-week low.