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Qalaa Holdings: Q3 19: TAQA excels while Qalaa’s losses drag on; maintain Equalweight

    Al Ahly Pharos Securities Brokerage
    19 December 2019

    Qalaa Holdings continues to lean on TAQA

    Qalaa Holdings reported 3Q19 results, recording revenue of EGP3,924.1 million (+12.4% QoQ, +20.6% YoY). QH’s topline growth, both on a QoQ and YoY basis, was driven primarily by TAQA Arabia’s seasonally strong performance this quarter.

    QH’s EBITDA margin for the quarter settled at 7.1% (-0.2pps QoQ, -2.0pps YoY). On a quarterly basis, QH’s margins remained firm as the margin expansion witnessed at TAQA and ASEC Holding managed to offset deteriorating profitability at other subsidiaries. However, on a YoY basis, TAQA’s performance alone was not enough to shore up QH’s margins.

    On the bottom-line level, QH continued to report losses, recording a net loss of EGP395.3 million this quarter including the effect of an FX gain of EGP189.1 million. The company had reported net profit of EGP158.1 million in 3Q18, which was shored up by one-off gains of EGP455.3 million. We expect QH to record further losses in 4Q19 since the company announced it expects to begin consolidating ERC’s results in 1Q20, which we hope will be enough for QH to return to operational profitability. 

    TAQA: Robust growth in line with expectations

    TAQA Arabia reported a huge jump in sales this quarter to reach EGP2,202.4 (+22.0% QoQ, +30.3% YoY). The company’s sequential topline growth was driven by robust growth across all segments, as 1) the Power segment saw a 32.7% increase in distribution volumes and higher electricity prices, 2) the Gas segment ramped up gas installations and reaped the benefits of a higher subsidized installation fee, and finally 3) the Marketing segment benefited from an increase in the prices of liquid fuels. On an annual basis, the 30.3% sales growth at TAQA was mainly owed to the Gas segment doubling its number of installations.

    EBITDA margin recorded 8.9% in 3Q19 (+0.5pps QoQ, +2.4pps YoY). The slight QoQ margin expansion was driven by improving margins, again across all of TAQA’s segments as a result of 1) higher electricity prices at the Power segment post-subsidy cuts, 2) a higher portion of infill installations, as well as a higher subsidized installation fee at the Gas segment, and finally 3) higher fuel prices at the Marketing segment. On a YoY basis, TAQA’s solid 2.4pps margin expansion was fueled mainly by higher electricity prices at the Power segment, and the contribution of the Solar project as it continued to ramp up and record sky high EBITDA margins of 91.9%.

    TAQA’s 3Q19 results came in line with our expectations, reassuring us that the company will be able to meet our targets for the year. We estimate a topline of EGP7,978.2 million for 2019, which is looking increasingly attainable with 9M19 sales already at EGP5,687.0 million. We also estimate an EBITDA margin of 8.1% for 2019, and TAQA’s EBITDA margin for 9M19 is at 8.2%.

    ASEC Holding delivers notable results, others disappoint

    ASEC Holding reported notable growth this quarter, with sales reaching EGP671.4 million (+29.2% QoQ, +60.2% YoY), and EBITDA margins expanding QoQ to 5.1% (+2.6pps QoQ, -8.4pps YoY). The company’s growth was mainly owed to Al Takamol cement, despite the reconsolidation of ARESCO which put a hamper on results. At Al Takamol, cement volumes ramped up to reach 240 k tons (+14.3% QoQ, +41.2% YoY) in 3Q19. Management also noted that cement prices have been on the mend in Sudan since August, and are therefore expected to reflect more on 4Q19 results.

    QH’s other subsidiaries delivered weak performance this quarter. In fact, apart from TAQA, the only subsidiary to turn a profit on the bottom line level for 3Q19 was Grandview, coming in with net income of EGP2.9 million.

    Debt restructuring insignificant; maintain EW on FV of EGP2.70

    QH announced that it has reached advanced stages of negotiation to restructure its debt at the holding level, as well as at several of its subsidiaries. After reverting to management, they clarified that QH is aiming to reschedule its holding level debt of c.EGP4 billion to be paid over the course of 5 years, starting with small payments that increase each year. As for ASEC Holding, the company has already signed restructuring agreements to write off more than EGP500 million of accrued interest, so ASEC will only be required to pay the remaining principle of c.EGP470 million by mid-2020. Although QH’s restructuring agreements will see interest expense decline in the coming period (hence helping shore up the company’s bottom line), we believe they have an insignificant impact on QH’s overall valuation.

    QH also announced that its flagship project ERC, is now operating at an average utilization rate of 85%, with results expected to be consolidated starting 1Q20. We re-iterate that, while we maintain our Equalweight recommendation on the company based on fundamentals, we recommend having exposure to QH in anticipation of ERC’s first set of results, which we expect will act as a significant catalyst to share price