Equity Analysis /
Egypt

Qalaa Holdings: 2018 in the green on major 4Q non-cash gain

    Myss Semeida

    ASEC drives QoQ topline growth; one-offs still driving profitability

    Qalaa Holdings' revenue for 4Q18 stood at EGP3,773.8 million (+15.1% QoQ, +33.6% YoY) The QoQ topline growth was predominantly driven by a surprisingly strong performance at ASEC Holding's Al-Takamol Cement, with sales more than doubling. ASEC Holding also contributed towards QH's annual surge in revenues, along with QH's pillar of strength, TAQA Arabia. On a full-year basis, QH reported EGP13,170.0 million in sales (+24.8% YoY), down to TAQA's solid performance.

    QH’s EBITDA margin settled at 8.9% (-0.5pps QoQ, +0.5pps YoY) this quarter. It is worth noting that the company's EBITDA margin was slightly inflated with a non-recurring SG&A gain of EGP29.2 million, and would have recorded 8.1% excluding one-offs. EBITDA margin for the year came in at 9.7% (+0.8pps YoY) witnessing a slight expansion which was owed to ASEC Holding, and to a lesser degree, Tawazon. 

    As QH fully deconsolidated Africa Railways from its financials, the company booked a whopping EGP2,554.7 million non-cash gain in 4Q18. This not only shored up 4Q's bottom line to EGP924.2 million  (+631.2% QoQ) but also pushed the company to record its first profitable year since 2009. QH reported EGP1,350.8 million in net profit for 2018, versus a loss of EGP4,771.0 million in 2017. If not for one-offs, QH would have booked a loss before taxes of EGP802.6 million for 2018.

    TAQA: A steady 4Q to finish off the year in line with expectations

    TAQA Arabia recorded a topline of EGP1,690.9 million (+1.3% QoQ,+37.0% YoY) in 4Q18. On a sequential basis, the slight uptick in sales came as a result of the Gas segment's revenue growth more than offsetting a slump at the Power segment, while Marketing sales remained relatively steady. TAQA Gas managed to connect over 35 thousand households this quarter versus c.22 thousand in 3Q18. On the other hand, we presume the drop in sales at the Power segment was due to decreased electricity distribution. On a full year basis, TAQA's revenue came in at EGP5,904.8 million (+42.5% YoY) exceeding our estimates by just 1.5%. The company's impressive annual sales growth was driven by a number of factors including higher prices for petroleum products and electricity, as well as a greater number of household gas installations.

    EBITDA margin recorded 5.1% in 4Q18 (-1.1pps QoQ, -1.6pps YoY). The QoQ margin contraction was presumably mainly the result of lower infill installations at the Gas segment. On an annual basis, all three segments recorded lower EBITDA margins but in varying degrees. All in all, 4Q18's slight contraction did not shake up TAQA's overall EBITDA margin for 2018, as it remained quite steady settling at 6.3% (-0.2pps YoY). 

    We believe TAQA has delivered strong growth over the course of 2018 and will continue to hold its own going forward. We also reckon the company's margins will witness expansion in 2019 on the back of its EGP1.35 billion solar project, which commenced operations late 1Q19.

    An exceptionally strong quarter for ASEC Holding and Tawazon 

    This quarter saw unexpected growth coming from ASEC Holding as well as Tawazon. ASEC Holding's revenues for 4Q18 stood at EGP1,068.6 million (+136.3% QoQ, +63.6% YoY), almost double what they were last quarter. The exceptional quarterly sales growth was all down to Al-Takamol Cement in Sudan, which saw a 64.7% QoQ jump in volumes sold, in addition to higher prices and a boost from restating revenues to account for a hyperinflationary environment. At Tawazon, revenues tripled QoQ to reach EGP173.9 million (+198.8% QoQ, +77.4% YoY) as ENTAG Oman recognized revenues from most of its Oman and UAE projects.

    On the other hand, significant weakness was witnessed at Nile Logistics and Grandview in 4Q18. Nile Logistics reported revenue of EGP25.7 million (-42.0% QoQ, -27.8% YoY), primarily on the back of a 72.0% QoQ contraction in volumes handled at its stevedoring operations. At QH's recently consolidated packaging and printing arm, Grandview, sales also saw a sharp drop of 39.2% QoQ to reach EGP348.0 million.

    Maintain Equalweight on FV of EGP3.29/share

    As expected, QH has managed to put an end to bottom-line losses this year by bolstering itself with consecutive non-cash gains, with the biggest in 4Q giving the company a final push to turn a profit in 2018. Management has noted that they will continue with their portfolio restructuring program in 2019, which we believe should keep QH in the green up until ERC kicks in. QH currently has three companies in the process of being sold: Zahana Cement in Algeria, ARESCO, and ESACO, all under ASEC Holding. The company expects the sale of the Zahana Cement plant to be completed during June 2019, bringing in proceeds of c.USD50 million.

    QH has been making steady progress towards completing the trial operations of ERC’s units, and have also been working on securing the necessary debt financing for the refinery’s initial working capital needs. The company has reaffirmed that ERC is expected to come online beginning of 3Q19, however we remain wary of potential execution risk. QH has also yet to announce further details regarding increasing its stake in ERC, including transaction value and deal financing. We reiterate that a higher stake does not necessarily mean a higher FV unless the transaction is executed on attractive terms. We remain Equalweight on the stock with a FV of EGP3.29/share.