Equity Analysis /
Egypt

Qalaa Holdings: Operational losses re-surface; maintain Equalweight

    Myss Semeida

    No one-off gains, no profits

    Qalaa Holdings reported Q1 19 results, recording revenue of EGP3,440.8mn (-8.8% qoq, +13.3% yoy). The sequential drop in QH’s topline was mainly the result of sales normalising at ASEC Holding’s Al-Takamol Cement, following exceptional highs in Q4 18. On an annual basis, TAQA Arabia’s steady performance continued to drive QH’s overall revenue growth.

    QH’s EBITDA margin for the quarter settled at 10.6% (+1.7ppts qoq, -1.1ppts yoy). On a qoq basis, QH’s margin expansion was mainly owed to TAQA Arabia, and to a lesser degree other subsidiaries, which together managed to offset margin contraction at ASEC Holding. The slight yoy margin contraction more or less mirrored that of TAQA Arabia, which was primarily due to higher gas installation costs pressuring margins against fixed, subsidised installation fees in the gas segment.

    With no major one-offs shoring up its bottom-line this quarter – just a small FX gain of EGP181.7mn – QH reported a net loss of EGP154.6mn. We believe this shows that TAQA’s strength alone is not enough to offset operational weakness at QH’s other subsidiaries. Hence, we expect the company to report further losses in Q2 19, particularly as the sale of Zahana cement has been delayed.

    TAQA: Stable topline; overhead savings drive margin expansion 

    TAQA Arabia recorded a topline of EGP1,679.2mn (-0.7% qoq, +40.9% yoy) in Q1 19. On a sequential basis, TAQA’s sales remained relatively flat as strong topline growth at the gas segment managed to offset weakness at the power segment. TAQA’s gas segment saw a c33.5% qoq increase in the volume of gas distributed this quarter, as well as a c22.4% increase in the number of household installations. On the other hand, the quarterly drop in the Power segment’s sales was mainly the result of lower electricity distribution, and lower overall pricing for electricity generation. As for the Marketing segment, sales remained relatively stable QoQ on steady volumes and prices. On an annual basis, topline growth for TAQA was both volume and price-driven; the company continued to benefit from higher prices for petroleum products and electricity, and managed to distribute a larger volume of gas and complete a higher number of installations.

    EBITDA margin was 7.1% in Q1 19 (+2.1ppts qoq, -0.7ppts yoy). The qoq margin expansion came despite margin contraction at all three of TAQA’s operating segments, as the company reported lower overhead costs as a whole than the sum of its parts. It is worthy to note that a 2.0ppts qoq EBITDA margin contraction was witnessed in the gas segment this quarter, mainly on the back of higher installation costs versus a fixed subsidised installation fee. Management have noted that they are currently lobbying to increase the subsidised fee of EGP3,500 per client. 

    We believe TAQA is on track to meet our topline expectations for 2019, as we estimate revenue of EGP7,188.1mn for this year. We also estimate an EBITDA margin of 8.7% for 2019, which we believe is still attainable as we expect TAQA’s solar project will see margins expand beyond this quarter’s 7.1%, starting in Q2 19.

    ASEC’s performance corrects downwards; Tawazon to follow suit 

    Last quarter, both ASEC Holding and Tawazon reported unsustainably high revenue figures. First, ASEC Holding’s Al-Takamol cement had an exceptionally strong quarter in Q4 18 on the back of high prices, large volumes, and the restatement of sales to account for a hyper-inflationary environment. This quarter, Al-Takamol’s sales have corrected downwards bringing down ASEC Holding’s sales to a more normalised level at EGP524.5mn (-50.9% qoq, -22.9% yoy). With lower volumes, and the significant devaluation of the Sudanese pound outpacing price adjustments, Al-Takamol reported significantly lower sales in EGP terms in Q1 19. Second, at Tawazon, reported revenues dropped slightly to EGP154.5mn (-11.2% qoq, +59.3% yoy), but remained on the high end as ENTAG Oman recognised the last portion of revenues generated from its UAE project. Going forward, QH forecasts lower results for Tawazon until further projects are added to the pipeline at its Omani division.

    On the plus side, all of QH’s other subsidiaries witnessed some improvement this quarter. Nile Logistics reported sales of EGP47.8mn (+86.0% qoq, +86.0% yoy), mainly as volumes handled at its stevedoring operations tripled. ASCOM recorded sales of EGP271.2mn (+18.3% qoq, +17.7% yoy), on the back of solid performance at both ASCOM for Chemicals & Carbonates Manufacturing (ACCM) and GlassRock. The company expects the third production line at ACCM to start operations by the end of July 2019. QH’s packaging and printing arm, Grandview, also reported growth with sales reaching EGP492.6mn (+41.6% qoq, -5.4% yoy). It is worthy to note that QH’s only subsidiaries that turned a profit on the bottom line level for Q1 19 are TAQA, Tawazon, and Grand view.

    Maintain Equalweight on FV of EGP3.29/sh

    We had initially anticipated that QH would be able to remain in the green up until the start-up of Egyptian Refining Company (ERC), as the sale of Zahana cement was previously expected to be completed during H1 19. However, given the delay in the sale process due to the recent uprising in Algeria, the company now expects the sale during 2020. QH expects cUS$26mn in proceeds from the Zahana sale, proportional to its ownership in ASEC Cement. ARESCO also remains under sale as part of QH’s portfolio restructuring program, but the expected proceeds are immaterial.

    QH noted that ERC is expected to start generating income in July 2019. We reiterate that our FV currently incorporates a 50% utilisation rate for ERC in 2019, and if the refinery’s commercial operations start date is pushed to the end of August 2019, as previously communicated by management, this will have no material impact on our valuation. Our valuation of ERC is primarily driven by the refinery getting off the ground just in time to reap the benefits of the IMO 2020 regulation. Management have also re-stated their intentions to increase QH’s stake in ERC, but we view this as unlikely in the short-term given the lack of available funding. We reiterate Equalweight on the stock with an FV of EGP3.29/sh.