Equity Analysis /
Egypt

EK Holding: Robust Q1 growth sets the tone for 2019; maintain Overweight

    Myss Semeida

    On track to meet our expectations for 2019

    EK Holding reported a strong set of Q1 19 results, recording impressive operational revenue at US$134.9mn (+9.6% qoq, +19.5% yoy). The main drivers of sequential growth were subsidiaries Sprea and Nat Energy, while the yoy increase came on the back of significant growth at Alex Fert and Nat Energy.

    The holding company’s gross margin settled at 33.1% (+1.3ppts qoq, +0.4ppts yoy) supported by Nat Energy and ONS on a quarterly basis, and Alex Fert, Sprea and ONS on an annual basis. Net income post minority and employee profit share came in at US$25.1mn (+56.1% qoq, +12.5% yoy), putting EK Holding on track to achieve our estimate of US$102.0mn in 2019.

    Alex Fertilizers: Volume ramp-up offsets price losses

    Alex Fert reported revenues of US$54.3mn (+2.7% qoq, +20.9% yoy). Surprisingly, the quarterly growth was volume driven, as the company was operating at a record utilisation rate of 114.3%, according to our calculations (+12.8% qoq, +10.5% yoy), while export urea prices fell to US$269.9 (-12.4% qoq, +9.2% yoy). On a yoy basis, the significant sales growth was both price and volume-driven. 

    Following the decline in prices, gross margin for Q1 19 dropped to 29.3% (-4.6ppts qoq, +2.9ppts yoy). However, on an annual basis, Alex Fert’s gross margin remained higher than in Q1 18 due to relatively higher prices yoy. On the bottom-line level, net income came in at US$11.5mn, translating to a net margin of 21.2% (-2.0ppts qoq, -0.2ppts yoy). The company’s net income was somewhat supported by interest income and FX gains. 

    We expect Alex Fert’s performance to remain steady going into Q2 19, particularly as global urea prices averaged US$258.9/ton for Q1 19 (-19.1% qoq, +0.4% yoy). Nevertheless, even at relatively low price levels, Alex Fert managed to record a Q1 19 gross margin above our 2019 estimate of 24.9%. If the high margins sustain, we believe the company could easily exceed our estimates for the year, and hence a FV upgrade to Alex Fert would be warranted.

    Sprea: Demand slowdown gradually coming to an end 

    Sprea’s revenues recorded US$30.8mn for Q1 19 (+19.5% qoq, -3.1% yoy). The company attributed the quarterly top-line growth mainly to improved SNF operations. Liquid SNF sales volume for the quarter jumped 101.1% qoq and 429.4% yoy. Overall sales volumes also witnessed a recovery this quarter, increasing c17% qoq, while average prices slipped by c3% qoq. On the other hand, the annual drop in sales came primarily on the back of lower volumes. We believe the company’s recent formica sheets expansion has not yet been reflected on results and hence, we expect its impact to materialise in Q2. 

    The company’s gross margin remained relatively steady at 32.2% (+0.6ppts qoq, +1.0ppts yoy), despite the rundown in global methanol prices. Management indicated that Sprea’s stable margins already reflected low methanol prices and the sales mix for the quarter did not allow for further expansion. Net margin for Q1 19 was 28.3% (+0.6ppts qoq, +4.0ppts yoy), supported by non-operating gains of US$2.3mn. 

    With Sprea’s gross margin steady at 32.2%, it is currently above our estimate of 29.1% for 2019. As global methanol prices remain hammered at US$279.0/ton (versus US$344.9/ton in Q4 18), and the company works on extracting operational efficiencies, we believe margins should remain in line with our expectations for 2019.

    Nat Energy: Consistent growth, margins back in line with expectations

    Nat Energy reported revenues of US$26.6mn (+14.0% qoq, +47.2% yoy). The qoq growth was primarily driven by a higher number of household gas installations, of which a higher portion (c60%) was infill. On an annual basis, higher electricity prices and generation at Kahraba, as well as a greater number of installations drove sales growth. 

    There was a significant expansion in gross margin at 39.6% (+6.8ppts qoq, -6.0ppts yoy), thanks to a larger number of high-margin infill installations. This is reassuring after the margin contraction witnessed in Q4 18, as Nat Energy’s gross margin is now more in line with our estimate of 38.3% for 2019. On the net profit level, seeing as the company is cash-rich, its Q1 19 bottom-line saw a new record of US$10.8mn bolstered by US$3.7mn of interest income.

    With such a strong first quarter, we believe Nat Energy could potentially exceed our top-line estimate of US$90.8mn for 2019, particularly as we expect further sales growth at Kahraba in H2 19 on the back of energy subsidy cuts. The company is also expecting a capex outlay of EUR25mn during H2 19 for the last 40MW expansion at Kahraba, which should kick in starting 2020.

    ONS: Hit by the weather, but production ramp-up still in the books

    At ONS, revenue unexpectedly fell to US$8.8mn (-20.7% qoq, +2.7% yoy) as the company indicated that the newly drilled well, earmarked for production in Q1 19, experienced weather-related delays. The company’s bottom-line consequently recorded a disappointing US$4.2mn in Q1 (+6.4% qoq, +0.1% yoy). We expect the first of four wells to be drilled this year to come online in Q2 19, hence production should ramp up significantly. Further improvement is also expected down the line in 2019 as new wells come online. In all, we believe ONS could still make our bottom-line estimate of US$25.4mn for the year depending on next quarter’s performance.

    Maintain Overweight 

    EK Holding continues to impress us with sustainable growth across its subsidiaries. It is also worth noting that the EGP appreciation should support Nat Energy and Alex Fert’s results in Q2 19. We are currently working on reviewing our FV for the company to incorporate ONS’ updated production profile for the shallow layer reserves once released. We also believe another update is due, to account for higher-than-anticipated margins at Alex Fert. As for the company’s recent developments, management have indicated that the company is planning to initiate a partial exit from ONS once the shallow layer reserves have been assessed, and will use the proceeds to drill an exploratory well in the deep layer. Hence, we will not be incorporating deep layer reserves in our FV until the company’s full strategy is revealed. EK Holding is currently trading at a 2019f PE of 14.0x, equivalent to its historical average.