Equity Analysis /
Egypt

ACGC: Seasonality boosts top line, profitability normalises; maintain Overweight

    Mohamed Hamza

    Cotton Export Season Revives Quarterly Topline

    ACGC recorded 3Q18/19 revenues of EGP693 million, up 1% YoY and 42% QoQ. We believe sequential improvement came on the back of seasonality, where cotton export season starts from December of every year.

    Topline Shapes Earnings; Profits Recover 

    Annual and sequential GP and EBITDA margins were driven by topline performance. Strong quarterly topline performance led to a 48% QoQ increase in COGS causing GP & EBITDA margin contraction of 3.7pps and 1.2pps respectively, while a 1.3% annual topline growth triggered GP & EBITDA margins to increase by 0.7pps and 1.0pps, respectively.

    NPM recorded 2.4% vs -0.3% in 2Q18/19 on the back of ‘other expenses’ normalizing to EGP6 million, down from EGP47 million due to a one-off early retirement scheme for 603 employees, which amounted to EGP40 million paid in 2Q18/19. Despite net interest expense increasing by 61% YoY, annual NPM demonstrated a 0.8pps growth.

    Stock Awaiting Cotton & Spinning Segment Catalysts 

    ACGC is trading at an EV/EBITDA19/20 of 6.4x and P/E19/20 of 3.8x, , which is higher than EM peers’ average EV/EBITDA19 of 5.2x and lower than EM peers’ average P/E19 of 7.0x, in light of the high debt accumulated (EGP1,172 million) in 9M18/19 to purchase high stock of cotton. 

    Cotton traders forecast that total Egyptian export contracts will close at 2 million quintals by FY18/19-end compared to 1.1 million quintals in FY17/18, driven by high production quality and low global prices. Current average export prices stands at an average of EGP2,173 per quintal, with an expectation to rise to EGP2,342 per quintal in FY19/20. Modern Nile Company (a subsidiary of ACGC) is a market export leader, hence we believe this should push volumes during the coming period. 

    Management recently announced that the expansion plans of spinning segment are currently in progress, with an estimated investment of EGP30 million. In our latest valuation update, we noted that management is renovating Egyptian Spinning & Weaving’s (a subsidiary of ACGC) machinery as they see huge growth potential going forward in the spinning segment.

    In light of the recent share price slump, we maintain our DCF FV of EGP3.32 with an Overweight recommendation.