Weak seasonality of auto sales and Huawei mobile cap revenue growth
MTIE reported 3Q2021 revenues of EGP2.24 billion (in line with our estimates of EGP2.20 billion), compared to EGP2.21 billion in 3Q20 and compared to EGP2.32 billion in 2Q21 (+1.6% YoY, -3.4% QoQ). During 3Q21, sales growth was capped by weak Huawei performance on lack of product availability and a weak seasonality for auto sales. During 9M2021, revenues recorded EGP7.08 billion, compared to EGP6.55 billion, an increase of 8.1% YoY.
Consumer and electronics consolidated sales recorded EGP1.48 billion in 3Q21 (-9.2% YoY, +3.6% QoQ). The annual decline is mainly attributed to Huawei weak sales during the period on lack of product availability. However, Huawei should start the introduction of new models towards the beginning of next year, which is accordingly expected to have a positive impact on 2022 consumer electronics growth figures. Mobile revenues (c.71% of consolidated consumer electronic revenues) showed a decline of 7% YoY in revenues during 9M2021. Home appliances revenues contributed 29% of total consolidated consumer and electronics revenues in 9M2021.
Kanawat, continued to show strong performance in 3Q21 on an annual basis and quarterly basis (EGP620 million in 3Q21, +28.1% YoY, +29.7% QoQ). Quarterly growth is partially attributed to a weak base effect in 2Q21 that witnessed a lack of product availability associated with a relatively low inventory levels that failed to sustain previous healthy levels. Kanawat recorded revenues of EGP1.75 billion in 9M21 (+40% YoY) and net profit surged by 91% YoY during 9M21, standing at EGP21 million.
Automotive sales recorded EGP425 million in 3Q21, compared to EGP550 million in 2Q21, and compared to EGP243 million in 3Q20 (+74.9% YoY, -22.9% QoQ), auto segment annual performance is primarily attributed to a weak base effect in 3Q20. On a quarterly basis, auto sales dropped as consumers tend to wait for new car models that are usually introduced during 4Q. MTIE sold 892 cars during 9M21, making management guidance of 1,100 cars sold achievable. Auto segment contributed 18.9% of total revenues in 1H21 (+4.4pps YoY).
Telecom sales recorded EGP326 million in 3Q21 (+0.8% YoY, +0.5% QoQ). Telecom sales contributed 14.6% of total revenues in 3Q21 (-0.1pps YoY, +0.6pps QoQ).
Flat margins on weak seasonality of auto sales
Gross profit came in at EGP229 million in 3Q21, compared to EGP211 million in 2Q20 and compared to EGP250 million in 2Q21 (+6.6% YoY, -11.9% QoQ), this implies a GPM of 10.2% (+0.7pps YoY, -0.6pps QoQ). Quarterly gross profit margin performance is mainly due to weaker auto sales (-22.9% YoY% in 3Q21). During 9M2021, EBITDA came in at EGP495 million (+14.5% YoY), implying a margin of 6.99% (+0.39pps YoY).
Net attributable profit came in at EGP328.4 million in 9M21 (+10.7% YoY), broadly in line with our estimates of EGP338 million, implying NPM of 4.64% (+0.1pps YoY), where bottom line performance is driven as well by te recognition of EGP9.46 million as investments from subsidiaries (Ebtikar and Basata), compared to EGP4.70 million in 9M2020 (+101% YoY).
Alpha is in Ebtikar - A closer look on e-payments RV valuation
We believe that a key catalyst for MTIE will be expansion plan from its NBFS arms through its stake in Ebtikar and Basata yielding higher investment income. Moreover, with market awaiting the IPO of Ebtikar, the company’s e-payment subsidiary, and given current implied global peers Marketcap/Total throughput of 0.30x, we value Bee and Masary at EGP10.7 billion, out of which EGP4.65 billion (EGP4.81/share) is MTIE’s share. MTIE’s management might distribute a portion the proceeds in case of a stake sale in the planned IPO to shareholders.
Expect healthy performance in 2022 on the continuous inclusion of high margin products to the company’s portfolio and a higher investment income from subsidiaries
MTIE is one of Egypt’s largest distributers of retail discretionary product, capitalizing on its geographical coverage and customer reach. MTIE is expected to report solid financial performance and margin expansion, mainly on the inclusion of high margin products to the company’s distribution portfolio. Samsung and Nokia’s new models introduction started to bear fruit in 2021 and is expected to continue throughout 2022, allowing Kanawat sales to sequentially recover, following the previous hits. Despite local and global challenges, we believe that signs of recovery in consumer electronics segment, the introduction of new models, adding new home appliances to the company’s distribution network, replicating MTIE’s model in Kanawat, that is in addition to the positive developments in Ebtikar (with Vitas to breakeven in 2H21), along with a sustainable rebound in auto sales could lead to a better operational and financial performance in 2021.
We downgrade our valuation of MTIE to EGP9.60/share, down from EGP10.20/share and maintain our Overweight recommendation; after taking into account the following:
Business developments that happened through 2021 and rolling over the assumptions going forward,
Updated our assumptions for the e-payment arm “Ebtikar” and financial services player “Basata,”
Updated our macro and WACC assumptions
MTIE is currently trading at 2022 P/E of 10.8x and EV/EBITDA of 8.2x.