Equity Analysis /
Egypt

OIH: Acquiring Nile Sugar; plans a capital increase

    Al Ahly Pharos Securities Brokerage
    7 April 2019

    OIH approves the acquisition of a 100% stake in Nile sugar

    OIH announced board approval of the IFA valuation for Nile Sugar, which has set the fair value at EGP2.84/Nile Sugar share, setting the company's value at EGP3.76 billion and consequently approved a purchase price of EGP3.59 billion in addition to the settlement of a current shareholders loan amounting to EGP70.0 million.

    Terms and structure of the payment:

    • OIH will only pay 10% of the total purchase price (c. EGP359 million) in addition to settlement of a current shareholders loan amounting to EGP70 million upon completion of the transaction.
    • The remaining 90% of the purchase price amounting to c. EGP3.23 billion will be recorded as debt on the company's financial statements, where OIH will issue promissory notes with the remaining 90% as a guarantee to the sellers.
    • The Selling Shareholders will then assign and transfer the rights of the promissory notes to OTMTA (OIH's major shareholder).

    OIH then calls for a capital increase

    OIH will call for a capital increase within 9 months, where OTMTA (owns 51.7% of OIH) will pro-rata subscribe to OIH's capital increase with the promissory notes value, representing the remaining 90% of the purchase price, implying a total capital increase value of c.EGP6.25 billion (at par of EGP 0.42 per share) distributed as follows: i. EGP3.23 billion equivalent to the promissory notes owed to OTMTA and ii. EGP3.02 billion (which will represent the injected cash) at par value of EGP0.42/share, and should be subscribed to by minority shareholders. OIH will use the EGP3.02 billion of newly injected cash in planned expansions in the agri-industry, the snacks industry, as well as the logistics segment, but the company didn't provide further details. 

    Thus, OIH will end up issuing around EGP14.88 billion new shares; bringing the total number of shares issued to c.20.1 billion shares, where each shareholder should subscribe to c.2.8 shares per share originally held to avoid dilution of ownership.

    Highlights and concerns on Nile Sugar IFA valuation

    Breaking down the IFA main operational assumptions:

    1) Revenue growth of c. 94% in 2019; mainly driven by higher utilization rates and higher prices in 2019, where:

    Utilization rate assumptions are:

    • Utilization rate of 80% in 1H18, 33% in 2H18, 73% in 2018
    • Utilization rate of 91% in 2019 and 94% going forward

    Sugar prices assumptions are:

    • EGP7,509 in 2018 and jumps to EGP8,349 in 2019 (+11% YoY), (+5.7% in 2020 and +4.4% in 2021)
    • An increase of 14.5% in global sugar prices in USD (based on Bloomberg futures)
    • Global sugar prices in terms of EGP prices per ton dropped by 17% in 2018 and will grow by 11.2% in 2019

    Stable growth in quantity sold over the forecast period.

    2) GPM of 17.7% in 2018, 25.1% in 2019, 25.8% in 2020 and 26.4% in 2021 (an improvement of c. 8.7pps over 2018-2021); mainly on  enhanced sugar extraction (planning to directly increase in-sourcing contribution)

    3) Net profit of EGP27.58 million in 2H18, EGP277.5 million in 2019, EGP314.98 million in 2020 and EGP378.0 million in 2021, which we believe is quite optimistic to achieve

    We believe that the IFA assumptions might be challenging to achieve, in light of current market developments in 2018.

    Net debt, Nile Sugar and capital increase Burden FV

    Theoretically speaking, Nile Sugar adds a net amount of EGP0.06 to OIH's fair value per share (Acquisition cost minus 90% that are debt financed). In addition, OIH's current net cash position has changed since our last valuation update from a net cash position of EGP373.2 million (book values as of 3Q18) to a net debt position of c.EGP944 million in 2018; mainly on USD90.0 million credit facilities provided to Beltone Financial, which automatically burdens our SOTP valuation.

    We choose to postpone updating our OIH fair value till we get a clearer view on: Nile Sugar operations, the reason behind the drop in OIH cash balance and OIH's expansions using the capital increase proceeds.