Sinai Cement is a public company listed on the Egyptian Stock Exchange since July 2000. It operates in the materials sector with a focus on building materials. Sinai Cement Company's headquarters are located in Cairo, Egypt.Sinai Cement Company was established as an “Egyptian Joint Stock Company” in 1997 in accordance with the provisions of Investment Guarantees and Incentives Law No. 8 of 1997 and its executive regulations, and in accordance with resolution No. 72 of 1998. Actual production of the factory began as of 22/1/2001 according to the decision of the chairman of the general authority for Investment and free zones on 22/9/2001.

Scem Er En 24 Q3

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Abu Qir Fertilizers and Chemical Industries is a public company listed on the Egyptian Stock Exchange since September 1994. It works in the manufacture of all types of fertilizers and chemical materials, especially chemical fertilizers and other materials related to them and derived from them or necessary for their manufacture, packaging, purchase and sale. Abu Qir Fertilizers Company is headquartered in Alexandria, Egypt and was established in July 1976. It produces a wide range of nitrogen and phosphate fertilizers, including urea and ammonium nitrate. Abu Qir Company exports 50% of its production to foreign markets, and has exported its products to 40 customers in 31 markets. The company also expanded its consumer base in the local market for free fertilizers to 61 customers.

Abuk Rev En 24

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Sector data

The petrochemical, chemical and fertilizer industries sector in Egypt is considered one of the most important economic and industrial sectors that constitute a large part of industrial and export activity. This sector includes a variety of industries that are related to chemicals, including petrochemical production, chemical industries, and fertilizers.

Petrochemical sector

Total investments in the petrochemical sector amounted to USD 1.4 Bn, according to reports from the Ministry of Petroleum, and the production volume is 4.3 million tons annually of petrochemical products, including polyethylene, polypropylene, and polyvinyl chloride(PVC), and 60% of the production is exported to global markets. The sector contributes an estimated 3% of the gross domestic product, and constitutes 12% of the industrial sector. The sector’s revenues amounted to USD 5.5 Bn dollars annually, with estimates that they will reach USD 8.5 Bn in the coming years.

Chemical industries sector

Investments in the chemical industries sector exceed USD 7 Bn, and the production volume is 9.4 million tons annually of products such as basic chemicals, specialty chemicals, and pesticides. About 30% of production is exported, and the sector’s revenues are estimated at USD 3.5 Bn annually. The sector's growth rate reached about 6%, with expectations that this trend will continue in the coming years.

Fertilizers sector

The fertilizer sector witnessed investments exceeding USD1.5 Bn during the last decade, and the production volume reached 19 million tons annually. The products vary to include different types of fertilizers, such as nitrogen fertilizers (such as urea and ammonia), phosphate fertilizers, and potash fertilizers. Nearly 50% of production is exported, and the sector’s revenues amounted to USD 2.4 Bn annually.

Chem Review En 24q2

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Total revenue increased by 29.7% Y-o-Y (119.1% Q-o-Q) from EGP 2.96 Bn to EGP 3.83 Bn due to the increase in the company's export revenue by 200-250% (Y-o-Y) and exports reached about 60% of the production volume.

Gross profit increased by 48.9% Y-o-Y (145.8% Q-o-Q) from EGP 613 M to EGP 912.56 M and gross profit margin increased by 3.1 points Y-o-Y from 20.7% to 23.8% due to the increase in revenues with an increase in COGS at a lower pace which increased by 24.7% Y-o-Y compared to an increase in revenue by 29.7% Y-o-Y.

Operating profit increased by by 62.4% Y-o-Y (150.4% Q-o-Q) from EGP 756.6 M to EGP 1.92 Bn and the operating profit margin increased by 3.8 points from 15% to 18.8% due to the decline in general and administrative expenses by 27.4% Y-o-Y to EGP 43.14 M compared to EGP 59.45 M in 1H 2023.

Net profit increased by 99.7% Y-o-Y (170.2% Q-o-Q) from EGP 212.48 M to EGP 424.27 M. and the net profit margin increased by 3.9 points Y-o-Y from 7.2% to 11.1% despite the increase in financing expenses to EGP 170.6 M compared to 64.21 M in 2023 Q4.

Olfi Review En 24q2

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Total revenue increased by 96.71 % Y-o-Y from EGP 2.27 Bn to EGP 4.48 Bn due to strong growth in total contract sales.

Gross profit increased by 144.4% Y-o-Y from EGP 1.38 Bn to EGP 3.37 Bn and gross profit margin increased by 14.7 points Y-o-Yfrom 60.6% to 75.3% due to the increase in revenues from sales of new premium units with high profit margins compared to revenues from delivered units with relatively lower profit margins.

Operating profit increased by by 153.7% Y-o-Y from EGP 756.6 M to EGP 1.92 Bn and the operating profit margin increased by 9.6 points from 33.3% to 42.9%

Net profit for 2H 2024 increased by 150.6% Y-o-Y from EGP 580.2 M to EGP 1.45 Bn. and the net profit margin and net profit margin increased by 27.41 Y-o-Y from 25.5% to 32.5%

Masr Review En 24q2

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Egypt / Non-Banking Financials / Pre-IPO Note

The Unique One

Welcoming an activist pioneer in Egypt

A unique player goes public:

By the end of 2023, Act Financial [ACTF], one of Egypt’s well-known direct investment companies, announced its intention to float on the Egyptian Exchange (EGX). The offering represents a minority stake of ACTF at c.32%, with an offering size of EGP1.04bn through a 47% capital increase to EGP281mn, adding 360mn new shares at a par value of EGP0.25/share. The IPO has two tranches: (1) Private subscription worth EGP870mn and (2) Public subscription worth EGP174mn. The IFA set ACTF’s price initially at EGP4.54/share before applying a10% liquidity discount and a 10% minority discount down to EGP3.63/share and another 20% discount down to EGP2.9/share.

A one-and-only business model:

ACTF was established in 2015 as an investment company, with a vested interest set up that assures zero conflict of interest between shareholders and management. ACTF has been following an investment approach known as Private Investment in Public Equity (PIPE), where it acquires influential minority stakes in public companies while assuring low exposure to market volatility and value traps. PIPEs affirm ACTF’s activism goal through: (1) enhancing the shareholding structure, (2) optimizing balance sheets, and (3) inviting strategic partners to the consortiums. ACTF utilizes leverage in making its acquisitions.

An attractive investment landscape:

Egypt’s investment landscape has become very attractive, especially following the EGP devaluation, which rendered its equity capital market deeply discounted. Thus, there is potential for the market to reach its pre-devaluation level again. Moreover, Egypt’s macroeconomic dynamics took a positive path, where external funding sources improved, backed by better infrastructure investments. Additionally, the regional appetite for Egypt grew strongly as most recently seen in the UAE’s investment in Ras El-Hekma.

Subscription offering & investors’ protection:

ACTF is opening subscriptions for both private and public tranches of its offering, starting on July 9, 2024. For individual investors in the private tranche the minimum investment is 1.75mn shares, while for institutions the minimum is 3.5mn shares with no maximum limit. Payments are due after the allocation through AAIB where all brokerage companies can place orders. For the public tranche 25% down payment is required before allocation. To increase investors protection, a stabilization fund will be established covering the public tranche for the first 30 trading days. In addition, ACTF promises to launch a 10% treasury shares program during the first 90 days to buy back shares if the share price plummets below its IPO price of EGP2.9/share. In addition, current shareholders are subject to a 12-month lock-up period and potentially is extended for 2 years for executives and strategic shareholders (<10% stake).

For more details, please download the full report below.

240717 Act Financial Actf Pre Ipo Note En

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In this note, we update our view on ABUK and MFPC and initiate core coverage on EFIC and EGCH. We also gauge the impact of the current natural gas supply cuts on the four EGX-listed fertilizers stocks if the issue is prolonged. Nitrogen fertilizers are heavy consumers of natural gas as a feedstock and are hence negatively impacted by any extended natural gas shortage or cut. Of the four stocks, we prefer ABUK (raised to Overweight, 12MPT EGP95/share) which trades at cheap multiples relative to its peers. On the other hand, we cut MFPC to )Underweight, 12MPT EGP39/share). We also initiate EFIC (12MPT EGP108/share) and EGCH (12MPT EGP10/share) as Underweight.

Impact of natural gas supply cuts will be minor if not extended

The recent heat wave in Egypt and the resulting natural gas supply cuts to fertilizer producers will negatively impact nitrogen fertilizer names if extended for longer. We estimate that a one-month cut in natural gas supply will reduce 2025 revenues and earnings by 9% and 15%, respectively, on average vis-à-vis our base-case scenario. All ABUK, EGCH, and MFPC will be negatively impacted, while EFIC will not be impacted since it is a phosphate fertilizer producer.

Global urea prices to remain firm in 2024

We expect global urea prices to be sustainable at current high levels throughout the remainder of 2024 for the following reasons:

• China, the world’s largest exporter of phosphate fertilizers and top global urea supplier, recently announced tighter controls on nitrogen and phosphate fertilizers exports to maintain domestic price stability.

• Growing urea demand in India, the top global urea buyer, which is usually covered by available Chinese urea supplies, Russia, and the Middle East.

• The ongoing shortage of fertilizers supply as companies are reluctant to add new capacities.

All of the above will result in a tighter future global supply-demand balance and hence sustained higher prices. We expect global urea prices to drift higher over the coming years to USD400/ton in 2028.

Local urea price movement is essential

We expect local subsidized urea prices in Egypt will move higher following the recent EGP devaluation. We note that the latest movement in the subsidized prices was in November 2021 from EGP3,000/ton to EGP4,500/ton, implying a discount of 73% vs. global urea prices. That said, we think the movement of subsidized urea prices has been delayed over inflation concerns resulting from potentially higher food prices. In our models, we assume subsidized urea prices will increase in 2025 and 2027 by 50% y/y each to settle at EGP10,125/ton by 2027.

Summary of Changes

Abu Qir Fertilizers [ABUK]

• Previous: 12MPT EGP60, Neutral / Moderate Risk

• Current: 12MPT EGP95, Overweight / Moderate Risk

EFIC [EFIC]

• Previous: —

• Current: 12MPT EGP108, Underweight / Moderate Risk

KIMA [EGCH]

• Previous: —

• Current: 12MPT EGP10, Underweight / Moderate Risk

MOPCO [MFPC]

• Previous: 12MPT EGP24, Neutral / Moderate Risk

• Current: 12MPT EGP39, Underweight / Moderate Risk

For more details, please download the full report below.

240702 Egypt Fertilizers Sectornote En

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12MPT: EGP52.6 (+11%)

UAE-based Electra Investment Holding recently launched an acquisition offer to acquire a 15-24.5% stake in Elsewedy Electric [SWDY] at USD1.05/share (equivalent to EGP49.3/share) or a 33% premium to the pre-announcement market price. This came after the Financial Regulatory Authority (FRA) approved the acquisition offer and asked SWDY’s board of directors to express their view on the offer within the following 15 days. In turn, SWDY appointed an Independent Financial Advisor (IFA) to prepare a fair value study for SWDY stock. The acquisition offer runs through 9 July via the OPR system. We updated our valuation model in view of Q1 2024 results, raised our 12MPT, and cut our recommendation on the limited upside. This led us to recommend that SWDY minority shareholder sell their shares in the offer.

Key Insights

Q1 2024: Earnings growth driven mainly by FX gains

In Q1 2024, SWDY reported a 37% y/y increase in net profits after minorities to EGP4bn, primarily driven by FX gains of EGP3.1bn. Normalizing the bottom line figure for FX gains, earnings would have declined 17% y/y to only EGP1.6bn.

• Revenues surged 36% y/y to EGP45bn, thanks to growth across all business segments with the highest increase seen in wires & cables (+57% y/y) and then transformers (+28% y/y). In addition, wires & cables (62%) along with turnkey (27%) remained the two highest contributors to total revenues. Growth is mostly attributed to favorable currency movement and increased demand in Saudi Arabia, Algeria, and Egypt.

• Gross profit increased 62% y/y to EGP10bn, thanks to improved supply conditions and the EGP devaluation. Wires & cables remained the top contributor to total gross profit, bringing a higher gross profit margin of 22% in Q1 2024 vs. 18% in the comparable period.

Double-digit revenue growth to continue

We expect revenues to continue growing at a high double-digit rate across our forecast horizon through 2028, driven by higher volumes in wires & cables, improved repricing, and growth in local and global infrastructure projects.

• Wires & cables: We expect revenues to grow at a 5y CAGR of 17% to EGP182bn by 2028 on higher volumes (5y CAGR of 8%) and a stronger USD.

• Turnkey projects: We expect revenues to grow at a 5y CAGR of 18% to EGP123bn by 2028 on growing awards and backlog of infrastructure projects in Egypt and the GCC region.

• Electrical products: We expect revenues to grow at a 5y CAGR of 15% to EGP31bn by 2028, thanks to efficient pricing strategies, higher utilization rates for transformers, and strong demand in the local and export markets.

Valuation, Investment Thesis, & Risks

12MPT raised, cut to Underweight/Medium Risk

• Our updated 5y DCF model yielded a fair value of EGP38.8/share and a 12-month price target (12MPT) of EGP52.6/share (up from EGP36.2/share), implying only a 7% upside to the acquisition offer price of USD1.05 (equivalent to EGP49.3/share) and an 11% upside to the current market price.

• Given the current acquisition offer, the risk of de-listing off the EGX appears high for SWDY of which free float stands at only 30.4% and potentially lower if all Elsewedy Family stakes are excluded. If the acquisition offer goes through at the maximum of 24.5%, the remaining free float would be only 6% or less, raising the risk of violating the minimum 5% requirement for listing on the EGX.

• Considering the limited upside potential and the potential de-listing risk, we change our recommendation to Underweight / Medium Risk.

• We recommend that SWDY minority shareholders sell their shares through the OPR system and receive USD1.05/share in cash, thus cashing in a 4% return based on yesterday’s close price of EGP47.18/share.

Investment Thesis

Higher global commodity prices, increased infrastructure projects in Egypt and the GCC region, in addition to new mega projects in Saudi Arabia.

Risks

A slowdown in mega project implementation, higher interest rates, and a stronger EGP.

Overweight/High Risk

12MPT: EGP16.9 (+66%)

In this note, we update our valuation model for Arabian Cement [ARCC] to incorporate its Q1 2024 financials released recently and now-higher FX rates.

Key Insights

Q1 2024: Higher prices, exceptionally higher volumes

Revenues increased 13% y/y (+35% q/q) to a record high of EGP1.9bn driven by higher blended volumes (+9% y/y) and blended selling prices (+9% y/y):

• Export volumes (mainly clinker) surged 21% y/y, which offset a 3% decline in local sales volumes.

• Overall selling prices increased, with local prices up 6% y/y and export prices up 21% y/y.

Meanwhile, cash cost per ton increased by only 4% y/y, which—combined with a lower SG&A expenses-to-revenues ratio—helped ARCC maintain stable gross profit and EBITDA margins around 33% and 27%, respectively. Still, earnings declined 37% y/y to EGP153mn, primarily due to high FX losses of EGP244mn. However, adjusting for the FX impact, normalized earnings grew 6% y/y (+67% q/q) to EGP342mn. Furthermore, net cash grew 25% to EGP575mn in Q1 2024, up from EGP460mn at the end of 2023.

Clinker exports to rise despite global competition

Q1 2024 was exceptional due to a shift in sales from Q4 2023, so we should expect sales volumes to normalize in the remainder of the year. ARCC, like other Egyptian cement producers, has been faced with excess supply in the local market. Also, it has seen fierce competition in the export markets, especially from Turkey and Algeria. Thus, we assumed clinker utilization rates and sales volumes will stabilize at 90% and 4.2mn tons p.a., respectively, through 2028. Recently, ARCC has been focusing on clinker exports to secure USD flows. Exports represented 40% of ARCC’s clinker production in 2023, which we expect to rise to 50% with the same clinker local/export mix as its 2023 levels.

Local blended prices to increase gradually

We expect local blended selling prices to increase gradually (a 5y CAGR of 8%) as cement producers start to pass on the increase in production costs following the EGP devaluation in March 2024. On the other hand, we assumed export prices to rise by only 2% p.a. in USD terms due to the fierce competition in the export markets. This translates into a 5y CAGR of 17% in EGP terms.

Lower coal prices to marginally improve margins

We maintained ARCC’s 2023 fuel mix with its RDF capacity limited to cover 20% of its total fuel consumption. The remaining 80% will continue be sourced from imported coal. We believe global coal prices will decline through 2028 due to the following:

• China’s transition to clean energy will lead to lower coal consumption and hence oversupply.

• Warmer weather reduces heating demand.

What differentiates ARCC from its peers

• Experienced management.

• Export-oriented (c.40% of sales volumes).

• Fuel mix efficiency.

• A strong balance sheet with a net cash position.

• High ROIC (83%) and ROE (40%) in 2023.

Valuation, Investment Thesis, & Risks

12MPT raised, Overweight/High Risk maintained

Our updated 5y DCF model yielded a fair value of EGP12.5/share (EGP11.4 previously) and a 12MPT of EGP16.9/share (EGP15.1 previously). We now expect the FX rate to average EGP47/USD in 2024 (vs. EGP34/USD previously) before moving gradually higher to EGP63/USD by 2028 (vs. EGP42/USD in 2027 previously). Our new 12MPT implies a 2024e P/E of only 7.8x and an upside potential of 66%. Thus, we maintain our rating at Overweight/High Risk.

Investment Thesis

Lower global coal prices, gradual increase in local cement prices.

Risks

High fuel and electricity costs, stronger EGP.

Underweight / High Risk

12MPT: EGP42.7 (-9%)

Key Insights

The one and only: Established in 1976 and listed on the EGX in 1997, Egypt Aluminum [EGAL] is the sole producer of aluminum and aluminum products in Egypt, with a total production capacity of 320,000 tons per annum of pure aluminum. EGAL imports alumina, the raw material used to make pure aluminum, and smelts it into pure aluminum. EGAL directs 40% of its production to fulfill the local market needs and exports the remaining production to the European market. 

Demand is growing: Global demand for aluminum is expected to grow, driven by a number of factors. For one, global economic growth leads to increased demand for aluminum-intensive products, such as automobiles, packaging, and construction materials. Also, the increasing use of aluminum in renewable energy technologies (e.g. solar panels and wind turbines), combined with the rising cost of other materials (e.g. steel), is making aluminum a more attractive option for some applications.

A direly-needed renovation: For the past few years, EGAL’s factory has been the subject of talks concerning its renovation to maintain current capacity and increase efficiency, thus lowering its overall electricity needs. EGAL sources electricity solely from the Egyptian government with no alternative or cheaper sources, which will pressure margins in the case of any electricity price hikes down the road.

Valuation, Investment Thesis, & Risks

Underweight / High Risk, 12MPT EGP42.7/share (-9%): EGAL’s simple business model does not only benefit from a highly-rich FX cash inflow but also from strong global demand and high barriers to entry, making EGAL well positioned strategically. Yet, the risks of cyclicality, high capex needs, and electricity price hikes put a lot of pressure on EGAL’s future cash flows. We valued EGAL using two methods: (1) a 10-year, 3-stage DCF model, which yielded a fair value of EGP33.4/share, and (2) a relative valuation approach using regional and global peers’ EV/ton, which yielded a fair value of EGP31.0/share. We set our fair value as the average of both methods, yielding a fair value of EGP32.2/share and a 12MPT of EGP42.7/share. Our 12MPT implies 2023/24 P/E of 3.0x and EV/EBITDA of 2.4x but offers a downside potential of 9%, hence our Underweight rating. EGAL is currently traded at a relatively low 2023/24 and 2024/25 P/E of 5.3x and 3.4x, respectively, which may appear cheap. Yet, we think that this is the Molodovsky Effect, with a low P/E indicating a cyclical peak.

Investment Thesis: High aluminum prices and demand. A strong beneficiary of a stronger USD. Local monopoly in Egypt. High barriers to entry.

Risks: Electricity price hikes. Highly cyclical industry. Production issues due to EGAL’s old factory. Management facing challenges in meeting expectations.

For the full report, please click below.

230919 Egal Corecoverage En

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Overweight / Medium Risk

12MPT: EGP38.9 (+51%)

Key Insights

Closing 2022 with an exceptional performance: Sidi Kerir Petrochemicals Co. (Sidpec) [SKPC] resumed its strong upward trajectory, following weak revenues seen in 2019 (-14% y/y) and 2020 (-30% y/y). The company benefited in 2022 from higher demand for its products and higher selling prices. SKPC also benefited greatly from the two EGP devaluation rounds in 2022, which drove its selling prices to soar at a higher rate than its costs. Over the years, the cost per tonne of SKPC’s ethane/propane (E/P) mix, its main feedstock, has been increasing, which dampened its margins. However, the new pricing formula introduced in October 2022 improved SKPC’s H1 2023 margins to a great extent, alleviating its cost burden going forward.

Joining the “competition”: SKPC currently holds a 20% stake in the Egyptian Ethylene & Derivatives Co. (ETHYDCO), its main Egypt-based competitor. Both fall under the Egyptian Petrochemicals Holding Co.’s (ECHEM) umbrella. In 2022, ETHYDCO produced about 324,000 tonnes of ethylene and 331,000 tonnes of polyethylene (PE), generating USD520mn in revenues (equivalent to EGP9.98bn) with a utilization rate of 83% for PE compared to SKPC’s 2022 101% utilization rate. SKPC said it will acquire the 80% it does not already own in ETHYDCO through a share swap. With SKPC currently controlling 25-35% of the domestic PE market, the combined market share of both companies could reach 50% if the tie-up goes through.

Valuation, Investment Thesis, & Risks

Valuation: We used the DCF model to value SKPC as well as ETHYDCO, for which we used a top-down approach using its historical margins and utilization rates. Thus, we valued ETHYDCO at EGP35.5bn, while SKPC’s equity was valued at EGP20.5bn (including 20% of ETHYDCO). Given that SKPC’s BoD already approved its acquisition of an 80% stake in ETHYDCO through a share swap, we combined both valuations, which came out to EGP48.9bn or EGP29.9/share. This implies a 12MPT of EGP38.9/share (+51%). Thus, we assign SKPC an Overweight / Medium Risk rating.

Investment Thesis: SKPC is one of the companies that we believe can ride out the local economic downturn. This is because (1) the EGP devaluation helps SKPC because of its consistent export revenues, (2) the high-interest rate environment will not affect the company negatively given its historically low-leveraged balance sheet and its high cash balance, and (3) SKPC’s new E/P feedstock cost formula will allow the company to resume its great historical margins.

Risks: Any volatility in E/P feedstock supplies, concerning both cost and quantity. SKPC is sensitive to the decline of global crude oil prices, given its high correlation with ethylene and PE prices. Global economic turmoil could suffocate global demand for PE products which could eventually hurt SKPC’s export revenues. A weaker USD.

For the full report, please click below.

230910 Skpc Corecoverage En

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Neutral / Medium Risk

12MPT: EGP60/share

Abu Qir Fertilizers [ABUK] announced exceptional preliminary results for FY2022/23, achieving a new record net profit of EGP14.6bn (+61% y/y). This aligns with our previous expectations for the year's earnings at EGP14.7bn. Now that the waves of global urea price hikes have subsided significantly compared to the previous fiscal year, do we still anticipate an increase in the value of ABUK’s shares?

Firstly, we expect a rebound in global urea prices from their current levels of around USD400/ton as we approach the end of the year, for several reasons:

• Russia's cancellation of the Black Sea grains agreement means Ukraine is no longer allowed to export grains and fertilizers to Europe.

• Approaching winter, typically accompanied by higher natural gas prices in Europe, raises production costs and subsequently prices.

• Nearing the fall’s fertilizer application season, increasing demand.

• India's suspension of rice exports, boosting demand for crops and raising their prices, thus incentivizing farmers.

• China's continuation of fertilizer export restrictions.

For these reasons, we anticipate an increase of around 10% from the previously projected price for FY2023/24.

Secondly, we expect further depreciation of the Egyptian pound against the U.S. dollar in FY2023/24, which will positively impact ABUK’s profits significantly as it exports nearly half of its production. In the previous fiscal year, ABUK's gains from currency fluctuations alone surpassed EGP3bn.

Thirdly, ABUK remains unburdened by any debt, whether short- or long-term, a strength point in times of rising interest rates. In fact, the company possesses a substantial cash position that generates income from bank deposits.

Fourthly, ABUK holds stakes in other fertilizer companies, including Alexandria Fertilizers (Alex Fert) and Helwan Fertilizers. As the profits of these companies increase, the value of ABUK's stakes rises, thereby increasing its valuation.

Fifthly, we expect a generous dividend distribution for FY2022/23, potentially reaching EGP6.5/share, a 13% yield.

12MPT raised to EGP60/share, with our Neutral / Medium Risk rating maintained: After reviewing these assumptions and penciling them into the company's financial model, using a discounted cash flow model, assuming a WACC of 17% and a long-term growth rate of 3%, we raise our 12-month price target by 14% to EGP60/share from EGP52.8/share, while maintaining our Neutral / Medium Risk rating, with an 18% upside potential. Notably, our valuation depends heavily on natural gas costs as well as urea prices and FX rate fluctuations. Our new 12MPT implies a 6x P/E ratio and a 2.8x EV/EBITDA ratio for FY2023/24.

Overweight / Medium Risk

12MPT: EGP66 (+155%)

Key Insights

Egypt’s leading drugmaker: Egyptian International Pharmaceutical Industries (EIPICO) [PHAR] is one of Egypt’s leading drug manufacturers with a market share of 3.12% in 2022. PHAR has a wide range of drugs, led by antibiotics and serving c.25 therapeutic classes. Currently, PHAR has two operating factories (EIPICO I and EIPICO II), with its third factory (EIPICO III) expected to be launched by Q3 2024.

Penetrating a new market: According to PHAR’s management, PHAR will be the first local authorized manufacturer to introduce biosimilar products in Egypt through its EIPICO III facility with a total investment of EGP2.9bn. Ranging from manufacturing to packaging, EIPICO III will produce various biosimilar products, spanning different products from biological to monoclonal (MABs) and biopharmaceutical proteins.

Capital increase concluded: In February 2023, PHAR announced its plan to raise some EGP496mn in equity to finance EIPICO III. The capital increase was fully covered over two phases that concluded on 10 July 2023. This capital increase is dedicated to finance EIPICO III, as a part of the equity portion of its financing structure. As per management, the newly-issued shares will be issued in August after finalizing the required paperwork.

Valuation, Investment Thesis, & Risks

Overweight / Medium Risk, 12MPT EGP66/share (+155%): We valued PHAR using the discounted cash flow (DCF) approach which yielded a fair value of EGP43/share and a 12MPT of EGP66/share, offering an upside potential of 155% and hence our Overweight rating. We expect PHAR’s earnings to grow at a 10y CAGR (2022-32) of 18%.

Investment thesis: Stable market share with a wide range of drugs in the local market. EIPICO III, PHAR’s newest venture, will penetrate the high-value market of biosimilar products, which is currently estimated at USD200mn a year, as per management. A consistent dividend payer, with a 5y average (2017-22) payout ratio of 57%.

Key risks: A highly-regulated environment, adding many regulations on drug manufacturing, pricing, and exporting. High competition in the pharmaceutical market, either locally or internationally. EGP devaluation means higher costs as c.70% of PHAR’s supplies are in USD.

For the full report, please click below.

230807 Phar Corecoverage En

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Egypt / Materials

12MPT EGP58

Ezz Steel [ESRS] - Forging Forces

Ezz Steel’s [ESRS] subsidiary Al Ezz Dekheila Steel Co. (EZDK) [IRAX] (a 64.1% stake) is set to voluntarily de-list from the EGX following particular EZDK shareholders’ desire to divest from the company, including the Egyptian government. EZDK has offered to buy out shareholders that are objecting to the de-listing against EGP1,250/share, a 53% premium to the closing price on 10 July 2023 before the announcement. As a result of this voluntary de-listing, EZDK could eventually become a wholly-owned subsidiary of ESRS, making this look like a de facto buyout. To assess the added value ESRS could gain from this corporate event, we used peers’ comparable multiples to value ESRS post this transaction. But before diving into the potential synergies from forging the forces of both ESRS and EZDK, let’s first have a quick look at the steel industry so far in 2023.

From ore to global steel

According to the World Steel Association (WSA), global crude steel production stood at 944mn tonnes (-1.1% y/y) in H1 2023. This is consistent with industry experts’ prediction that world steel production will more or less maintain the same level of production as 2022 (1.9bn tonnes). The marginal production decline that occurred was a result of (a) worldwide inflationary pressures, (b) high interest rates, and (c) supply disruptions from the Russia-Ukraine war. Hence, many countries’ production volumes were greatly affected in H1 2023, such as Japan (-4.7% y/y), the United States (-2.9% y/y), Brazil (-8.9% y/y), Turkey (-16.3% y/y), and the European Union (-10.9% y/y). We can expect global steel production to remain consistent at its current level, driven by China’s efforts to restabilize its economy and Turkey’s efforts to rebuild following the earthquake. Furthermore, global steel prices have been trending downward following high commodity prices witnessed in 2022 as alternate suppliers (such as India and Iran) offset the shortage caused by the Russia-Ukraine war, with prices decreasing c.USD40/tonne q/q in Q1 2023.

From ore to local steel

In Egypt, domestic production has taken a significant hit as a result of the FX illiquidity which rendered many domestic steel producers unable to import needed raw materials. Many Egyptian steel factories had to either cease production for periods of time or operate at reduced capacities as a result, which we had previously reported in PRIMETime on 14 June 2023. However, ESRS’ production was not affected due to its sheer size and access to FX. Thus, domestic steel prices have been trending higher as a result of the FX shortage and inflationary pressures. For instance, ESRS raised local prices of its steel rebar (mainly used in construction) by 37% ytd to EGP32,135/tonne (+82% y/y). Meanwhile, domestic steel consumption was greatly affected by Egypt’s economic woes:

• Consumption of rebar decreased 33% y/y to 1.4mn tonnes in Q1 2023 (ESRS local rebar sales fell 32%).

• Consumption of hot-rolled coil (HRC) (mainly used in steel pipes, automotive, and engineering industries) decreased 23% y/y to 396,000 tonnes in Q1 2023 (ESRS local HRC sales fell 20%).

Man of steel

ESRS needs no introduction, of course. With a total steel production capacity of 7mn tonnes per year, it stands as the largest steel producer in Africa and the Middle East. In 2022, ESRS’ steel production output reached 5.1mn tonnes (+2% y/y) ranking the 67th largest steel producer in the world by the WSA (vs. 74th in 2021).

ESRS’ Q1 2023 performance

ESRS’ top-line in Q1 2023 reached EGP28bn (+49% y/y, +19% q/q) with a GPM of 29% (+4pp y/y, +10% q/q), driven by:

• Higher export revenues of USD285mn (+34% y/y) as a result of greater sales volumes offsetting lower prices. 

• Higher local revenues of EGP18.8bn (+26% y/y) as a result of higher prices offsetting lower sales volumes.

However, ESRS reported net losses of EGP1.7bn (vs. net profits of EGP759mn in Q1 2022, EGP571mn in Q4 2022), as a result of:

• An FX loss of EGP8.9bn (+684% y/y, +336% q/q). 

• Higher finance costs of EGP1.2bn (+53% y/y, +39% q/q). 

Achilles’ heel

Notwithstanding FX gains and losses, ESRS would have reported net profits of EGP7.2bn in Q1 2023. This shows how highly sensitive ESRS is to EGP devaluations, given that:

1. Most of its COGS are USD denominated:

• Iron ore and scrap, the two main raw materials, are imported and paid in USD.

• Natural gas costs are priced in USD terms, albeit paid in EGP. 

2. ESRS has several USD-denominated liabilities totaling some USD880mn at the end of Q1 2023, which also makes it susceptible to the impact of interest rate hikes.

The de facto buyout

Certain EZDK shareholders, specifically the Egyptian government (a 31% combined stake in EZDK) given its FX liquidity needs, expressed their desire to divest from the company. EZDK’s BoD accordingly approved buying out shareholders seeking to exit, which would result in a violation of the EGX listing rules (low free float) and hence the voluntary de-listing decision. Assuming the full acquisition of EZDK shares not owned by ESRS, this transaction will cost EGP8.75bn, which is likely to go through given the hefty price premium vs. the pre-announcement market price that will entice retail and institutional investors alike. As part of the de-listing procedures, EZDK agreed to pay 60% of the Egyptian government’s exit value in USD. This is equivalent to USD147mn, which will mostly be financed by a USD125mn long-term loan from a group of UAE banks. The EGP1,250-a-share puts EZDK’s valuation at EGP24.4bn, which implies an LTM P/E ratio of 8.6x and an LTM EV/EBITDA of 2.2x compared to 5.6x and 1.7x, respectively, based on the closing price on 10 July 2023.

Steel synergy

We believe this corporate event is a win-win situation. On one hand, the Egyptian government will secure needed FX liquidity. On the other hand, ESRS will eventually capture tremendous added value. Firstly, ESRS is effectively taking full control of EZDK through a de facto leveraged buyout at a relatively low interest rate of 10.9% (according to our estimates), which means better capital allocation and a lower cost of capital. Indeed, EZDK’s financial position can comfortably afford the additional USD debt. Furthermore, economies of scale will eventually lead to improved production efficiency while simultaneously allowing for cost savings. Meanwhile, ESRS would eventually increase its effective stakes in EZDK’s subsidiaries, namely:

1. Al Ezz Flat Steel Co. (full ownership by EZDK).

2. Al Ezz Rolling Mills Co. (full ownership by EZDK).

3. Hadid Co. For Industry, Trading & Contracting (Contrasteel) (a 90% stake by EZDK).

4. Contra Wood for Wooden Products (an 86% effective stake by EZDK). 

5. Egyptian Steel (an 18% investment stake by EZDK).

We note that EZDK and ESRS are effectively within the same group with the same organizational structure and the same operating procedures. Thus, we are only considering the added benefit ESRS could get from owning 100% of EZDK for the purposes of this report. We believe ESRS will enjoy a stronger negotiating power as its proportionate domestic market share rises from an estimated 31% to 43% of total steel consumption in Q1 2023 on a pro forma basis for ESRS and EZDK. We note that Egyptian Steel is an investment of EZDK and is not a subsidiary that EZDK has operational control. Thus, we only considered Egyptian Steel’s added value for the purposes of our valuation. We calculate that Egyptian Steel’s market share contribution to ESRS will increase from 3% to 4%.

Steel surge

EZDK’s crown jewels are the factories that produce HRC, the main USD source for the company. Following the transaction, ESRS will be able to consolidate a greater share of USD export revenues by assuming complete ownership of EZDK’s HRC factories. As a result of a previous corporate reorganization, ESRS only has full ownership of a mini-mill in Al-Sadat City with a production capacity of 1mn tonne/year of rebar. Meanwhile, EZDK now fully owns the other three factories:

• A plant in Alexandria with a production capacity of 2.1mn tonnes/year of long steel (rebar and wire rod) and 1.1mn tonnes/year of flat steel (HRC).

• A complex in Suez (Al Ezz Flat Steel Co.) with a production capacity of 1.2mn tonnes/year of HRC and 1.1mn tonnes/year of rebar. (We note that ESRS recently added a second melt shop in the complex, increasing its melting capacity and thus optimizing the efficiency of the rolling mill. Production from the melt shop began in May 2023 and it is expected to add 1-1.2mn tonnes/year to ESRS’ production volumes and will benefit ESRS’ FV down the line. We note that production from the second melt shop was not considered in our valuation).

• A plant in the Tenth of Ramadan City (Al Ezz Rolling Mills Co.) with a production capacity of 0.5mn tonnes/year of long steel, also converts wire rods into welded steel fabric.

Proportionately speaking and before the transaction, ESRS effectivity controls 3.4mn tonnes/year of long steel production capacities and 2.3mn tonnes/year of HRC production capacities, based on its 64.1% stake in EZDK and its own capacity. After the transaction and the full control of EZDK, ESRS will have added 1.3mn tonnes/year of long steel capacity and 0.8mn tonnes/year of HRC capacity.

Steel fusion

We note that 87% of the loans that are on ESRS’ consolidated balance sheet belong to EZDK and as such 91% of FX losses incurred were associated with EZDK. We can assume that down the line the two entities will eventually merge once ESRS has fully exploited all benefits from keeping their balance sheets separated, including deferred tax assets resulting from prior years’ losses.

Valuation

What now?

To gauge the added benefit for ESRS from fully controlling EZDK, we opted to perform a comparable analysis on peers within the steel industry. All but one of the steel companies included in our analysis were also listed among the WSA top 100 steel-producing companies. In selecting the appropriate multiple for the analysis, we focused on a metric that could adequately capture the complete benefits of integrating EZDK. Therefore, we decided to utilize peers’ total steel production volumes in 2022 and their respective EV/tonne to avoid the use of other financial indicators (e.g. sales, EBITDA, net income, etc.) that might not accurately reflect post-transaction changes.

The magnitude

The production volume figure below shows the 2022 production volumes for ESRS, EZDK, and Egyptian Steel. In 2022, ESRS' consolidated steel production reached 5.1mn tonnes, comprising ESRS' standalone volumes and EZDK's consolidated volumes. However, this figure does not accurately represent ESRS' effective stakes. To provide a more accurate representation, we considered:

• ESRS' 64.1% effective stake in EZDK gives it proportionate control of 2.7mn tonnes of EZDK’s production volumes. 

• ESRS' 12% effective stake in Egyptian Steel gives it proportionate control of 194,000 tonnes of Egyptian Steel’s production volumes. 

To analyze the impact of the transaction, we added ESRS' effective control of Egyptian Steel's volumes post-transaction to ESRS' consolidated production volumes. This results in our proportionate pro forma 2022 production volumes of 5.4mn tonnes.

The balance

We then revised certain aspects of ESRS’ consolidated balance sheet to reflect the proportionate pro forma position of the company post-transaction, by: 

1. Adjusting debt to account for the loan that EZDK will acquire to finance the Egyptian government’s exit. 

2. Adjusting EZDK’s cash balance lower to reflect the funds used to finance the rest of the acquisition. 

As a result of the transaction, ESRS' net debt will rise from a current EGP22bn to a proportionate pro forma of EGP31bn. Furthermore, With ESRS becoming EZDK's sole owner, there will no longer be any major non-controlling interest, which we took into account. With ESRS' long-term investments currently reflecting EZDK’s 18% stake in Egyptian Steel, we excluded its EGP2.5bn book value since we implicitly reflected Egyptian Steel’s value in ESRS' proportionate pro forma tonnage. In a nutshell, both non-controlling interest and long-term investments were adjusted to zero.

A proportionate valuation approach

Our comps analysis yielded a median peers' EV/tonne of USD414. For ESRS, we accounted for Egypt's recent FX issues, which have already had a negative impact on ESRS, by applying a 20% discount to peers’ EV/tonne, reaching an adjusted EV/tonne of USD331. We also conducted a sensitivity analysis given a range of other discount rates. Using proportionate pro forma production volumes for ESRS, we arrived at an EV of USD1.8bn, net of the 20% discount. After deducting net debt, we estimated ESRS' proportionate pro forma fair value at EGP23.7bn or EGP44/share, suggesting a 12MPT of EGP58/share.

Overweight / High Risk

12MPT: EGP15.1 (+96%)

Key Insights

Playing in the big league: Powered by two production lines producing 4.2mn tons of clinker (the equivalent of 5mn tons of cement), Arabian Cement Co. [ARCC] is the sixth largest cement producer in Egypt’s cement industry. ARCC produces and sells clinker and cement in both the local and the export markets, with a total of c.4.5mn tons of clinker and cement sold in 2022. ARCC also offers transportation services, which contributed c.4% to revenues in 2022.

More exports, more USD: ARCC is trying to position itself as a major clinker and cement exporter, with almost half of its production exported to African and even European markets. In addition, ARCC’s factory enjoys a very convenient location in Ain Sokhna, nearby the main seaports that export dry bulk products. Indeed, ARCC is the fourth largest clinker and cement exporter in Egypt, with a 14% market share. Growth in exports enables ARCC to secure its high foreign-currency needs.

Efficiency is key: ARCC focuses on improving its efficiency through retrofitting its kilns to use alternative fuel sources, building an RDF plant to fulfill its needs, building solar electricity sources, and others. Despite production volumes being limited by the local quota, ARCC has been able to maintain high utilization rates by increasing its exports, thus maintaining better economies of scale.

Valuation, Investment Thesis, & Risks

Overweight / High Risk, 12MPT EGP15.1/share (+96%): Despite the tough years the Egyptian cement industry faced between 2019-2021, ARCC’s focus on efficiency to streamline its cost structure, alongside strong sales volumes and shrewd management team, makes ARCC a good investment option, in our view. In addition, ARCC boasts a generous dividend yield of c.15%, with a dividend payout ratio expected to stabilize over our forecast horizon. We valued ARCC using a five-year discounted cash flow (DCF) model, which produced a fair value of EGP11.4/share and a 12-month price target (12MPT) of EGP15.1/share (an 96% upside), hence our Overweight rating. Our 12MPT implies a conservative 2023e P/E of 7.5x and an undemanding 2023e EV/EBITDA of 4.2x. Currently, ARCC is trading at an EV/ton of EGP666 (USD21.6), an 8% discount to a peers' average of EGP727 (USD23.5).

Investment Thesis: More efficient cost structure. Strong management team. A negative cash conversion cycle. A beneficiary of higher government export subsidies. A high dividend yield stock.

Risks: Cement production quota cancellation. Low pricing power. Local demand shocks. Lower government infrastructure spending. Persistence of a high-commodity price environment. A stronger USD vs. EGP. Hikes in EGP interest rates.

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Egypt / Energy & Utilities

12MPT EGP7.4

TAQA Arabia: The Story

Trading on TAQA Arabia’s [TAQA] shares is set to start today when almost everyone is asking the same question: What is a fair valuation for the company’s equity? The company’s independent financial advisor (IFA) has assigned a fair value of EGP8.9/share. From our end, we ran our own analysis of TAQA’s key business segments to come up with a valuation range based on regional comparable company analysis and a DCF model. But first, let’s go quickly over TAQA’s businesses.

Power pioneers: TAQA is Egypt's prominent energy and utility provider with more than 25 years of operational history up its sleeve. The company caters to the daily energy requirements of more than 1.7mn customers. TAQA specializes in investing, installing, constructing, and operating energy infrastructure, encompassing gas transmission and distribution, conventional and renewable power generation and distribution, and marketing oil products and lubricants. The company also offers water treatment and desalination services to a diverse clientele.

Energized diversification: Since its establishment in 2006, TAQA has successfully incorporated 15 operating companies. With its own track record, each company executed numerous projects in various Middle Eastern and African countries. This diverse portfolio of subsidiaries has enabled TAQA to evolve into an energy powerhouse. Below, we highlight TAQA’s four main businesses: 

TAQA Gas: Harnessing Egypt's energy potential

What it does: TAQA Gas’ main operations include engineering, procurement and construction development, transmissions, pipeline installations, natural gas filling stations, natural gas car conversions, water heating, and operating distribution concessions with distribution capacities of more than 11.8 bcm/year.

How it measures up: Even though TAQA Gas is the second lowest contributor to group revenues (25% in 2022), it is the highest contributor to group EBITDA (47% in 2022).

TAQA Power: The power surge

What it does: TAQA Power’s primary operations include development, construction, operation, maintenance, billing and collection, and energy efficiency of conventional and renewable power generation and distribution projects in a variety of different industries. The company’s track record includes the development of more than 150MW traditional power generation projects, 1300MVA power distribution projects, and 105MW solar PV generation projects. Other operations include electric vehicle charging services and offering specialized solar solutions with flexible financing options to provide a more sustainable and efficient source of energy.

How it measures up: TAQA Power is the second highest contributor to group EBITDA (38% in 2022) even though it only contributed 19% to group revenues in 2022.

TAQA Water: The blue horizon

What it does: TAQA Water’s main operations include investing, designing, constructing, automating, installing, operating, and maintaining smart water solution systems. Services include filtration, desalination, chemical treatment, and wastewater treatment. Currently, the company is developing the first green water desalination plant in Egypt; it will serve more than 5,000 people in the Red Sea Governorate and reduce carbon emissions by 5.5 tons/day.

How it measures up: TAQA Water’s figures are included in the others segment in TAQA’s financials (EGP1.3mn in revenues in 2022). 

TAQA Petroleum: Liquid gold

What it does: TAQA Petroleum’s main operations include the distribution of refined fuel products and Castrol lubricants through its network of service stations. Currently, the company owns and operates an 18ML fuel storage terminal and is constructing another one. Currently, TAQA Petroleum has 64 filling stations and 80 Castrol service centers around Egypt. 

How it measures up: TAQA Petroleum is the largest contributor to group revenues (56% in 2022) but is the lowest in terms of EBITDA contribution (16% in 2022) and EBITDA margin (3% in 2022). 

Valuation

Relative Valuation

Disassembling the valuation puzzle: To assign a value to TAQA’s equity, we used a sum-of-the-parts (SOTP) method, valuing each business separately using regional peers’ multiples. We believe an SOTP method is appropriate in view of TAQA’s diverse and distinct businesses, attaching a value to each business. To do so, we considered TAQA’s three main segments (namely gas, power, and petroleum) and then applied a regional peers’ median EV/EBITDA multiple (mostly from the Middle East) to reach an enterprise value for each business. The figures below highlight the regional peers’ median EV/EBITDA multiples used for each business.

Putting the pieces together: When adding all enterprise values of TAQA’s businesses, we opted to account for the relative country risk (economic, FX, etc.) between the regional peers (mostly in the GCC) and TAQA (mainly in Egypt). Thus, we applied a discount to the resulting group enterprise value, then we ran a sensitivity analysis to see how the group valuation would be impacted given different discount rates. We chose to apply a 25% discount to regional peers’ median multiples, which yielded lower adjusted multiples.

Furthermore, we accounted for intercompany eliminations by calculating the weighted average EV/EBITDA multiple of all businesses’ adjusted peers’ multiple which came out to 8x. Using TAQA’s consolidated EBITDA (after eliminations), we reached a group enterprise value of EGP10.3bn, net of the 25% discount and after accounting for the intercompany eliminations. After deducting net debt and minority interest and adding investments, we estimate TAQA’s fair value to hover around EGP7.9bn or EGP5.9/share, implying a 2022 P/E ratio of 14.7x. 

Discounted Cash Flow (DCF) Valuation

A consolidated approach: Another alternative we used to value TAQA was discounting the group’s consolidated cash flows over the coming five years (2023-2027) based on basic key assumptions, namely:

• Revenues to grow at a 5y CAGR of 9% to EGP16.6bn by 2027.

• EBITDA to grow at a 5y CAGR of 13% to EGP2.3bn by 2027.

• NOPAT to grow at a 5y CAGR of 14% to EGP1.3bn by 2027.

• Cumulative investment of EGP7.8bn over the coming five years, split between working capital (averaging 5% of revenues) and cumulative capex of EGP4.2bn (averaging 6% of revenues).

• A weighted average cost of capital (WACC) ranging between 21% and 9% throughout our forecast horizon, culminating into a terminal WACC of 10.6%.

• A terminal return on invested capital (ROIC) of 1x terminal WACC.

• A terminal growth rate of 3%.

As such, we reached an enterprise value of EGP8.8bn, from which we deducted net debt and minority interest and added investments. Thus, we estimate TAQA’s fair value to hover around EGP7.4bn or EGP5.5/share, implying a 2022 P/E ratio of 13.8x.

Summary valuation: Combining both valuations together yields an average equity value of EGP7.7bn or EGP5.7/share, suggesting a 12MPT of EGP7.4/share which implies a 2022 P/E ratio of 18.6x. 

What this all means for Qalaa Holdings: Qalaa Holdings [CCAP] currently (pre-trading) has a 55.3% effective stake in TAQA through its subsidiaries, Silverstone Capital Investments Lts. (a 61.56% stake), Trimstone Assets Holding Ltd. (full ownership), and Citadel Capital for International Investments Ltd. (full ownership). Thus, both of our valuation methods (relative and DCF) suggest that TAQA would contribute some EGP4.1-4.4bn to CCAP’s valuation or EGP2.2-2.4/CCAP share, the midpoint of which is 82% of CCAP’s latest market price. However, TAQA’s shareholder structure will change as CCAP reduced its debts by transferring 20% of Silverstone’s stake to a creditor, within a week after the start of trading. Following the restructuring, CCAP will only have a 28.5% effective stake through Silverstone, Trimstone, Citadel Capital, Nile Energy (full ownership), and Stratford Investments (full ownership). CCAP is also currently negotiating with several banks to have some of their debts written off in exchange for the rest of Silverstone’s 17.68% stake. There is no timetable for this, but If a settlement with the banks is reached, CCAP’s effective stake would become 17.63%. 

Neutral / Medium Risk

12MPT: EGP16.9 (was EGP8.3)

In our CORECoverage update last August, we underlined Crédit Agricole Egypt’s [CIEB] resilience against extremely volatile economic conditions through a conservative strategy and a selective portfolio. That was before the Central Bank of Egypt hiked interest rates by a cumulative 500bps (300bps in October 2022 and 200bps in March 2023), which we had not factored in our forecasts at that time. Back then, we laid our bet on the possibility that to navigate through the tough year, the bank would use the same old strategies it had used in 2016, given the same drivers (a hawkish monetary policy and a local currency devaluation). Indeed, in 2022 CIEB proved our hypothesis correct by maintaining its moderate balance sheet growth which followed suit in Q1 2023. Not only did CIEB succeed in riding the wave of fierce competition, but it also managed to record sturdy profitability margins, similar to those seen in 2016 and 2017. Having updated our valuation model, in view of the currently-high interest rate environment, we raise our 12MPT from EGP8.3/share to EGP16.9/share, but downgrade our rating from Overweight / Medium Risk to Neutral / Medium Risk.

Skating over obstacles: As we noted before, CIEB always chooses profitability over aggressive market expansion. The bank builds upon its selective portfolio to shield against a volatile environment. For example, the high-yield certificates of deposit (CDs) issued by state-owned banks induced most banks to follow suit to safeguard their funds. However, CIEB did not need to, thanks to its corporate foreign-currency deposits, with total deposits closing the year higher by 25% y/y on the back of the EGP devaluation, albeit lower than a total market growth rate of 33%. Similarly, CIEB’s loan book grew by 13% in 2022 on the revaluation of corporate foreign-currency loans vs. a total market growth rate of 32%. Still, CIEB chooses to drift away from investing in Treasuries despite their attractive yields to avoid a higher effective tax rate. This can be seen clearly in 2022 where total financial investments as a percentage of total assets declined to 17%. Meanwhile, GLDR also declined to 57% in 2022 as the bank resorted to investing in interbank assets, especially after open market operations (OMO) auctions started to offer relatively high yields. Also, in Q1 2023, this approach was evident with a 20% devaluation in the EGP, pushing CIEB’s deposits to grow 12% ytd. Additionally, with a positive asset repricing gap, the bank was still able to make the best use of a high interest rate environment. Accordingly, net interest income (NII) reached a quarterly record high of EGP1.5bn, pushing NIM up as high as 8.4%. As for asset quality, NPLs were maintained at 2.8%, which explains the provisions reversal of EGP3mn in Q1 2023 in view of a coverage ratio of 153%.

Been there, done that: A closer look at how CIEB fared back in 2016 and 2022, we can deduce that the bank’s strategy has not changed in view of similar circumstances. Below, we note a few of the similarities that could drive the rest of this year, keeping 2017 in mind:

• Subdued balance sheet growth: We expect IEA to exhibit a tamer y/y growth of 6% to EGP71bn in 2023 as the high interest rates put a lid on loan growth. Also, we do not expect further devaluation in EGP throughout 2023 which would also limit CIEB’s balance sheet growth. Similarly, we expect deposits to grow by c.15% in 2023 to EGP69.6bn, mainly on the back of the EGP devaluation in Q1 2023.

• Strong earnings growth, driven by NII: We expect net income to grow 70% y/y to EGP4.1bn in 2023, given the expected 56% y/y growth in NII to EGP5.9bn in light of the cumulative effect of the interest rate hikes. We noticed a similar pattern in 2016 and 2017 when net income grew by 32% and 43%, respectively.

• Accelerating ROAE: ROAE increased from 30% in 2015 to 36% in 2016, only to peak at 41% in 2017 as the cumulative effect of interest rate hikes materialized. Similarly, ROAE increased from 20% in 2021 to 26% in 2022, and we expect another expansion in ROAE to 34% in 2023, even after taking into account that CIEB did not distribute any dividends for 2022.

• Solid credit quality: We expect credit quality to remain intact throughout 2023, where the cost of risk (CoR) to remain around -60bps (same as 2022) with an NPL ratio of 2.9% and a coverage ratio of 171%.

• Generous dividends: We expect the dividend payout to resume in 2023 back to its historical average payout ratio of 60%.

   
12MPT raised by 103% to EGP16.9/share, yet downgraded to Neutral / Medium Risk: Our residual income-based fair value came out as EGP17.3/share, assuming a long-term ROE of 22% and a terminal COE of 15%. However, we set our 12MPT at EGP16.9/share based on a justified P/BV of 2x applied to Q1 2023 equity. This offers an upside potential of 21%, which is still lower than CIEB’s COE. Hence, we downgrade our rating from Overweight to Neutral with the same Medium Risk. Our new 12MPT implies a 2023e P/BV of 1.5x. Key catalysts: Further EGP devaluation amplifying CIEB’s loan book. A higher-than-anticipated earnings growth. Key risks: Intensifying competition. Deterioration in asset quality resulting in a higher-than-expected CoR.

Neutral / Medium Risk

12MPT: EGP26.4 (was EGP26.1)

Since we published our CORECoverage report (20 Nov. 2022) and update (8 Feb. 2023) on Alexandria Containers Handling Co. [ALCN], the stock rallied beyond our 12MPTs, hitting a high of EGP26.7/share on 26 Apr. 2023, and generating a triple-digit return of more than 105%. Today, we affirm our positive view on ALCN’s strong, yet simple business model, which makes the company one of the key beneficiaries of a stronger USD with high margins and healthy unlevered balance sheet. Updating our valuation model, we raise our 12MPT slightly from EGP26.1/share to EGP26.4/share but downgrade our rating from Overweight / Medium Risk to Neutral / Medium Risk on the recent stock rally.

Unrivaled fundamentals: ALCN boasts unrivaled characteristics, namely a negative cash conversion cycle, a debt-free and cash-heavy balance sheet, a regular and generous dividend payout, very high margins and ROEs, and—most notably—USD-linked revenues. Currently, the only peers close to ALCN are Damietta Containers Handling Co. [DCCC] and Port Said Containers Handling Co. [POCO]. Both companies, listed on the EGX but are yet to trade, have lower revenues and margins compared to ALCN’s. We consider ALCN to be a good choice for value and income-based investors and as a hedge against local currency fluctuations.

What changed? We revised our financial model, with very minor adjustments to volumes and prices of the trade containers segment and no change in the transit containers segment. Nevertheless, the most significant change came from our revised annual FX forecast, in which we use an average of EGP25.8/USD in 2022/23 (vs. EGP25.0/USD previously) all the way to EGP39.7/USD in 2026/27 (vs. EGP30.2/USD previously). Our base-case scenario is still intact; we believe the current economic reforms and government programs to support external trade should boost ALCN’s volumes in the near future.

12MPT raised slightly, downgraded to N/M, and removed from SPP: Our updated 5y DCF model yielded a fair value of EGP19.9/share and a 12MPT of EGP26.4/share, implying a 2023/24e P/E of 8.5x and suggesting an upside potential of 13%. Thus, we downgrade our rating from Overweight / Medium Risk to Neutral / Medium Risk. As a result, we remove ALCN from our STANDPoint Portfolio (SPP). Key Catalysts: Further EGP devaluation. Government’s trade support programs. Higher EGP interest rates. Key Risks: New competition from EGMPT in Alexandria Port. Investors’ focus shifting to upcoming IPOs in the sector (i.e. DCCC and POCO). A stronger EGP.

Relative Performance (5Y)

Overweight / Medium Risk

12MPT: EGP36.2 (was EGP21.0)

Despite slowing global commodity prices over the last few months, Elsewedy Electric’s [SWDY] top line still grew on a stronger USD, driven by its export-oriented business model. Meanwhile, SWDY’s turnkey segment has been gaining more exposure to new markets, such as the GCC, further solidifying its performance. In Q1 2023, SWDY’s revenues rose and margins widened concurrently due to its wise inventory management combined with higher selling prices on a higher FX rate. Today, we reiterate our positive view on the company and its stock, maintaining our Overweight rating after raising our 12MPT by 91% to EGP36.2/share. SWDY is currently trading at an attractive TTM P/E and EV/EBITDA of 5.4x and 4.7x respectively, and an extraordinarily low 5y forward PEG ratio of 0.3.

Above and beyond: SWDY’s Q1 2023 results were astonishing, where the company’s earnings jumped 282% to EGP2.9bn (54% of 2022 full-year earnings) on 80% y/y higher revenues of EGP33.3bn (36% of 2022 full-year revenues). Q1 2023 results included FX gains of EGP1.3bn, without which earnings would have still risen by 106% y/y on a like-for-like basis. Meanwhile, margins also improved on the back of the company’s active inventory management, having locked in low-cost inventory in H2 2022, paired with higher prices on a stronger USD during Q1 2023. Indeed, the wires and cables segment performed strongly during Q1 2023 despite commodity prices easing off over the prior few months. Meanwhile, the turnkey segment exhibited outstanding growth, raking in EGP37bn of new awards in Q1 2023 alone, almost equal to the 2022 full-year figure, which should subsequently lead to higher revenues going forward.

Copper, the new gold: We expect SWDY’s revenues and earnings to grow at 5y CAGRs of 16% and 17% to EGP194bn and EGP12bn by 2027, respectively. This should be powered by higher revenues despite an expected tightening in margins over the coming period as inventory cost catches up to the higher FX rate. Revenues can be broken down into:

• Wires and cables: We expect revenues to grow at a 5y CAGR of 18% to EGP98bn by 2027 on higher export volumes and a stronger FX rate.

• Turnkey projects: We expect revenues to grow at a 5y CAGR of 12% to EGP68bn by 2027 on a healthy backlog of projects in Egypt and the GCC region.

• Electrical products: We expect revenues to grow at a 5y CAGR of 25% to EGP28bn by 2027, powered by higher utilization rates for transformers and demand from export markets.

12MPT raised to EGP36.2/share, rating maintained at OW/M: Our updated 5y DCF model yielded a fair value of EGP26.3/share and a 12MPT of EGP36.2/share, mainly on a stronger USD. Still, our 12MPT implies conservative multiples: 2023e P/E of 7.3x and 2023e EV/EBITDA of 6.0x. With an upside potential of 92%, we maintain our Overweight / Medium Risk rating. Key Catalysts: A stronger for longer USD. Higher global commodity prices. Expansion of the turnkey segment in the GCC region. Key Risks: Higher interest rates. Lower government infrastructure spending.

Relative Performance (5Y)

Commercial International Bank [COMI]

Egypt / Banks / Core Coverage Update

12MPT: EGP59.4

(was EGP54.5) set on 14 May 2023

Investment Rating: Neutral | Risk Rating: Medium

The fact that Commercial International Bank – Egypt [COMI] is the largest private-sector bank in Egypt comes at a high cost, just like it comes with benefits. The bank had to be the first to make several changes in its strategy to cope with market conditions, launching new products at a high cost to fend off fierce competition. In turn, other private-sector banks followed suit, which changed the whole sector’s dynamics. However, the distinction here is that these changes, which are usually negative for any bank, only made COMI stronger. Indeed, COMI already had enough space and flexibility to withstand the market conditions and even make the best out of it. This confirms COMI’s strength and leadership in such a volatile economic environment. That said, we update our valuation for COMI, raising our 12MPT by 9% to EGP59.4/share but downgrading our rating to Neutral / Medium Risk.

We up our 12MPT by 9% to EGP59.4/share yet downgrade our rating to N/M

Our residual income-based fair value came out as EGP52.2/share, assuming a long-term ROE of 23% and a terminal COE of 15%. However, we set our 12MPT at EGP59.4/share based on a historical average P/E of 8.5x applied to 2023e earnings. This offers an upside potential of 15%, which is still lower than COMI’s COE. Hence, we downgrade our rating from Overweight to Neutral with the same Medium Risk. Our new 12MPT implies a 2023e P/BV of 2.1x.

Key catalysts

Higher-than-anticipated corporate lending with improving economic conditions. Higher-than-expected earnings growth.

Key risks

Persisting competition from state-owned banks affecting COMI’s deposits. Deterioration in asset quality.

For the full report, please click here.

Amany Shaaban

Equity Analyst

T +202 3300 5720

ashaaban@egy.primegroup.org