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Al Ezz Ceramics & Porcelain [ECAP]
Egypt / Ceramics / Core Coverage Update
12MPT: EGP35.3 (was EGP14.8)
set on 16 Mar. 2023
Investment Rating: Overweight | Risk Rating: Medium
Our bullish view on Al Ezz Ceramics & Porcelain (GEMMA) [ECAP] published in our Core Coverage report dated 30 December 2021 was due to its growth potential and relatively low multiples. Today, we affirm our positive view on ECAP, adding to the mix its higher utilization rates and selling prices, despite the lower purchasing power and higher imported costs. Although pressured in 2022 on a strong USD, ECAP’s margins stood strong as it managed to pass on the higher costs to its end customers. We updated our financial model, which resulted in a 12MPT of EGP35.3/share (138% higher than our previous 12MPT of EGP14.8/share). Thus, we reiterate our Overweight / Medium Risk rating for ECAP.
Competing on another level
The Russia-Ukraine war pressured all ceramics producers locally and globally, due to the higher costs of imported raw materials and fuel. In addition, a stronger USD pressured Egyptian ceramics producers’ margins during 2021 and 2022, especially for those with a low pricing power, in view of a weaker purchasing power in the local market. ECAP, however, produces mainly high-end ceramics and porcelain products that are priced higher and enjoy a lower elasticity of demand compared to its local peers (e.g. Lecico Egypt [LCSW], Remas [CERA], and General Co. for Ceramic & Porcelain Products [PRCL]). This allows ECAP more pricing power over its products, hence it was impacted by FX fluctuations to a lesser extent. We note that ECAP’s products are better positioned with a market share of 70-80% in Egypt’s high-end ceramics market, according to management, with the remainder fulfilled by imports. Moreover, ECAP’s GPM is higher than its local peers’ and more stable against changes in the macro environment (averaging 25.2% over the last five years).
A niche segment
ECAP currently has a capacity of 15mn sqm (adjusted from 18mn sqm, based on a bigger tile size compared to the standard 30x30 tile). With the utilization rate reaching c.92% at the end of 2022, ECAP is currently looking to increase its capacity by 833,000 sqm (+5.6%) by the end of Q3 2023 to cater to the growing demand for high-end ceramics in the market, driving total capacity to 15.8mn sqm per annum. ECAP focuses c.85% of its production on the local market, due to the strong demand for high-end tiles and the lack of local competition in this niche segment. Despite the production disruptions in Turkey and Europe due to the earthquake and natural gas crises, respectively, we expect ECAP to continue focusing mainly on its higher-margin local market, while exporting only 15% of its production to secure its foreign currency needs.
For the full report, please click here.
Abdelkhalek Mohamed
Equity Analyst
T +202 3300 5717
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