1. Today’s Trading Playbook
Mohamed Saad, Equity Analyst
Dina Abdelbadie, Equity Analyst
DAbdelbadie@egy.primegroup.org
KEY THEMES
Last Thursday, local media reports claimed that the Egyptian government is mulling cutting natural gas prices again to USD3.0/mmbtu for the industrials sector. Winding the clock a little back, we recall that natural gas prices have already been cut for that sector, except for fertilizer names in addition to Sidi Kerir Petrochemicals [SKPC] that were not included in March's cut. The media reports suggest that natural gas prices may be cut across all industrial companies, including those that did not benefit from the March cut. Now, before jumping into conclusions – which we will, we need to put a few points into perspective to gauge the market reaction today and throughout the week. First, those media reports have neither been officially confirmed nor do they provide a timeline for the purported decision, so investors eager to buy on the unconfirmed news should be cautious. Second, at first, we expect the market to generally treat the majority of energy-intensive family with grace in response to the media reports.
As time progresses and assuming those media reports gain credence, we see buying will be more focused towards names with relative business model stability. In this sense, we tend to believe that fertilizer companies, added to SKPC, will be market favorites (a) after having missed out on the first round of price cuts back in March and being sort of dipped by the market as a result back then and (b) because their selling prices have been less violently hit compared to other industrial segments.
Meanwhile, a cut in natural gas prices would shore up the competitive advantage of the Egyptian ceramics abroad. However, weak local (and international post COVID-19) demand would prune the possible gains. Either way, a potential restructure of Libya, Iraq, and Syria will keep the sector’s hopes alive. Elsewhere in cement, most companies are already using coal as their source of energy, except for South Valley Cement [SVCE]. So, we view the effect here as limited; it only gives companies flexibility to revert to natural gas whenever it is more cost effective. However, similar to ceramics, the industry is still suffering from the weak local demand, oversupply, and export difficulties, let alone the slowdown in the real estate sector.
POSITIVE
ABUK, SKPC, EGCH, EKHO, ESRS, Ceramics: In view of the above, we assemble our list of beneficiaries in the following order: Abu Qir Fertilizers [ABUK], SKPC, Egyptian Chemical Industries [EGCH], Egypt Kuwait Holding Co. [EKHO], and Ezz Steel [ESRS], followed by ceramics players.
neutral
MFPC, Cement: Needless to say, Misr Fertilizers Production Co. [MFPC] is most likely out of this picture, given its urea-linked pricing formula. We do not see cement producers jumping back to natural gas as of yet until it proves to be more cost effective to the other energy sources most of them use nowadays (e.g. coal and refuse-derived fuel).
For valuation multiples and other stock-related data, please check our multiples report.
Now, on to the top news and analysis for the day.