Arabian Cement Co.: Survival of the Fittest
ARCC: Capitalizing on resilience and efficiency; initiate at OW/H
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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