Today’s Trading Playbook
KEY THEMES
Q3 2021 – almost in the black: Arabian Cement Co.’s [ARCC] Q3 2021 recorded a consolidated net income of EGP0.07mn vs. net losses of EGP34.2mn a year earlier. ARCC has managed to break even in Q3 2021, thanks to a 13% y/y increase in its top line. The cement manufacturer has made use of the Egyptian Competition Authority's (ECA) decision to cut capacities, effective July 2021. Indeed, the decision helped decrease excess supply in the market, narrowing the gap between supply and demand in the local market, helping cement manufacturers to increase their selling prices. For ARCC, on the revenue side, cement selling prices increased to EGP718/ton (+28% y/y), thanks to the aforementioned ECA decision which more than offset the decrease in volume sold. On the cost side, there is a 15% y/y increase in cash cost to EGP605/ton due to the increase in the costs related to ARCC’s fuel mix.
Fuel mix costs going down once again: Many of ARCC’s fuel mix components reached an all-time high. But right now, they seem to face a number of downward pressures where we can see prices normalizing in Q1 2022. Meanwhile, we can see some fluctuations in ARCC’s fuel mix components, yet management thinks the peak is already behind us. Management said that coal inventory is enough to the extent that it does not have to buy at such high levels. Coal price in normal times is around USD70/ton, around half the current prices.
What to expect in 2021? Management still thinks ARCC will be able to record top line within the range of EGP2.3-2.4bn which is 5% lower than consolidated 2020 revenues of EGP2.5bn. We can also see a double-digit net income figure between EGP50-P60mn with a net profit margin of 2-3%. On the other hand, 2022 is harder to expect due to the uncertainty related to ECA decision continuation in the far future.
Cement prices rally is expected to continue: Cement selling prices rebounded in Q3 2021 and Q4 2021. The company expects the pace of the rally to be slower. Management expects cement prices will gradually improve to a target EGP1,300/ton in the long run.
We are maintaining our short-term positive outlook on the industry, we think we will see a recovery in cement companies’ earnings and margins if demand and—consequently—prices were to be sustained at the current level. ARCC is currently traded at TTM EV/EBITDA and at EV/sales of 10x and 0.95x, respectively.
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