Egypt Aluminum: Business As Usual
EGAL: Future electricity prices mute valuation today; initiate at UW/H
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.
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