Amr Hussein Elalfy CFA, Head of Research
Egyptian Media Production City [MPRC] has a couple of interesting fundamental features. For one thing, it's flush with cash. Indeed, MPRC’s net cash position stood at EGP264mn as of H1 2020, where the company’s market cap is only EGP872mn. In other words, net cash is 30% of MPRC’s market price. The other interesting fundamental feature concerns its poor monetization of assets; MPRC has an asset turnover of just 0.17x and an ROE of a mediocre 4.5%.
Now, if a company is cash rich, yet facing difficulties in utilizing its assets, a sensible approach could be to utilize excess liquidity hoping for a return, which is what MPRC seems to have attempted recently. Late July 2020, MPRC managed to up its stake in Arab Hotel Co., the owner of Movenpick Hotel in Media Production City, from an initial 10% stake. Post-acquisition, we calculate MPRC’s stake would reach 97.55%. This deal implicitly valued Movenpick at EGP223mn or EGP0.784mn/room, according to our calculation. This is compared to EGP0.780mn/room for Misr Hotels [MHOT]. While there are no details about Movenpick Hotel, we believe MPRC managed to gain a majority at a depressed valuation, which should eventually work out well for MPRC.
Moreover, if we to adjust MPRC's net cash after this investment, MPRC’s net cash would decrease to EGP70.5mn. Valuing MPRC's 97.5% stake in Movenpick Hotel at EGP217mn (according to the above-mentioned transaction), we would reach a value of EGP288mn for MPRC’s Movenpick Hotel and its net cash. At MPRC’s current market cap of EGP872mn, we see the market attaching only EGP585mn to all MPRC’s other business lines. We note that MPRC reported net earnings of EGP52mn in H1 2020, which if annualized, would imply that MPRC’s business lines other than Movenpick Hotel are valued by the market at a P/E of just 5.7x, which is still cheap.
Today’s Trading Playbook
Amr Hussein Elalfy CFA, Head of Research
KEY THEMES
As we mentioned yesterday, our bet on large caps has paid off with EGX 30 jumping more than 2%, its highest daily positive performance in exactly two months. Still down 18% ytd, we expect EGX 30 to continue closing the gap vis-à-vis its small-cap counterpart EGX 70 throughout the end of the year. Yesterday’s performance has been buoyed in part by a positive sentiment in the market concerning Libya’s stabilizing situation, which could open the door for Egyptian companies to partake in that country’s reconstruction. For a run of where stocks stand in terms of performance and valuation, please refer to the EGX multiples report (always found in Section #5 of PRIMETime).
POSITIVE
Large Caps: Same as yesterday.
MPRC: As noted above, MPRC’s valuation is cheap when chipping away its net cash position and adjusting for its recent acquisition of Movenpick Hotel. The stock was up 6.7% yesterday, in line with the market’s overall positive performance and partially helped with the company’s treasury share buyback.
NEGATIVE
DSCW: Q2 2020 results published by Dice Sport & Casual Wear [DSCW] (please see below) may pressure the stock in the short term. The company looks to have suffered from COVID-19 induced lockdowns around the world, hitting its top line growth.