Today’s Trading Playbook
Amr Hussein Elalfy CFA | Head of Research
KEY THEMES
After the Egyptian pound was devalued more than four years ago back in November 2016, the stocks of certain companies whose business models relied on a stronger U.S. dollar began to react positively. One of these stocks was Egypt Aluminum [EGAL] which had the best of both worlds. On one hand, EGAL's revenues jumped in EGP terms. On the other hand, its opex–mainly electricity, even if it remained fixed, fell as a percentage of revenues, hence boosting its profit margin noticeably. Later on, the price of electricity increased in EGP terms before the Egyptian government cut electricity prices in March 2020. However, electricity prices rose in USD terms given a stronger EGP. Earlier in the year, EGAL was plagued with low aluminum prices that hit around USD1,400 in April 2020 and a weaker USD (vs. EGP) and hence weaker revenues with an effectively higher opex burden. More recently, the price of aluminum globally began to head north of USD2,000/ton (up 40%+ since April 2020)–a clear positive for EGAL. However, the more sustainable aluminum prices remain above that threshold, the higher the profitability for EGAL, which is why investors need to monitor the development of aluminum prices globally. Although EGAL jumped 7% over the past two trading sessions, we could still see further re-rating, especially if the price of electricity is revisited by the government.
POSITIVE
EGAL: With the company raising selling prices in view of higher global aluminum prices, the remainder of this fiscal year could see the company improve its bottom line.