Lecico Egypt
LCSW / Egypt / Ceramics / Core Coverage Update
12M PT: EGP4.30
(ETR: -57%, was EGP3.8) set on 19 October 2022
Investment Rating: Underweight | Risk Rating: High
Lecico Egypt [LCSW], a well-established name in Egypt’s ceramics industry, turned into profitability in Q1 2022 after incurring net losses in 14 consecutive quarters. However, it turned to losses again in Q2 2022 due to higher non-recurring provisions and a capital loss on the sale of land in France. Still, the stock rallied 186% ytd, making it the top gainer on the EGX. We up our 12MPT to EGP4.3/share, driven mainly by higher exports on a weakening EGP and generally higher selling prices. However, with a potential downside of c.57%, we maintain our Underweight / High Risk rating on the name.
The hard years
Historically, LCSW incurred bottom-line losses in six out of the last seven years despite reporting strong top-line growth. This was due to its fluctuating gross margins, filtering through to low or negative EBIT margins over the years, and high financing expenses. LCSW suffers from a long cash conversion cycle (was 133 days in 2021), which forces it to draw high levels of bank overdrafts to finance its working capital needs. Consequently, LCSW has a high financial leverage with over EGP815mn of net debt, translating into a net debt-to-EBITDA ratio of 5x in H1 2022. This is notwithstanding EGP220mn in long-term payables due to the Egyptian gas companies. Moreover, the current high-interest rate environment in Egypt could pressure LCSW’s financing costs. As for Lebanon, LCSW’s operations have a positive cash flow, according to management.
The light at the end of the tunnel
Over the coming years, we expect LCSW to have a better positioning in its export markets, leading to a top-line improvement in view of several catalysts: (1) higher prices of sanitary ware exports due to a weakening EGP, (2) higher demand for sanitary ware products in Europe, supported by its strong distribution network, and (3) cheaper labor and energy costs. Against the backdrop of the current natural gas crisis in Europe, some ceramics producers in Europe and Asia began cutting production, which creates an opportunity for LCSW to increase its export volumes and prices. We expect LCSW’s revenues to reach EGP3.1bn in 2022 on a weaker EGP and a slightly higher utilization rate of the sanitary ware segment. We also expect a net loss of EGP37mn in 2022, including one-off charges of EGP38mn. Excluding those one-offs, LCSW’s bottom line would be showing an improvement y/y, eking out a net profit of c.EGP1mn (vs. a net loss of EGP36mn in 2021). Yet, we expect LCSW’s bottom line to remain weak in the coming years, potentially reporting losses due to its high financial leverage and fluctuating gross margins.
UW/H, 12MPT EGP4.3/share
Using an EV/EBITDA multiple of 5.0x and a historical FX-adjusted median EBITDA of USD11.9mn, we reached a 12MPT of EGP4.3/share (ETR: -57%, up from EGP3.8/share); thus, we maintain our UW/H rating. Key catalysts: Weak EGP to benefit exports. The energy crisis in Europe extending for longer. Key risks: Rising energy costs. A high-interest rate environment. LBP devaluation in November resulting in a non-cash impairment charge.
Abdelkhalek Mohammed
Equity Analyst
T +202 3300 5717
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