1. Today’s Trading Playbook
Amr Hussein Elalfy CFA, Head of Research
KEY THEMES
We stated here before—and we still think—that the remainder of the year will witness a recovery in large caps in general, especially as foreign investors come back to the market. However, given the market’s recent rally, we still see some interesting movements in some small-cap names: some with questionable momentum, others linked to medium-term catalysts. Please read below for a glimpse of a few of those small-cap names (PACH, AIH, and AFDI).
POSITIVE
PACH – Low price levels, combined with a potential medium-term catalyst: Paints & Chemical Industries [PACH] was a top performer last Thursday, up c.13% (c.18% as of last price). This comes despite PACH’s 9M 2019/20 results reflecting weak operating performance. Top line slipped and margins deteriorated on a weaker volume, weaker prices situation. PACH stock price was punished notably since early 2018 due to challenges facing its business model. However, the company possesses a modest net cash position (11% of market cap pre-Thursday’s rally) as well as commanding some 53,000sqm land plot related to its old factory. We believe that Thursday’s rally was not about PACH’s balance sheet; the assets have always been there. Yet, we believe the optimistic views concerning Libya reconstruction pushed the name higher. PACH’s 50%-owned subsidiary PACHIN for Paints & Chemical Industries – Libya promises a fruitful involvement in the neighboring country’s reconstruction story.
neutral
AIH – Price reflects thriving NBFS, a risky bet on CBM recovery: Arabia Investments Holding’s [AIH] (+79% ytd) financial performance in H1 2020 was clouded by a hit to its construction and building materials (CBM) flank. Earnings dropped 28% y/y despite considerable growth coming from its non-banking financial services (NBFS) arm. Yet, we believe AIH could be yet another beneficiary from the Libya reconstruction story on which both of its CBM operating companies are able to capitalize. AIH’s Toblat has production lines in New Alamein, while Kahormika (an electromechanical contractor) used to have regional presence. AIH expects EGP72mn in net earnings for 2020, supported by a thriving NBFS segment. On one hand, we think the current market cap (EGP703mn) generously prices in the strength of its NBFS segment, leaving the CMB segment to either push it further up or put a lid on AIH stock rally.
NEGATIVE
AFDI – Price not justified by fundamentals unless monetization is on the cards: Al-Ahly for Development and Investment [AFDI] (+101% ytd) is another name that has jumped aggressively (+8% on Thursday, +10% on last price). The stock sold off to very cheap levels last March, given—what we think—its “interesting” stakes. AFDI wholly owns an active leasing player (i.e. Nile Financial Leasing), a 17% stake in Cairo Capital Holding, as well as some JVs with B Investments [BINV]. AFDI’s annualized Q1 2020 ROAE stands at 10%, with a 2020e P/E of 10x. While these are considered good figures when compared historically, it is still not justifying the 0.96x P/BV multiple that AFDI is trading at now. Unless AFDI is up for a potential exit from one of its investments, we do not think the current price level is that attractive anymore.