Egypt’s cement sector recorded total sales volume (local + export) of 49.8m tonnes in fiscal year 2018/19 (FY19), slightly down 0.8% year over year (YoY) and above Pharos Research’s estimate of 48.5m tonnes.
On a sequential basis, sales volume grew 9.8% on the back of increased wholesaler purchases towards the year end to qualify for incentives and rebates, and Eid vacation in the third quarter of the year (3Q19). Meanwhile, average realised prices declined by EGP 11/tonne in the quarter, efficient companies such as Arabian Cement Company (ACC) were able to improve their margins, thanks to integrating higher local pet coke into the energy mix.
Looking ahead, Pharos Research expects sector performance to remain weak in FY20 unless the government intervenes by setting a price floor for cement, and/or inefficient players exit. Pharos added that it believes that even if demand grew in the coming 2-3 years, it will not be able to absorb the supply/demand gap.
Pharos recommends buy for ACC stock with fair value EGP 5.50, highlighting the company’s margins’ improve due to pet coke integration and solar energy. The company’s 4Q19 revenue came in at EGP 757m, down 8.3% YoY and up 1.6% QoQ on the back of lower realised prices and despite achieving 7.6% QoQ growth in sales volume.
Moreover, ACC’s 4Q19 EBITDA margin improved to 14.3% against 12.0% in 3Q19 and 9.7% in 4Q18. The improvement was entirely driven by achieving 50% local pet coke mix into the energy mix along with the solar power plant the company recently built. Attributable net loss recorded EGP 4m which came on the back of booking interest expense related to the licences of EGP 15m in the quarter. ACC stock is currently trading at FY20 profit / earning (P/E) of 27.6x, enterprise value / EBITDA (EV/EBITDA) of 5.3x, and EV/tonne of $26.
Pharos also recommends buy for Misr Beni-Suef Cement Company (MBSC) with fair value EGP 22, thanks to the company’s solid balance sheet bolstering its performance. MBSC’s 4Q19 revenue came in at EGP 443m, down 17.8% YoY and 6.9% QoQ. The sequential decline was driven by both lower realised prices and 5.4% decline in sales volume. EBITDA margin came in at 13.5% in 4Q19 against 13.7% in 3Q19 and 8.4% in 4Q18. Net income came in at EGP 13m, up 257% YoY and down 38.8% QoQ. MBSC stock is currently trading at FY20 P/E of 23.2x, EV/EBITDA of 0.9x, and EV/ton of $2.6.
