alexandria mineral oils company (amoc.ca)€¦ · products exports are naphtha, fuel oil, and...

Alexandria Mineral Oils Company (AMOC.CA)

Initiation of Coverage – February 6th, 2018

Source: Investing.com

*Price as of 5th of 2018

*Values in EGP

Major Shareholders

Al Ahli Capital Holding 25.30% Alexandria Petroleum

Co 20%

Local Pension Funds 10.20%

Source: Investing.com & AOLB Research

Investment Summary

AMOC is backed by strong domestic demand and rising

international prices of end products. Egypt is a net importer of

most of AMOC’s end products. Brent crude oil prices surged to

an average of USD54.1 (+23.8%) in 2017 and expected to cement

further to record and average of USD59.7 (+10.3% YoY) in 2018e.

Since Petroleum products are highly correlated with crude oil

prices at R-squared average of 97%. Thus, we expect AMOC’s

products prices to follow suit.

On the downside, risks are present of crude oil price volatility

and higher competition with the entry of ERC (4.2mn tons).

Thus, AMOC is upgrading MDD unit and upscaling product mix to

withstand the competition and improve margins through

agreements with market participants. AMOC should achieve

average net margin of 15%, up from a five-year average of 9%.

Our DCF-based fair value is EGP9.0/share, a downside of -3.1%

with a calculated WACC of 19.5%. In spite of AMOC’s favorable

position, the recent capital increase in FY2018 has impacted the

target price negatively. Despite high investment budget, we

expect AMOC to offer a c.9% 2018e dividend yield. AMOC’s

2018e PE is at 9.5x, below the Reuters sector average PE of

17.85x and industry average of 25.9x.

Financial Indicators and Valuation Multiples

Year 30 Jun 2017a 2018e 2019f 2020f 2021f

Revenue (EGP mn) 9,589 10,957 12,070 12,953 13,659 Net profit (EGPm) 1,100 1,267 1,683 1,904 2,106 EPS (EGP mn) 0.85 0.98 1.30 1.47 1.63 EPS (% YoY) 152.8% -92.3% 32.8% 13.1% 10.6% PE (x) 10.85 9.47 7.13 6.30 5.70 EV/EBITDA (x) 8.1 6.0 4.6 4.0 3.6 P/CF (x) 10.5 NA 8.27 7.32 6.37 ROAE (%) 40% 34% 35% 35% 35% P/BV (x) 4.0 2.7 2.3 2.1 1.9 Dividend yield (%) 16% 9.4% 10.6% 11.9% 13.2%

Based on Closing Price of 5th

February Source: AMOC and AOLB Estimates

Recommendation SELL

Fair Value EGP 9.0 Market Price EGP 9.29 Downside -3.1%

Stock Data

Reuters Code AMOC.CA

Authorized Capital (mn) 2,000

Issued Capital (mn) 1,291

No. of shares 1,291

Par Value 1.0

Market Cap (mn) 11,998

Price 9.23

Highest (1yr range) 9.89

Lowest (1yr range) 4.87

Average (1yr range) 7.37

Free Float 18.7%

Sally Fawzy Mikhail

Senior Equity Analyst

[email protected]

Mariam Wael

Equity Analyst

[email protected]

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AMOC EGX30 Rebased

mailto:[email protected]


1



Contents Industry Dynamics .........................................................................................................................................2

Strong world growth rate entices oil demand .......................................................................................................2

An extension of the cuts through 2018 is expected ...............................................................................................2

Oil prices rebound owing to OPEC production cut resolution ...............................................................................3

Egypt Overview & Outlook .............................................................................................................................4

Moderate reserves .................................................................................................................................................4

Market undersupplied ............................................................................................................................................4

Net importer of petroleum products .....................................................................................................................4

Government dominance.........................................................................................................................................5

Company overview ........................................................................................................................................7

Stock Split & capital increase .................................................................................................................................7

GDRs on LSE ............................................................................................................................................................7

Business Operation .................................................................................................................................................9

Low Sulphur fuel-oil Refinery .................................................................................................................................9

Solid ties for feedstock and marketing ...................................................................................................................9

Innovative Development Strategy ..........................................................................................................................9

Fully liberal petroleum products prices with high correlation with oil prices .................................................... 11

AMOC’s refining margin narrowing by tops global standard Brent cracking margin.......................................... 12

New entry to compress AMOC’s market share ................................................................................................... 12

Backed by strong domestic demand and prices rebound ................................................................................... 13

Exports contribute 12% of total revenues ........................................................................................................... 14

Financial Analysis & Forecast ........................................................................................................................ 15

Low leverage & High Cash ................................................................................................................................... 15

Single-digit dividend yield ................................................................................................................................... 15

Revenues to grow 14% ........................................................................................................................................ 15

Gross Margin to widen ........................................................................................................................................ 16

EBITDA and Bottom-line expansion .................................................................................................................... 16

Valuation ..................................................................................................................................................... 18

2



Industry Dynamics

Strong world growth rate entices oil demand

The world annual real GDP growth forecast is 3.7% in 2018e, same as in 2017, according to the World

Bank. World oil demand in 2Q2017 grew strongly by 2.2m b/d (2.3% YoY), significantly above its

1995-2016 trend of 1.2m b/d, due to strong growth among Organization for Economic Co-operation

and Development (OECD) countries. For 2017, global oil demand is revised up, averaging 96.99m b/d.

For 2018e, world oil demand is projected to climb by 1.52m b/d (1.4% YoY) to a record high 98.51m

b/d (World Bank and OPEC).

Higher supply growth expectation from the US and Canada

As stated by Organization of the Petroleum

Exporting Countries (OPEC), global crude oil

supply is revised down due to actual data of

4Q2017 to stand at 96.5m b/d in 2017. For

2018e, driven by higher growth expectation

for the US and Canada, the global oil supply

is anticipated to increase 1.3m b/d to

97.82m b/d in 2018e, with 0.68m b/d

undersupplied. This would leave little room

for additional OPEC production; we expect

OPEC crude oil production at 32.42m b/d in

2018f, equivalent to 2017 level.

An extension of the cuts through 2018 is expected

OPEC crude oil production has declined by 0.2mb/d in 2017. According to OPEC, this is partly

resulting from the Declaration of Cooperation (DoC) which reflects an agreement by 12 members to

cut output by 1.2m b/d in the first six months of 2017. The agreement has been extended to March

2018. Saudi Arabia committed to the largest reduction, with the exemption of Libya and Nigeria. The

agreement received a wide-ranging support of another 10 non-OPEC countries which agreed to

reduce output by 0.55m b/d, led by Russia and Mexico (OPEC and World Bank).

The agreement was successful because compliance with the promised cuts was high. An extension of

the cuts through 2018 is expected. OPEC is likely to discuss inclusion of Libya and Nigeria to

agreement of output limits. Nigeria has suggested it could do so when its production reaches 1.8m

b/d.

Annual Brent Crude Oil Prices & Oil Balance

Source: EIA & OPEC Notes: Oil Balance = World Supply – World Demand

0.6

1.5

0.4

-0.5 -0.68 0

20

40

60

80

100

120

-1

-0.5

0

0.5

1

1.5

2

2014a 2015a 2016a 2017a 2018f

Balance (mn barrel/day) Annual Prices (USD/barrel)

3



Compliance with the production agreement by the 10 non-OPEC producers has been high due to

actual cuts (Russia), field maintenance (Azerbaijan and Kazakhstan), and natural production declines

(Mexico), as viewed by World Bank.

Oil prices rebound owing to OPEC production cut resolution

In 2017 prices recovered moderately due to oil balance undersupply. With projected widened gap

between supply and demand, on 11th January, the Brent Crude Oil stood at USD 70.36/b, a USD 5.98

above the December average. The January 2018 record is the highest since 3 December 2014 and

the strongest rebound since 20 January 2016 low at USD 26.01/b (1.7x growth). The increase is due

to strong demand, falling inventories, and greater compliance by OPEC and non-OPEC producers with

agreed production targets that began in January 2017.

With projected increases in U.S. shale production, the global market is unlikely to tighten

significantly in 2018. According to US Energy Information Agency (EIA), Brent Crude Oil stood at USD

54.15/b in 2017 and projected at USD 59.74/b, in 2018. We forecast Brent crude oil at an average of

USD69/b in 2018, supported by continued production cuts from the DoC and strong economic and

demand growth.

Brent Crude Oil Price Trend (USD/Barrel)

Source: EIA

0

20

40

60

80

100

120

140

160

Arab Spring

Global Crises

Invasion of Iraq and Sep 11 Attacks

OPEC's decision to maintain production

OPEC decision to cut

production

4



Egypt Overview & Outlook

Moderate reserves

According to British Petroleum (BP) 2017 Energy Outlook, Egypt enjoys 3.5bn barrels of oil reserves

at end of 2016 (0.2% of total worldwide oil reserves), ranking third in Africa following Libya and

Nigeria at 48.4bn barrels and 37.1bn barrels, respectively. Egypt Reserves to Production (R/P) ratio is

at 13.7x versus 44.3x for Africa. Egypt is the largest non-OPEC oil producer and the second largest gas

producer in Africa.

Market undersupplied

Egypt's oil production is in short of demand. In 2016, total production was 691k bpd, while

consumption recorded 853k bpd, exceeding supply by a 162k bpd deficit. Egypt’s main petroleum

products exports are naphtha, fuel oil, and waxes, while gasoil and LPG are its main imports. In

FY2015, Egypt has increased its imports from the key petroleum, namely; LPG’s 2.2m tons, Gasoline

2.1m tons, and Gasoil 6.1m tons. AMOC is an exporter of fuel oil and waxes, while oils, gas oils,

naphtha, gasoline and LPG are directed to the domestic market through its parent company Egyptian

General Petroleum Corporation (EGPC).

Foreign oil companies' investments rose to USD 8.1bn on exploration and development in FY2017

from USD 6.6bn in the previous fiscal year, an increase of 22.7%. Egypt expects the investments of

foreign oil companies to exceed USD 10bn in the current FY2018. The new investments should

narrow the shortage in supply.

Net importer of petroleum products

According to Central of Bank of Egypt (CBE), investments in oil refineries reached EGP869.5m in

FY2017 (a 20% growth YoY), however the sector witnessed a 3.1% contraction in FY2017 (down from

a growth of 2.5% in FY2016). To meet local demand from petroleum products, the government paid

USD 6.9bn to petroleum products imports during FY2017, up from USD 6.2bn a year earlier, 12% of

Egypt’s total import bill. FY2017 petroleum products exports were only USD 2.2bn (a 26% increase

YoY), causing a USD 4.7bn gap. The domestic market consumes around 75mn tons of petroleum

products annually, and Egypt’s oil sector supplies 60% of the local needs and the rest is imported.

In an attempt to drop the budget deficit to 9.4% in FY2018 compared to 12.5% in FY2017, the

government took steady steps to reduce energy subsides. The petroleum subsidies recorded

EGP22bn in 9M2017, only 28% of Egypt’s total subsidies, compared with 36.7% in FY2016 and 49% in

FY2015.

5



Egypt is not considering an increase in fuel prices before 30 June 2018, the government is planning to

lift fuel subsidies gradually until they are entirely removed within few years. The government started

cutting fuel subsidies as part of an economic program – which also involved floating the currency –

implemented to help secure a USD 12bn International Monetary Fund (IMF) loan deal.

Government dominance

Egypt is the biggest oil refiner in Africa with a total of ten refining companies operating 12 refineries,

where South Africa runs second. The sector (eight companies) is currently dominated by the state,

with nine out of ten oil refineries are controlled by the government-owned Egyptian General

Petroleum Corporation (EGPC), directly or indirectly. AMOC is owned indirectly by EGPC through

Alexandria Petroleum Company, Misr

Petroleum, and Petroleum

Cooperative.

In 2016, Egypt's maximum oil refineries

combined capacity reached 732,550

bpd), according to EGPC. Additions of

6,550 bpd come in result of robust

capacity upgrades over the past five

years.

EGPC is the sole supplier of feedstock

to all refineries, and the main customer

for end products destined for the local

market at international prices.

Sector upgrade

Global refiners have announced new refinery additions or expansions to existing capacities of 7m

b/d from 2017 to 2021, exceeding projected global petroleum demand growth of less than 5.5

million bpd, during the same period. The Middle East is contributing with 20% of announced projects

(1.4m b/d) during the next 5 years. However, Africa is characterized with both high refinery

construction costs and low capacity utilization. The projected refining capacity increases in Africa,

during the next five years, is below anticipated demand growth and is driven mainly by the 2020

transition to low-sulfur bunker fuel.

Egypt’s total refinery capacities stood at 810k bpd in 2016, while the actual oil refinery throughput is

at 508k bpd in 2016, with 62% utilization rate (BP Statistical Review World Energy 2017). This is

because some oil refineries are old and date back to 1913, namely El Nasr, with the exception of

Egyptian Refineries Capacities & Main Shareholder

Company Capacity

(Million tonnes/p.a.) Main Shareholder

APC 5.0 EGPC

CORC 10.0 EGPC

NPC 6.0 EGPC

APRC 4.0 EGPC

SOPC 3.0 EGPC

ASORC 4.5 EGPC

MIDOR 5.8 EGPC

AMOC 1.7 Alex Petroleum

Egypt’s Total Capacity 40.0

Source: Ministry of Petroleum and AMOC

6



Middle East Oil Refinery (MIDOR) and AMOC. As Egypt produces only sour oil, most of its petroleum

products are at the heavy end of the spectrum. AMOC and MIDOR, however, owing to the more

advanced technology used, are able to produce a range of light products, e.g. waxes.

In early 2017, the Ministry of Petroleum announced an USD 8.3bn budget to upgrade eight oil

refineries within four years to increase production to meet accelerating local demand, curb import

bill and control budget deficit. Hence, the Middle East Oil Refinery (MIDOR), the more advanced one,

will be listed on the Egyptian Stock Exchange (EGX) to raise funds for future developments for the

eight other state-run oil refining companies, as well as raising AMOC’s free float.

Private Sector Entry through PPP

The sector is witnessing only one new entrant; Egyptian Refining Company (ERC) new USD 3.7bn

processing plant at capacity of 4.2mn tons per year of liquid products, brining Egypt’s total refining

capacity at 44.2mtpa. The ERC refining portfolio is 2.3mn tons of diesel, 600k tons of jet fuel, 522k

tons of gasoline, in addition 600k tons of sulfur and coke as well as butane gas and naphtha. The

facility will ramp up output to 98% of capacity by the end of 2018. ERC is owned by Egyptian and

Arab private investors, Egyptian public institutions, international development institutions (IFC, DEG

and FMD) and EGPC with 24% stake.

ERC will further process products from Cairo Oil Refinery Company (CORC) to produce additional

high-quality petroleum products including approximately 2.3mtpa of diesel for the domestic market.

ERC is partnering with EGPC, CORC and PPC (Petroleum Pipeline Company) (EGPC affiliates) in public-

private-partnership (PPP) agreement, which entails CORC selling to ERC atmospheric residue to be

used as feedstock; EGPC purchasing ERC’s end products at international prices; and PPC providing

storage and transportation facilities. ERC will sell its products to EGPC at international prices minus

1% under a 25-year off-take deal.

7



Company overview

Alexandria Mineral Oils Company

(AMOC) was founded in 1997 and is

headquartered in Alexandria, Egypt.

AMOC was listed on EGX in 2004,

the sole refinery publically traded,

with 18.7% free float.

AMOC is indirectly owned by the

Egyptian (EGPC) through Alexandria

Petroleum Company (20%). Major

stake of AMOC, 53% of the

company, is owned by state-owned

banks, the biggest of which is the

National Bank of Egypt through its

investment arm, Al-Ahly Capital

Holding (25.3%), and Misr Bank (8.6%), and Misr Insurance Company (5.4%).

Enhancing stock liquidity for secondary offering

AMOC’s management have been focusing on gaining more exposure in the capital market, AMOC’s

Extra-Ordinary General Assembly and General Assembly have convened on the 25th of February

2017 and approved issuance of Global Depository Receipts (GDRs) equals 10% of the company’s

capital and a 1:10 stock split. On August 1, 2017, AMOC joined the EGX 30 and EGX 20 capped

indices.

Stock Split & capital increase

On April 19, 2017, AMOC undertook a 1:10 stock split at a par value of EGP1/share and 861mn

shares. In December 2017, AMOC increased the issued and paid capital from EGP 861mn to EGP

1.29bn, through free shares. The increase was EGP 430.5mn distributed over 430.5mn shares, at par

value of EGP1/share. The increase in capital was financed through the general reserve, recorded EGP

627.8mn. The capital increase was through distributing dividends through 1:2 bonus shares.

GDRs on LSE

Alexandria Mineral Oils Co (AMOC) signed a contract with BNY Mellon to issue global depositary

receipts (GDRs) on the London Stock Exchange (LSE). AMOC also signed a deal with Baker McKenzie

in London and Cairo offices to provide the company with relevant legal services to be listed on LSE’s

GDRs. Owning 25.31% of AMOC, Al Ahli Capital decided to transfer 39.5% of its stake in AMOC (10%

of total shares) to GDRs for trading in the LSE in early 2018.

AMOC Shareholders Structure

Source: AMOC

18.70%

4.50%

25.30%

8.70%

20%

5.40%

10.20%

3.60% 3.60%

Free Float

Misr Life Insurance Co.

Al Ahli Capital Holding

Misr Capital Investmens

Alexandria Petroleum Co

Misr Insurance Co

Local Pension Funds

Misr Petroleum Co

Cooperative PetroleumCo

8



Secondary offering

The government has announced proceeding with the privatization program through listings on the

Egyptian Stock Exchange (EGX) through IPOs and secondary offerings. The government announced

the IPO of ENPI to take place on 1Q2018, as well as MIDOR. AMOC is thought to be a candidate for

secondary offering. According to the Chairman of AMOC, Amr Mostafa, the company plans

increasing its EGX listing by another 10 - 20% of its shares; the listing will come out of the principal

shareholder’s stake or from more than one shareholder’s stake.

9



Business Operation

Low Sulphur fuel-oil Refinery

AMOC is a second stage refinery, where it

refines low Sulphur fuel-oil. AMOC engages in

the production of oil and paraffin wax. Its

products include fully-refined hydro-treated and

unhydro-treated paraffin waxes; transformer,

base, and fuel oils; and automatic transmission

fluids.

The refinery’s main product portfolio includes

two variants of paraffin wax and automatic

transmission oils, three categories of base oil,

transformer oils and fuel oils. They are produced

in two separate complexes; one for lubricants

and other oils. The second is for gas oil

production. The refinery is ISO 9001:2008 and

ISO 14001:2004 certified as well as OHSAS

18001:2007 certified.

Solid ties for feedstock and marketing

AMOC is engaged in a feedstock supply

agreement with EGPC through sister companies

Alexandria Petroleum Company and Al-Amreyah

Petroleum Company. AMOC’s primary focus is meeting local demand, where it has an off-take

agreement for more than 88% of its products with EGPC to satisfy domestic needs; the remaining is

exported or sold locally to private sector companies. AMOC owns 40% stake in Alexandria Waxes

Company a joint venture with the German Oil International Sasol as an exclusive off-taker to AMOC’s

wax production in international markets. AMOC is considering raising its stake in Alexandria Wax

Products from 40% to 55%, through acquiring a stake from Sasol, which owns 51% of Alexandria

Wax.

Innovative Development Strategy

AMOC is adopting an innovative development strategy that is set-out to function in three parallel

pivots. AMOC’s Extra-Ordinary General Assembly and General Assembly approved adding new items

to the activity scope: including compatible processes such as producing furnace oil, oil blending and

packing for others, crude refining at MIDOR and producing diesel and gasoline with taking into

AMOC’s Designed Capacity

Products tons p.a.

I Lube Oil Complex

Transmission Oil (A.T.F.) 5,500

Transformer Oil (T.O.) 16,500

Base Oil 88,000

Total Oils 110,000

Waxes 27,000

Subtotal 137,000

II Gas Oil Complex

Primary Products:

Gas Oil 460,000

Naphtha 98,000

LPG 43,000

Subtotal 601,000

Secondary Products:

Fuel Oil 560,000

Heavy Residual 431,000

Sulphur 4000

Subtotal 995,000

Total Capacity 1,733,000

Source: AMOC

10



account the provisions and regulations needed to issue the necessary license in order to implement

the above processes.

I- Revamp of operational and production facilities for enhanced yields

Improvement of the core operational facilities and production facilities is highlighted in

AMOC signed an agreement with Axens Group to build a new oil complex with an investment

cost of around USD 800mn that will help increase the local refinery’s production across the

board.

In 2017, AMOC-AXENS revamping contract to develop the second phase of Middle Distillates

De-waxing Unit (MDDU) units with a total investment cost of USD 50mn. AMOC is working

with Axens on the revamp project for producing Euro five standards products in addition to

production of Diesel and currently the production process is undergoing pilot testing and

conducting economic modeling.

Petroleum Projects and Technical Consultations Company (Petrojet) undergone a concrete

structure at a total cost of EGP 10.8mn, with a value of EGP 12.9mn, operating in October

2017.

Processing new feed blend by replacing high economic value feed (soft wax + aromatic

extract) which will improve the products quality.

II- Extended arms of partnership for utilization of non-functioning assets

In utilization of a handsome cash balance of EGP 1.46bn as end of September 2017 (1QFY2018),

AMOC aspires to purchase crude oil, process it in the Egyptian refineries and sell the final

products to EGPC according to the international prices. Also, AMOC aims to reduce dependency

on the domestic suppliers by utilizing the international market, and importing a portion of raw

materials needs.

In April 2017, AMOC agreed to process 500 barrels/month at MIDOR. This step increased

revenue by USD6mn in FY2017, at USD 2/barrel average profit margin.

In May 2017, AMOC signed a deal with Dana Gas to initially refine 1,500 barrels/ day,

ultimately increase to 4,000 barrels/day.

On October 17, 2017, a toll contract was signed between AMOC and Petromin of Saudi

Arabia, whereby AMOC packages and blends about 10k ton/year of Lube Oils for Petromin at

AMOC’S facilities against toll fee, yet to be increased to 50k ton/year in successive stages.

Dealing with Arabian Company for Oil and Derivatives to purchase 1,200 tons of main

unrefined oils at EGP 1,095/ton as of October 2017.

11



EGPC contracting with Iraqi company SOMO on the import of 24mn barrels of Basra crude oil,

where AMOC imports and refines 260k barrels monthly through 2018.

In terms of exports, AMOC signed an agreement in July 2017 to export a number of

petroleum products including fuel oil (mazut) to the State Oil Company of Azerbaijan

Republic.

Tanta lab is to process an extra monthly shipment from 45k to 60k barrels at an expected

profit of USD 3/barrel

Fully liberal petroleum products prices with high correlation with oil prices

In measuring R-squared (coefficient of determinations) to test the correlation among variables,

where Brent Crude Oil is the benchmark, R-squared for Gasoline, Gasoil (Solar), and Fuel Oil (Mazot)

are 89%, 99%, and 98%, respectively. R-squared indicates the variables are highly correlated and that

89%, 99%, and 98% price movements of Gasoline, Gasoil (Solar), and Fuel Oil (Mazot), respectively

are explained by price movements in the benchmark Brent Crude Oil.

In regression analysis, we have two scenarios for 2018e Brent Crude Oil; scenario I: annual average

Brent Crude Oil at USD59.74/b and scenario II: annual average Brent Crude Oil at USD69/b.

Accordingly, AOLB projects 2018e Gasoline, Gasoil, and Fuel Oil prices under scenario I at USD1.88/b,

USD1.66/b, and USD1.78/b, respectively. Under scenario II, AOLB projects 2018e Gasoline, Gasoil,

and Fuel Oil prices at USD2.06/b, USD1.91/b, and USD2.03/b, respectively. AMOC’s petroleum

product prices will follow the same pattern, since EGPC’s contracts stipulate that international prices

are the benchmark for both feedstock supply and end-product sales.

AMOC’s Petroleum Products Correlation with Brent Crude Oil Price Trend (USD/Barrel)

Source: EIA

0

50

100

150

200

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Brent Crude Gasoline Rebased Gasoil (Solar) Rebased Fuel Oil (Mazot) Rebased

12



AMOC’s refining margin narrowing

by tops global standard Brent

cracking margin

The refining industry works on

margins on top of the feedstock

cost. The 12 - year average refining

margin for Brent cracking stands at

5%, while AMOC’s 12 – year

operating margin records 14%.

However, the gap between the two

curves is narrowing, indicating a

compression in AMOC’s operating margin, yet 500 bps above the standard margin.

New entry to compress AMOC’s market share The petroleum sector has launched a plan to upgrade Egypt’s total oil refinery capacity to 44.2mtpa

by end of 2018e, compared with the current capacity of 40mtpa (+10.5% growth), in order to meet

the local demand for refined products, particularly gasoil and LPG. So far, confirmed new entrant of

ERC of Citadel Capital, with a capacity of 4.2mtpa and an investment of USD 3.7bn. This new capacity

with full utilization by the end of 2018e, when it comes on-stream, will cut AMOC’s market share

from the current 4% to 3.6% by end of 2018e. Nevertheless, AMOC’s market position is secure to

benefit from accelerated demand and rising prices.

Refining Margins (%)

Source: EIA & AOLB Research

Egypt Refineries Market Share in 2017 vs. 2018e

Source: AMOC & AOLB Research

0%

5%

10%

15%

20%

25%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Brent Cracking Margin AMOC (Operating Margin)

AMOC 4%

APRC 10%

APC 13%

MIDOR 15%

SOPC 7%

CORC 25%

NPC 15%

ASORC 11%

2017 AMOC 3.6%

APRC 9.1% APC

11.3%

MIDOR 13.2%

SOPC 6.8%

CORC 22.7%

NPC 13.6%

ASORC 10.2%

ERC 9.5% 2018

13



Backed by strong domestic demand and prices rebound

Egypt is net importer of fuel oil, gasoil, LPG, Naphtha, and lube base oils. Thus, AMOC is well backed

by strong local demand, where is produces around 4% of Egypt’s total production for LPG and

Naphtha,7% of Egypt’s total production for Gasoil, 11% of Egypt’s fuel oil and 30% of Egypt’s lube

base oils.

AMOC has an off take agreement with EGPG for LPG, Naphtha, Gas Oil and Fuel oil production sold

at international prices. Growth in petroleum product sales are closely tied to industrial activity (fuel

oil and naphtha), the auto industry (gas oil), and population and household formation rates (LPG).

According to AOLB estimates, the 2018e global economic growth rate is expected to steadily grow at

3.7% and the economic growth rate in Egypt is expected at 4.6%. The industrial activity exhibited

moderate growth at 3.7% in FY2017, 0.4% in Q42017 in particular, and expected to achieve 4.7%

growth in FY2018e. On the other hand the auto industry witnessed 31.6% contraction in 2017 and

expecting a moderate growth of 10% in 2018e.

AMOC Domestic Market Share (mtpa)

LPG & Naphtha Fuel Oil

Gasoil Base Oils

Source: AMOC

2.3

0.13

2

Egypt's ProductionAmoc's ProductionEgypt's Imports

9

1

5


7

0.48

7


0.33

0.3

0.1


14



Exports contribute 12% of total revenues

Since priority is for domestic market, any domestic market surplus can be exported. AMOC main

exports are waxes through the German Sasol Oil International (51% ownership of Alex Wax), an

exclusive distributer for AMOC in international market. Main export markets include: Mexico,

Germany, Morocco, Nigeria, Ethiopia, South Africa, India, and Bangladesh. In FY2018e, Wax

contribution is USD52.7mn (EGP935.6mn), where total exports comprise 12% to total revenues.

15



Financial Analysis & Forecast

Low leverage & High Cash

AMOC has built up a handsome cash balance at EGP 1.47bn, thus the company did not resort to

debts to supply its operation upgrades, where the Debt/Equity ratio stood as low as 0.01x in 2017.

We don’t expect AMOC to resort to debt in the future, since the full amortization of its debts

outstanding in 2014, particularly with the prevailing high lending rate at 19.75%. AMOC is benefiting

from high deposits rates, and expected to record an EGP89.07m of interest income in FY2018e.

Single-digit dividend yield

Traditionally, AMOC is a high divined-paid stock, however due to extensive operation upgrades in

DDM unit, 2018e dividends is expected to declined 83%, to record a 9% dividend yield, down from a

53% payout ratio in 2017. ALOB forecasts this trend to continue in 2018. On the other hand, with the

conclusion of upgrades, we forecast a higher dividend yields starting 2019 at 10.5% and 11.9% in

2020.

Revenues to grow 14%

Throughout 2018e, AMOC is to produce 433k tons of Gas Oil, 867k tons of Fuel Oil, 83k tons of

naphtha and 31k tons of butane. It also produced 181k tons of oils and waxes. The refinery’s main

export product was paraffin wax, which topped 62k tons, making USD52.7mn in proceeds.

Backed by local domestic demand, petroleum products prices rebound (c. 10.3% YoY), and

partnerships agreements, AOLB forecast AMOC’s revenue to increase to EGP10.9bn in FY2018e, 14%

YoY growth, while total refinery utilization rate increases to 94.5%, up from 92.8% in 2017. The

stable economic outlook will have a positive effect on AMOC’s revenue, impacting both prices and

volumes.

AMOC’s export sales are projected to stabilize at 12% of total sales in the coming couple of years to

record USD1.3bn in 2018, 18% YoY growth and increase thereafter to 13% in 2020, while sales to the

local market (comprising 88% of sales) are forecast to increase to EGP9.6bn in 2018e, 14% YoY

growth. Sales 2018-2022 CAGR is 16%

Revenues & Utilization Rate Revenues Breakdown for 2018e

Source: AOLB Estimates

4.4

9.6 10.9

12.1 12.9

88%

90%

92%

94%

96%

98%

100%

-

2

4

6

8

10

12

14

2016 2017 2018e 2019f 2020f

Revenues (EGP bn) Utilization Rate (%)

15%

9%

2% 5%

29%

39%

1% EGP10.96bn Lube Oil

Waxes

LPG

Naphtha

Gas Oil

Fuel Oil

OtherRevenues

16



Gross Margin to widen

We forecast AMOC to maintain an average gross profit margin of 19% throughout our forecast

period, up from 11% over 2013-2017, in the near term; we expect its gross profit margin to widen to

17% in 2018e, up from 13% in 2017. Although higher crude oil prices translate into higher petroleum

products prices, they would also result in higher feedstock costs.

However, AOLB projects petroleum products prices rises at 15% YoY to exceed crude oil prices

increases, resulting in narrowing of COGS/Sales ratio to 83% in 2018e, down from 87% in 2017,

where feedstock constitutes 89.5% of total costs. AMOC is requiring 1.6mtpa of Low Sulfur Fuel Oil

(LSFO) per annum feedstock. Average revenue per ton is expected at EGP 6,323 in 2018e versus EGP

5,534 in 2017, while average cost per ton is projected at EGP 5,277 in 2018e versus EGP 4,822.

EBITDA and Bottom-line expansion

AOLB forecast AMOC’s EBITDA to increase to EGP1.6bn in FY2018e, 49.5% YoY growth, while the

EBITDA margin to expand to 15.5%, up from 11.9% in 2017.

Egypt’s oil refineries are subject to 22.5% corporate tax rate for profits below EGP10mn and 25% rate

above EGP10mn, while oil exploration companies are subject to 40%. The company is subject to

effective tax rate of 26%, due to lack of debt balance to enjoy a tax break, while taxes projected at

EGP363mn in 2018.

Gross Profit (EGP/Ton) Gross Profit Margins


12% 13%

17%

18% 19%

10%

12%

14%

16%

18%

20%

2016a 2017a 2018e 2019f 2020f

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2016a 2017a 2018e 2019f 2020f

EGP

Sales/Ton COGS/Ton

313

711 1,045

1,235 1,409

17



The forex recorded a surge in gains by EGP275.1mn in 2017 due to devaluation of the pound, since

some bank deposits are in US dollars of EGP1.1bn (USD64.5mn), 58% of total deposits. We expect

forex losses of 24.7mn due to slight ease of the exchange rate to USD/EGP 17 through 1H2018.

The interest income is projected to reach EGP89mn, due to a large bank deposits in Egyptian pounds

of EGP1.4bn, 42% of total bank deposits. While the interest expense is minimal at EGP3.6mn in 2018,

due to small short-term bank loans of EGP30mn.

AOLB forecast AMOC’s net profit to grow to EGP1.26bn in FY2018e, 15% YoY growth, while the NP

margin to expand to 12%, up from 11% in 2017. Net profit 2018-2022 CAGR is 16%.

EBITDA & EBITDA Margin Net Profit & NPM


6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

-

500

1,000

1,500

2,000

2,500

2016a 2017a 2018e 2019f 2020f

EGP (mn)

EBITDA EBITDA Margin

8.0%

10.0%

12.0%

14.0%

16.0%

-

500

1,000

1,500

2,000

2,500

2016a 2017a 2018e 2019f 2020f

EGP (mn)

Net profit NPM

18



Valuation

Our DCF valuation indicates a fair value of EGP9.0/share, a -5.2% downside from current levels. The

valuation is based on five years of explicit forecasts and a terminal value using a 3% long-term

growth rate. Since AMOC's debt-to-equity ratio was as low as 0.01x at end-2018e - minor short-term

debt balance - AMOC's cost of debt is fairly low at 9%. We used a WACC of 19.5%, where the cost of

equity is 20%. AMOC’s 2018e P/E is 9.5x. AMOC trades below the Reuters Oil & Gas sector average at

17.9x and Refinery Industry average of 25.9.

Assumptions for Calculation of WACC (%)

Symbol Assumptions

Risk-free Rate of Return Rf 14.7%

Long-term Cost of Debt Kd 9.0%

Equity Risk Premium Rp 7.0%

Beta B 0.7

Tax Rate t 25.0%

Weight of Debt Wd 1.0%

Weight of Equity We 99.0%

Cost of Equity Ke 20.0%

WACC Dr 19.5%

Source: AMOC, CBE, AOLB calculations

19



F IN A N C IA L ST A T EM EN T S P ER F OR M A N C E R A T IOS

Year to 30 Jun 2016 2017 2018e 2019f 2020f Year to 30 Jun 2016 2017 2018e 2019f 2020f

Inco me statement (EGP tho usands) Gro wth and margins

R evenue 4,375,587 9,589,696 10,957,440 12,070,551 12,953,527 Revenue growth (%) (31.9) 119.2 14.3 10.2 7.3

Cost o f goods so ld (3,750,196) (8,277,780) (9,241,445) (9,848,699) (10,428,268) EBITDA growth (%) 8.2 122.2 33.6 31.7 13.9

Other operating expenses (113,262) (173,856) (195,431) (218,580) (243,961) EBIT growth (%) 9.7 146.3 36.0 33.4 14.4

EB IT D A 512,128 1,138,060 1,520,564 2,003,273 2,281,298 Pre-tax growth (%) 14.1 164.0 9.5 35.5 13.8

Depreciation/amortization (82,205) (79,369) (81,038) (82,254) (83,487) Reported net profit growth (%) 27.8 153.0 16.1 32.7 13.1

EB IT 429,923 1,058,690 1,439,526 1,921,020 2,197,810 EBITDA margin (%) 11.7 11.9 13.9 16.6 17.6

Net interest income/(expense) 65,402 84,537 81,529 101,182 125,159 EBIT margin (%) 9.8 11.0 13.1 15.9 17.0

Associates 0 0 0 0 0 Pre-tax margin (%) 12.5 15.1 14.5 17.8 18.9

Other income/(expense) 32,751 275,508 21,020 77,567 68,837 Net margin (%) 9.9 11.5 11.7 14.0 14.8

Exceptional items (net o f tax) 19,948 27,888 41,832 46,016 50,617 Effective tax rate (%) 20.7 24.0 19.4 21.0 21.5

P re-tax pro f it 548,024 1,446,624 1,583,908 2,145,784 2,442,424 Liquidity

Tax (113,259) (346,780) (306,526) (450,479) (525,258) Capex/depreciation (x) (0.0) 0.2 0.4 0.4 0.4

M inority interest 0 0 0 0 0 Current ratio (x) 7.6 2.6 5.5 6.2 6.6

Preference dividends 0 0 0 0 0 Quick ratio (x) 6.3 2.1 4.6 5.2 5.6

R epo rted net pro f it 434,765 1,099,844 1,277,382 1,695,305 1,917,166 Working capital/revenue (%) 9.9 5.2 7.4 7.4 7.7

Dividends (477,169) (592,047) (1,306,694) (1,380,709) (1,561,691) Receivable days 14.4 13.5 19.0 19.1 19.3

Adjustments (one-off) 645 704 704 0 0 Inventory days 29.3 21.8 28.1 27.6 28.5

R etained earnings (41,758) 508,501 (28,608) 314,596 355,475 Payable days 2.2 17.0 24.8 19.4 19.4

R estated net pro f it : Cash operating cycle (days) 41 18 22 27 28

Recurrent net profit (excl. excep & adjs) 434,120 1,099,140 1,276,678 1,695,305 1,917,166 R isk measures

Fully-diluted net profit 434,120 1,099,140 1,276,678 1,695,305 1,917,166 Dividend cover (x) 0.9 1.9 1.0 1.2 1.2

Payout ratio (%) 109.8 53.8 102.3 81.4 81.5

C ashflo w (EGP tho usands) Net interest cover (x) nm nm nm nm nm

P re-tax pro f it 548,024 1,446,624 1,583,908 2,145,784 2,442,424 Net debt/equity (incl M I) (%) nm nm nm nm nm

- associates' profits 0 0 0 0 0 Net debt/equity (excl M I) (%) nm nm nm nm nm

+ associates' dividends 0 0 0 0 0 R eturns

+ depreciation/amortization 82,205 79,369 81,038 82,254 83,487 Return on avg cap employed (%) 16.4 37.4 37.9 39.6 40.0

- tax paid (113,259) (346,780) (306,526) (450,479) (525,258) WACC (%) 19.5 19.5 19.5 19.5 19.5

+ increase (-decrease) in provisions (1,232) (12,500) 0 0 0 Return on avg equity (excl M I) (%) 17.7 40.3 34.5 35.7 35.5

- (profit)/+loss on disposal o f FAs 0 0 0 0 0 Company cost o f equity (%) 21.8 21.8 21.8 21.8 21.8

+/- o thers 0 0 0 0 0

Gro ss cash f lo w 515,739 1,166,713 1,358,420 1,777,558 2,000,653 SH A R E D A T A / VA LUA T ION

- capital expenditure 2,790 (12,353) (31,370) (31,989) (32,468) Share data

(Incr)/decr in working capital 21,096 287,892 (1,121,774) (126,157) (142,668) Issued shares (m) 86.1 86.1 1,291.5 1,291.5 1,291.5

F ree cash f lo w 539,625 1,442,252 205,276 1,619,413 1,825,517 Weighted avg shares (m) 86.1 86.1 1,291.5 1,291.5 1,291.5

Other inflows/ (outflows): Fully diluted shares (m) 86.1 86.1 1,291.5 1,291.5 1,291.5

- acq of subsids/other investments 0 0 0 0 0 Basic EPS - weighted avg (EGP) 5.06 12.78 0.98 1.30 1.47

+/- minority interests 0 0 0 0 0 YoY change (%) 28.0 152.8 (92.3) 32.8 13.1

- dividends paid (357,877) (444,035) (980,021) (1,035,532) (1,171,269) Fully diluted EPS (EGP) 5.06 12.78 0.98 1.30 1.47

+ proceeds from share issues 0 0 0 0 0 YoY change (%) 28.0 152.8 (92.3) 32.8 13.1

+ proceeds from disp of FA/subsids 0 0 0 0 0 Recurring EPS - weighted avg (EGP) 5.06 12.78 0.98 1.30 1.47

+/- o thers (118,667) (86,814) 649,322 63,611 (178,041) YoY change (%) 28.0 152.8 (92.3) 32.8 13.1

N et cash f lo w 63,081 911,403 305,078 647,492 476,207 Gross DPS (EGP) 5.00 5.50 0.88 0.98 1.11

CFPS (EGP) 5.99 13.55 1.05 1.38 1.55

N et cash/ (debt) start 971,339 1,034,420 1,945,823 2,250,901 2,898,393 NBV/share (EGP) 28.33 35.07 3.40 3.96 4.39

N et cash / (debt) end 1,034,420 1,945,823 2,250,901 2,898,393 3,374,600 Valuat io n

PER (Basic) (x) 1.9 0.7 9.7 7.3 6.4

B alance sheet (EGP tho usands) PER (FD) (x) 1.9 0.7 9.7 7.3 6.4

Fixed assets 2,161,311 2,169,077 2,210,319 2,242,308 2,274,777 PER (Recurrent) (x) 1.9 0.7 9.7 7.3 6.4

Depreciation (1,047,847) (1,126,349) (1,207,387) (1,289,640) (1,373,127) P/CFPS (x) 1.6 0.7 9.0 6.9 6.1

N et f ixed assets 1,113,464 1,042,728 1,002,933 952,668 901,649 Price/Book value (x) 0.3 0.3 2.8 2.4 2.2

Long-term investments 931 931 977 1,026 1,077 Dividend yield (%) 52.6 57.9 9.2 10.3 11.6

Intangible assets 0 0 0 0 0 Basic EPS Cagr 2018e-2020f (%) nm G-PE (Basix) (x) nm

Lo ng-term assets 1,114,395 1,043,659 1,003,910 953,694 902,726 FD EPS Cagr 2018e-2020f (%) nm G-PE (FD) (x) nm

C urrent assets Recurrent EPS Cagr 2018e-2020f (%) nm G-PE (Recurrrent) (x) nm

Cash & cash equivalents 1,038,515 1,975,890 2,280,968 2,928,460 3,404,667 EV/EBITDA (x) 20.2 9.1 6.8 5.2 4.5

Receivables 166,548 541,425 600,408 661,400 709,782 EV/EBIT (x) 24.0 9.8 7.2 5.4 4.7

Inventory 288,235 702,797 721,592 769,008 857,118 EV/revenue (x) 2.4 1.1 0.9 0.9 0.8

Other non-cash assets 163,210 100,604 657,446 724,233 777,212 M arket cap/revenue (x) 2.8 1.3 1.1 1.0 0.9

T o tal current assets 1,656,507 3,320,717 4,260,414 5,083,101 5,748,779 Earnings yield (%) 53.1 134.4 10.4 13.8 15.6

C urrent liabilit ies

Current borrowings 4,095 30,067 30,067 30,067 30,067 PR OGR ESSIV E QU A R TER LY R ESU LTS SN A PSHOT FOR C U R R EN T Y EA R :FY 2 0 18

Payables 23,008 747,062 506,381 539,655 571,412 Qtly inco me statement (EGP m) 1Q 2Q 1H 3Q 9-mths

Other current liabilities 190,413 476,498 239,898 255,661 270,706 Turnover 3,529 nm nm nm nm

N et current assets/ ( liabilit ies) 1,438,991 2,067,090 3,484,069 4,257,718 4,876,594 Operating profit 451 nm nm nm nm

N et assets 2,553,386 3,110,749 4,487,979 5,211,412 5,779,320 Reported net profit 403 nm nm nm nm

Lo ng-term liabilit ies Basic EPS (EGP) 0.4 nm nm nm nm

Long-term debt 0 0 0 0 0 YoY Growth (%) 4 nm nm nm nm

Other LT liabilities 113,863 90,896 94,876 99,055 103,443

T o tal LT liabilit ies 113,863 90,896 94,876 99,055 103,443 OT H ER IN F OR M A T ION

Issued share capital 861,000 861,000 1,291,500 1,291,500 1,291,500 Top two major shareholders: 12-mth High/Low: EGP9.77-5.37

Reserves (incl prefs, t/stock etc) 1,142,851 1,058,304 1,236,261 1,539,344 1,882,154 1) A l Ahli Capital Holding Avg daily vo l (000): 1,994.5

Retained earnings 435,672 1,100,548 1,865,341 2,281,513 2,502,223 2) A lexandria Petro leum Co Latest results: 1QFY2018

Shareho lders' funds 2,439,523 3,019,852 4,393,103 5,112,357 5,675,877 Free float: 18.7 Next results: 2QFY2018

M inority interests 0 0 0 0 0 Reuters code: AM OC.CA M ajor business: Oil Refinery

C apital emplo yed 2,553,386 3,110,749 4,487,979 5,211,412 5,779,320 SOUR C ES: A OLB R esearch, C o mpany data

20



Recommendation Rating

Buy Hold Sell

Above 15% From 5% - 15% Below 5%

Disclaimer

This report is based on publicly available information. It is not intended as an offer to buy or

sell, nor is it a solicitation of an offer to buy or sell the securities mentioned. The

information and opinions in this report were prepared by the AOLB Research Department

from sources it believed to be reliable at the time of publication. AOLB accepts no liability

or legal responsibility for losses or damages incurred from the use of this publication or its

contents. AOLB has the right to change opinions expressed in this report without prior

notice.

21



Research Department

Sally Mikhail Mariam Wael

Senior - Equity Analyst Equity Analyst

[email protected] [email protected]

Micheal Armia

Head of Technical Analysis

[email protected]

Omar Hussein Reham Aboul Atta

Head of Retail Trading Head of Institutions desk


Moataz Ashmawy Laila Tarek El Ghawass

Managing Director Managing Director - Branches


Commercial Website: www.arabeyaonline.com

Trading Website: www.aolbeg.com

For more info, kindly contact us on our hotline 16225







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