cement sector note - september 2016
TRANSCRIPT
PRIME INVESTMENT RESEARCH AUTOMOTIVE |EGYPT
GB AUTO – INITIATION OF COVERAGE JANUARY, 14TH
2016
PRIME INVESTMENT RESEARCH
BUILDING MATERIALS |EGYPT CEMENT SECTOR NOTE
19TH SEPTEMBER, 2016
EGYPT’S TROUBLED ECONOMY WEIGHS ON
LOCAL CEMENT INDUSTRY.
SKEPTICAL CEMENT DEMAND GROWTH
EXPECTATIONS, WITH A BLEAK OUTLOOK.
NEW CAPACITIES ENTRIES ARE EXPECTED TO
PUT PRICES IN A FREEFALL SITUATION.
ARC REAPS THE BENEFITS OF EARLY
MIGRATION TO COAL, WHILE MARGINS ARE
PRESSURED BY FX LOSSES.
MCQ’S ACQUISITION SPARKS GROWTH.
SUCE’S LOW LIQUIDITY BLUNTING STOCK’S
HIGH POTENTIAL.
SCEM’S BREAKTHROUGH IS NOT SEEN IN THE
HORIZON.
SVCE’S PLANS TO DOUBLE CAPACITY IS THE
MAIN CATALYST.
2
PRIME INVESTMENT RESEARCH CEMENT SECTOR NOTE
19TH SEPTEMBER, 2016
CEMENT SECTOR… A SUSPICIOUS OUTLOOK, TRIGGERED BY NEW CAPACITIES AND SLOWER DEMAND GROWTH…
Perilously slower demand growth rate... Local cement demand growth rate came perilously lower
in 1H2016 at 6%, y-o-y, compared to a growth rate of 9% in 1H2015, y-o-y. We believe this lower
growth rate came as a result of: 1- The rockiness of Egypt’s economy and the fluctuations in
exchange rate. 2- Lower growth rate of construction and building sector. 3- The seasonality effect
of Ramadan also dealt a setback in this lower growth rate. It is worthy to note that, the market’s
utilization rate reached 83% in 1Q2016, 72% in 2Q2016 and 80% in 1H2016.
… gives us a suspicious outlook over demand growth. We are less optimistic now over the growth
of local cement demand in the upcoming years. Although the fragility of the local economy and
the declining value of the EGP pushed investors to use real estate as a hedging tool in the past few
years, we expect the unprecedented spikes in real estate’s prices as a result of the continuous
hikes in building material’s prices, will make the majority of investors unable to afford investing in
real estate, therefore, we expect to see a lower growth rate in construction activity in the
upcoming years. As a result, we do not see cement demand booming in the coming period,
however, it will grow at lower rates. Subsequently, we expect the market to reach equilibrium
between supply and demand by 2020, compared to our previous expectations of reaching
equilibrium by 2018. Egypt’s cement market remained underutilized of 17mn tpa in 2015, as
demand recorded c53mn tons compared to a local capacity of 70mn ton in the same year.
FX crisis drags margins down. Although Local cement manufacturers depend on locally sourced
raw materials, many players have migrated to coal to use it as a source of energy, due to the
shortage of NG supply and the very expensive HFO, which is imported. The devaluation of the EGP
against the USD by 14% in March 2016, in addition to the unavailability of foreign currency
through official sources forcing coal importers to source FX from the parallel market, with a spread
of more than 40%, pushed us to consider parallel market rates in our valuation model.
Nevertheless, as the devaluation in March 2016 was followed by higher selling prices, we also
expect any further devaluation or floatation to be followed by hikes in cement selling prices,
especially after all manufacturers migrate to coal. And thus, our new exchange rates forecasts
were coupled with higher expected selling prices.
New capacities deepen the wounds of an already oversupplied industry. In our cement note
issued in February 2016, we expected the new 14 licenses offered by IDA to represent a major risk
for our valuation. This is still one of the main risks to our valuation, as the total market’s capacity
will reach 98mtpa, leading to a higher gap between supply and demand, especially after many
current and new players submitted offers for these licenses including South Valley Cement, Misr
Beni Suef Cement, El Sewedy Cement and others. Furthermore, Sinoma International Engineering
announced in mid-June 2016 that it has signed a contract with the Ministry of Defense to build six
cement production lines with the largest capacity locally estimated at 12-14mtpa in Beni Suef and
will probably be online by 2019. This represents a huge setback for local cement industry, as this
capacity will result in a total capacity of c82mn tpa, excluding new licenses. We opted to include
neither the new licenses capacities’ nor the Ministry’s of Defense project capacities’ in our
assumptions, as there is no official announcement yet. However, recent news from Industrial
Development Authority states that the bidding for the new cement licenses will start at EGP 120-
150mn and the bidding will be held in October. And hence, our forecast may be revised down
further.
Arabian Cement (ARCC)
FV EGP 9.3
Mkt Price EGP 6.2
Potential 50.0%
Recommendation Strong Buy
Daily Average Turnover EGP 4.0mn
Free Float 22.5%
Misr Cement Qena (MCQE)
FV EGP 84.2
Mkt Price EGP 80.6
Potential 4.5%
Recommendation Hold
Daily Average Turnover
EGP 1.1mn
Free Float 24.0%
Suez Cement (SUCE)
FV EGP 20.0
Mkt Price EGP 10.4
Potential 92.3%
Recommendation Strong Buy
Daily Average Turnover EGP 0.4mn
Free Float 29.4%
Sinai Cement (SCEM)
FV EGP 16.2
Mkt Price EGP 23.4
Potential -31%
Recommendation Sell
Daily Average Turnover EGP 0.1mn
Free Float 35.3%
South Valley Cement (SVCE)
FV Under Review
Mkt Price EGP 4.09
Potential -
Recommendation -
Daily Average Turnover EGP 3.1mn
Free Float 44.8%
3
PRIME INVESTMENT RESEARCH CEMENT SECTOR NOTE
19TH SEPTEMBER, 2016
CEMENT PRODUCTION AVG SELLING PRICE
SOURCE: IDA & PRIME RESEARCH
PRODUCTION & UTILIZATION RATE
Overall, we downgraded fair values for all covered cement companies due to;
1- Higher risk free rate, which crossed 16%.
2- New exchange rate assumptions.
3- Higher electricity prices.
4- Softer demand expectations.
5- We preferred to apply a 2% liquidity risk premium in valuation models for stocks with low turnover
namely; MCQ, SUCE and SCEM.
It is worthy to note that, if our expectations of 1% interest rate hike in the next MPC meeting materialized, we will
downgrade our fair value even further.
Company Name FV Last Price
Potential Recommendation
P/Ex EPS Dividend Yield P/BV
2015a 2016f 2015a 2016f 2015a 2016f 2015a 2016f
Arabian Cement
9.3 6.2 50% Strong Buy 8.49 8.26 0.73 0.75 5.56% 8.50% 1.71 1.66
Misr Cement Qena
84.2 80.6 4.5% Hold 9.05 9.07 8.91 8.88 3.72% 2.46% 2.87 2.73
Suez Cement 20.0 10.4 92.3% Strong Buy NA 17.05 -0.33 0.61 9.61% 1.47% 0.26 0.29
Sinai Cement 16.2 23.4 -31% Sell NA 55.71 -0.57 0.42 0.00% 4.27% 1.22 1.22
South Valley Cement
Under Review
4.1 - - 27.33 - 0.15 - 0.00% - 0.60 0.57
0
5000
10000
15000
20000
25000
30000
1Q 2Q 1H
Th
ou
san
d T
on
2014 2015 2016
0
100
200
300
400
500
600
700
800
1Q 2Q 1H
EG
P
2014 2015 2016
69%
70%
76%
73%
74%
76%
64%
66%
68%
70%
72%
74%
76%
78%
45000
46000
47000
48000
49000
50000
51000
52000
53000
54000
2010 2011 2012 2013 2014 2015
Th
ou
san
d T
on
Cement Production Utilization Rate
4
PRIME INVESTMENT RESEARCH CEMENT SECTOR NOTE
19TH SEPTEMBER, 2016
Arabian Cement, our top pick is crushed under risk free rate,
We downgraded ARC’s fair value to be EGP 9.3/share from the previous EGP 9.9/share, with an upside potential of
50% and a Strong Buy recommendation. This downgrade was mainly resulted from the very high risk free rate that
weighs on all equities through increasing cost of equity. However, we now expect a healthier energy mix for ARC than
before, as it was able to provide its facilities with the required coal despite of the consistent FX crisis in the local
market. On the other hand, we reduced our utilization rates expectations than before, as a result of the expected
slower demand growth in the upcoming years. Meanwhile, new EGP floatation expectations were partially
compensated by the expected price spikes. ARC announced that it will construct a new pet coal mill with an
investment cost of EGP 80mn. This, according to the company, should reduce the amount of coal imported by ARC
and hence reducing the amounts of foreign currency required to import coal. We believe this bodes well for ARC as it
will hedge, partially, the FX risk for the company through depending on local pet coal.
ARC’s KPIs Hist. Forecast
In EGP Mn 2015 2016F 2017F 2018F
Revenues 2,273 2,278 2,590 2,752
Change 0.2% 0.2% 13.7% 6.3%
Gross Profit 731 864 1,007 1,082
GPM 32.1% 37.9% 38.9% 39.3%
EBITDA 633 768 901 963
EBITDA Margin 27.8% 33.7% 34.8% 35.0%
Depreciation & Amortization 175 184 191 196
Net Income After Minority & Taxes 277 285 452 546
NPM 12.2% 12.5% 17.5% 19.8%
EPS 0.7 0.8 1.2 1.4
P/Ex 8.9 7.8 5.2 4.4
DPS 0.4 0.5 0.8 1.0
EV/Ton 912.7 895.7 838.8 691.8
Misr Cement Qena, Asec’s acquisition is the main catalyst,
Although standalone 1H2016 financial results came in line, we downgraded the fair value of MCQ to be EGP
84.2/share from EGP 102.5/share, with an upside potential of 4.5% and Hold recommendation. This downgrade
comes as a result of the aforementioned reasons, in addition to the less efficient energy mix used in Asec Cement.
Asec Cement showed a very high utilization rate in 1H2016, recording 120%. Hence, we opted to increase the
company’s utilization rates in the upcoming years above our previous expectations. We still see Asec’s acquisition by
MCQ represents a potential for the company, as we believed this acquisition will double both the market share and
the bottom line for MCQ on consolidated level, and 1H2016 consolidated results came to support our view. However,
liquidity is a major concern, as average daily traded volume one year back was 14 thousand shares only. This
pushed us to apply a 2% liquidity risk premium in our valuation model.
5
PRIME INVESTMENT RESEARCH CEMENT SECTOR NOTE
19TH SEPTEMBER, 2016
MCQ’s KPIs Hist. Forecast
In EGP Mn 2015 2016F 2017F 2018F
Revenues 1,096 2,592 2,698 2,848
Change -4.8% 136.5% 4.1% 5.6%
Gross Profit 392 884 1,093 1,219
GPM 35.8% 34.1% 40.5% 42.8%
EBITDA 355 732 941 1,056
EBITDA Margin 32.4% 28.3% 34.9% 37.1%
Depreciation & Amortization 42 100 121 121
Net Income After MI 266 265 388 489
NPM 24.3% 10.2% 14.4% 17.2%
EPS 8.9 8.9 13.0 16.4
P/Ex 9.1 9.1 6.2 4.9
DPS 3.0 4.3 9.0 13.2
EV/Ton 756.5 955.0 830.2 687.5
Suez Cement, high potential hindered by low liquidity,
Although we downgraded Suez cement’s fair value from EGP 24/share to be EGP 20/share, there is still a
considerable upside potential of 92.3% with a Strong Buy recommendation. However, the low liquidity of
the stock is a setback for reaping the benefits of this high potential, as its average daily traded volume
one year back was at 35 thousand shares. Tourah’s quarries issue with the government was solved by
2Q2016, paving the way for the company to increase its production in the same quarter, and hence
reducing fixed costs. In addition, the migration to coal in Suez’s two lines, Suez and Katameya,
strengthened the company’s margins on standalone basis. We also expect Tourah’s and Helwan’s coal
mills to come on stream by 2018, leading to healthier margins for Suez Group.
Suez’s KPIs Hist. Forecast
In EGP Mn 2015 2016F 2017F 2018F
Revenues 5,642 5,780 6,673 7,841
Change -8.3% 2.4% 15.5% 17.5%
Gross Profit 887 1,092 1,476 1,891
GPM 15.7% 18.9% 22.1% 24.1%
EBITDA 322 672 988 1,314
EBITDA Margin 5.7% 11.6% 14.8% 16.8%
Depreciation & Amortization 464 486 512 562
Net Income After MI -60 112 303 504
NPM -1.1% 1.9% 4.5% 6.4%
EPS -0.3 0.6 1.7 2.8
P/Ex NA 17.3 6.2 3.7
DPS 1.0 0.2 0.6 8.0
EV/Ton 210.9 251.6 204.6 121.9
6
PRIME INVESTMENT RESEARCH CEMENT SECTOR NOTE
19TH SEPTEMBER, 2016
Sinai Cement, troubled governance of Sinai weighs on margins,
We downgrade SCEM’s fair value to EGP 16.2/share with a downside potential of 31%, implying a Sell
recommendation. The company is suffering from high SG&A expenses due to its location in the troubled
governance of Sinai. Furthermore, the company’s energy mix was less efficient than our expectations;
subsequently, we opted to reduce energy mix efficiency in the upcoming years. Moreover, Sinai cement is
selling at a discount of c14% to the local average prices, which also weighs on the company’s gross profit
margin.
SCEM’s KPIs Hist. Forecast
In EGP Mn 2015 2016F 2017F 2018F
Revenues 975 1,237 1,322 1,531
Change -18.3% 26.8% 6.9% 15.8%
Gross Profit 203 399 489 598
GPM 20.8% 32.3% 37.0% 39.1%
EBITDA 49 167 246 321
EBITDA Margin 5.1% 13.5% 18.6% 20.9%
Depreciation & Amortization 89 103 105 107
Net Income After MI -39 29 65 139
NPM -4.0% 2.3% 4.9% 9.0%
EPS -0.6 0.4 1.0 2.0
P/Ex NA 58.5 23.4 11.7
DPS 0.0 1.0 1.0 1.0
EV/Ton 1,010 821 810 747
South valley Cement, doubling capacity bodes well for the company,
SVC is currently Under Review, as we are awaiting it to publish its 1H2016 results in order to analyze the effects of
the events in 1H2016 over its financial results. SVC applied for one of the new licenses issued by the government, in
order to construct new clinker silos to provide the new cement line with its required clinker. This bodes well for SVC,
as the company’s early plan was to rely on imported clinker, which its cost is significantly higher than the locally
produced clinker, to supply the new line. Therefore, we consider SVC’s application for the new licenses the main
catalyst for the stock.
In the next section we exhibit a comparative analysis, showing the performance of the companies under coverage
during 1H2016,
7
PRIME INVESTMENT RESEARCH CEMENT SECTOR NOTE
19TH SEPTEMBER, 2016
CEMENT PRODUCTION
SOURCE: IDA, COMPANIES & PRIME RESEARCH
SALES VOLUME
0
500
1000
1500
2000
2500
3000
3500
4000
4500
ARCC MCQE SUCE SCEM
Th
ou
san
d T
on
1Q2016
2Q2016
1H2016
0
500
1000
1500
2000
2500
3000
3500
4000
4500
ARCC MCQE SUCE SCEM
Th
ou
san
d T
on
1Q2016
2Q2016
1H2016
Supply softened in 2Q16,
Q-o-Q, as a result of the
holy month of Ramadan…
…this was reflected in
2Q16’s sales volume.
8
PRIME INVESTMENT RESEARCH CEMENT SECTOR NOTE
19TH SEPTEMBER, 2016
CLINKER PRODUCTION
UTILIZATION RATE
SOURCE: IDA, COMPANIES & PRME RESEARCH
SOURCE: IDA, COMPANIES & PRIME RESEARCH
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
ARCC MCQE SUCE SCEM
Th
ou
san
d T
on
1Q2016
2Q2016
1H2016
0%
20%
40%
60%
80%
100%
120%
140%
ARCC MCQE SUCE SCEM
1Q2016
2Q2016
1H2016
Only SCEM witnessed a
jump in clinker
production in 2Q16, Q-o-
Q.
MCQ witnessed the
highest utilization rate, as
a result of the jump in
Asec’s utilization rate,
that it recently acquired.
9
PRIME INVESTMENT RESEARCH CEMENT SECTOR NOTE
19TH SEPTEMBER, 2016
SALES VALUE
GROSS PROFIT
SOURCE: IDA, COMPANIES & PRIME RESEARCH
-
500
1,000
1,500
2,000
2,500
3,000
3,500
ARCC MCQE SUCE SCEM
EG
P M
n 1Q2016
2Q2016
1H2016
0
100
200
300
400
500
600
700
ARCC MCQE SUCE SCEM
EG
P M
n
1Q2016
2Q2016
1H2016
Selling price hikes in
2Q16, partially mitigated
for the drop in sales
volume.
Healthier gross profit in
Q216 comes as a result of
the spike in selling prices.
10
PRIME INVESTMENT RESEARCH CEMENT SECTOR NOTE
19TH SEPTEMBER, 2016
GROSS PROFIT MARGIN
SOURCE: IDA, COMPANIES & PRIME RESEARCH
EBITDA
-
50
100
150
200
250
300
350
400
450
ARCC MCQE SUCE SCEM
EG
P M
n 1Q2016
2Q2016
1H2016
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
ARCC MCQE SUCE SCEM
1Q2016
2Q2016
1H2016
ARC recorded the highest
GPM in 1H16, as it has
the most efficient energy
mix amongst the 4
companies.
High SG&A is one of the
main problems that Sinai
Cement faces, and it
weighs on the company’s
EBITDA…
11
PRIME INVESTMENT RESEARCH CEMENT SECTOR NOTE
19TH SEPTEMBER, 2016
EBITDA MARGIN
SOURCE: IDA, COMPANIES & PRIME RESEARCH
EBIT
50-
-
50
100
150
200
250
300
350
ARCC MCQE SUCE SCEM
EG
P M
n
1Q2016
2Q2016
1H2016
5%
10%
15%
20%
25%
30%
35%
40%
45%
ARCC MCQE SUCE SCEM
1Q2016
2Q2016
1H2016
… Leading to an almost
zero EBITDA margin in
1Q16 in SCEM.
Operating profit
improved in 2Q16, Q-o-Q,
for all companies.
12
PRIME INVESTMENT RESEARCH CEMENT SECTOR NOTE
19TH SEPTEMBER, 2016
EBIT MARGIN
NET INCOME
SOURCE: IDA, COMPANIES & PRIME RESEARCH
60-
40-
20-
-
20
40
60
80
100
120
140
160
ARCC MCQE SUCE SCEM
EG
P M
n
1Q2016
2Q2016
1H2016
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
ARCC MCQE SUCE SCEM
1Q2016
2Q2016
1H2016
An impressive jump in
SCEM’s EBIT margin in
2Q16, Q-o-Q.
The jump in interest
expenses and the high FX
losses, weighed on
companies bottom line.
13
PRIME INVESTMENT RESEARCH CEMENT SECTOR NOTE
19TH SEPTEMBER, 2016
NET PROFIT MARGIN
COGS/SALES
SOURCE: IDA, COMPANIES & PRIME RESEARCH
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
ARCC MCQE SUCE SCEM
1Q2016
2Q2016
1H2016
40%
45%
50%
55%
60%
65%
70%
75%
80%
85%
90%
ARCC MCQE SUCE SCEM
1Q2016
2Q2016
1H2016
MCQ’s NPM was heavily
crushed under the
interest expenses of the
new loan.
The higher selling price in
2Q16 resulted in a huge
drop in COGS/Sales in
1Q16, Q-o-Q.
14
PRIME INVESTMENT RESEARCH CEMENT SECTOR NOTE
19TH SEPTEMBER, 2016
EPS
PRICE/TON
SOURCE: IDA, COMPANIES & PRIME RESEARCH
(1.00)
-
1.00
2.00
3.00
4.00
5.00
ARCC MCQE SUCE SCEM
1Q2016
2Q2016
1H2016
MCQ recorded the
highest EPS in 1H16, as its
bottom line doubled on
consolidated level, due to
Asec acquisition.
MCQ is selling at a
premium to all companies
under coverage.
400
450
500
550
600
650
700
ARCC MCQE SUCE SCEM
EG
P 1Q2016
2Q2016
1H2016
15
PRIME INVESTMENT RESEARCH CEMENT SECTOR NOTE
19TH SEPTEMBER, 2016
SOURCE: IDA, COMPANIES & PRIME RESEARCH
COST/TON
ARC has reaped the
benefits of being a
pioneer in coal migration.
300
350
400
450
ARCC MCQE SUCE SCEM
EG
P 1Q2016
2Q2016
1H2016
16
PRIME INVESTMENT RESEARCH CEMENT SECTOR NOTE
19TH SEPTEMBER, 2016
Stock Recommendation Guidelines
Recommendation Target-to-Market Price (x)
Buy x > 15%
Accumulate 5%< x <15%
Hold -5% < x < 5%
Reduce -15% < x < -5%
Sell x < -15%
Strong Buy x > 40%
Investment Grade Explanation
Growth 3 Yr. Earnings CAGR > 20%
Value Equity Positioned Within Maturity Stage of Cycle
Speculative Quality Earnings Reflect Above Normal Risk Factor
17
PRIME INVESTMENT RESEARCH CEMENT SECTOR NOTE
19TH SEPTEMBER, 2016
PRIME SECURITIES
Hassan Samir Managing Director +202 3300 5611 [email protected]
RESEARCH TEAM
Aboubakr Emam, CFA Head of Research +202 3300 5724 [email protected]
Eman Negm, MSc Economist +202 3300 5716 [email protected]
Mohamed Marei Equity Analyst +202 3300 5725 [email protected]
Ali Afifi Equity Analyst +202 3300 5723 [email protected]
Omneya El Hammamy Equity Analyst +202 3300 5718 [email protected]
Ingy Fahmy Equity Analyst +202 3300 5722 [email protected]
Taher Seif Equity Analyst +202 3300 5719 [email protected]
Mohamed Magdi Junior Equity Analyst +202 3300 5720 [email protected]
SALES TEAM
Mohamed Ezzat Head of Sales & Branches +202 3300 5784 [email protected]
Shawkat Raslan Heliopolis Branch Manager +202 3300 5110 [email protected]
Amr Saber Team Head – Institutions Desk +202 3300 5659 [email protected]
Amr Alaa, CFTe Manager +202 3300 5609 [email protected]
Mohamed Elmetwaly Manager +202 3300 5610 [email protected]
Emad Elsafoury Manager +202 3300 5624 [email protected]
HEAD OFFICE
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