• Recurring earnings surge 91% Y-o-Y, in line Arabian Cement Company’s (ACC) 2Q16 consolidated recurring earnings (excluding FX and deferred tax) grew 91% Y-o-Y to EGP137mn, (in line with our estimate). The recurring earnings growth was driven by a robust margin improvement and 40% drop in net interest expenses. Reported net profit was up 62% Y-o-Y to EGP109mn. We forecast 2016 recurring pre-tax earnings to grow 17% Y-o-Y on: i) 4% revenue growth (price +3%, volume +1.5%); and ii) EBITDA margin expansion of 120 bps to c31%. We will review our 2016e EBITDA margin as there may be potential upside to our 2H16 forecast and to reflect the expected increase in sector capacity in the medium term, which we believe will have a negative impact on prices.
• Modest revenue growth on slight price increase, in line Revenue inched up 3% Y-o-Y in 2Q16 to EGP574mn. This was driven by a modest increase in the avg. ex-factory price of 3% to EGP590/tonne (vs. EGP542 in 1Q16), as volumes were flat Y-o-Y at 973k tonnes. Local sales volumes were flat Y-o-Y as well in 2Q16 mainly driven by a drop in June (-9% Y-o-Y) due to Ramadan, hence ACC was able to maintain its market share in 2Q16 at c7.5%. ACC aims to maintain its strategy of focusing on profitability, but expects to increase its market share in 2H16.
• Solid margin improvement due to non-reliance on imported clinker Gross profit rose 32% Y-o-Y (in line) as its gross margin expanded 9.7pp to 43% (-2.0pp vs. our estimate), driven by lower CoGS (-12%) due to non-reliance on imported clinker, better energy mix, and reduced transportation costs versus 2Q15 that also mitigated the increase in its fuel bill due to EGP devaluation. EBITDA rose 36% (in line) as SG&A was flat Y-o-Y, and EBITDA margin improved 9.7pp to 40% (-1.6pp vs. our estimate). We believe ACC should see a lower cost increase than the industry average in 2016 post EGP devaluation as it pays less for its fuel versus competitors who have not shifted to coal and due to better efficiency. At end-2Q16 the energy mix for ACC was 74% coal, 16% diesel, and 10% alternative fuel (RDF).

Tarek El-Shawarby
Wafaa Baddour, CFA