• Cut FV to reflect weak 2015 results, EGP weakness; trades at discount We cut our FV to EGP13 due to: i) +150 bps in CoE on rising RFR; ii) terminal EBITDA margin down 3.6pp to 30% on weaker than expected 2015 margin and EGP weakness impact on fuel cost; and iii) EGP70mn FX loss on USD debt in 2016e and EGP32mn in 2017e; USD debt was USD64mn in 2015. Our FV implies 52% upside (share price -13% YTD versus +13% for HFI); hence, we reiterate our Buy rating. It trades at a 2016e P/E of 11x, below global peers (12x), despite superior profitability. We expect costs to rise less than the industry average on the back of devaluation as: i) it pays cUSD4.5/ mmBtu for coal (devaluation adds cEGP20/tonne), while cement players who did not shift to coal pay USD8/mmBtu (up cEGP35-45/tonne); and ii) more efficient as it uses c3.5mmBtu/tonne versus 4-5 for less-efficient peers.
• Strong demand growth and rising prices expected in 2016 We expect demand to rise 8% Y-o-Y in 2016 (5% in 2015), due to residential projects and infrastructure; the first two months of 2016 saw 20% Y-o-Y growth (partly due to base effect on weak Jan 2015). Better demand and rising energy costs in EGP terms supported a recent rise in market prices; we expect ACC’s ex-factory price to inch-up 3% in 2016 (vs -12% in 2015). We expect announced expansions to add 8.5 mn tonnes to industry capacity by 2018 with utilisation up to 88% by 2018. Govt. stated earlier this year it is offering 14 new licences in anticipation of rising demand; bids should be sent in by 2Q16, but a few companies have stated they will not apply, incl. ACC.
• Solid clean earnings growth in 2016 on improved revenue and margins We expect 2016 pre-tax recurring earnings (ex-provisions, FX loss) to rise 17% on: i) 4% revenue growth (price +3%, volume +1.5%); and ii) EBITDA margin up 120 bps to c31% on non-reliance on imported clinker, mitigating the fuel bill rise (+19% Y-o-Y) due to devaluation. We expect an FX loss of EGP70mn to limit earnings growth to 6%. We assume ACC will utilise c100% capacity by 2019 (4%-volume CAGR). Prices should rise as demand improves, but modestly given the completion of the industry shift to coal in 2016-17, which will increase supply and excess capacity regionally. We assume a dividend pay-out of c70% for 2016-17, implying an average yield of c7%.

Tarek El-Shawarby
Wafaa Baddour, CFA