• Recurring pre-tax earnings up 4% Y-o-Y; reiterate Buy on valuation Arabian Cement Company’s (ACC) 1Q16 consolidated recurring earnings (excluding FX and deferred tax) grew 20% Y-o-Y to EGP112mn, (16% above our estimate). Recurring pre-tax earnings rose 4% Y-o-Y to EGP123mn, entirely due to better margins despite a softening in revenue. Reported net profit fell 40% Y-o-Y to EGP34mn on: i) EGP76mn FX loss on USD debt (debt of USD64mn in 2015) versus a loss of EGP31mn in 1Q15; and ii) lower income tax to reflect a standard tax rate of 22.5% in 1Q16 versus a 30% rate in 1Q15 (the 22.5% was applied later in 2015 retroactively). We reiterate our Buy rating as our FV implies 57% upside potential and as it is trading at only 10.8x 2016e P/E.
• Revenue decelerates on lower volume and price, in line Revenue inched down 6% Y-o-Y in 1Q16 to EGP552mn. This was driven by: i) 2% decrease in average ex-factory price to EGP542 per tonne; selling prices were very low in January but recovered by the end of the quarter due to higher demand, exceeding the EGP600 level; and ii) 5% decrease in sales volume to 1.02mn tonnes versus market growth of 13%, leading to a lower market share of 6.8% in 1Q16 versus 8.2% in 1Q15. ACC aims to maintain its strategy of prioritising profitability over volume.
• Solid margin improvement on non-reliance of imported clinker Gross profit inched-up 2% Y-o-Y (14% above our estimate), as its gross margin improved by 3.2pp to 37.7% (3.5pp above our estimate); driven by lower CoGS (-11% Y-o-Y) likely due to non-reliance on imported clinker that also mitigated the increased fuel bill due to EGP devaluation. EBITDA rose a further 4% (15% above our estimate) on lower SG&A (-10% Y-o-Y) due mainly to lower marketing expenses, and EBITDA margin rose 3.3pp Y-o-Y to 34.7% (3.6pp above our estimate). We reiterate our view that 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 also due to its better efficiency. At end-1Q16 the energy mix for ACC was 78% coal, 11% diesel, and 11% alternative fuel (RDF).

Tarek El-Shawarby
Wafaa Baddour, CFA