14-Aug-2017
Arabian Cement (Egypt) - 2Q17: High costs and low volumes hit results
Rating: Buy
Target Price: EGP10.00
Closing Price: EGP8.10
Recurring pre-tax loss for the first time, misses estimate
Arabian Cement (Egypt) reported weak 2Q17 results with a recurring pre-tax loss of EGP7mn driven by i) a significant increase in COGS (raw materials and transportation costs) and SG&A expenses; ii) a drop in revenue on weak local sales volumes, leading to large margin contraction; and iii) high net finance costs (+99% Y-o-Y) driven by the hike in interest rates. Reported earnings fell 90% and recurring earnings were down 93% Y-o-Y (excluding FX gain/loss, provisions, and other one-offs) to EGP9mn (80% below our estimate). Earnings were supported by tax adjustments recognised in the current period related to the prior’s year tax, resulting in a net reversal of EGP17mn. We will revisit our forecasts and valuation to reflect the weak 2Q17 results.
Technical issue negatively impacted volumes in 2Q17; resilience to price increase remains
Revenue fell 6% Y-o-Y in 2Q17 to EGP541mn (in line with our estimate), attributed to a 9% Y-o-Y drop in sales volumes while selling prices inched-up 4% Y-o-Y. The Y-o-Y drop in sales volumes in 2Q17 was negatively impacted by a technical issue in April (sales volumes in April dropped 21% Y-o-Y) leading to a 16% Y-o-Y drop in local sales, while exports hit 62k tonnes in 2Q17 versus no exports in 2Q16 (7% of 2Q17 sales). Total Egyptian local sales volumes fell 8% Y-o-Y in 2Q17, or a drop of 6% Y-o-Y if we include export activities.
Margin compression on hike in energy costs
Gross profit (excluding depreciation) dropped 58% Y-o-Y (-36% vs EFGe) due to a significant increase in COGS (+34% Y-o-Y) on i) higher raw materials costs (+32% Y-o-Y) impacted by increased coal costs Y-o-Y (higher prices plus devaluation impact), as well as more usage of high cost diesel at the expense of low cost RDF during the quarter; and ii) high transportation costs. EBITDA fell even further (-66%) due to an increase in SG&A expenses (+46%), SG&A-to-sales ratio went up to 5% versus 3% in 2Q16. Hence, the gross profit margin was down 24pp Y-o-Y to 19.5% and EBITDA margin contracted 26pp Y-o-Y to 15% (-12pp vs EFGe).
Tarek El-Shawarby
Target Price: EGP10.00
Closing Price: EGP8.10
Recurring pre-tax loss for the first time, misses estimate
Arabian Cement (Egypt) reported weak 2Q17 results with a recurring pre-tax loss of EGP7mn driven by i) a significant increase in COGS (raw materials and transportation costs) and SG&A expenses; ii) a drop in revenue on weak local sales volumes, leading to large margin contraction; and iii) high net finance costs (+99% Y-o-Y) driven by the hike in interest rates. Reported earnings fell 90% and recurring earnings were down 93% Y-o-Y (excluding FX gain/loss, provisions, and other one-offs) to EGP9mn (80% below our estimate). Earnings were supported by tax adjustments recognised in the current period related to the prior’s year tax, resulting in a net reversal of EGP17mn. We will revisit our forecasts and valuation to reflect the weak 2Q17 results.
Technical issue negatively impacted volumes in 2Q17; resilience to price increase remains
Revenue fell 6% Y-o-Y in 2Q17 to EGP541mn (in line with our estimate), attributed to a 9% Y-o-Y drop in sales volumes while selling prices inched-up 4% Y-o-Y. The Y-o-Y drop in sales volumes in 2Q17 was negatively impacted by a technical issue in April (sales volumes in April dropped 21% Y-o-Y) leading to a 16% Y-o-Y drop in local sales, while exports hit 62k tonnes in 2Q17 versus no exports in 2Q16 (7% of 2Q17 sales). Total Egyptian local sales volumes fell 8% Y-o-Y in 2Q17, or a drop of 6% Y-o-Y if we include export activities.
Margin compression on hike in energy costs
Gross profit (excluding depreciation) dropped 58% Y-o-Y (-36% vs EFGe) due to a significant increase in COGS (+34% Y-o-Y) on i) higher raw materials costs (+32% Y-o-Y) impacted by increased coal costs Y-o-Y (higher prices plus devaluation impact), as well as more usage of high cost diesel at the expense of low cost RDF during the quarter; and ii) high transportation costs. EBITDA fell even further (-66%) due to an increase in SG&A expenses (+46%), SG&A-to-sales ratio went up to 5% versus 3% in 2Q16. Hence, the gross profit margin was down 24pp Y-o-Y to 19.5% and EBITDA margin contracted 26pp Y-o-Y to 15% (-12pp vs EFGe).
Tarek El-Shawarby