Arabian Cement (ARCC) reported its 2Q18 financial results, with earnings coming in at EGP50mn (+319% Y-o-Y, -69% Q-o-Q), below our forecast of EGP78mn. The earnings miss was driven by: i) lower-than-expected margins on higher-than-expected operating costs (avg. cash cost/tonne +5.4% Q-o-Q, +5% vs. EFGe); and ii) forex loss of EGP9mn (vs. forex gain of 4mn in 1Q18), which was not included in our forecast. Excluding the forex loss, earnings would have been EGP59mn, still 24% below our forecasts due to the weaker-than-expected margins. Revenues reached EGP736mn (+35% Q-o-Q, -20% Y-o-Y) and were in line with EFGe (-1%), as local sales volumes and prices were in line with EFGe. Cement prices softened during the quarter and were languishing at EGP744/tonne (+25% Y-o-Y, -8% Q-o-Q), partly due to seasonally weak demand and as the new Army cement capacity came on line during the quarter. 
 
Our take on the results: While margins were a bit of a disappointment, we are encouraged that there were no negative surprises on the local volume front, despite new capacity coming online in the market. Going forward, we expect cement sales to pick up in 2H18 following the end of a seasonally weak 2Q (Ramadan), but we expect the margin pressure is likely to be sustained, as prices, while stable, are unlikely to improve in the short term, given the oversupply in the market. As such, we still believe the sector will witness some challenges, and we believe it will take time for the market to rebalance following the substantial capacity added by the army (c12-13mtpa). With that said, ARCC is still our preferred pick in the Egyptian cement space, and we maintain our Buy rating on the name, with the stock trading at compelling valuations of: i) EV of only USD42/t (vs. considerably higher Greenfield and Brownfield costs); and ii) a P/E multiple slightly above 6x.

Arabian Cement (Egypt): EGP6.69 as of 12 Aug. 2018, Rating: Buy, TP: EGP12.00/share, MCap: USD142mn, ARCC EY/ARCC.CA

Sameer Kattiparambil
Ahmed Hazem Maher