        Revenues – EGP826mn, +11% Y-o-Y, +2% Q-o-Q, +19% vs. EFGe
        EBITDA – EGP81mn, -43% Y-o-Y, +36% Q-o-Q, -8% vs. EFGe
        Net income – EGP17mn, -64% Y-o-Y, 8x Q-o-Q, 4.7x vs. EFGe
 
Arabian Cement (ARCC) reported its 4Q18 financial results, showing a substantial pick-up in earnings to EGP17mn (-64% Y-o-Y, 7.8x Q-o-Q) and beating our earnings estimates of EGP4mn. The beat was mainly due to: i) positive tax adjustments amounting to EGP36mn reported during the quarter; ii) provision reversal of EGP5mn; and iii) other income of EGP6mn vs. our EGP1mn forecast. Excluding the impact of the one-offs, ARCC would have reported net loss of EGP29mn. Operationally, revenue came in at EGP826mn (+11% Y-o-Y, +2% Q-o-Q) and 19% ahead of our estimates, on a mix of better-than-expected sales volumes for both local (-2% Y-o-Y, -1% Q-o-Q, +9% vs. EFGe) and export volumes (+84% Y-o-Y, +42% Q-o-Q, +70% vs. EFGe) and higher-than-expected local selling prices at EGP729/tonne (+8% Y-o-Y, flat Q-o-Q, +6% vs. EFGe). GP margin, on the other hand, eroded to only 4% vs. 16% in 4Q17, 7% in 3Q18, and EFGe of 8% as cash cost was higher than expected at EGP628/tonne (+22% Y-o-Y, +1% Q-o-Q, +7% vs. EFGe) and as export prices were well below our expectation (-19% vs. EFGe). The lower-than-expected margin was the main factor behind the operational miss (EBITDA -8% vs. EFGe).
 
Our take on the results: Despite the operational miss, we are positively surprised the company was able to maintain its local prices in line with the previous quarter despite the current challenging environment. In addition, export growth was stellar (+42% Q-o-Q), although pricing on this side was a bit of a disappointment. We believe the sector will continue to witness challenges in the short to medium term, post the substantial capacity additions in 2018 (13mtpa) and that some capacity will have to be removed from the market for it to rebalance. ARCC remains our preferred pick in the Egyptian cement market amidst the current difficult environment, and we remain Buyers of the name, given that it is trading at compelling valuations and management’s strong track record (2020 EV/tonne of only USD32, and EV/EBITDA of 4.6x).

Yousef Husseini, Dina Hicham
 
Arabian Cement (Egypt): EGP5.77 as of 27 Feb. 2019, Rating: Buy, TP: EGP9.00/share, MCap: USD125mn, ARCC EY/ARCC.CA