South Valley Cement has finally reported its 1Q17 financial results, showing earnings of EGP20mn (vs. profit of EGP43mn in 1Q16, -48% Q-o-Q). The results came in below our expectation of EGP37mn, mainly on higher-than-expected COGS that were inflated by i) higher-than-expected raw material costs, only heavy fuel oil prices were fixed by the government at the time at cEGP2.3k/tonne; and ii) higher-than-expected electricity charges (cEGP17mn vs EFGe of EGP15mn, +54% Y-o-Y). Operationally, revenues came in at EGP262mn (+3% Y-o-Y, -8% Q-o-Q), in line with our estimates for EGP262mn, as we had assumed that the plant would be running at full rates. Interestingly though, the company did manage to cut back on its SG&A charges and shaved off 180 bps in SG&A/revenues; we believed SVCE to be paying one of the highest marketing fees in the sector. Below the operating line, the drawdown of debt facilities to finance the establishment of the coal conversion needs also led to interest charges of EGP13mn (vs. cEGP2mn in 1Q16), which amplified bottom line pressure.  
 
Overall, we think that margins will likely remain under pressure until the company is able to i) fully pass on the higher costs; and/or ii) fully convert to coal, which will allow the company to regulate its costs. With another wave aimed at easing the energy subsidy bill (especially on fuel oil that feeds SVCE's plant), We think that higher fuel oil prices would lead to a cEGP100-120/tonne and would likely cause another round of margin compression (we are already assuming full liberalisation of fuel oil by 2018). At its current price, we believe SVCE stock is trading at an unjustifiably low EV multiple of cUSD28/tonne and assigning nearly no value to the SVCE's 47% stake in BMIC or the EGP1.4bn investment book; hence, we remain Buyers of the name.

South Valley Cement: EGP4.24 as of 09 Jul 2017, Rating: Buy, TP: EGP7.00/share, MCap: USD115mn, SVCE EY/SVCE.CA