misr cement qena - re initiation of coverage - march 2016

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PRIME INVESTMENT RESEARCH MISR CEMENT QENA – RE - INITIATION OF COVERAGE

MARCH 30, 2016

Despite being one of the most profitable cement companies in Egypt, Misr Cement Qena was affected by the stalling cement demand and higher supply, which resulted in lower cement selling prices. However, we have a positive outlook for Misr Cement Qena. This positive view is supported by: 1- The Company’s solid performance. 2- Migration to use coal and RDF as sources of energy. 3- The acquisition of Asec Minya Cement in November 2015 by Misr Cement Qena.

We Re-Initiate our coverage for Misr Cement Qena with a “BUY” rating; with an upside potential of 45% driven from a Fair Value of EGP 106.7/share. We valued Misr Cement Qena using a Sum of Parts (SOPT) valuation methodology. We valued Misr Cement Qena and Asec Minya using a DCF valuation method utilizing an average WACC over our forecasted period of 14.9%, a risk free rate of 11.46%, an equity risk premium of 8% and a perpetual growth rate of 3%. We assigned MCQE a beta of 0.65 which is higher than the company’s statistical beta, since we believe the statistical beta does not reflect the real systematic risk of the industry. Moreover, we valued Asec Concrete based on the acquisition price of the company. MCQ acquired 55% of Asec Concrete’s shares with a total value of EGP 69.8mn, which we used as an indicator to the total value of the company.

A Strong financial position. The firm used to record solid margins supported by a low operating cost structure, professional management and a very efficient production line that that might pass 100% utilization rate. Although, the company’s solid margins were trammeled in 2015 by two main barriers: 1- The increasing cost of energy. 2- And falling prices, MCQ maintained its strong profitability relative to its peers in FY2015.

Company Equity Value Ownership Contribution

Misr Cement Qena 2,138,824 100% 2,138,824

Asec Concrete 126,957 100% 126,957

Asec Minya Cement 1,526,189 60% 921,360

EV 3,188,803

No. of Shares 29,878

Fair Value 106.7

Key Highlights (as of FY2015) MCQE ARCC SVCE SUCE SCEM

Sales EGP Mn 1,096 2,273 875 5,643 975 GPM 36% 32% 33% 16% 21%

EBIT Margin 29% 20% 12% -3% -4% Net Profit (Loss) Margin 24% 12% 10% -1% -4%

P/B 2.61x 2.05x 0.52x 0.43x 1.2x P/E 8.24x 9.90x 20.1x NA NA

EPS EGP 8.91 0.73 0.18 (0.33) (0.57) DPS EGP 3 0.53 0 1 0

*SVCE represents estimated values

MISR CEMENT QENA … HIGH DIVIDENDS PAYOUT RATIO ACQUISITION BOLSTERS PROFITABILITY … WHILE TUMBLING PRICES PRESSURE IT

Stock Data Outstanding Shares [in mn] 29.9 Mkt. Cap [in mn] 2,156.6 Bloomberg – Reuters MCQE EY / MCQE.CA 52-WEEKS EGP 70 – EGP 89.4 TURNOVER (1-YR DAILY AVERAGE) EGP 3.5MN

Ownership Misr Insurance 12% Egyptian company for investments 10% Kuwaiti – Egyptian Investment 10% Misr Life Insurance 9% Others 59% Free Float 24%

Financial Highlights

EGP mn 2014 2015 2016F 2017F Revenues 1,150 1,096 2,391 2,490 GPM (%) 46% 36% 38% 44% EBITDA 482 355 770 948

N.Income 313 266 287 410 Source: Misr Cement Qena, Prime Estimates All prices are as of 29 March 2016

Source: Bloomberg

0

20

40

60

80

100

MCQE EGX - Rebased

“BUY” MARKET PRICE EGP 73.4 FAIR VALUE EGP 106.7 POTENTIAL 45% UPSIDE

INVESTMENT GRADE “VALUE”

Company Profile

Misr Cement Qena (MCQE.CA) was founded in May 25th 1997 as a shareholding company to produce and sell cement and other construction products. In May 2000, MCQE had its shares listed in EGX. The company’s current authorized capital is EGP 600mn with an issued and paid-in capital of EGP 298.78mn and a par value of EGP 10/Share.

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MARCH 30, 2016

MCQ SALES VOLUME & UTILIZATION MCQ COGS & COGS/SALES

SOURCE: MCQ & PRIME ESTIMATES

MCQ used to adopt consistent dividends payout policy because of the company’s ability to generate profit and its solid margins. MCQ announced dividends of EGP 16/share for the FY2010, however, this rate started to decline after 25th January revolution reaching dividends of EGP 3/share for the FY2015. In our opinion, once MCQ reap the benefits of the acquisition of Asec Minya, it will increase its dividends per share to reach EGP 16/share by FY2020.

Asec Minya Cement Acquisition Sparks Growth. In November 2015, MCQ acquired 46.5% of shares of Asec Minya Cement, in addition to the 13.9% that was already held by MCQ, and 55% of shares in Asec Concrete for EGP 1bn. We believe this acquisition will have a positive effect on MCQ group and enhance profitability, in addition to double its market share to be around 8% of the total market.

Misr Cement Qena Synopsis

In 2015, MCQ reported sales revenue of EGP 1.09bn compared to EGP 1.15bn in FY2014. Although MCQ increased its sales volume in FY2015 by 3% compared to FY2014, the drop in selling prices in the FY2015 resulted in relatively lower sales revenue by around 5%. Moreover, COGS have also increased by around 13% to be EGP 704mn in FY2015 compared to EGP 624mn in FY2014. The unavailability of HFO through the governmental sources pushed MCQ to seek HFO from other sources at a higher cost compared to the official one; this led to an increase of around 12% in the cost of HFO over the whole year. Hence, gross profit margin dropped to 36% in FY2015, from 46% in FY2014. Net income recorded EGP 266mn during FY2015, lower than FY2014 EGP 313mn by 15%. MCQ is one of the most efficient cement producers in Egypt in utilizing its production capacity, however, with cement oversupply hitting the country, we expect MCQ to cross the 100% utilization rate in the last two years of our forecast horizon after the country reach equilibrium in cement demand and supply, in our opinion. Misr Cement Qena is fully dependent on Heavy Fuel Oil (HFO) from governmental entities and third parties, its dependency on HFO provided a shield for the firm against the shortage of Natural gas supply in the past few years. Noteworthy, the company had a plan to invest EGP 200mn in a natural gas pipe line to substitute HFO as a source of energy, however, the company’s management preferred to postpone this investment because of the fears of the NG supply shortage, and then it was canceled after the decision to migrate to coal as a source of energy. MCQ plans to migrate to coal as a main source of energy starting 4Q 2016. In addition, MCQ invested in a Refused Derived Fuel to use with coal to substitute HFO. Using a mix of coal and RDF to substitute HFO will save, on average, EGP 80-100/ton, which will enhance profitability margins for the company. Once MCQ converge to coal and RDF in FY2017, we assumed an energy mix of coal 70%, RDF 20% and HFO 10% used in production.

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

DPS EGP 16 13.5 7 6 6 3.0 4.3 8.9 13.1 14.4 16.0

320

355 350

306 305314

320

54%

65%63%

55%54% 53% 53%

40%

45%

50%

55%

60%

65%

70%

280

290

300

310

320

330

340

350

360

2014 2015 2016 2017 2018 2019 2020

EGP

COGS/Ton COGS/sales

1,952 2,002

2,156 2,200 2,200

2,310 2,310 89%

98% 98%100% 100%

105% 105%

80%

85%

90%

95%

100%

105%

110%

1,700

1,800

1,900

2,000

2,100

2,200

2,300

2,400

2014 2015 2016 2017 2018 2019 2020

Thou

sand

EG

P

Sales Volume Qena Cement Utilization Qena

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ASEC SALES VOLUME & UTILIZATION ASEC COGS & COGS/SALES


MCQ CAPEX & CAPEX/SALES MCQ EBITDA & NET MARGINS


Asec Minya Cement Synopsis

Asec Minya Cement launched its operations in August 2013 with a cement production capacity of 2mtpa and an investment cost of USD 360mn. The plant is located in Al Minya, Upper Egypt. The company is selling two types of products: 1- Ordinary Portland Cement (OPC). 2- Sulfate Resistance Cement (SRC). Asec Cement depends on HFO as the main source of energy. A coal mill is under construction currently in order to replace HFO. In addition, there is also an NG pipe line under construction that is expected to be completed in FY2016. However, MCQ plans to depend on coal as the main source of energy. Using coal in Asec’s plant is expected to save around EGP100 – 110/ton, hence, reducing costs of production. Asec Minya is expected to migrate to coal by 3Q 2016. In addition, the company is suffering from not being connected to the Electricity National Grid which resulted in higher costs of electricity; however, MCQ plans to connect Asec Minya to the National Grid within FY2016. Furthermore, we see Asec Minya as the new story in MCQ.

1,887 1,915

2,090

2,200 2,200

2,310 2,310

85%

95% 95%

100% 100%

105% 105%

80%

85%

90%

95%

100%

105%

110%

1,700

1,800

1,900

2,000

2,100

2,200

2,300

2,400

2014 2015 2016 2017 2018 2019 2020

Thou

sand

EG

P

Sales Volume Asec Cement Utilization Asec

387 385

353

333326

339351

62%

68%

62%58%

56% 56% 57%

0%

10%

20%

30%

40%

50%

60%

70%

80%

290

300

310

320

330

340

350

360

370

380

390

400

2014 2015 2016 2017 2018 2019 2020

EGP

COGS/Ton Total COGS

0.8%

9.7%

20.5%

0.4% 0.4% 0.5% 0.5%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

2014 2015 2016 2017 2018 2019 2020

Thou

sand

EG

P

Capex Capex/Sales

42%

32% 34%

42% 43% 43% 43%

27%24%

17%

23% 24% 26% 28%

0%

10%

20%

30%

40%

50%

60%

2014 2015 2016 2017 2018 2019 2020EBITDA Margin Net Profit Margin

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ASEC CAPEX & CAPEX/SALES ASEC EBITDA & NET MARGINS


CEMENT SELLING PRICE


Despite of the company’s strong cost structure, MCQ suffers from low selling prices compared to other cement firms, due to its location. The company mainly targets upper Egypt region, and since it is located in Qena, it has low transportation and freight cost and hence, it sells at a lower cost than the average market selling price. Since MCQ is selling cement in a discount to the average market prices, the drop in cement selling prices in the country had an aggressive affect on the company. We expect the company to sell its products at the same discount to the average market prices, as we expect it to still target Upper Egypt region for the foreseeable future. On the other hand, Asec Minya is selling in a premium to MCQ because; 1- Asec Minya does not only targets Upper Egypt, but also sometimes targets Cairo and neighbor cities. 2- In addition to producing and selling ordinary Portland cement (ORC), it also produces and sells sulfate resistance cement (SRC) which is sold at higher prices than ORC.

Upside Risk Downside Risk 1) The current increases in cement selling prices in 1Q 2016 to persist through the year.

1) Further devaluation of the EGP against USD increasing cost of coal.

2) A more rapid recovery in demand for cement than we expected.

2) Setting an increased carbon tax on coal which would affect the Energy cost.

3) Reaping benefits of Asec Minya faster than expected. 3) FX risk affecting coal imports. 4) Lower demand in Upper Egypt leading to lower

utilization than expected.

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100

200

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400

500

600

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800

2012 2013 2014 2015 2016 2017 2018 2019 2020

EGP

Average Market Price MCQE Asec Minya

7.2%

-0.4%0.5% 0.5% 0.5% 0.4%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

-20,000

0

20,000

40,000

60,000

80,000

100,000

120,000

2014 2015 2016 2017 2018 2019

Thou

sand

EG

P

Capex Capex/Sales

31%

21%

30%

34%37% 36% 36%

14%

2%

11%

17%20%

22%24%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2014 2015 2016 2017 2018 2019 2020

EBITDA Margin Net Profit Margin

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MARCH 30, 2016

Income Statement 2013a 2014a 2015a 2016f 2017f Revenue 956 1,151 1,096 2,391 2,491 Growth 28.1% 20.4% -4.8% 118.2% 4.2% COGS 548 624 704 1,492 1,405

S,G & Admin. Expenses -9 -12 -14 -44 -47 EBITDA 377 482 355 770 948 Growth 6.7% 27.7% -26.3% 116.8% 23.2%

EBITDA Margin 39% 42% 32% 32% 38% Depreciation & Amortization 41 42 42 100 121

EBIT 336 440 313 670 828 Interest Expense 0 0 14 256 213 Pre Tax Income 345 460 330 437 638

Income Tax 89 139 64 97 143 Effective Tax Rate 26% 30% 19% 22% 23%

Net Income 271 313 266 287 410 Growth -15.6% 15.3% -14.9% 7.9% 42.6%

NPM 28.4% 27.2% 24.3% 12.0% 16.5%

Key Highlights 2013a 2014a 2015a 2016f 2017f

EBITDA margin 39% 42% 32% 32% 38%

EPS (EGP) 9.1 10.5 8.9 9.6 13.7

EPS Growth 15.6% 15.3% -14.9% 7.9% 42.6%

DPS (EGP) 5.8 6.0 3.0 4.3 9.0

BVPS (EGP) 21.2 24.3 28.1 38.7 51.9

P/E x 8.08 7.01 8.24 7.63 5.35

Dividend Yield 8% 8% 4% 6% 12%

P/Book x 3.46 3.02 2.61 1.89 1.41

Balance Sheet 2013a 2014a 2015a 2016f 2017f Cash & Marketable Securities 315 482 298 372 560

Trade Receivables-Net 6 5 7 6 7 Inventory 87 93 80 299 286

Total Current Asset 457 621 481 968 1,159 Net Fixed Assets 391 352 320 1,856 2,168

Projects Under Implementation 2 8 105 423 0

Total Assets 989 1,134 2,081 4,611 4,692 Short Term Bank Debt 0 0 0 137 153

Total Current Liabilities 204 266 267 910 906 Long-Term Debt 0 0 850 1,397 1,090

Provisions 151 143 125 159 158 Total Shareholders' Equity 634 725 839 1,158 1,550

Total Liab.& Shareholders' Equity 989 1,134 2,081 3,646 3,727

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MARCH 30, 2016

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MARCH 30, 2016

PRIME SALES TEAM

Hassan Samir Managing Director +202 3300 5611 [email protected]

Mohamed Ezzat Head of Sales & Branches +202 3300 5784 [email protected]

Shawkat Raslan Heliopolis Branch Manager +202 3300 5110 [email protected]

Amr Saber Team Head-Institutions Desk +202 3300 5659 [email protected]

Amr Alaa, CFTe Manager +202 3300 5609 [email protected]

Mohamed Elmetwaly Manager +202 3300 5610 [email protected]

Emad Elsafoury Manager +202 3300 5624 [email protected]

RESEARCH TEAM

* [email protected]

+202 3300 5728

HEAD OFFICE PRIME SECURITIES S.A.E. 2 Wadi El Nil St., Liberty Tower, 7th-8th Floor, Mohandessin, Giza, Egypt Tel: +202 33005700/770/650/649 Fax: +202 3760 7543

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misr cement qena - re initiation of coverage - march 2016

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