Total cement sales (domestic + exports) declined 3.3% y-o-y in the first half of 2019 (1H19). While June sales volume grew 4.5% y-o-y, we think this is primarily due to Ramadan impact. Average selling prices remained almost flat in the second quarter of 2019 (2Q19), a trend we expect to continue throughout the fiscal year (FY) 2019. Average sector utilization rates in June recorded 52% compounding pressure on players and selling prices.
Pharos Research view cement demand has to grow by roughly 47% for sector dynamics to materially improve (implying 85% utilisation rate) which is far-fetched in the short term. That said, we believe that current dynamics will drive inefficient and highly leveraged players out of the market (north of 6m tonnes could forcefully exit the market in the coming 12 months). Nevertheless, we believe that current market prices are extremely attractive from the perspective of long-term investors. Accordingly, we like companies that operate towards the lower end of the cash cost curve such as Arabian Cement Company (ARCC), cash rich companies such as Misr Beni Suef Cement (MBSC) and Suez Cement (SUCE) should the company succeed in unlocking the value of non-core assets. While we realize that South Valley Cement’s (SVCE) investment portfolio constitutes a large amount of its market cap, we remove it from our top picks due to its inefficiency.
ARCC: FX gains continue to offer respite
ARCC’s 2Q19 revenue recorded EGP 772m, up 6.1% y-o-y and down 6.7% q-o-q. The company’s 1Q19 GPM improved on a quarterly basis to 6.6% vs 5.3% in 1Q19 and 16.2% in 2Q18. While selling prices remained almost flat the improvement was driven entirely by a reduction in the cash cost/tonne and it should improve further when the solar power plant comes on stream in 4Q19. The company reported attributable net income of EGP 19m, thanks to booking an fx gain of EGP 26m during the quarter. If we mute this gain, attributable net loss came in at EGP 7.3m. ARCC is currently trading at FY19 P/E of 9.3x, EV/EBITDA of 3.8x, and EV/tonne of $26.
The company is currently focused on efficiency as evident by its investment in renewables to provide 4% of its electricity consumption.
SUCE: Tourah shutdown likely resulted in a sizable impairment
SUCE’s 2Q19 revenue reached EGP 1.514bn, down 17.6% y-o-y and 16.8% q-o-q. The sequential trend of gross loss extended recording a gross loss margin (GLM) of 2.5% versus a GLM of 1.4% in 1Q19. Bottom line came in as a loss of EGP 506.5m against a net profit amounting to EGP 213.1m in 1Q19. It is worth noting that the sale of Minya White Cement Plant contributed to the net profit generated in 1Q19 and the company could have possibly booked a sizable impairment on Tourah Shutdown in 2Q19 which had a value on the books of EGP 783m in 1Q19.
Pharos Research expects the gross loss trend to prolong and the bottom line to remain in negative territory unless the company managed to monetize Tourah land plot. Suez is currently trading at FY19 P/E of 1.2x, EV/EBITDA of 1.4x and EV/tonne of $9.
The company is currently focused on divestiture of non-core assets. The company has earlier divested its 0.3 mtpa white cement plant in Minya for roughly EGP 700m. The company received EGP 230m last year and received the rest in 1Q19.
Official Sources said that Suez Cement plans to either monetise Tourah’s land plot or consider other alternatives to unlock the land value.
The company is currently focused on improving efficiency across its cement plants.
The energy mix is currently 70-80%, 20% AF, and 2-3% HFO to heat the kilns post maintenance shut downs.