PRIME INVESTMENT RESEARCH AUTOMOTIVE |EGYPT GB AUTO – INITIATION OF COVERAGE JANUARY, 14 TH 2016 PRIME INVESTMENT RESEARCH BUILDING MATERIALS |EGYPT CEMENT SECTOR NOTE 19 TH SEPTEMBER, 2016 EGYPT’S TROUBLED ECONOMY WEIGHS ON LOCAL CEMENT INDUSTRY. SKEPTICAL CEMENT DEMAND GROWTH EXPECTATIONS, WITH A BLEAK OUTLOOK. NEW CAPACITIES ENTRIES ARE EXPECTED TO PUT PRICES IN A FREEFALL SITUATION. ARC REAPS THE BENEFITS OF EARLY MIGRATION TO COAL, WHILE MARGINS ARE PRESSURED BY FX LOSSES. MCQ’S ACQUISITION SPARKS GROWTH. SUCE’S LOW LIQUIDITY BLUNTING STOCK’S HIGH POTENTIAL. SCEM’S BREAKTHROUGH IS NOT SEEN IN THE HORIZON. SVCE’S PLANS TO DOUBLE CAPACITY IS THE MAIN CATALYST.
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PRIME INVESTMENT RESEARCH AUTOMOTIVE |EGYPT
GB AUTO – INITIATION OF COVERAGE JANUARY, 14TH
2016
PRIME INVESTMENT RESEARCH
BUILDING MATERIALS |EGYPT CEMENT SECTOR NOTE
19TH SEPTEMBER, 2016
EGYPT’S TROUBLED ECONOMY WEIGHS ON
LOCAL CEMENT INDUSTRY.
SKEPTICAL CEMENT DEMAND GROWTH
EXPECTATIONS, WITH A BLEAK OUTLOOK.
NEW CAPACITIES ENTRIES ARE EXPECTED TO
PUT PRICES IN A FREEFALL SITUATION.
ARC REAPS THE BENEFITS OF EARLY
MIGRATION TO COAL, WHILE MARGINS ARE
PRESSURED BY FX LOSSES.
MCQ’S ACQUISITION SPARKS GROWTH.
SUCE’S LOW LIQUIDITY BLUNTING STOCK’S
HIGH POTENTIAL.
SCEM’S BREAKTHROUGH IS NOT SEEN IN THE
HORIZON.
SVCE’S PLANS TO DOUBLE CAPACITY IS THE
MAIN CATALYST.
2
PRIME INVESTMENT RESEARCH CEMENT SECTOR NOTE
19TH SEPTEMBER, 2016
CEMENT SECTOR… A SUSPICIOUS OUTLOOK, TRIGGERED BY NEW CAPACITIES AND SLOWER DEMAND GROWTH…
Perilously slower demand growth rate... Local cement demand growth rate came perilously lower
in 1H2016 at 6%, y-o-y, compared to a growth rate of 9% in 1H2015, y-o-y. We believe this lower
growth rate came as a result of: 1- The rockiness of Egypt’s economy and the fluctuations in
exchange rate. 2- Lower growth rate of construction and building sector. 3- The seasonality effect
of Ramadan also dealt a setback in this lower growth rate. It is worthy to note that, the market’s
utilization rate reached 83% in 1Q2016, 72% in 2Q2016 and 80% in 1H2016.
… gives us a suspicious outlook over demand growth. We are less optimistic now over the growth
of local cement demand in the upcoming years. Although the fragility of the local economy and
the declining value of the EGP pushed investors to use real estate as a hedging tool in the past few
years, we expect the unprecedented spikes in real estate’s prices as a result of the continuous
hikes in building material’s prices, will make the majority of investors unable to afford investing in
real estate, therefore, we expect to see a lower growth rate in construction activity in the
upcoming years. As a result, we do not see cement demand booming in the coming period,
however, it will grow at lower rates. Subsequently, we expect the market to reach equilibrium
between supply and demand by 2020, compared to our previous expectations of reaching
equilibrium by 2018. Egypt’s cement market remained underutilized of 17mn tpa in 2015, as
demand recorded c53mn tons compared to a local capacity of 70mn ton in the same year.
FX crisis drags margins down. Although Local cement manufacturers depend on locally sourced
raw materials, many players have migrated to coal to use it as a source of energy, due to the
shortage of NG supply and the very expensive HFO, which is imported. The devaluation of the EGP
against the USD by 14% in March 2016, in addition to the unavailability of foreign currency
through official sources forcing coal importers to source FX from the parallel market, with a spread
of more than 40%, pushed us to consider parallel market rates in our valuation model.
Nevertheless, as the devaluation in March 2016 was followed by higher selling prices, we also
expect any further devaluation or floatation to be followed by hikes in cement selling prices,
especially after all manufacturers migrate to coal. And thus, our new exchange rates forecasts
were coupled with higher expected selling prices.
New capacities deepen the wounds of an already oversupplied industry. In our cement note
issued in February 2016, we expected the new 14 licenses offered by IDA to represent a major risk
for our valuation. This is still one of the main risks to our valuation, as the total market’s capacity
will reach 98mtpa, leading to a higher gap between supply and demand, especially after many
current and new players submitted offers for these licenses including South Valley Cement, Misr
Beni Suef Cement, El Sewedy Cement and others. Furthermore, Sinoma International Engineering
announced in mid-June 2016 that it has signed a contract with the Ministry of Defense to build six
cement production lines with the largest capacity locally estimated at 12-14mtpa in Beni Suef and
will probably be online by 2019. This represents a huge setback for local cement industry, as this
capacity will result in a total capacity of c82mn tpa, excluding new licenses. We opted to include
neither the new licenses capacities’ nor the Ministry’s of Defense project capacities’ in our
assumptions, as there is no official announcement yet. However, recent news from Industrial
Development Authority states that the bidding for the new cement licenses will start at EGP 120-
150mn and the bidding will be held in October. And hence, our forecast may be revised down
further.
Arabian Cement (ARCC)
FV EGP 9.3
Mkt Price EGP 6.2
Potential 50.0%
Recommendation Strong Buy
Daily Average Turnover EGP 4.0mn
Free Float 22.5%
Misr Cement Qena (MCQE)
FV EGP 84.2
Mkt Price EGP 80.6
Potential 4.5%
Recommendation Hold
Daily Average Turnover
EGP 1.1mn
Free Float 24.0%
Suez Cement (SUCE)
FV EGP 20.0
Mkt Price EGP 10.4
Potential 92.3%
Recommendation Strong Buy
Daily Average Turnover EGP 0.4mn
Free Float 29.4%
Sinai Cement (SCEM)
FV EGP 16.2
Mkt Price EGP 23.4
Potential -31%
Recommendation Sell
Daily Average Turnover EGP 0.1mn
Free Float 35.3%
South Valley Cement (SVCE)
FV Under Review
Mkt Price EGP 4.09
Potential -
Recommendation -
Daily Average Turnover EGP 3.1mn
Free Float 44.8%
3
PRIME INVESTMENT RESEARCH CEMENT SECTOR NOTE
19TH SEPTEMBER, 2016
CEMENT PRODUCTION AVG SELLING PRICE
SOURCE: IDA & PRIME RESEARCH
PRODUCTION & UTILIZATION RATE
Overall, we downgraded fair values for all covered cement companies due to;
1- Higher risk free rate, which crossed 16%.
2- New exchange rate assumptions.
3- Higher electricity prices.
4- Softer demand expectations.
5- We preferred to apply a 2% liquidity risk premium in valuation models for stocks with low turnover
namely; MCQ, SUCE and SCEM.
It is worthy to note that, if our expectations of 1% interest rate hike in the next MPC meeting materialized, we will
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