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Egypt cements quarterly update | Falling demand drives prices down 6% q-o-q

Demand down 14% y-o-y in 3Q20 as building permit halt continues to undermine construction activity. Domestic cement sales amounted to 10.2mn tonnes in 3Q20 (-14% y-o-y, +2.6% q-o-q), reflecting the impact of the government’s decision, on 25 March, to halt construction activity and building permit issuances for six months to counter building code violations, in addition to the impact of COVID-19. This means that full year 2020e demand is likely to register 44-45mn tonnes (down 7-9% y-o-y), far below our 52mn tonnes estimate.

Cement capacity utilisation registers 50.5% in 3Q20%; Inventory estimated at 24% of demand. This reflects the industry’s weak demand dynamics and heavy oversupply vs. 56.3% in 3Q19 and 56.1% in 2Q20. The industry added no additional clinker inventory in 3Q20, leaving total accumulated inventory at 9.3mn tonnes (flattish y-o-y), 24% of demand, on our estimate. Total exports amounted to 0.37mn tonnes in 3Q20 (-31.8% y-o-y and +58% q-o-q), at negligible export margins due to strong regional competition. Loss making players continue to lobby for support from the government and seek parent support, with no apparent willingness to exit the industry.

Retail prices, industry margins fall further due to weak demand dynamics. Egypt’s retail cement prices fell 5.9% q-o-q in 3Q20 to EGP736/t, reflecting negative demand dynamics, keeping industry margins under pressure. We calculate that cost-efficient cement players should generate an EBITDA margin of 8-12% at current levels, while inefficient players should generate -5% to 5%.

Arabian Cement (ACC) [Underweight | TP EGP3.20] seen loss making-making in 3Q20. We look for ACC to report revenue of EGP636mn (-14.5% y-o-y and +2.5% q-o-q) and an EBITDA of EGP65mn (-26.7% y-o-y and -13.9% q-o-q). This should lead to a net loss of EGP16mn in 3Q20 vs. a net loss of EGP6.8mn in 3Q19 and EGP5mn in 2Q20 (on a normalised basis). ACC trades on a 2020e EV/EBITDA of 5.6x, in line with our valuation. However, we assume 92.5% capacity utilisation in 2020e and beyond, almost double industry average levels, meaning lower-than-expected demand could be a major downside risk.