EUR 72.54 For Business Accounts Only

Bleak industry outlook; Upgrade to Neutral post-share price drop

Upgrade to Neutral on valuation. We cut our DCF-EV by c5%, as we reflect further industry deterioration, but raise our TP by 11%%, as we account for EGP479mn (EGP1.30/share) net debt reduction, which was driven by exceptionally strong 1Q18 performance. We previously held a non-consensus Underweight call on ACC, as of Aug-16. We turn Neutral on the stock after the share price dropped 12.8% y-t-d, underperforming the market by 17.6% and c88% in total since we first called our Underweight. We maintain our negative stance on the industry, but believe that ACC’s share is fairly priced, posing limited upside at the current level. ACC trades on a 2019e EV/EBITDA of 6.5x, 24.2% below regional peers, with close growth profile, which we find is justified by Egypt’s high capital costs.

Bleak industry outlook persists; Oversupply the new industry norm. We cut our demand estimates by 12.4% over our 5-year forecast horizon, mainly reflecting the effect of slower pace of monetary easing and consumption spending recovery on cement demand outlook. The supply/demand imbalance worsened after the 13.2mn tpa mega greenfield cement capacity started commercial production in 2018, amid aggressive efforts by industry players to protect market share over profitability. We look for demand recovery to be gradual and long-term, driven mainly by the pick-up in consumption spending and small and medium income housing. This recovery would keep 24% of industry capacity idle in 2023e vs. c38% in 2018e. Exports remains marginal amid unsupportive regional dynamics and rising industry costs.

Industry margins to remain pressured. EBITDA margins for healthy cement players fell to 16-18%, following the new mega plant’s commencement, down from 30-40% before the EGP floatation and c20% in 2017. We expect this to be the new margin norm for the industry, such that cement prices would be dictated by the industry’s cost curve, keeping margins under pressure, with limited scope for surprise on the upside.

Short-term headwinds ahead. We expect ACC’s EBITDA and net income to remain subdued in 2H18, dropping by 13.5% y-o-y and 34.7% y-o-y, respectively, in 2019. This comes on the back of industry weakness and market share losses to the new mega capacity, before recovering in 2020. Demand outlook poses the main risk, in our view, with every 5% lower/higher-than-estimated volumes knocking/adding 8.8% off our TP for ACC, all else constant.