EUR 75.80 For Business Accounts Only

Cut to UW, on worsening industry dynamics

Industry demand, margins continue to deteriorate; Further capacity exits unlikely to alleviate pressures. Cement demand continued deteriorating in 2019, falling by 8.8% in 1Q19. A growing supply/demand gap and heavy competition led the industry’s margins and profitability to maintain a downward trend in 2019. 6.8mn tpa of cement capacity shutdowns over 2018-19a were insufficient to support margins. We change our demand forecasts to assume flattish demand at 51mn tonnes p.a. over 2019-22e, and a meagre 2-3% demand growth p.a. beyond 2022e. We expect at least another 4.5mn tpa of cement capacity shutdowns in 2020, but believe this will not ease the industry’s pain.

Cut TP by 59%, on waning profitability. We lower our average EBITDA estimate for ACC by c34%, to reflect the worsening industry dynamics. We reduce our TP by 61.4%, and downgrade our rating to Underweight from Overweight. ACC’s 2020e EV/EBITDA of 5.9x is 34.1% below regional peers, but remains expensive, in our view, given its suboptimal EBITDA growth (2019-21 CAGR of 4.6% vs. 14.1% for peers) and Egypt’s high capital costs.

Dividend reduction beyond 2019e inevitable. ACC slid into losses in 4Q18, and we estimate losses to continue over 2019-20. We expect ACC to distribute a dividend of EGP200mn (EGP0.53/share) in 2019, similar to the annual distribution since ACC’s IPO in 2014. However, beyond 2019, ACC’s retained earnings balance will not support the same levels until deleveraging and gradual top line growth improves dividend potential, starting 2022e, in our view.

Upside risks. The main industry upside risks are government intervention to reduce excess capacity, better construction activity, and/or higher capacity shutdowns than our expectations, bringing the industry closer to balance. For ACC, every 5% of higher/lower EBITDA/t and cement volumes than our estimate raises/reduces our TP by 10%, all else constant.