Egypt cements quarterly update | Industry demand continues to weaken; Expect ACC to break even in 4Q18
Demand contraction continues into 4Q18. The Egyptian cement industry’s production and sales volumes are back. Cement demand has been contracting since the EGP floatation in Nov-16. The latest data shows a continued decline in 4Q18, at 13.3mn tonnes, down 10.8% y-o-y (-3.5% q-o-q). Our conversations with cement companies indicate demand contraction continued into 1Q19, particularly given few days of exceptionally cold weather. We believe demand recovery will be gradual (2018-23e CAGR of c5.2%) and should be mainly driven by personal income pick-up, mainly for the small and medium income groups, which contribute 70-90% of cement demand, on our estimate.
Current inventory levels at 7.9mn tonnes, c17% of annual demand. Cement capacity utilisation averaged c66% in 4Q18, down from 82.7% in 4Q17 and 68.4% in 3Q18. Unsupportive demand and weak operating rates led clinker inventory to increase 1.1mn tonnes in 4Q18, putting total clinker inventory in the system at 7.9mn tonnes, enough to meet c63 days of demand at current levels.
Retail prices nearly flattish q-o-q, margins highly depressed. Retail cement prices averaged EGP887/t in 4Q18, nearly flattish q-o-q, reflecting highly competitive industry dynamics, hindering pricing growth. The spot retail price stands at EGP850/t, 4.2% below the 4Q18 average. At current prices, we estimate cost efficient players to record an EBITDA margin of 10-14% vs. -10-10% for cost inefficient players.
ACC 4Q18 Preview: Expect the company to break even on margin weakness. Arabian Cement Company (ACC) [Overweight | TP EGP8.30] should report its full year 2018 financial statements this week. We look for a feeble net income of EGP6mn in 4Q18, in line with 3Q18 and vs. EGP48mn in 4Q17, reflecting the impact of industry woes and unsupportive margins.
Arabian Cement Co SAE is an Egypt-based company engaged in the manufacture of cement and concrete. Its products include: Clinker, the raw material for the production of Portland types of cement, used in different percentages depending on the properties sought for the final product; Al Mosalah Cement, used for concrete with special needs, concrete pump, shotcrete, mortar and supporting floors, among others; Al Tahrir Cement, used for general construction purposes, general concrete works, reinforced and ordinary concrete, buildings, tanks, reservoirs and culverts; El Sadd Cement, used in all concrete works that are exposed to sea water or soils of high sulphate content, and Ready Mix Concrete, offered through the Company's subsidiary, Andalus Ready Mix Concrete. The Company offers its products in a variety of formats such as, bagged, bulk, big bags and in containers, among others.
CI Capital is a diversified financial services group and Egypt’s leading provider of leasing, microfinance, and investment banking products and services.
Through its headquarters in Cairo and presence in New York and Dubai, CI Capital offers a wide range of financial solutions to a diversified client base that include global and regional institutions and family offices, large corporates, SMEs, and high net worth and individual investors.
CI Capital leverages its full-fledged investment banking platform to provide market leading capital raising and M&A advisory, asset management, securities brokerage, custody and research. Through its subsidiary Corplease, CI Capital offers comprehensive leasing solutions, including finance and operating leases, and sale and leaseback, serving a wide range of corporate clients and SMEs. In addition, CI Capital offers microfinance lending through Egypt’s first licensed MFI, Reefy.
The Group has over 1,700 employees, led by a team of professionals who are among the most experienced in the industry, with complementary backgrounds and skill sets and a deep understanding of local market dynamics.
CI Capital has been recognized as the “Best Investment Bank in Egypt” by EMEA Finance for four years running from 2013-2016, and by Global Finance in 2014 and 2015.
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