EUR 73.98 For Business Accounts Only

On a rocky road; Remain Underweight

Nearer start of mega cement plant 1Q18e to deepen industry woes. Egypt’s idle capacity widened to 27% in 2017 from 20% in 2016, reflecting the 6% demand drop post the EGP flotation. However, we expect this gap to further widen to 31% in 2018 when the Ministry of Defence’s 13.2mn tpa cement plant comes on line. This widening gap incorporates our expectations that improving macro dynamics and personal income recovery should lead to 7% demand CAGR over 2018-22e, 1.7x GDP; c0.7t/capita by 2022e up from 0.59t/capita in 2018e. We expect inventory piling-up to continue, reaching 7mn tonnes by 2017 and adding another 8.6mn tonnes over 2018-22, capping margin-accretive pricing growth. Volume losses to new comers and marginal players is inevitable, in our view. Meanwhile, an unfavourable regional outlook and rising costs should impede export potential, with 1mn tonnes of exports in 2017e, 1.9% of production, rising marginally to 2.2% in 2018e thanks to new export subsidies.

Expensive in light of deteriorated profitability, risks. We raise our DCF-EV for ACC by 8.7% to EGP3.6bn to reflect: 1) 15.5% higher USD:EGP forecasts, and ii) marginal export volumes (7.7% of our TP). In USD terms, this means a 5.3% cut to USD40.5/t, reflecting a c11% downward revision to ACC’s 5-year average EBITDA to USD7.3/t due to worsening industry dynamics. ACC trades on a 2018e EV/EBITDA of 6.4x, 14.4% below regional peers, which we view as expensive given: i) its 2018-20e EBITDA CAGR of 7.2% vs. 9% for peers, ii) the industry’s unfavourable risk profile, and iii) Egypt’s high cost of capital despite our estimate of a 6pp cumulative interest rate cut by the end of 2018.

Downsides outweigh upsides. ACC’s valuation is more sensitive to demand downsides than upsides. This is since higher-than-expected industry demand is likely to be captured by new comers or small-scale industry players, which compete aggressively for market share. We assume a gradual ramp-up of capacity utilisation at the new mega cement plant, wherein higher-than-expected supply from the new plant can undermine valuation further. Otherwise, our TP for ACC goes up/(down) by c10% and c9% for every 5% higher/(lower)-than-anticipated operating rate and USD:EGP p.a., respectively, all else constant. A one-year delay in the new mega plant’s start would support ACC in the short-term, leading to a 2018e P/E of 7.0x, but raises our TP only to EGP7.8/share, leaving our call unchanged, although it may delay fair value realisation.