EUR 27.31 For Business Accounts Only

CSAG EY | Rising competition, on local terminal capacity build-up; Downgrade to Neutral

Cut TP by 22% to EGP14.0/share. We update our FY21/22e forecasts for CSAG to factor in: i) +21pp higher throughput at DCHC and PSCH, on the 33% newly added capacity to the former terminal, ii) -16pp lower blended EBITDA margin at DCHC and PSCH, to reflect lower pricing amid substantial local capacity build-up (+77pp over 2019-22), and iii) loss-making core operations (e.g. custom clearance) vs. nil previously, eating into dividend income from terminal investments. CSAG trades on a FY20/21e P/E of 11.4x, 33% above its five-year historical average, unjustified, in our view, given rising competition risk. This comes against CSAG’s FY20-22e EPS CAGR of -4% compared to peers’ +16%. While CSAG offers a FY19/20 dividend yield of 9% (payable before year-end), we expect a FY21-25e average yield of 6%.  

Terminal capacity build-up to more than offset medium-term trade recovery. Over 2019-22, Egypt’s total container terminal capacity is planned to increase by c77% to 15.5mn TEU p.a. from 8.8mn, lowering the 2019 implied utilisation rate to 51% from 68%. This comes along the East Mediterranean’s ports pre-COVID-19 sub-optimal utilisation rate of 67% in 2019, further intensifying competition. Although DCHC added 33% to its handling capacity (berth 5 & 6) reaching 2mn TEU p.a., 30% of the old terminal is idle, until the EGP521mn deepening project’s completion in 2Q22e.

Lower pricing key for Egyptian ports, to navigate intense competition. We expect revenue/TEU to record a negative FY21-25e CAGR of 3% and 5% for DCHC and PSCH, respectively. DCHC recorded revenue of USD74/TEU in FY20 (-11% y-o-y) vs. PSCH’s USD116/TEU (+3% y-o-y), which charges a relatively higher tariff for its ancillary warehousing services, at its 80k sqm inland port, located at the 10th of Ramadan City. We look for terminal FY24/25e EBITDA margins of 35% (54.2% in FY19/20) and 37% (54.5% in FY19/20) for DCHC and PSCH, respectively.     

Upside risks. While we forecast a terminal utilisation of 95% for both DCHC (60% in FY20/21e) and PSCH (70% in FY20/21e), to reflect gradual recovery in trade flows, we highlight that each 1% higher-than-estimated revenue/TEU in USD terms, raises our 12M TP by 7%, all else constant, as the primary upside risk to our forecasts.