EUR 22.89 For Business Accounts Only

EFIC EY | Downgrade to Underweight, on rising WC needs

Cut TP by 29% to EGP10.0/share. We update our 2020-24e forecasts to reflect a: i) -14% lower sales volume, mainly on lower SSP exports (-47pp p.a.), ii) +1.7% higher average selling price in USD, iii) +4.1% higher EBITDA margin at 2020-24e average of 24.7%, on lower material cost, and iv) +74pp higher WC investments, on higher inventory days. Global SSP sales (65% of EFIC’s revenue) continue to lose market share (2015-20 CAGR of -2.8%) to higher analysis DAP and MAP, according to IHS. Meanwhile, our model factors a 2021-24e SSP price and volume CAGR of 3% and 5%, respectively. The stock trades on a 2021e P/E of 8x, in line with local peers, relatively high and unjustified, given: i) lower SSP marketability vs. urea, ii) -8% FCFE yield over 2020-21e, on higher WC needs, and iii) high turnover of top management (two changes over 2019-20). This comes against an EPS 2020-21e CAGR of -18 vs. peers’ -5%.    

Lower revenue stretches inventory days and drains cash flows, on COVID-19. In 1H20, revenues dropped 42% y-o-y to EGP502mn, in line with lower demand on COVID-19 backdrop. Inventory and cash cycle days surged to 644 (+383 days y-o-y) and 601 (+403 days y-o-y) in 1H20, respectively. Accordingly, we expect EFIC will record -13% FCFE yield in 2020e, weighed on by WC investment of EGP239mn (18% of revenue). Over 2020-24e, we project WC investment to represent 28% of EBITDA, as EFIC’s run rate gradually improves to 61% in 2024e (vs. 31% in 1H20).   

Lower interest rates to support earnings amid geared balance sheet. In 1H20, net debt surged 39% y-o-y to cEGP1.1bn, driven by higher WC investments, which recorded EGP178mn in 1H20. We forecast EFIC’s net debt-to-EBITDA to close 2020e at 3x. We look for revenue and EBITDA to grow at a 2020-24e CAGR of 13% and 12%, respectively, in response to gradual purchasing power recovery. We expect EFIC to record a 2020-24e CAGR of 4.1% and 3.3% in total volume and average selling price, respectively. Lower interest rates (3.5pp in 2020) support our 2020-24e EPS CAGR of 20%.

Upside risks. While we are negative on EFIC’s high management turnover and challenges in export markets, we highlight its main upside risks, as follows: i) every 100bps higher-than-estimated 2021-24e average utilisation rate of 58% hikes our TP by c5%, all else constant, and ii) every 100bps higher-than-estimated average selling price of USD100/t over 2021/24e, raises our TP by 14%, all else constant.