Compelling valuation; Initiate with Overweight
TP of EGP23.0/share, implying c22% upside. EFIC trades on a 2018e EV/EBITDA of 5.4x, 37% below local peers (8.6x). Despite EFIC’s unfavourable product mix and aged plants, we argue this is too steep of a discount. We believe that we have fairly incorporated these two issues in our forecasts by assuming suboptimal capacity utilisation rates (65% for SSP unchanged since 2014), and a relatively low terminal growth rate of 2%. Our TP implies a 2018e EV/EBTIDA of 6.3x, 27% below peers (and 16% below its own 2000-2017 average of c7.5x), on a 2017-19e EBITDA CAGR of 20%, vs. peers’ 22%.
New capacity is positive, but nature of product mix an overhang. SSP (56% of EFIC’s 9M17 revenue) was c11% of global P consumption in 2017 vs. north of 50% in 1950. SSP is globally the least applied phosphate nutrient by farmers, due to having low phosphorous content. A new SSP granulation line (28% of SSP granulation capacity increase) in the Assuit plant (commercial operations in 1Q19e vs. the company’s plan for 1H18 to account for teething problems) adds only EGP0.4/share to our TP, assuming low utilisation rates.
Latam odds are promising, although overall export targets seem ambitious. Over the next 5 years, management targets to increase exports to 50% of revenue vs. the current 24%. This should have a strong windfall on EBITDA, given SSP export margins of USD60/t, 33% higher than local margins. This is relatively ambitious, in our view, given the low global SSP demand growth; 4-year CAGR of 0.3% vs. 2.5% for TSP, according to IHS. Latam, having similar soil content as Egypt’s (low on P and sulphur), could be a source of increased exports, a source of medium-term upside.
Stable dividends. EFIC offers a 2018e dividend yield of c3% on our DPS estimate of EGP0.51/share (23% pay-out), as we expect deleveraging; 2017e ND/EBITDA of 1.1x, falling to 0.1x by 2020e (all debt in EGP). Key risks include increases in sulphur and phosphate rock prices (33% and 18% of cash costs, respectively), which although EFIC’s end-products are freely priced locally, unlike urea, may eat away at margins on low farmer affordability.
Egyptian Financial and Industrial SAE. Egyptian Financial and Industrial SAE (EFIC) is an Egypt-based company involved in the production and marketing of agricultural chemicals. The Company focuses on the production and distribution of chemical resources and agricultural fertilizers, as well as the production of plastic and general bags to fill up its products; the ownership of the means of road and river transportation, and the import of all raw materials and necessary production supplies for the Company's production. The Company's products are structured into three divisions: the Phosphatic Fertilizers division includes powder single super phosphate fertilizer, granulated single super phosphate fertilizer and compound fertilizer; the Sulphuric Acid division includes commercial sulphuric acid, pure sulphuric acid, analytical reagent (AR) sulphuric acid, diluted sulphuric acid for batteries and fuming sulphuric acid, and the By-Products division includes ferrous sulphate and sodium fluosilicate.
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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