A faltering aluminum fabricator amid continued fiscal tightening; Initiate with Neutral
Fiscal consolidation overshadows favourable industry dynamics. The global aluminum market is expected to post a 300k tonne deficit in 2018, according to CRU. Despite being volatile, we expect the aluminum price to remain above USD2,050/t over 2019-24 (+4% from 2009-16 mid-cycle price). This is supported by a sustained deficit, instigated by outgrowing demand at 3.4% p.a. vs. 2.9% for supply, and China’s high cost marginal producers (>50% of global supply). This would not trickle down to EGAL’s profitability, given the increasing electricity prices (+43% in Jun-18), as part of the Egyptian government’s fiscal consolidation plan. We initiate coverage on EGAL (320k tpa smelter) with a Neutral rating, and a 12M TP of EGP37.3/share. Our valuation puts the stock on an EV of USD1,137/t, a c65% discount to the global peer median of USD3,305/t, chiefly justified by EGAL’s lower EBITDA of USD229/t in FY20e, 59% below peers’ USD555/t, implying an electricity price of cEGP1.3/kWh.
EGAL’s electricity cost one of the highest among global smelters. Following the Jun-18 electricity price hike of 43% y-o-y, we expect EGAL’s electricity cost (47% of CoGS) to record cUSD800/t in 2018e vs. USD602/t in 2017 (the highest smelter incurred USD625/t in 2017). Accordingly, we forecast EGAL to post a negative FY18-20 EBITDA CAGR of c37% (vs. +9.4% for global peers). We estimate an EBITDA margin of 9.4% in FY20e down from 24.7% in FY18a (vs. 14.2% in 2017 for global peers).
Negative on expansion plan, cost escalation poses downside risk. In Aug-18, Metallurgical Industries Holding (EGAL’s primary shareholder) proposed a USD600mn plan (excl. USD130mn initial WCInv) to increase EGAL’s capacity by 78% to 570k. However, we estimate an investment cost of USD3,200/t (the current capacity build-up of 430k at Russia’s UC Rusal costs USD3,488/t). Running a DCF analysis yields a negative NPV of EGP4.24/share. Our exercise factors in electricity consumption of 12,800 kWh/t (vs. current 15,100 kWh), a debt-to-equity mix of 80/20, and commissioning in FY23e.
Replacing old potlines a potential drag. To refurbish its >30 year old cells, EGAL will have to acquire 320 modern cells (500 amperage) to replace the current ones, at USD3,143/t, on our calculations. Incorporating this cash outlay in our model would weigh further on cash flows and dividends (FY20-24e average DPO at 80%).
Egypt Aluminum Co SAE. Egypt Aluminum Co SAE (Egyptalum) is an Egypt-based company engaged in the production and sale of aluminum products and by-products. The Company focuses on the production, distribution, market, import and export aluminum, raw materials, alloys and derivatives; participation in establishment of companies in different investment sectors, and real estate and financial investment activities. The Company's aluminum plant is located at Nag Hammady, 100 kilometers north of Luxor. Egyptalum's products include ingots, slabs, sheets, billets, plates, wires and anode blocks. As of June 30, 2012, the major shareholder of the Company was Metallurgical Industries Company with a stake of 89.97%.
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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