EUR 21.39 For Business Accounts Only

Lower LME aluminum and EGP appreciation drag valuation; Downgrade to Underweight from Neutral

 

Cut TP by c50% to EGP12.5/share. We update our valuation to primarily factor over FY20-24e: i) lower EGP:USD by 4.2%, following the recent EGP appreciation, while keeping 5% annual depreciation, ii) a 4.4% lower blended aluminum selling price, on mounting pressures from the trade war, dampening demand outlook, whereby the aluminum price tumbled 23% y-o-y to USD1,770/t, iii) 5.7% lower electricity tariffs in EGP terms, while our estimate for the USD tariff remains intact at USD0.066/kWh in FY21e, and iv) DCF rollover. We look for an EBITDA margin of 8.5% in FY24e (+1.4x vs. FY20e). EGAL trades on a demanding FY20e P/E of 10.6x, 25% above peers, unjustified, due to EGAL’s sub-optimal EPS growth and Egypt’s high capital costs.                

Pleas to build BOO solar park intensify, amid weak aluminum. Post the Jun-19 electricity price hike of EGP1.11/kWh (+10.2% y-o-y) in FY20e, EGAL is set to tender a 600 MW solar park within the next two months, pending regulatory approvals, as per the Minister of Public Enterprises. We see this as a possible catalyst for the stock, but opt not to factor it in our base case, due to lack of clarity on execution terms and timing. Running an exercise to factor the park, assuming 25% effective capacity worth a 150 MW generating capacity p.a. (26% of EGAL’s consumption), tariff of USD0.03/kWh (management guides for USD0.025-0.03/kWh), BOO terms, and 3-year execution period, would cut our long-term blended tariff estimate by 14% to USD0.057/kWh (-14%). It would also hike our TP to EGP20.1/share (+69%), all else constant. The USD tariff recorded a FY14-19a CAGR of 6.7%.

Short-term aluminum price recovery pivotal. To avoid capacity closures, we expect the price to record USD1.9k/t (threshold for marginal producers to maintain production) in end-FY20 vs. the current USD1,770/t. This is backed by a global primary aluminum deficit of 1.5mn tonnes (1.5% of consumption) in 2019, according to industry sources.

Upside risks. Assuming a stable electricity tariff at EGP1.11/kWh, as per the company’s request to the government, would raise our FY21-24e EBITDA estimates by 107% and hike our TP to EGP27.0/share, all else constant. Each incremental USD50/t higher (lower) aluminum base price than our estimate raises/reduces our TP by 17%, all else constant.