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Egypt cements quarterly update | Pressures persist, despite 4Q19 demand uptick; COVID-19 likely to intensify 2020e pressures

Demand up 3.9% y-o-y, not necessarily indicative of the start of recovery; COVID-19 to further pressure 2Q20 demand. Local cement sales increased 3.9% y-o-y (+8.6% q-o-q) in 4Q19 to 12.9mn tonnes. This could be normal demand volatility, coming mostly from a slight uptick in demand from small and medium income housing after six consecutive quarters of contraction, and does not necessarily imply that demand recovery will continue. The impact of the COVID-19 outbreak on Egyptian construction activity has yet to be seen, with expectations of demand pressures in 2Q20, which could further strain the sector throughout 2020e. For our valuation of Arabian Cement Company (ACC) [Underweight | TP EGP3.20], we assume a cement capacity utilisation of 92.5% in 2020e (vs. the industry’s current c63%), but there could be further downside to our numbers if demand remains weak. ACC’s current share price implies a 2020e EV/EBITDA of 5.3x, 12% below the normalised industry average.

Cement capacity utilisation at 63%; Inventory at 8.4mn tonnes. Egypt’s average cement capacity utilisation was 63% in 4Q19 vs. 61.5% in 4Q18 and 60% in 3Q19. Clinker inventory stood at 8.4mn tonnes in 4Q19 (+5.4% y-o-y, -10.5% q-o-q), on our estimate, representing c19% of demand at current levels. Total exports stood at 0.34mn tonnes (+6.5% y-o-y, -37.7% q-o-q), with the export margin at bay. COVID-19 is likely to further hinder the industry’s marginal exports in 2020e.

Prices, margins pressured. Average retail cement prices decreased by 2.5% q-o-q (-8% y-o-y) to EGP816/t in 4Q19, in line with the industry’s cost curve, driven by the EGP appreciation. At current prices, cost-efficient cement players are estimated to be marginally loss-making, while less efficient players are heavily loss-making.