EUR 39.16 For Business Accounts Only

Growth losing steam after a stellar 2017

Government plans to pursue non-thermal power generation lead to TP hike, but stay Neutral post rally. We raise our 12M TP to EGP165/share. This is a notable increase from our previous TP (EGP96/share) on the back of: i) continued follow-through by the Egyptian government on additional electricity generation projects, despite now enjoying a surplus (FY18/19e capacity utilisation at 43%), and ii) robust 3Q17 cash generation, thanks to low-cost cable inventory and a weaker-than-expected EGP. However, we maintain our Neutral rating, as a recent rally in the share price, buoyed by inclusion into the MSCI Egypt IMI Cap Index, as of 3 December 2017 (6.4% weight), puts the stock on a 2018e P/E, 16% ahead of its historical average. We also see fewer catalysts in 2018.

Pipeline heavily dependent on nuclear, coal ambitions. Excluding large nuclear and coal-based power generation projects planned by the Egyptian government, the pipeline of power generation projects in the bidding stage is USD2bn, according to MEED Projects. This is only 25% the value of those underway, suggesting waning backlogs, if the government does not follow through on plans to build non-thermal plants. We, nonetheless, raise our forecasts for turnkey awards to cUSD1bn p.a., as of 2018, to reflect these prospects. We had previously assumed award intake would be limited to T&D spending in Egypt and prospects in the MENA region, albeit only a handful, given industry data signals a weak spending outlook and high competition.

Overturn in cash generation due. While a year-end dividend is possible, given stellar 2017e EPS growth of 46% y-o-y, we do not expect this can be sustained for four reasons: i) we project a 2018 EPS decline of c20% y-o-y as margins normalise, ii) the 15% y-t-d spike in copper prices increasing working capital needs, iii) cash generation over 2014-17 was heavily tied to the turnkey business, where we see a stable backlog in 2018 (1Q17-3Q17 declined c12%), iv) USD17.5mn solar project equity deployment in 2018, and v) other capex initiatives the company is embarking on across its facilities (2018 capex guidance is cEGP1.6bn, 26% of 2018e EBITDA).  

Elevated structure. Management demonstrated its ability in keeping apace with what was a vigorous rerating in operations; we rank long-term prospects as high. However, on a 12-month basis, the domestic and regional backdrop is likely to cap growth, in our view. Risks would include: i) delay/cancellation of Egypt’s ambitious coal and nuclear power projects, ii) sharp DZD weakness, iii) receivables in Egypt or Saudi, or v) disruptions in Qatar (9.7% of 9M17 recurring EPS).