MEPC AB | Containerboard rally priced-in; Initiate at N
Valuation full. MEPCO is a leading containerboard manufacturer in Saudi and the MENA region’s second largest. The stock rallied 162% y-o-y to reflect strength in containerboard prices, outperforming TASI by 127%. MEPCO trades on a 2022e EV/EBITDA of 7.5x, close to the historical industry average of 8.0x. Its shares are likely to perform well with 2Q22 results release. We project record 2Q22 quarterly net profit of SAR111mn (+19% q-o-q), on higher prices.
2022: Second year for price run, but likely to be the peak. We estimate MEPCO’s blended price to reach USD850/t in 2022, up 26% y-o-y, thanks to a USD50/t price hike in early 2Q22. The price hike follows the footsteps of European players and is further to a cumulative USD200/t increase over 2021, thanks to higher global energy and freight costs, capacity shutdowns in Europe, supply chain disruptions, increased consumer reliance on e-commerce, and the transition towards paper instead of plastics. New capacity is, however, due end-2022, mainly in China and the US, ending the two-year run.
New avenues to cushion earnings. 60k tpa of new, higher-margin, tissue output will begin in 1Q23, adding 25% to gross profit once operational by 2024. Saudi’s new waste law that took effect in Nov-21 will avail supply of OCC, c80% of material costs, and c57% of cash costs. Mid-21, MEPCO received the right to collect Jeddah’s waste for 25 years, also allowing for increased trading of recyclable waste. We believe that lower OCC prices and the higher-margin tissue project will cushion the impact on earnings from declining containerboard prices.
Resumption of dividends, more proactive strategy. The magnitude of the 2021-22 containerboard rally has allowed MEPCO to meaningfully de-lever. Our model points to MEPCO turning net cash late-2023 vs. net debt/EBITDA of 1.3x in 2021 and as high as 3.9x in 2020, cushioning earnings. We expect MEPCO to maintain regular dividends, contrary to a previously erratic approach, with a 2022-26e average DPO of 23%. This should allow MEPCO to pursue its five-year plan of becoming a fully integrated paper manufacturer. Expansions are an upside risk.
Middle East Paper Co SJSC is a Saudi Arabia-based manufacturer of paperboard. The Company's products are used in a range of industries, such as food and beverages, consumer durables, detergents and industrial goods, among others. In addition, its products are used as the basic paper for impregnation with phenolic resins in the manufacture of decorative laminates applied in finishing surfaces of furniture.
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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