EUR 21.33 For Business Accounts Only

Cut TP 20% on deteriorating operations; Maintain OW on land story

Cut TP by 20% to EGP60.0/share, as core operations continue to struggle. We cut our DCF-EV for Pachin’s core paints operations by 52%, as the bleak industry dynamics continue to pressure the company’s profitability. We maintain our Overweight call, as we expect Pachin’s monetisation of its 53k sqm vacant land plot to be the main value driver. 58% of our TP comes from the land value (EGP716mn, EGP13.5k/sqm) and 42% from core paints operations.

Severe volume, margin deterioration since the EGP float; Recovery a long-term story. Pachin’s operations have been deteriorating substantially since the EGP floatation in Nov-16. This trend continued in FY18/19, driven by a mix of worsening construction activity and toughening competition among existing industry players and new entrants, undermining Pachin’s volumes (down 8.2% in FY18/19, c50% since the EGP float) and margins (FY18/19 EBITDA margin at c2% vs. c12% before the float). We expect no recovery in FY19/20e, and a very gradual recovery beyond, starting with 11% volume growth in FY20/21e and an average of 8.4% over 2021-24e. EBITDA margins should gradually expand to 7.3% in 2024e from the current nil level, as Egypt’s improving macro dynamics start to reflect on the paints market.

Current share price ignores vacant land value; Land development could start in FY20/21e. Despite the unattractive outlook on Pachin’s core operations, we believe the current share price ignores the vacant land plot, leaving significant upside from the current level. Pachin completed the removal of the old buildings on the land in 1Q19/20, and is looking to launch a JV agreement with a realtor for development. We expect the market to realise the land value (EGP13.5k/sqm, a mid- range between independent and state valuations) upon the start of the development, likely in FY20/21e, making the current share price an attractive entry point.

Failure to monetise the land the main downside risk. Failure by Pachin to monetise the land would knock EGP35.0/share (58%) off our TP, all else constant. Otherwise, every 5% of lower-than-expected paint volumes and prices reduces our TP by 5% and c18%, respectively, all else constant.