EUR 21.76 For Business Accounts Only

Rally overdone; Downgrade to Underweight

Underweight post strong rally. We raise our TP by 15.4% to reflect c7% higher USD:EGP forecasts over 2018-22 (17.7 over 2018-19e, 5% devaluation p.a. thereafter), which is partially offset by 17.5% higher non-material cost inflation at the new FX assumptions. Al Ezz Dekheila (EZDK)’s share price is up by c100%, since mid-Nov 2017, which we find overdone, and accordingly cut our rating to Underweight from Overweight. EZDK trades on a proportionate 2018e EV/EBITDA of 5.6x, falling to 5.4x in 2019e, c16% below global peers, while our SoTP implies 5.1x in 2018e and 4.8x in 2019e, c24% below peers, capturing EZDK’s weak free cash flow generation, higher capital costs, unfavourable risk profile, and constrained capacity: 2019e operating at 100% vs. a global average of c71%.

EFS a drag on EZDK’s balance sheet and cash flow. We estimate EZDK’s ailing subsidiary, EFS, to require EGP7.7bn of WC investment over 2018-19 to optimise operations, dragging EZDK’s balance sheet and cash flow. We forecast EZDK to need EGP5bn in additional net debt over 2018-19, mainly to cover EFS’s WC needs. EFS marginally contributes to EZDK’s valuation by EGP125mn (EGP11/share), due to its hefty financing to cover piled up payables (EGP3.4bn as of Sep-17, 61% of 2018e EBITDA), with a scope for downside. If EFS fails to acquire the WC funding it needs to optimise its operations, EZDK may have to provide the financial support.

Negative risk profile. We assume a 100% operating rate across all operating units, as of 2019, up from 64% in 2017e and 84% in 2018e, leaving every 5% lower operating rate p.a. eating away 29% of our TP, all else constant. Other risks include: i) higher profitability (every 5% of higher/lower-than-expected EBITDA/t would add/deduct 15.5% to/from our TP), and ii) FX assumptions (43% higher/lower TP for 5% higher/lower-than-expected EGP p.a.).