EUR 38.85 For Business Accounts Only

Cheap on multiples, but limited catalysts on the horizon; Remain Overweight

Cut TP by 43% to EGP10.4/share, still offering decent upside. We downgrade our valuation primarily to reflect the decline in GCC volumes, intense competition, and a stronger EGP, pressuring RCC’s pricing and wage structure. Despite the stock’s illiquidity and below average 2020-22e EPS CAGR of 2.0% (peer average is 12%), we believe RCC trades at an unjustified discount of 69% to peers. Following lacklustre performance since 4Q18, we expect EBITDA to start picking up in 2Q20, as the effect of the stronger EGP should soften, offset by growth in the offshore outsourcing business via targeting new clients and availing more services. Our implied valuation with a 2020e P/E of 10.4x (vs. current 5.7x), is still at a 42% discount to peers. We see no short-term catalysts for RCC, but flag its attractive 2020e dividend yield of 9%.

New facility in Cairo to add 8% to top line, competition to drive EBITDA margin lower. We assume RCC’s new 1.5k-workstation building in Smart Village (operational in Dec-19) will reach 30% utilisation by end-2020e vs. guidance of 50%, as we factor in potential delays in new contracts, in line with 2019. We expect the new facility to add 8% to the top line, resulting in a 2019-21e revenue CAGR of 11%. We also account for an EBITDA margin decline to 16% by 2024e, from 18% in 2020e, in line with peers’ average, on intense competition, as Egypt remains an attractive BPO location.

New management to focus on growth in offshore business. The new CEO stated that voice services (60% of revenue) are declining. Accordingly, the company plans to expand its digital, HR, accounting, and procurement services, in addition to penetrating new countries. Moreover, management will continue with its expansion plans in Dubai and Saudi Arabia in the medium-term, which we do not account for in our base case as they are still in early stages. Assuming Dubai and Saudi have 150 workstations each, with a 70% utilisation rate and 20% EBITDA margin, we see 13% upside to our valuation for each location.

Further EGP appreciation and competition key risks. Every 5% higher-than-forecasted EGP value cuts our valuation by 10%, given the company’s positive currency position. We also view further competition as a risk, as Egypt remains an attractive hub for contact centre outsourcing.