EUR 26.12 For Business Accounts Only

Restructuring talks drive an unjustified rally; Reiterate UW

Restructuring plans drove the rally; but follow-through is in question, in our view. Pachin’s share price rallied by c55% since Sep-17, driven mainly by its parent company’s plans to restructure companies under its portfolio, including Pachin. However, we find limited inefficiencies in the company’s core operations to resolve, and, although no details were communicated, the market, in our view, appears to assume Pachin’s vacant 50k sqm land plot is up for sale. Talks on land monetisation have been ongoing since 2013, without materialising, noting that the land is not properly registered. Pachin intends to use the land in launching a real estate project, as opposed to a direct sale, making monetisation, if any, a long-term process, given the lengthy registration and licensing procedures (guidance is over one year). Management also have no concrete plan, until now, for the economics and size of the residential project. Accordingly, we choose to exclude it from our 12M TP.

Value of operating assets does not justify current share price. We raise our TP by 30% to factor in 7% higher USD:EGP forecasts, and 8.2% lower average cost (in USD/tonne), as the company strives for cost control amid unattractive industry dynamics (including using 20-25% cheaper TiO2 from China and subpar wage raises despite soaring inflation). Pachin trades on a FY18/19e and FY19/20e P/E of 18.4x and 13.8x, respectively, 21% above global peers for 2018e, and in line with peers for 2019e, despite Egypt’s high capital costs. This is in line with our view that the market is factoring Pachin’s non-core assets, whose monetisation is questionable, into the share price.

Recovery to come at a cost. Pachin’s volume dropped by c40% in FY16/17, on limited affordability, post the EGP flotation (recovery in 1H17/18 was a marginal 3.7% y-o-y). However, we assume improving personal income should derive a 2018-23 volume CAGR of c10%, c2x GDP growth, bringing Pachin’s 2023e sales volumes to its pre-float levels. Pachin’s operations are WC intensive, and recovery should come at the cost of high WC needs, which we estimate at EGP284mn over 2018-23, c28% of EBITDA. This is broadly overlooked, in our view.

Better-than-anticipated demand, land monetisation are the main upside risks. Every 5% of higher-than-expected demand would add 7.6% to our TP, all else constant. We do not factor Pachin’s 50k sqm vacant land into our valuation, given the limited visibility on the timeline and expected proceeds of monetisation. This leaves any positive cash flows from the land as an upside risk to our Underweight call, noting that even the sale of land at the independent appraisal (EGP7k/sqm) does not explain the current share price.