-        Revenues – EGP808mn, +20% Y-o-Y, +11% Q-o-Q, +16% vs. EFGe
-        EBITDA – EGP83mn, -40% Y-o-Y, -35% Q-o-Q, -22% vs. EFGe
-        Net income – EGP2mn, -98% Y-o-Y, -96% Q-o-Q, -87% vs. EFGe

Arabian Cement (ARCC) reported its 3Q18 financial results, with marginal earnings of EGP2mn (-98% Y-o-Y, -96% Q-o-Q), which came in below our forecast of EGP17mn, despite a better-than-expected top-line. Revenues reached EGP808mn (+20% Y-o-Y, +11% Q-o-Q) and came 16% above EFGe as local and export sales volume surprised positively. The earnings miss was a function of much lower-than-expected margins (EBITDA margin of c10% vs. EFGe of c15%), driven by: i) lower-than-estimated cement prices realised from export activities (EGP541/tonne; -11% Q-o-Q, -11% vs. EFGe) as the company was likely sacrificing prices to increase sales volume; and ii) higher-than-expected operating costs (avg. cash cost/tonne +5% Q-o-Q, +5% vs. EFGe). Export volumes saw substantial growth Q-o-Q (+56%) and came 23% ahead of our estimate, contributing c10% of total revenues. Meanwhile, local sales volume jumped 11% Q-o-Q to 0.98mn tonnes and came 17% above our estimates. Local cement prices, however, softened during the quarter and were languishing at EGP708/tonne (+12% Y-o-Y, -4% Q-o-Q, in line with EFGe), because of the competition pressure from the Army’s new cement capacity, which started operations this year. EBITDA margin dropped to c10% from c17% in 2Q18 (c21% in 3Q17), on the back of the lower prices and higher costs. 

Our take on the results: Although earnings were lower than expected, they do not come as a complete surprise, given that we had been expecting some price volatility over the short term due to the intense competition in the market. Despite the competition, ARCC was able to increase cement sales volume sequentially (partly supported by a pick-up in construction activities post seasonally weak 2Q), which is commendable. We are not too concerned with the 5% sequential increase in costs as: i) feedstock coal prices (South Africa – ARCC’s major source of coal) peaked during 3Q and have been down since then, so some of the cost inflation should subside; and ii) exports have a higher cost per tonne due to additional logistical costs. As such, a higher-than-normal share of exports this quarter would have likely skewed the cost profile upwards. We believe the sector will continue to witness more challenges over the short to medium term, as prices would remain volatile and it will take time for the market to rebalance following the substantial capacity added this year (c12-13mtpa). With that said, ARCC is still our preferred pick in the Egyptian cement space, and we reiterate our Buy rating on the name, as we believe current cement prices are not economically sustainable over the medium term and the stock is trading at compelling valuations of: i) EV of only USD31/t (vs. considerably higher Greenfield and Brownfield costs); and ii) a FY20 EV/EBITDA multiple of 4.6x. 

Sameer Kattiparambil, Ahmed Hazem Maher

Arabian Cement (Egypt): EGP5.66 as of 15 Nov. 2018, Rating: Buy, TP: EGP9.00/share, MCap: USD120mn, ARCC EY/ARCC.CA