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Valuation Analysis of ACC Company

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by

Medhat Mokhles

on 5 February 2016

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Transcript of Valuation Analysis of ACC Company

Valuation Analysis of ACC Company
World Cement overview
Why the scenario was reversed ?
Egypt Cement Industry

Investment Summary
ACC Overview

MSA University
As there were so many Mega projects that as not constructed such as the New Capital and youth Housing and also that the government stopped the informal sectors from being held
We Issue a Hold recommendation for ARCC based on our calculations using the DCF model.
Our estimation for the fair value per share is EGP 8.56 (USD1.09), with minor resistance of EGP 9.40 and major resistance EGP 10.20 and a support level EGP7.70. once prices reached EGP7.40 our recommendation should be sell as ARCC has annual production 5m of cement & clinker of 4.2m

Global Factors
Global Factors: Global oil prices are facing downward pressure in 2015 and is expected to continue in 2016 where it hitting its lowest value since 2009 due to

China`s economy slow down
Emergence of shale oil in the United States
Canada through the newly discovered techniques
The unexpected decision took by the OPEC countries not to cut down production to stabilize prices.

Regional Factors
The instability in Middle East countries on both political and economic

The last two years Egypt had relied heavily on the Aid from the GCC countries especially Saudi Arabia, UAE, & Kuwait which is expected to be cut due to their heavy budget deficit

Macro Factors
The residential housing sector represents nearly 85% of the cement consumption in Egypt
We expect to see further increase in this sector in the coming years

Micro Factors
Concurrent with falling cement prices in 2015 the ACC has facing an increase cost due to the sharp increase
in the energy prices
The main challenge to the cement Industry along with EGP devaluation against the dollar has offset any benefit the company could have from decreasing oil and consequently coal prices

Competitive Positioning
Arabian cement company is the only firm that have its own warehouse facilities in Damanhour & Delta
The firm has its own transportation trucks providing ACC with competitive advantage
Was the first firm to Move toward energy transformation to use Coal & RDF as a main source of Energy
ACC Value Chain
Source : Pharos 2014
Industry Overview
Production Capacity

Cement Production ( 2010 - 2019 )
Cement prices
The main reasons for the fluctuation in the cement prices in 2013-2014 was due to:
Energy Shortage due to EGAS Decision for cutting the Natural GAS
Importing of Clinker to meet the Growing demand in Egypt
Energy Analysis
Natural Gas
Cement Industry depends heavily on natural gas with around 46% of its production based on it.In the early 2014 the Egyptian government allowed the cement firms to use of coal and to expand the usage of refuse – derived fuel (RDF).
Electricity
ARCC uses electricity mainly in cement where based on management and production guidance the firm uses around 90 – 100 KWh to produce 1 ton of cement as In July 2014 the government set average price for energy intensive industries as cement at EGP 0.4/KWH
Diesel Prices
The increase in diesel prices with 64% rise in the price post July 2014 to reach LE1.8/liter This increase in diesel prices had actually raised the cost of transportation in almost all firms as diesel is used for public transportation as ACC
Coal Prices
Australian Coal prices 2013- 2020
ACC Financial Analysis
Revenue
In 2015, all companies in the industry recorded dramatic fall in the revenues.

The company witnessed 17% decrease in its net sales revenues in 2015 compared to 2014

The prices had decreased by almost 12% in 2015
2016 Expectation
In 2016, it's expected to see a slow recovery in the prices but it will not reach the previous expectation levels of L.E700
COGS
In 2016, it's expected the energy account for almost 35% of the total COGS
The coal alone account for 48% of total COGS .

Working Capital
Company`s working capital has decreased in 2015

The inventory is higher than the company`s historical trend as it has to import coal after that it starts to increase forward.

In general the company`s working capital shows the firm ability to meet its short term obligations.

The cash has increased in 2015 and forward based on our assumption that the company is paying current taxes on cash & the rescheduled loan that increase the company`s cash payments.
CAPEX and Debt
The firm debt ratio was high but stable during 2012 – 2014 reflecting new loans the firm had borrowed

The debt ratios did not decline as expected in 2015 due to loans paid in dollars rescheduling in 2015

Debt – to – Equity ratio is expected to decline throughout 2020

The interest coverage ratio is expected to increase – except for 2015







Valuation Analysis
Investment Risk
Operational Risk
The main operational risk for ACC Company was securing energy which is listed on their top priorities. In 2013 – 2014 the firm faces energy shortage especially in the natural gas where the EGAS decided to stop supplying gas to the cement firms, actually; this decision forced the
company to change its energy mix to 70% coal and 30% RDF which implied higher costs and puts huge pressure on the company’s gross profit margin, as the firm main sources of energy are 70% Coal, 20% HFO and 10% RDF.

Foreign Risk
The company foreign exchange risk arises from various currency exposures mainly the USD, due to its transaction made in USD. In fact the continuous devaluation to the
EGP – a scenario we assume to continue in the future to reach USD = EGP9.30 in 2020 affected negatively the firm`s operating profit specially in 2016 where the loan paid in USD rescheduled in 2015 is expected to increase its payments in USD in 2016
Credit Risk

ACC has an advantage of no credit risk exposures. The company has policies that ensure that sales are made to its customers with appropriate credit policy also the company is dealing with the only reputable financial institutions. The market share of all the cement firms is constant therefore any cement firm inside Egypt has two options to increase its market share.

Thank you
Source: BP statistical review of world energy 2015, EIU estimates 2015
Moreover, raw materials did not witness major fluctuations within our model as the prices are assumed to grow with normal inflation rate, and depreciation will remain unchanged (10% of COGS).
We value ARCC at EGP 8.6/share and recommend hold

We base our valuation applying a discounted cash flow methodology

Also we used the WACC to discount the free cash flow to the firm

The risk free rate (RF): 9.34% calculated as the after tax 90 days T–bills of the Egyptian government

Cost of Debt: 8.53%-the after tax interest rate on the most recent EGP loan of the company

Beta (β):the stock has been listed in EGX for less than 5 years we assumed the market beta of 1

Valuation Analysis

We did not assume beta greater than one because in our opinion the firm had passed all the critical turning points

Equity risk premium: we used the methodology and parameters calculated by Domadaran`s

According to Domadaran`s CDs spread Egypt`s risk premium is 6.56% as of January 2016

The mature market calculations is based on current US market risk premium based on S&P 500 is 6% as of January, 2016

Our estimates assume 7% YoY correction in cement prices, expecting prices to cool off from the current peaks as a result of improved supplies
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