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HC updates its estimates for SIDPEC’s target price

Market excitement overdone; Downgrade to UW

  • Polyethylene prices reach all-time highs, but we assume this will be short-lived and has yet to reflect on feedstock costs

  • Polypropylene project shelved; paving the way for the return to dividend distributions, while the potential sale proceeds provide upside risk to valuation 

  • We cut our 2021–24e EBITDA and EPS estimates c21% and c26% respectively, exacerbated by lower sales volumes and a weaker USD, and downgrade to Underweight helped by the recent share price rally

Polyethylene prices quickly recovered, but feedstock could follow suit, not fully translating into margin expansion for SIDPEC: After hitting lows following the pandemic, international polyethylene prices rebounded impressively toward the end of 2020 before reaching all-time highs this month on a series of supply shocks (from the US arctic freeze to an unexpectedly heavy cracker turnaround season in Europe to short supply of containers in Asia and high freight rates), amid robust post-COVID demand. While most estimates point to these levels sustaining through 1H21, long-term prospects have become increasingly difficult to forecast. We assume a return to mid-cycle by the end of next year and only oil price-driven growth thereafter. We also do not expect these high prices to result in a pure windfall for SIDPEC’s earnings in 2021 as this level is likely to put the company’s feedstock formula back into effect, after having fixated at the formula’s implied floor for the better part of last year, on our calculations. Not to mention the risk of ongoing feedstock supply issues, which besides affecting production volumes, could also have further implications on feedstock costs as the imported gas will likely come at substantially higher prices. The company is budgeting for a c23% y-o-y increase in raw material cost per ton, on our base-case calculations. We  therefore opt to maintain the current (suboptimal) utilization rates and local-based gas prices until further clarity about the steadiness of supply from GASCO going forward and the pricing and contribution of the imported quantities, which still translates to significantly better-than-budgeted figures for 2021 and a substantial operational improvement over 2020.

Polypropylene project behind us, potentially resolving a key share price overhang: The company is finalizing an agreement with the Red Sea National Company for Refining and Petrochemicals (RSNCRP) to sell its polypropylene project license and participate in the shareholding of the latter with a 5% stake. We believe this to be the best-case scenario as we had not been fond of the project due to 1) unclear (and significantly changed) economics, 2) disproportionately large size (and risk) compared to SIDPEC, 3) the commitment of the company to hold a 100% stake in the venture, and (4) the unfavourable market perception of the capital increase that would ensue. This deal also reimburses some EGP700m in project license costs (and feasibility studies), previously seen as sunk costs, though unlikely through cash proceeds. This, and improved earnings, should help the company return to paying dividends next year.

Downgrade to Underweight: We lower our 2021–24e EBITDA and EPS estimates c21% and 26% respectively, which translates to a c11% cut to our 12-month target price to EGP8.00/share. Our new target price puts SIDPEC at a 2021e P/E multiple of 8.8x (trading at 11.1x) and implies a negative potential return of 20.2% on the 23 March closing price of EGP10.0/share. Therefore, we downgrade the stock to Underweight from Neutral. In our view, current valuation is stretched, with the stock rallying c45% over the past five months. The market is likely overlooking the potential imminent increase in feedstock costs along the end-product price rally, which is likely to appear as early as 1Q21, in our view.

HC successfully advises Almarai on the acquisition of 100% shares in Bakemart UAE and Bahrain

  • HC Securities & Investments acted as co-advisor to Saudi food giant Almarai on the acquisition of 100% shares in Bakemart UAE and Bahrain in a deal worth AED 93.5 million (USD25.5 million).

The transaction remains subject to obtaining certain mandatory and regulatory approvals including the approval of the General Authority for Competition in the Kingdom of Saudi Arabia, The acquisition will further expand Almarai’s bakery product offering and enhance its contribution to the Kingdom’s food security in line with Saudi Vision 2030.

Established in 1977, Almarai is headquartered in Riyadh, Saudi Arabia and is actively engaged in five categories across the Middle East and North Africa (MENA) region: Dairy, Juice, Bakery, Poultry and Infant Nutrition. Almarai is currently the Middle East’s leading food and beverage manufacturer and distributor – and the world’s largest vertically integrated dairy company.

Mohamed Aburawi, head of investment banking at HC commented: “We are pleased to support Almarai on this important transaction in expanding its bakery business. HC has developed a long term relationship with Almarai for over a decade; back in 2009, HC advised Almarai on the acquisition of 100% of The International Company for Agro Industrial Projects “Beyti” marking its entry to the Egyptian market. This transaction also testifies of the HC’s cross-border execution capabilities, in addition to its ability to offer best-in class advisory services and connect investors with best-of-breed opportunities in the region via its offices in Cairo and Dubai International Financial Centre (DIFC)”


HC Securities & Investment

HC Securities & Investment (HC) is a leading investment bank in Egypt and the MENA region. Since its inception in 1996, HC has leveraged its relationship-driven insights, local and regional market knowledge, industry-specific expertise and strong execution capabilities to provide its clients with a wide range of services in investment banking, asset management, securities brokerage, research, custody, online trading and private equity through its offices in Egypt and the UAE (DIFC). HC Investment Banking has an outstanding track record of advising leading corporates in Egypt and the MENA region on M&A, capital market, and financing transactions in excess of USD 5.9bn. HC Asset Management, , now manages 11 onshore mutual funds for commercial banks and portfolios for institutions and sovereign wealth funds with assets under management in excess of EGP 7bn. HC Brokerage is ranked among the top brokers in Egypt and provides a wide array of services, including research and online trading to institutional and retail clients.


For further information, please visit www.hc-si.com or contact Marwa Nakhla, Corporate Communications Supervisor, at mnakhla@hc-si.com

Egypt currently relies on foreign portfolio inflows as a main source for foreign currency, HC expects the CBE to keep interest rates unchanged

  • HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled March 18th and based on Egypt’s current situation, they expect the CBE to keep interest rates unchanged.

Head of macro and financials at HC, Monette Doss commented: “February inflation figures came in lower than our estimates of 4.9% y-o-y and 0.5% m-o-m, which we believe reflects suppressed consumer demand currently. Over the rest of 2021, we expect monthly inflation to average 0.8% m-o-m and 6.4% y-o-y accounting for possible domestic price shocks following the recent commodity price rally and possible recovery in consumer confidence following the successful rollout of the COVID-19 vaccine. Our numbers rule out domestic gasoline price increases since the current market price reflects a Brent price of USD61/barrel (as estimated in the FY20/21 government budget). We estimate FY20/21e average Brent price at USD54/barrel, as it averaged USD44/barrel in 1H20/21 while Bloomberg consensus estimates for 2H20/21 come at USD62/barrel. We, therefore, expect 2021 inflation to remain within the CBE’s target range of 7% (+/-2%) for 4Q22. On the external position front, however, we believe that Egypt currently relies on foreign portfolio inflows as a main source for foreign currency given slashed tourism revenue and low exportation activity. Hence, with treasury yield hikes in the USA as well as different emerging markets such as Turkey, we believe that the CBE has limited room to undertake further interest rate cuts in its upcoming meeting. We believe that global interest rate hikes reflected in a decline in average monthly portfolio inflows in Egyptian treasuries to USD1.25bn during January and February from USD2.29bn in 2H20. We, accordingly, expect the MPC to keep rates unchanged in its upcoming meeting. That said, we note that Egyptian 12M treasuries currently offer a real yield of 5.1% (given a nominal yield of 13.3%, 15% tax rate on treasuries’ income for American and European investors and our 2021e average inflation forecast of c6%) which is higher than Turkey’s real yield of 2.0% (given nominal yield of 15.7% on 14M treasuries, zero tax rate, and Bloomberg 2021 inflation forecast of 13.7%).

It is worth mentioning that, in its last meeting on 4 February, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to keep rates unchanged for the second consecutive time after undertaking cuts of 50 bps twice in its September and November 2020 meetings. Egypt’s annual headline inflation accelerated to 4.5% in February from 4.3% in the previous month, with monthly inflation increasing 0.2% m-o-m reversing a decline of 0.4% m-o-m in January, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS).