Fwd: Egypt's Arabian Cement Company IPO - Analysing valuation/pricing scenarios, pre-IPO

Mohamed E. Shaheen from iphone

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From: "NAEEM Research" <research@naeemholding.com>
Date: 15 April 2014 04:27:04 pm EET
Subject: Egypt's Arabian Cement Company IPO - Analysing valuation/pricing scenarios, pre-IPO

Arabian Cement to start IPO roadshow next week - Arabian Cement Company (ACC) plans to hold international presentations from next week aimed at attracting investors to a stock market debut that would be the first in Cairo since 2011. Chief Executive Jose Maria Magrina said the firm was looking to float a stake of between 22.5-30%. It will hold presentations for investors in Britain, Saudi Arabia, South Africa, the United Arab Emirates and the United States. "Our target is the 14 May to start trading but that may change as it depends on the result of the roadshow," he said on Monday. "We believe that this is the right time as the country is now going through a second renaissance," Magrina said. "We want to capture this and we think that this excitement will help the company and the stock exchange to perform better." Magrina said Arabian Cement's capital was worth around EGP757m (USD109m) and the initial public offering (IPO) would see Egyptian shareholders sell down some of their stakes. He did not identify the investors. EFG-Hermes has been mandated to advise on the IPO

About ACC –

*        The company has a cement production capacity of 5mt, relative to the industry capacity of an estimated 60mt

*        According to local dispatch indications, ACC sold roughly 4mt of cement during 2013, operating at 80% utlisation rates

*         Roughly 97% of the production is sold locally with exports making up 3% of total cement sales

*        With an indicative utilization rate of 80%, Arabian Cement is exposed to the local shortage of natural gas supplies; in our opinion, a 20% deficit given most of its plant capacities being new (commenced in 2008 and 2012)

*        The company relies mostly on gas for cement production, but hopes to increase its capacity from renewable energy by the end of this year from 10% to 30%. Plans are laid out for an EGP300m expenditure to use both coal/waste

*        Spanish cement group Cementos La Union, which owns 60% of ACC, is expected to keep its majority 60% stake intact in ACC

Valuation of the IPO –

*        Given ACC's cement plant capacity of 5mt being almost new (less than five years old), the company's total value can be looked at from a replacement-cost perspective. Going by latest indications, the replacement cost/ton of cement in Egypt is around EGP1,250/ton. In other words, it costs approximately EGP6.25bn (USD900m) to construct a new cement plant in Egypt with a capacity of 5mt p.a.  

*        Listed cement stocks in Egypt (out of which five are under our coverage universe), currently reflect  big disparities in their implied replacement cost valuation multiples; ranging between EGP735/ton – EGP1,350/ton (refer chart below). The difference in valuation is mainly a result of the cost structure mix (between gas and mazut), local energy shortages impacting production, company specific issues, labor strikes, disclosures etc.   

*        However, it can still be concluded that most Egyptian cement stocks (as of today), on average trade at a 20%-25% discount to their replacement cost value i.e. about EGP1,000/ton. For ACC, this would translate to a total value of EGP5bn (USD715m) assuming no debt in its books

*        Given that ACC currently has net debt amounting to EGP1.34bn, an indicative EGP3.7bn equity value arises

*        We highlight the following valuation/IPO pricing scenarios for  ACC, assuming 25% of its shares offered to the market (also depicted in the chart below)

1.       Pricing at replacement cost  - Total equity value of EGP4.9bn raising/offering EGP1.23bn through the IPO

2.       Pricing at indicative fair value, based on current market multiples of existing listed cement stocks in Egypt – Total equity value of EGP3.7bn offering EGP915m through the IPO

3.       Pricing at a 20% discount to indicative fair value - Total equity value of EGP1.86bn, raising/offering EGP464m through the IPO

4.       Pricing at a 30% discount to indicative fair value - Total equity value of EGP1.62bn raising/offering EGP406m through the IPO        

*        The IPO pricing would depend on the extent of discount (if any) that the financial advisors/lead managers (of the IPO) would suggest to the company; an IPO pricing usually involves offering a discount through the issue price, to ensure better participation/subscription to the offer and, giving investors the opportunity to unlock returns post issuance

 

 

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