EGYPT|FERTILIZERS

November 24, 2011

Egyptian Financial & Industrial

STRONG BUY (UPGRADED)

LTFV | EGP15.4 (DOWNGRADED)
TP | EGP14.3 (DOWNGRADED)

Restructuring renews hope! Strong Buy High risk

EFIC saw two presidents resign during the opening months of 2011;
however, current management is eagerly taking steps to renovate and
correct past inconsistencies by undertaking several restructuring activities.
This includes addressing the companys expensive 2008 inventory, which
appears to be accounted for by a EGP20mn provision in 4Q10. We have thus
updated our model and reduced our estimates for companys LTFV from
EGP26.6 per share to EGP15.4 per share on the back of higher discount
factor and EGYPHOS elimination. Despite the positive news of restructuring
activities from 2011 onwards, we have assigned a new TP of EGP14.3, due to
lower LTFV and lower relative valuation. The suggested TP makes EFIC
trade at an EV/EBITDA multiple of 8.5x for 2012 compared with peers
EV/EBITDA multiple of c.10X, down from EGP23.2 per share. Accordingly,
the new TP suggests an upside potential of 50%+ from recent market price,
prompting us to upgrade EFICs rating to Strong Buy, up from Hold.

Positives
Writing off expensive inventory: EFICs management has allocated a
c.EGP20mn provision, through which we believe it has indirectly written off its
expensive inventory.
Machinery maintenance & capacity build-up: New management decided to
increase its SSP production capacity by 700k tons per year in Suez during
2012. This should benefit EFICs production capacity (i.e. fewer production
interruptions) and will allow the company to increase its export sales volume.
Rescheduling loan structure: EFIC was able to restructure close to 53% of its
short-term bank loans into medium-term ones, signalling a breather for short
term repayments and interest expense burden.
Ammonium Sulphate agreement: Management is believed to be continuing its
negotiations with the GoE to export its AS directly, without reliance on third
parties.

Cautions
No DPS expected for 2011: We expect that the restructuring activities may
deter any DPS for 2011.

COMPANY SYNOPSIS
Egyptian Financial & Industrial Company (EFIC) is a jointstock company founded in 1929. EFIC's main activities are
producing and trading phosphate fertilizers and chemicals. It
produces the following products:
1.

Single super phosphate (SSP) in two forms powdered

(PSSP) and granulated (GSSP)

2.

Sulphuric acid

3.

Ammonium Sulphate (AS)

4.

Di-Calcium Phosphate (DCP)

5.

Mixture fertilizers NPK

EFIC is the largest producer of phosphate fertilizers in

Egypt, accounting for around 70% of SSP local market sales
in 2007. Such a market share takes into account sales from
Suez Co. for Fertilizers Production (SCFP), EFIC's 99.88%owned subsidiary.
EFICs 2009 AGM/EGM has approved to increase its
authorized capital of EGP700mn to EGP1000mn, while
maintained its issued capital of EGP693mn, distributed over
69.3mn shares at a par value of EGP10/share.

SHAREHOLDER STRUCTURE
Holding Companies
Banks
Inusrance companies
Others
Free Float
Total

26.6%
10.0%
1.08%
10.3%
52.0%
100.0%

STOCK DATA
Reuters; Bloomberg
Recent price as of 23-Nov-11
No. of O/S shares
Market cap
52-wk high / low
Avg. daily volume / turnover

EFIC.CA; EFIC EY
EGP 9.38
69.3 mn
EGP 650.03
EGP 20.65/ EGP 0
0.14 mn / LE 1.97 mn

NI decrease 2011 on possible provision: We revised consolidated NI before

provisions to EGP96mn; however, we have provisioned EGP68mn on possible
contingencies, which include a liability of EGP61mn to Al Nasr Mining Co.

STOCK PERFORMANCE | 52 WEEKS

Valuation and recommendation: In light of the current restructuring activities, we

have decreased the companys TP to EGP14.3, compared to our previous
estimate of EGP23.2. The suggested TP caters an upside potential of 50%+; thus,
we have upgraded EFICs rating from Hold to Strong Buy.

25

Volume

EFIC

EGX 30 - rebased

mn shares

EGP

3.5
3.0

20

2.5
15

2.0
1.5

EGP mn

2010 A

2011 P

2012 P

2013 P

2014 P

10

Revenues
Growth rate

650.3
13.0%

899.0
38.2%

1,025.3
14.0%

1,160.1
13.2%

1,307.6
12.7%

89.6
-23.5%
13.8%

214.3
139.2%
23.8%

236.8
10.5%
23.1%

264.3
11.6%
22.8%

301.9
14.2%
23.1%

Net income
Growth rate
Net m argin

(8.1)
NM
-1.2%

44.8
NM
5.0%

85.2
90.2%
8.3%

101.3
19.0%
8.7%

111.4
9.9%
8.5%

PER
P/BV
EV/EBITDA
Net debt/EBITDA
Dividend yield

NM
0.8x
16.3x
4.3x
0.0%

14.5x
0.7x
6.4x
3.6x
0.0%

7.6x
0.7x
7.1x
3.6x
2.1%

6.4x
0.6x
6.1x
3.0x
2.5%

5.8x
0.6x
5.7x
2.6x
3.1%

Source: Company reports and CI Capital Research estimates

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Oct-11

Nov-11

Jul-11

Aug-11

Jun-11

May-11

Mar-11

May-11

Mar-11

Jan-11

Feb-11

Dec-10

EBITDA
Growth rate
EBITDA m argin

0.5

Nov-10

COMPANY NOTE

1.0

Source: Bloomberg
MUHAMMAD EL EBRASHI
MUHAMMAD.ELEBRASHI@CICAPITAL.COM.EG

EGYPT|FERTILIZERS
November 24, 2011

Recent news and 3Q11 highlights

Recent Developments

The company has changed its external auditor from MazarsMostafa Shawki to
KPMG Hazem Hassen, starting with the 2011 fiscal year.

The GAM dated May 5 accepted the resignation of Mr. Esmat Awad Sayyad, the
newly inaugurated chairman and managing director, and the successor of Mr. Yehia
Kotb. The GAM has also approved the election of Mr. Ali Awad Sayyad.

Company management changed its accounting policy for inventory, and wrote off
c.EGP20mn of inventory.

Management has confirmed its restructuring activities and the enhancement of

production capacities. Its strategies involve addressing lower quantity sold due to
two non-operational lines of production: the granulating unit in companys Kafr El
Zayyat plant and the sulphuric acid unit in companys Assiut plant. Of these, the
former halted production in June 2009 on the orders of the El Gharbiyya governor,
while the latter's stoppage came in September 2008 when the line was frozen for
1
renovation and repairs.

3Q11 operational analysis

A healthy sales performance: Consolidated 9M11 sales recorded EGP535mn, a 13%
increase YoY (3Q11 sales were EGP199mn). Absent any further details and considering
the non-operational facilities of Kafr el Zayyat & Assuit plants, we believe that EFICs
management is buckling down and hard at work, as indicated by the 9M11 results. For
example, EFICs standalone revenues contributed with c.55% of consolidated top line.
We expect that new management is aiming to benefit from the 4% increase in the
international P fertilizer prices.
Higher EBITDA margin on lower discounts and SG&A: 3Q11 consolidated EBITDA
margin came in at 30%, which came higher than that of 3Q10 of c.15% and higher than
CICRe of 17%. This came on the back of lower-than-expected SG&A, and we expect
that the higher food prices may have encouraged management to waive sales discounts
in the local market. Also, EFICs standalone EBITDA margin came in at 18%. That said,
the companys EGP19.7mn standalone EBITDA contributed less than 35% of the
EGP60mn consolidated EBITDA figure. Accordingly, we believe that SCFP operations
buoyed consolidated performance during 3Q11.

COMPANY NOTE

Higher interest expense to finance WC: A higher interest expense came alongside the
companys higher level of operations during 3Q11; however, management was able to
cut down its outstanding debts since the beginning of the year.

Interest expense came in at EGP20mn (vs. CICRe of EGP15.3mn), 10% higher

than 2Q11 of EGP18.3mn. We believe that the QoQ increase in interest expense
followed the increase in working capital requirements, including the increase in price
of sulphur, which is vital in supporting the general increase in companys

Source: Companys management reply no. 5 to the Central Accounting Agency report in 1Q11

standalone financials

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EGYPT|FERTILIZERS
November 24, 2011

consolidated sales. The international benchmark price for this raw material
increased by 16% QoQ to reach USD175/ton vs. USD150/ton in 2Q11.

In addition, EFICs management was able to decrease both of its short term and
long term borrowing to EGP197mn and EGP363mn in 3Q11, down from
EGP276.6mn and EGP443.9mn, respectively, by year end 2010.

Net income: EFICs income from continuing operations totaled EGP18mn, which beat
our estimates of c.EGP15mn, of which 35% came from EFICs standalone while the
residual was generated from SCFP during 3Q11.
Figure 1 | EFIC Quarterly Performance Highlights
Consolidated Financials (EGP '000)

1Q11 A
Mar-11
111,887
-21%
-37%

2Q11 A
Jun-11
223,837
53.0%
100.1%

3Q11 A
Sep-11
199,351
8%
-11%

3Q11 E
Sep-11
164,698
-65.2%
-50.9%

Variance
A vs. E
21.0%

9M11 A
Sep-11
535,075
12.9%

9M11 A Variance
Sep-11 A vs. E
500,422
6.9%
5.6%

Gross Profit
Gross Margin
YoY growth
QoQ growth

31,487
28.1%
-45%
-325%

52,016
23.2%
0.5%
65.2%

74,504
37.4%
99%
43%

57,553
34.9%
-60.6%
-31.1%

29.5%
243 bps

158,007
29.5%
8.0%

141,056
12.0%
28.2% 134 bps
-3.5%

EBITDA
EBITDA Margin
YoY growth
QoQ growth

23,272
20.8%
-53%
NM

39,332
17.6%
-4.3%
69.0%

60,166
30.2%
119%
53%

27,675
16.8%
-76.5%
-55.8%

117.4%
1338 bps

122,770
22.9%
4.3%

90,279
36.0%
18.0% 490 bps
-23.3%

EBIT
EBIT Margin
YoY growth
QoQ growth

16,000
14.3%
-65%
NM

32,378
14.5%
-11.0%
102.4%

51,563
25.9%
100%
59%

23,718
14.4%
-77.9%
-51.0%

117.4%
1147 bps

99,941
18.7%
-6.8%

72,096
38.6%
14.4% 427 bps
-32.8%

Net Income - Reported

Income - Continuing Operations Margin
YoY growth
QoQ growth

2,954
2.6%
-87%
NM

22,957
10.3%
-12.7%
677.2%

17,929
9.0%
61%
-22%

14,450
8.8%
-75.8%
-44.2%

24.1%
22 bps

43,840
8.2%
-26.5%

40,360
8.1%
-32.4%

8.6%
13 bps

Net Profit - Adjusted

Net margin
YoY growth
QoQ growth

2,955
2.6%
-88%
NM

12,699
5.7%
-44.7%
329.8%

17,929
9.0%
61.3%
41%

14,450
8.8%
-75.8%
-7.7%

24.1%
22 bps

33,584
6.3%
-43.8%

30,104
6.0%
-49.6%

11.6%
26 bps

Revenue
YoY growth
QoQ growth

COMPANY NOTE

Source: EFIC reports & CI Capital Research estimates

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November 24, 2011

Projection Assumptions
1.

We have increased the applied CAPM on EFIC and SCFP to 15.4% and 16% from
13% and 14.2%, respectively. This follows increasing the applied risk premium
following the recent political instability of the MENA countries, and higher adjusted
beta of 0.91.

2.

Production capacities: The company should accommodate its production

capacities to cater to revived demand from Latin America following Egypts entrance
into a trade agreement with the MERCOSUR countries.

SSP related capacities: EFICs 700k SSP production capacity in Suez

governorate may be postponed until 2012. We also expect that management
could be motivated to replenish machinery in both Kafr el Zayat and Assuit
plants, similar to the additional SSP case, in order to upgrade production
capacities.

AS related capacities: We continue to account for EFICs additional 300k of

AS production capacity to 300k per year in SCFP.

Additional SSP
production capacity
postponed

Figure 2 | EFICs consolidated production capacities

'000 ton/year
4,500

SA - Kafr El Zayat
SSP - Assiut
AS - SCFP

SA - Asyut
SSP - SCFP
DCP - SCFP

Additional 150k/yr of AS

SA - SCFP
SSP - Suez

SSP - Kafr El Zayat

NPK - SCFP

Launch of 700k/yr of SSP

4,000
3,500

20
300
50

20
300
50

10
225
50
450

20
300
50
450

20
300
50
450

700

700

2,500

150
50
450

450

450

2,000

750

750

750

750

750

750

750

750

750

750

750

750

500

425

425

425

425

425

425

210
170

210
170

210
170

210
170

210
170

210
170

2008

2009

2010

2011

2012

2013

3,000

1,500
1,000

Note: SSP capacities include PSSP & GSSP

Source: EFIC & CICapital Research estimates

COMPANY NOTE

3.

Utilization rates:

The companys management stated that Asyuts SA production line is on hold

for restructuring/maintenance, and Kafr el Zayats GSSP had been stopped
several times by the local governorate. We believe that consolidated utilization
rates for 2011 may approach 64%, increasing to c.80% in 2014.

Focus on AS: We have decreased the utilization for SCFPs ammonium

sulphate (AS) for 2011 to 61%, compared with our early assumption of 79%.
However, we increased the products rates of utilization to 76% in 2014 up from
our earlier assumption of 70%. This follows our belief that current management
will continue to negotiating, and possibly succeed, with the government of Egypt
to export its AS directly without going through third party agreements.

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Management is yet to
solve AS exports with
GoE...

EGYPT|FERTILIZERS
November 24, 2011

Figure 4 | Export sales volumes contribution (2006A

2014P)

Figure 3 | EFICs consolidated sales volumes (2006A

2014P)
SA

'000 ton
2,000

PSSP

GSSP

45%

AS

41%

40%
1,800

35%

227
1,600

30%

200

1,400
70

29%

25%
22%

25%

627

1,200
1,000

308

359

800

160
798

191

153
269

550

2006A

2007A

2008A

15%

5%

671

0%

213
236
77

9%

835

307

200
-

17%

501

222
388

98

23%
10%

10%

380
404

638

15%

163

320

600
400

20%

562
37

87

123

95

134

131

124

2009A

2010A

2011P

2012P

2013P

2014P

2006A 2007A 2008A 2009A 2010A 2011P 2012P 2013P 2014P

Source: EFIC financials& CICapital Research estimates

4.

Inventory: Company management has revalued its inventory (specifically GSSP

and rock phosphate) at its market value, which is lower than historical costs,
resulting in a write-off of EGP20mn. This move might indicate that the company has
indirectly written off part of its expensive sulphur. We also expect that companys
management is likely not to repeat its 2008 sulphur inventory hedge again.

Writing off expensive

inventory

Figure 5 | EFICs inventory policy change during 2008 to 2010

2008

2009

2010

Finished/WIP
goods

EFIC: Cost basis*.

SCFP: Same as EFIC.

EFIC: Weighted average.

SCFP: cost basis.

EFIC: Weighted average.

SCFP: Same as EFIC.

Raw material

EFIC: Lower of cost or market

(LoCM)**.
SCFP: Same as EFIC.

EFIC: Lower of cost or market

(LoCM)**.
SCFP: Same as EFIC.

EFIC: Weighted average.

SCFP: Same as EFIC.

*Cost bases: is calculated from raw materials, direct labor costs, and the proportionate indirect
costs.
**LoCM: deducts expected manufacturing costs.

COMPANY NOTE

Source: EFICs financials

5.

EBITDA performance: Although we have increased our expectations for the

consolidated SG&A, following the recent increase in salaries as directed by the
government of Egypt (GoE), we have increased our expectations for consolidated
EBITDA margin compared with our old estimates and compared with 2010
performance. This comes on the back of company decision at the beginning of 2011
to write-off inventory, which might enhance the consolidated gross profit margin.

6.

Loan restructuring: The companys management was able to restructure

EGP420mn in short- to medium-term loans between EFIC standalone and SCFP,
EGP220mn for the former and EGP200mn for the latter. This might trigger the
following:

Consolidated interest expense: We have decreased the interest burden on

the consolidated front in light of the short term loans allocated to SCFP and
EFIC standalone on a medium-term basis (eight semi-annual installments over
three years). This should give EFIC standalone some breathing room while
paying its dues and focusing on its restructuring activities, as well as the newly
initiated production line in Suez.

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November 24, 2011

SCFP interest capitalization: EFICs management announced that it will stop

to include major part of SCFPs assets (i.e. unfinished machinery) as
construction in progress, as opposed to its accounting policies of previous
years. We have altered our forecast for SCFP assets to reflect the change.

7.

Depreciation: Following managements announcement of including SCFPs

unfinished machinery as assets, we have increased EFICs annual consolidated
depreciation expense. In addition, we continue to account for the newly-leased
operations in Suez. Also, we believe that current management shows commitment to
replenish/maintain current production capacities to increase utilization rates. We
note that according to companys management reply no. 5 to the Central Accounting
Agency report in 1Q11 standalone financials due to non-operational lines of (1) the
granulating unit in companys Kafr El Zayyat plant and (2) the sulphuric acid unit in
companys Asyut plant. Of these, the former halted production in June 2009 on the
orders of the El Gharbiyya governor, while the latter's stoppage came in September
2008 when the line was frozen for renovation and repairs.

8.

Taxes: We have increased the tax rate to 12.5%, up from an average of 7% starting
2011 onward. The increase follows the recent increase in the GoE tax rate by 5% to
reach 25%. We expect that SCFPs tax shelter is rewarding consolidated
performance.

9.

Cash conversion cycle (CCC): We have increased companys cash conversion

cycle from 209 to north of 290 days, based on our belief that management might
increase the credit sales and its credit terms for its receivables to stimulate sales
activity.

10. EGPHOS: A major partner in the EGPHOS project has announced that the project
might be delayed for a two year period; thus we expect that the project is unlikely to
be launched any time soon. Accordingly, we are ruling out its inclusion in our
valuation, as well as EFICs investment income, until receiving clear guidance from
the company or about the project.
11. Provisioning: We expect the companys management to provision an amount of
EGP68mn, representing the repayment of EGP61mn to Al Nasr Mining Company as
well as a contingent EGP7mn. The latter amount might satisfy the Central
Accounting Agency requirement in footnote no. 1, which had been mentioned in
EFICs standalone financial statements for 1Q11.

COMPANY NOTE

12. Cash dividends: We believe that the new management may hold off on distributing
cash dividends for the third year in a row. This follows our view that management
might want to retain some liquidity to undertake the restructuring process during
2011 onwards.

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November 24, 2011

Figure 6 | EFICs Debt Maturity Profile (2011 2014)

EFIC

EGP mn
160

SCFP

140
120
67.5
100
62.5
80

50

60
40

20

77.5
62.5

20

50
30

0
2011

2012

2013

2014

Source: EFICs financials

Figure 7 | EFICs consolidated financial highlights

Figures EGP '000

Dec-07
Actual

Dec-08
Actual

Dec-09
Actual

524,997

931,325

575,599

650,308

899,024

1,025,279

1,160,103

1,307,568

77.4%

-38.2%

13.0%

38.2%

14.0%

13.2%

12.7%

798,633

1,013,292

1,079,609

1,143,649

13%

1%

7%

14%

214,258

236,808

264,280

301,878

13.78%

23.83%

23.10%

22.78%

23.09%

-23.52%

139.18%

10.52%

11.60%

14.23%

Old

163,433

214,448

236,447

266,856

EBITDA margin

18.18%

20.92%

20.38%

20.41%

Growth rate

82.44%

31.21%

10.26%

12.86%

31%

10%

12%

13%

-64,372

-97,164

-92,219

-109,601

-91,635

-106,623

-89,833

-120,029

-30%

-9%

3%

-9%

Sales

New
Growth rate

Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Actual Projected Projected Projected Projected

Old

EBITDA

% Chg.
New

164,364

296,329

117,134

EBITDA margin

31.31%

31.82%

20.35%

Growth rate

89,581

New

-31,459

-50,440

-82,048

-68,589

Old

% Chg.

New

Attrib. Income

COMPANY NOTE

Interest Exp.

% Chg.

135,567

239,694

25,762

-8,096

44,784

85,178

101,342

111,414

76.8%

-89.3%

-131.4%

NM

90.2%

19.0%

9.9%

25.74%

4.48%

-1.24%

4.98%

8.31%

8.74%

8.52%

41,602

86,859

180,335

174,037

Growth rate

NM

108.8%

107.6%

-3.5%

Net margin

5.2%

8.6%

16.7%

15.2%

8%

-2%

-44%

-36%

Growth rate
Net margin

25.82%

Old

% Chg.

Source: EFIC consolidated financial statements and CI Capital Research estimates

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Valuation Summary
We have used DCF and multiples to value EFICs fundamental and relative value,
respectively. The following are summaries for our approaches:
DCF valuation Downgraded: We have reduced our estimate for the companys
intrinsic value by 42% based on higher discounting factors, i.e. risk premiums and beta
and removal of EGYPHOS. This was although we have increased companys utilization
rates and increased profit margins.

EGP15.4 vs. old

EGP26.6per share

Multiple valuation Downgraded: We have downgraded companys relative valuation

by a similar 42% based on the EV/EBITDA multiple for 2013.

EGP13.2 vs. old

EGP22.6

Technical valuation Removed: Although the technical analysis view of the stock
suggests EGP10-11/share as a support, we chose not to incorporate the technical
pricedue to the recent political changes.
TP Downgraded: We blended the two approaches (DCF and multiple valuations), as
opposed to our previous method, which had included the technical analysis. This
resulted in EGP14.3/share.
We have summarized our findings below.
Figure 8 | EFICs valuation summary
Valuation methodology
LTFV

Weights Change
Value Change

Multiple

Overall effect
TP

DCF
5

Technical
6

Relative
5

11.0

13.2

Value - EGP

15.4

14.3

Source: CI Capital Research estimates

Valuation Methodology

For the second time, we have revised downward our estimates for EFICs 12M
LTFV and TP.

According to our expectations, we estimate EFICs LTFV and TP to record

EGP15.4/share and EGP14.3/share, down from our old estimates of EGP26.6/share
and EGP23.2/share, respectively.

DCF

COMPANY NOTE

We have also decreased our estimate for the companys shareholders value from
EGP1,824mn to EGP1,070mn a c.45% slash due to the following:
1.

We have removed the EGYPHOS project from our valuation.

2.

Increasing the applied risk premium following the recent political instability of the
MENA countries.

3.

Applying an adjusted beta of 0.91 (instead of 0.85) as per Bloomberg.

4.

We have increased our discount rates applied on EFIC and SCFP to 15.4% and
16% from 13% and 14.2%, respectively.

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November 24, 2011

Figure 9 | EFICs New &Old Valuation (000)

Subsidiary

Enterprise
Value (EV)

EFIC
SUEZ
Valuation
Liquidity Discount
SUEZ
EGYPHOS (1st phase)
Valuation
Liquidity Discount
EGYPHOS (1st phase)
Sum

New Valuation
Equity EFIC's share
share

422.1

100.0%

422.1

1,527.5

99.9%

1,525.7
10%
1,373.1

0%

1,949.6

0%
-

Subsidiary

23.5%

EFIC
SUEZ
Valuation
Liquidity Discount
SUEZ
EGYPHOS (1st phase)
Valuation
Liquidity Discount
EGYPHOS (1st phase)

76.5%

0.0%

1,795.3 100.0%

Net Cash/(Debt)

(725.5)

Shareholders' value

1,069.8

No. of Shares

69.3

LTFV

15.4

OLD Valuation
Enterprise Equity EFIC's
Value (EV) share share

% of
total
value

Sum

731.0 100.0%
1,851.6

99.9%

1,696.7

15%

4,279.3

Net Cash/(Debt)

No. of Shares

EV (EGP mn)

Ownership %

Prop. Ent
Value (EGP
mn)

EFIC

61.9

>

2013

4.5

278.4

100.0%

278.4

SCFP

336.8

>

2013

4.5

1,515.8

99.9%

1,362.6
-

EGYPHOS
Total prop EV.
Net Cash/(Debt)

1,641.0
(725.5)
915.5

Equity Value

COMPANY NOTE

-18%
62.8%

-18%
-100%

9.6%

-100%

2,650.0 100.0%

-32%

26.6

Figure 10 | EFICs Relative Value

Peers'
EV/EBITDA*

27.6%

%
Change
(New
vs. old)
-42%

-10%
-42%

69.3

LTFV

EFICs local share is currently trading at a 2013E PER of 6.5x and a 2013E EV/EBITDA
of 6.1x. We believe investors would be more concerned withthe companys multiples for
2013 one year from now; thus we used 2013 multiples to reach a multiple-based
valuation vis--vis peers.

Year

254.5
0%
254.5

1,842.4

Relative Valuation

EBITDA (EGP
mn)

1,849.4
10%
1,664.5

(807.6)

Shareholders' value

Source: CI Capital Research estimates

Subsidiary

731.0

% of
total
value

Shares

69.3

Relative Value

13.2

Source: CICapital Research estimates

Please Read Last Page For Contact Details and Important Disclaimer

-42%

EGYPT|FERTILIZERS
November 24, 2011

Target Price & Recommendation

Target price
We have altered the process through which we calculate EFICs target price. According
to our new methodology, we have ceased to incorporate the market sentiment reflected
in our technical analysis for the stock price movement.
Though we continue to blend fair values, we did so according to a different weight
scheme (50%-50% for LTFV and relative valuation, respectively).
Our old method had been weighted 50%-10%-40% for LTFV, technical and relative
valuation, respectively. We think this might be a short term target and we chose to stick
to a longer-term target. Hence, we have assigned a new target price of EGP14.3/share,
which lower than our old estimate of EGP23.2/share.

Recommendation
Following our belief that the current management is committed to restructuring and the
enhancement of current production capacities, we have a positive sentiment and our
suggested TP of EGP14.3/share leaves EFIC with north of 50% as upside potential from
current market price, to trade at a 2012e EV/EBITDA multiple of 8.5x. The stock currently
holds a 50%+ upside potential, prompting us to upgrade EFICs rating two notches up
from Hold to Strong Buy.
Figure 11 | EFICs TP calculation
Target Price Calculation
Method

23-Nov-11

5-Oct-10

Weights

Share price

Weights

Share price

DCF*

50%

15.4

25%

26.6

Multiple**

50%

13.2

40%

22.6

0%

11.0

35%

21.5

Technical price***
Weighted average

14.3

23.2

12-month Target price

14.3

23.2

Current price as of
Upside potential

9.4

20.3

52.8%

14.3%

* Using the LTFV

** Based on the comparable valuation
*** Based on the high end technical price
Source: CI Capital Research estimates

COMPANY NOTE

Investment rationale
1.

Companys new management has written off expensive inventory.

2.

Capacities enhancement initiatives:

3.

New production capacities are being added.

Environmental approvals are being resolved.

Loan restructuring to control cash outlays and quarterly interest expense.

Please Read Last Page For Contact Details and Important Disclaimer

10

EGYPT|FERTILIZERS
November 24, 2011

Risks to Recommendation

COMPANY NOTE

Downside Risks
1.

A liquidity squeeze or increasing debt levels might deter the companys

management from distributing enough cash to pay dividends to shareholders or
serve the loan repayment and restructuring activities.

2.

Inventory piling up for AS in the local distribution system might reduce the amount of
AS sold. It is worth mentioning that AS is considered an N fertilizer product that falls
under the trade regulation of the N fertilizers in Egypt. According to the regulation, a
newly-established trading company should procure all N fertilizers from local
companies to be sold to the market or exported.

3.

Kafr el Zayat and Asyut plants have obsolete machines, which might subject EFICs
production to stoppages. However, managements decision to launch its new Suez
plant and replenish them may reduce this operational risk.

4.

EFICs EBITDA margin might be at risk, as new local companies have established
their own phosphate mining companies for fear of escalating price competition.

5.

Additional capacities, either local or regional, could increase competition and

jeopardize EFICs current market share.

6.

Global demand for P fertilizers in 2012 might be negatively affected if the present
trend of unfavorable weather conditions continues.

7.

Cancellation of the MERCOSUR agreement might negatively consolidated export

sales volume.

Please Read Last Page For Contact Details and Important Disclaimer

11

EGYPT|FERTILIZERS
November 24, 2011

Company Financials (2010A-2014P)

Balance Sheet
(EGP mn)

Dec-11P

Dec-12P

Dec-13P

Dec-14P

Assets
Cash & Cash Equivalent
59.6
Net Receivables
125.7
Total Inventory
257.0
Other Current Assets
151.6
Total Current Assets
594.0
Net Plant
1,236.2
Long-Term Investments
0.3
Total Assets
1,838.2

44.0
221.7
329.2
0.0
594.9
1,227.1
0.0
1,822.0

50.2
280.1
542.0
0.0
872.3
1,397.2
0.0
2,269.4

73.3
349.6
498.7
0.0
921.6
1,379.8
0.0
2,301.4

70.2
429.9
606.3
0.0
1,130.9
1,368.8
0.0
2,499.7

Liabilities &
Shareholders'
Equity
STD and CPLTD
423.6
Accounts Payable
38.8
Accrued Expenses
0.0
Down Payments
0.0
Dividends Payable
1.6
Total Current Liabilities 507.3
Total Long-Term Debt
445.8
Other Non-Current Liab.
0.0
Total liabilities
953.1
Minority Interest
0.4
Shareholders' Equity
844.0
Total Liabilities & Equity1,838.2

Cash Flow (EGP mn) Dec-10A

NOPAT
72.0
Dep. & Amor.
17.6
COPAT
89.6
WI Change
202.1
Other Current Items
(2.0)
CF After Current Oper. 289.7
Financing Payments
(134.4)
Cash Before LT. Use
155.3
Net Plant Change
(45.3)
FCFF
246.4
Others
(10.7)
CF Before Financing
99.4
Short-Term Debt
(530.9)
Long-Term Debt
492.3
Change in Cash
36.1

351.2
47.5
0.0
0.0
0.0
398.6
416.4
0.0
815.0
0.7
897.5
1,822.0

788.2
113.8
0.0
0.0
0.0
902.0
288.2
0.0
1,190.3
1.2
969.3
2,269.4

878.4
102.9
0.0
0.0
0.0
981.3
155.0
0.0
1,136.3
1.8
1,054.6
2,301.4

1,136.0
96.8
0.0
0.0
0.0
1,232.8
10.0
0.0
1,242.8
2.4
1,145.8
2,499.7

Fact Sheet
ROE
ROS
ROA
ROIC
Gross Margin
EBITDA Margin
ATO
WI/ Sales
Net Debt/EBITDA
Debt/ Tangible Equity
Current Ratio

Income Statement
(EGP mn)
Dec-10A
Revenues
650.3
COGS
(518.1)
Gross Profits
132.2
SG&A
(42.6)
EBITDA
89.6
Dep. & Amort.
(17.6)
EBIT
72.0
Interest Expense
(68.6)
Provisions
(12.8)
Interest Income
0.2
Investment Income
0.6
Other Non-Operating Inc.
0.4
EBT
(8.2)
Taxes
0.0
Attributable Profits
(8.1)

Dec-11P
899.0
(634.3)
264.7
(50.4)
214.3
(30.6)
183.7
(64.4)
(68.0)
0.0
0.2
0.0
51.5
(6.4)
44.8

Dec-12P
1,025.3
(726.6)
298.7
(61.9)
236.8
(41.8)
195.0
(97.2)
0.0
0.0
0.2
0.0
98.0
(12.3)
85.2

Dec-13P
1,160.1
(813.6)
346.5
(82.2)
264.3
(55.7)
208.6
(92.2)
0.0
0.0
0.2
0.0
116.6
(14.6)
101.3

Dec-14P
1,307.6
(893.9)
413.7
(111.8)
301.9
(64.4)
237.5
(109.6)
0.0
0.0
0.3
0.0
128.2
(16.0)
111.4

Dec-10A

Dec-10A
-1.0%
-1.2%
-0.4%
4.1%
20.3%
13.8%
0.4x
54.1%
9.0x
1.1x
1.2x

Dec-11P
176.9
30.6
207.5
(159.4)
115.9
164.0
(211.3)
(47.4)
(21.5)
26.6
(67.5)
(136.3)
(38.7)
83.9
(15.6)
(0.0)
Dec-11P
5.0%
5.0%
2.5%
10.0%
29.4%
23.8%
0.5x
56.0%
3.4x
0.9x
1.5x

Dec-12P
182.2
41.8
224.0
(204.8)
0.0
19.1
(210.4)
(191.3)
(211.9)
(192.7)
0.2
(403.0)
422.1
0.1
6.2
(0.0)
Dec-12P
8.8%
8.3%
3.8%
8.5%
29.1%
23.1%
0.5x
69.1%
4.3x
1.2x
1.0x

Dec-13P
193.3
55.7
249.0
(37.1)
0.0
211.9
(220.4)
(8.5)
(38.4)
173.6
0.2
(46.6)
85.2
0.0
23.1
(0.0)
Dec-13P
9.6%
8.7%
4.4%
8.8%
29.9%
22.8%
0.5x
64.2%
3.6x
1.1x
0.9x

Dec-14P
220.7
64.4
285.1
(218.5)
0.0
66.6
(242.8)
(176.2)
(53.4)
13.2
0.3
(229.3)
245.9
0.0
(3.1)
0.0
Dec-14P
9.7%
8.5%
4.5%
9.2%
31.6%
23.1%
0.5x
73.7%
3.6x
1.1x
0.9x

Per-Share Ratios
Dec-10A
Share Price
9.38
No. of Shares (000)
69,302
EPS
-0.12
DPS
-0.00
Revenues/Share
9.38
Gross Cash Flow/Share
1.29
FCFF/Share
3.56
EBITDA/Share
1.29
EV/Share
21.06

Dec-11P
9.38
69,302
0.65
0.00
12.97
2.99
0.38
3.09
19.82

Dec-12P
9.38
69,302
1.23
0.19
14.79
3.23
-2.78
3.42
24.19

Dec-13P
9.38
69,302
1.46
0.23
16.74
3.59
2.50
3.81
23.23

Dec-14P
9.38
69,302
1.61
0.29
18.87
4.11
0.19
4.36
24.90

Multiples
P/E
Div Yield %
P/ Revenue
EV/ Revenues
P/ COPAT
EV/ COPAT
P/ FCFF
EV/ FCFF
P/ EBITDA
EV/ EBITDA
P/ BV

Dec-11P
14.5x
0.0%
0.7x
1.5x
3.1x
6.6x
24.4x
51.6x
3.0x
6.4x
0.7x

Dec-12P
7.6x
2.1%
0.6x
1.6x
2.9x
7.5x
(3.4x)
(8.7x)
2.7x
7.1x
0.7x

Dec-13P
6.4x
2.5%
0.6x
1.4x
2.6x
6.5x
3.7x
9.3x
2.5x
6.1x
0.6x

Dec-14P
5.8x
3.1%
0.5x
1.3x
2.3x
6.1x
49.4x
131.0x
2.2x
5.7x
0.6x

Dec-10A
(80.3x)
0.0%
1.0x
2.2x
7.3x
16.3x
2.6x
5.9x
7.3x
16.3x
0.8x

Note: A= Actual; P Projected

COMPANY NOTE

Source: Company Reports & CI Capital Research estimates

Please Read Last Page For Contact Details and Important Disclaimer

12

CI Capital Securities Brokerage

Research
Amr Hussein Elalfy, CFA | Co-Head of Research
Amr.Elalfy@cicapital.com.eg
Mona Mansour | Co-Head of Research

(Egypt & UAE)

Dynamic Securities

Khaled Abdel Rahman

Ahmed Roushdy

Managing Director & Global Head of Securities Brokerage

Managing Director

Khaled.Abdelrahman@cicapital.com.eg

Ahmed.Roushdy@cicapital.com.eg

Mona.Mansour@cicapital.com.eg

CI Capital Holding
8 Nadi El-Seid Street, Third Floor
Dokki
Giza, Egypt
Tel: +2(02) 33 38 62 59
Research@cicapital.com.eg
www.cicapital.com.eg

Disclaimer
The information used to produce this market commentary is based on sources that CI Capital Research (CICR) believes to be reliable and accurate. This information has
not been independently verified and may be condensed or incomplete. CICR does not make any guarantee, representation or warranty and accepts no responsibility or
liability to the accuracy and completeness of such information. Expression of opinion contained herein is based on certain assumptions and with the use of specific
financial techniques that reflect the personal opinions of the authors of the commentary and is subject to change without notice. It is acknowledged that different
assumptions can always be made and that there is a wide choice of techniques that can be adopted each of which can lead to a different conclusion. Therefore, all that
is stated herein is of an indicative and informative nature as forward-looking statements, projections and fair values quoted may not be realized. Accordingly, CICR
does not take any responsibility for decisions made on the basis of the content of this commentary. This commentary is made for the sole use of CICRs customers and
no part or excerpt of its content may be redistributed, reproduced or conveyed in any form, written or oral, to any third party without the prior written consent of CICR.
In February 2008, CI Capital Research (CICR) launched a new rating system to give analysts more freedom to be market responsive. This is to make one element of our
research more dynamic, namely the advertising of target prices and recommendations. What we did not change is our assessment of the Long Term Fair Value (LTFV),
nor have we stopped our detailed industry and company research. What we did is change the target price to trade in the balance of where a share should trade and
where we think it will trade.
LTFV: As before we continue to estimate a fundamental valuation, largely DCF and/or NAV based.
Target Price: The price, which is not necessarily the LTFV, is where the analyst, given all (qualitative as well as financial) information available, thinks the share price can
get to within the next 3-12 months. This can be changed at any time on changing facts and perceptions.
Recommendations: Our new rating system falls out from the total return relating to the share price performance to the target price, and including any distributions may
not be included in the target price calculation. This is shown in the table below, and to be BUY must return over 19%, an arbitrary hurdle rate we think reasonable given
prevailing interest rates and risks (Please see table below.)

Rating
Strong Buy

Potential Upside/Downside
>30%

Buy

>20%<30%

Hold

>10%<20%

Underweight

>0% <10%

Sell

<0%