Alexandria Containers Valuation Update Doubling FV Estimate Post FY-15 Results

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1 Alexandria Containers Valuation Update Doubling FV Estimate Post FY-15 Results Positive Volume and Price Effects Trigger a Positive Earnings Surprise in FY-15 Alexandria Containers reported an unaudited revenue of EGP 1,243.1m in FY-15, up 39.2% y/y and versus our initiation-of-coverage projection of EGP 1,056.1m. The increase in top line was driven by 1) higher-than-projected market share and throughput, due to temporary operational difficulties faced by the firm s only competitor in the ports of Alexandria and El Dekheila, and 2) a higher-than-projected average revenue per container in EGP-terms due to the 6.7% depreciation of the EGP versus the USD during H1-15 and stronger-than-expected pricing power. ACCH s GPM also surged to 69.7% in FY-15, versus 66.0% a year earlier. Berth 100 Project Scrapped, Yet Firm Deepens Berth 96 Instead In our initiation of coverage, we had highlighted ACCH s potential success in executing Berth 100 project as a catalyst for the firm s share price. We remind readers that Berth 100 was designed to be of higher depth than the existing berths in the ports of Alexandria and El Dekheila to cater for transit traffic, which is typically transported by mega container vessels. In May 2015, Alexandria Port Authority (APA) cancelled the tender for Berth 100, probably due to cost constraints. However, one month earlier in April 2015, ACCH had announced that it would commence dredging works to increase the depth of existing Berth 96 (400.0m long) in El Dekheila to 17.0m. Based on management announcements, dredging operations are expected to be finalized by end To be conservative, however, we maintain a soft annual growth rate in the average TEUs per vessel at around 10.0% over our forecast horizon, which is in line with history and consistent with TEU limits implied by existing port infrastructure specifications. The Best of Both Worlds: High Dividend Yield + cc 90% Upside Potential Our valuation upgrade results from adjusting our model to account for the higher-than-projected operating results and service fees in FY-15 whilst maintaining our conservative valuation assumptions beyond FY-15. Despite the recent rally in the share price (up 37.4% since our initiation of coverage less than one year ago), our new DCF-based FV estimate, which is almost double the old estimate, yields a STRONG BUY recommendation on the presence of a valuation gap of 85.2%. Along with the potential for significant capital appreciation, ACCH provides a solid cash dividend stream. Over the past five years, the firm has consistently distributed cc 57% of its annual net income to shareholders around four months after the end of the fiscal year. ACCH s BoD has recently proposed the distribution of a cash dividend of EGP 19.3 per share out of FY-15 net profit, which translates into an expected dividend yield of 8.7% on a holding period of only three months. FV, EGP/Share Recommendation 28 July 2015 Neveen Mohamed neveen.mohamed@pharosholding.com Hany Genena, CFA hany.genena@pharosholding.com STRONG BUY Last Price, EGP/Share Valuation Gap 85.2% Reuters/Bloomberg ALCN.CA/ALCN EY S/O, m 24.6 MCAP, EGP m 5,444.9 Free Float, % 4.1% 52W ADTV, EGP m W H-L, EGP/Share Return, 3M/1Y 5.2%/76.4% EGX30 Return, 3M/1Y -7.1%/-9.7% Main Shareholders Holding Co. for Maritime & Land Transport 55.8% Alexandria Port Authority 39.9%

2 Contents I. Review of FY-15 Results II. III. IV. Revised Projections Valuation Risks V. Annex: Financial Statements 2

3 Contents I. Review of FY-15 Results II. III. IV. Revised Projections Valuation Risks Annex: Financial Statements 3

4 I. Review of FY-15 Results Throughput Beats Expectations on Market Share Expansion ACCH handled a total of 1,027,950 TEUs in FY-15, up 13.6% y/y and versus our projection of only 922,860 TEUs. The increase was mainly driven by the increase in ACCH s market share to 61.3% from 57.7% in FY-14. We remind readers that ACCH is one of two container terminal operators located in the ports of Alexandria and El Dekheila and that the two ports mostly cater for merchandise trade with the US and Europe due to their geographical proximity to the key ports in Western Europe and East US and to the commercial centers of Egypt along the Delta. In line with our expectations, container traffic in the two ports increased in conjunction with the soft recovery in imports of capital and intermediate goods, as gauged by the increase in the ratio of merchandise imports to GDP from 20.3% in H1-14 to 21.8% in H1-15. The increase in the firm s market share can be explained by partial divergence of traffic from the competing operator, Alexandria International Container Terminals (AICT), due to repair works in selected cranes, which ended in Q3-FY15. We note that fewer but higher-capacity container vessels docked at the ports of Alexandria and El Dekheila in 11M-FY15, in line with the global trend of shifting to higher-generation vessels. Throughput Analysis 11M-FY15 11M-FY14 FY-15E* FY-14A Alexandria & El Dekheila Ports Total TEUs 1,537,655 1,425,912 1,677,442 1,567,089 Number of Ships 1,354 1,433 1,477 1,573 Ships/Day TEUs/Ship 1, , ACCH Total TEUs 932, ,669 1,027, ,731 Market Share 60.6% 57.1% 61.3% 57.7% * Total throughput in Alexandria and El Dekheila is estimated based on annualized 11M-FY15 figures published by Alexandria Port Authority (APA) Source: APA website, Company Press Release, CBE, Pharos Research. 4

5 I. Review of FY-15 Results Stronger-than-Expected Pricing Magnified the Volume Effect ACCH managed to increase average revenue per container in FY-15 by 22.5% y/y to EGP 1,209.3 versus a projected 15.9% y/y increase to EGP 1,144.3 in our initiation of coverage. In H1-15, the Central Bank of Egypt (CBE) executed a first round of EGP depreciation that saw the EGP fall by 6.7% against the USD. As such, the average exchange rate during FY-15 came in perfectly in line with our projections at EGP 7.3 per USD. The higher-than-projected increase in revenue per container during the year was mostly driven by an adjustment in USD-denominated fees in August we remind readers that the firm typically revises upwards its service fee schedule on an annual basis. Revenue Per Container, in USD and EGP Terms FY-15 FY-14 Total Revenues, EGP m 1, Growth in Revenues 39.2% 28.8% Revenue/Container, EGP 1, Growth in EGP Revenue/Container 22.5% 22.2% USD/EGP, Average Period Revenue/Container, USD Growth in USD Revenue/Container 16.3% 13.1% Source: Company Press Release, Pharos Research. 5

6 Contents I. Review of FY-15 Results II. III. IV. Revised Projections Valuation Risks Annex: Financial Statements 6

7 II. Revised Projections Throughput Assumptions In line with the global trend of building higher-generation container vessels, we revise downwards the number of ships calling at the ports of Alexandria and El Dekheila to only 1,533 ships per annum but maintain the increase in the average number of containers carried per ship at 10.0% per annum to reach 1,829 TEUs by FY-20. We remind readers that, at present, the standard berth depth in both ports ranges between m which allows for the docking of up to third/fourth generation containerships, which can carry up to 3,000 5,000 TEUs. However, in April 2015, the firm announced that it had signed a contract with Canal Company for Ports and Major Projects (CHP) to partake in dredging works that will increase the depth of a part of Berth 96 (400.0m long) in El Dekheila to 17.0m. Following the completion of dredging works, expected by end 2016, the berth will be capable of receiving up to sixth generation ships, carrying over 10,000 TEUs. Going forward, we expect ACCH s market share to revert to its pre-fy-15 averages, given that the firm s competitor, Alexandria International Container Terminals (AICT), has finalized the maintenance works that partially impacted handled volumes during FY-15. Throughput Analysis and Revised Projections FY-15E* FY-16P FY-17P FY-18P FY-19P FY-20P Alexandria & El Dekheila Ports Total TEUs 1,677,442 1,915,028 2,106,531 2,317,184 2,548,902 2,803,792 Number of Ships 1,477 1,533 1,533 1,533 1,533 1,533 Ships/Day TEUs/ Ship 1,136 1,249 1,374 1,512 1,663 1,829 Growth in TEU/Ship 14.0% 10.0% 10.0% 10.0% 10.0% 10.0% ACCH Total TEUs 1,027,950 1,072,416 1,179,657 1,297,623 1,401,896 1,542,086 ACCH Market Share 61.3% 56.0% 56.0% 56.0% 55.0% 55.0% * Based on annualized 11M-FY15 figures reported by the Alexandria Port Authority (APA) Source: Alexandria Port Authority, Pharos Research. 7

8 II. Revised Projections Outlook For Service Fees In May 2015, ACCH s BoD approved another round of increases in USD-denominated service fees to come into effect in August In line with our projections, the firm increased fees of basic handling services by only 6.3%-12.5% while the increase in the fees charged for ancillary services was more prominent. Most notably, the firm imposed a minimum fee of USD 2,500 per docking ship to ensure that the quay is not occupied by vessels loading/unloading few containers and generating minimal revenues. Consistent with our assumptions, the firm kept basic handling fees of transit containers unchanged. ACCH Fee Schedule: FY-16 versus FY-15* In USD FY-15 FY-16 %Δ 1) Basic handling services of import/export containers % 2) Basic handing services of export containers carrying Egyptian products % 3) Storage (in excess of 15 days) % 4) Transfer of containers between internal and external terminal yards % 5) Container inspection using terminals fork-lift a. partial inspection b. Whole inspection % 33.3% 6) Container stuffing/unstuffing a. Using a 3 tons fork lift b. Using a 5 tons fork lift % 28.6% * The list above is not an exhaustive list. We outlined some of the fees applicable to full twenty-foot containers. Other fees apply to forty-foot and empty containers. Source: Company Press Release, Pharos Research. 8

9 II. Revised Projections Revenue Per Container We conservatively maintain our average revenue per container growth assumptions but adjust our model to incorporate higher-than-expected service fees in FY-15. In FY-15, average revenue per container stood at USD 164.6, versus our estimate of USD and up 16.3% y/y. Despite the firm s strong pricing power, we maintain our conservative fee/container growth projections in USD terms but adjust the USD/EGP exchange rate to account for the steeper-than-projected devaluation of the EGP in FY-16YTD. In our initiation of coverage, we had expected the average USD/EGP to stand at 7.7 in FY-16. However, post the 2.6% devaluation administered in early July, the current exchange rate already weakened to EGP 7.83 per USD in banks and we expect further weakening down the road to an average of EGP 7.9 per USD, at the very least. Our revised assumptions yield an average revenue per container CAGR of 6.6% in USD-terms and 12.3% in EGP terms until FY-20 versus CAGRs of 13.3% and 19.9%, respectively, between 2010 and FY-15A FY-16P FY-17P FY-18P FY-19P FY-20P Average Revenue/Container, USD Growth in USD Revenue/Container 16.3% 9.9% 8.4% 5.0% 5.0% 5.0% USD/EGP, Average Period Average Revenue/Container, EGP 1, , , , , ,157.1 Growth in EGP Revenue/Container 22.5% 18.2% 13.6% 9.9% 10.0% 10.0% Total Revenues, EGP m 1, , , , , ,326.4 Growth in Revenues 39.2% 23.3% 24.9% 20.9% 18.8% 20.9% Source: Company Press Release, Pharos Research. 9

10 Contents I. Review of FY-15 Results II. III. IV. Revised Projections Valuation Risks Annex: Financial Statements 10

11 III. Valuation Cost of Capital and Tax Assumptions Rates Explicit Forecast Horizon FY-16 to FY-20 Risk Free Rate 9.5% Beta 1.0 Market Risk Premium 7.0% COE 16.5% Terminal Cost of Capital Risk Free Rate 6.0% Terminal Beta 1.0 Market Risk Premium 7.0% Perpetual COE 13.0% Perpetual Growth Rate 3.0% Taxation ACCH operates in a free zone and is not subject to corporate income tax Source: Pharos Research 11

12 III. Valuation DCF EGP m, unless o/w stated FY-16P FY-17P FY-18P FY-19P FY-20P FY-21P EBIT , , , ,796.2 Taxes ESOP and Board Bonuses Reinvestment CAPEX Depreciation Change in Working Capital FCFF , , ,247.6 DCF Periods Discount Factor PV of Forecast-Horizon FCFF PV of Forecast-Horizon FCFF 2,778 Value of Terminal FCFF at Time T+5 12,476 PV of Terminal FCFF 5,813 Enterprise Value 8,592 Plus Cash Plus Investments Equity Value 10,083 Shares Outstanding, m 24.6 FV Per Share Source: Pharos Research 12

13 Contents I. Review of FY-15 Results II. III. IV. Revised Projections Valuation Risks Annex: Financial Statements 13

14 IV. Risks Upside Risks Success in maintaining market share in container traffic above the 56.0% mark, Higher-than-projected rate of EGP depreciation versus the USD, Downside Risks Loss of market share/clients to HPH, 14

15 Contents I. Review of FY-15 Results II. III. IV. Revised Projections Valuation Risks Annex: Financial Statements 15

16 Annex: Financial Statements Income Statement EGP m FY-16P FY-17P FY-18P FY-19P FY-20P Revenues 1, , , , ,326.4 COGS ,197.6 Gross Profit 1, , , , ,128.8 SG&A EBIT , , , ,796.2 Interest Income EBT , , , ,856.3 Corporate Income Tax Net Income , , , ,847.0 Source: Company financials, Pharos Research. 16

17 Annex: Financial Statements Balance Sheet EGP m FY-16P FY-17P FY-18P FY-19P FY-20P Cash and Equivalents 1, , , , ,638.7 Investment in T-bills Net Operating Working Capital Inventory, Net Receivables, Net Total Current Assets Total Current Liabilities Notes and Accounts Payable Investment in Cash, WC and Other , , ,705.3 Investment in LT Assets , , , ,938.3 Investment in ST and LT Assets 1, , , , ,643.6 Financed By 1, , , , ,643.6 Shareholders Equity 1, , , , ,643.6 Paid-in Capital Legal Reserves Other Reserves 1, , , , ,926.0 Retained Earnings and Profit of the Year Source: Company financials, Pharos Research. 17

18 Annex: Financial Statements Cash Flow Statement EGP m FY-16P FY-17P FY-18P FY-19P FY-20P Net Income Before Taxes , , , ,847.0 Adjust for Non Cash Items Depreciation and Amortization Adjust for Working Capital Change in Receivables Change in Inventory Change in Payables CFO , , , ,955.0 CFI CFF ,019.1 Cash and Equivalents, BOP , , , ,201.8 Change in Cash Cash and Equivalents, EOP 1, , , , ,638.7 Source: Company financials, Pharos Research. 18

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