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EFG slashes Lecico Egypt FV, reiterates Neutral

EFG slashes Lecico Egypt FV, reiterates Neutral
Lecico
LCSW
-0.26% 18.91 -0.05
EFG-Hermes said in a report issued Monday on Egypt’s sanitary ware and tile producer Lecico Egypt that it maintained a Neutral recommendation on the stock.
The report issuer cut its fair value estimate for the stock by c4% to EGP11.0/share (10% upside potential), to reflect the net impact of: i) c25% cut in 2014-17 EPS estimates; ii) lower net debt; and iii) DCF rollover. “We reiterate our Neutral rating: the rise in energy prices effective July 2014 (natural gas +133%, electricity +30%), the political unrest in Libya (key export market for tiles), and the appreciation in the EGP versus the EUR (+c7.5% YTD) are key challenges for Lecico, in our view. Lecico trades at 2015e P/E of 9.3x, well below peers’ average of 14x, which we see warranted, given the risks associated with the business outlook. Our FV implies 2015e P/E of c10.3x. The share price has underperformed the market YTD (+15% versus +30% for HFI), and has corrected sharply (-17%) from its 52-week high in mid-August, likely on the back of anticipated operating challenges,” said EFG. Lecico increased prices by an average of 8% in August/September, aiming to mitigate the impact of higher energy bill, in line with our view. Further price increases are expected to take place; we expect tile prices to rise 10% in 2015, given Lecico’s better pricing power in the local market, versus 3% for sanitary ware, deflated by EUR weakening versus EGP (c70% of SW export volume goes to Europe). We expect sustained solid local demand to partly offset lagging exports in the tile segment, while SW export volumes should be resilient, in our view, on recovery in UK and rest of Europe. We expect tile export’s contribution to fall to c15% in 2015 from c25% in 2013. EFG forecasts 2014 clean net profit of EGP87 million (+10% Y-o-Y, 2013 was affected mainly by EGP103 million one-off loss on France divestment), on 7% top-line growth, lower net interest expense and below-EBIT items. It expects gradual recovery in margins starting 2016, versus 2015 previously, as it factored in a gradual return to economies of scale on slowdown in pace of volume growth. Key risks: i) unrest in Libya; ii) setback in local demand; iii) ability to apply price increases; and iv) further rise in natural gas price.