EFG-Hermes upgraded, in a recent study, Lecico Egypt (LCSW.CA) rating to Buy from Neutral and raise Fair Value (FV) 18% to EGP 10.0/share (c22% upside potential) as we: i) deconsolidate France operations; ii) lower Egypt's RFR (-100bps) on easing T-bill yields in 2H2013; and iii) roll over DCF. Hermes stated that, deconsolidation of France operations, expected in 4Q2013, should improve profitability on better: i) margins by reducing SG&A expenses; and ii) cash flow by enhancing working capital cycle (on lower receivables, inventory). We value Lecico at an implied 2014e P/E of c7.0x (trading P/E of 5.4x), at a discount to peers' average of 12x to account for the risk of potential rise in natural gas/electricity prices (energy c17% of COGS) and any slower recovery/unrest in its key markets. The market has not yet reflected the positive impact of France divestment, in our view; share price (+8% since the beginning of July) underperformed HFI (+29%). We expect tile to run near full capacity utilisation starting 2014, leaning on sustained solid demand in Libya and Egypt, and rollover of new tile lines (6.4 million sqm in 2H2013). Solid domestic demand for sanitary ware (SW) and recovery in UK (30% of exports, 16% of total SW volume) will offset lagging recovery in the rest of Europe, in our view. We forecast 2013-18e volume CAGRs of 6% for tile and 5% for SW, on c5% price increase/annum. We maintain our 2014-17e revenue CAGR of 11%, while we raise our net profit forecasts by c15% on average on faster EBITDA margin recovery post deconsolidation of loss-making France operations. Our forecast calls for clean net profit growth of 57% in 2014 and a CAGR of 13% in 2015-18e. The exit of loss-making operations in France will require a cEGP130 million write-off in 4Q2013, according to Lecico Management; hence, we expect FY2013 net loss of EGP43 million. On a clean basis (excluding FX gains, one-offs and provisions), we expect flattish net profit at EGP77 million.
