EFG Hermes research unit initiated, in a recent report, Arabian Cement company (ARCC) coverage with a 'Buy' rating and LE 13.6 / share Fair Value (FV) with 22% upside. EFG Hermes stated that the company differentiates itself with a commercially driven, innovative management and is one of the country's most profitable with a 3*% ROE and cash generating firms. The company has a $ 35 million capex plans (2013-1Q2015) to substitute natural gas with coal and RDF, ahead of peers. On the positive side, EFG Hermes noted that the company has a higher utilization on faster shift to coal, Expansions and acquisitions, strong demand that supports prices. However, adverse regulations and weak Demand is a downside risk according to EFG Hermes. ACC expanded its clinker capacity during 2008-11 to 4.2 mtpa to enable it to produce 5.0 mtpa of cement. ACC positions itself as a premium, quality brand and has captured c8% market share as it has a utilization rate (83% in 2012-13) above the industry average (73%); focuses on high-demand Greater Cairo and Delta; and operates a fleet (to reach c70% of volume) and recently near-demand warehouses (a new concept in Egypt). EFG Hermes expected a return of Demand growth in 2015, supported by government stimulus packages and focus on budget housing. In 2015, Hermes expected the company's fuel mix will be 67.5% coal, 27.5% RDF and 5% natural gas. Hermes expected clean pre-tax earnings CAGR to ease to c10% in 2014-18; post the 2010-13 expansionary phase. The Use of coal should boost clinker utilization but also relieve prices given the sector's overcapacity; However, Hermes assumed prices will remain above the historical average on better demand. EFG Hermes expected EBITDA margin to eventually ease to 35% in late forecast years.
