Alexandria Mineral Oils Company (AMOC.CA)

Transcription

1 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Alexandria Mineral Oils Company (AMOC.CA) Recommendation SELL Fair Value EGP 9.0 Market Price EGP 9.29 Downside -3.1% Reuters Code Source: Investing.com *Price as of 5 th of 2018 *Values in EGP Stock Data AMOC.CA Authorized Capital (mn) 2,000 Issued Capital (mn) 1,291 No. of shares 1,291 Par Value 1.0 Market Cap (mn) 11,998 Price 9.23 Highest (1yr range) 9.89 Lowest (1yr range) 4.87 Average (1yr range) 7.37 Free Float 18.7% Major Shareholders Al Ahli Capital Holding 25.30% Alexandria Petroleum Co 20% Local Pension Funds 10.20% Investment Summary AMOC is backed by strong domestic demand and rising international prices of end products. Egypt is a net importer of most of AMOC s end products. Brent crude oil prices surged to an average of USD54.1 (+23.8%) in 2017 and expected to cement further to record and average of USD59.7 (+10.3% YoY) in 2018e. Since Petroleum products are highly correlated with crude oil prices at R-squared average of 97%. Thus, we expect AMOC s products prices to follow suit. On the downside, risks are present of crude oil price volatility and higher competition with the entry of ERC (4.2mn tons). Thus, AMOC is upgrading MDD unit and upscaling product mix to withstand the competition and improve margins through agreements with market participants. AMOC should achieve average net margin of 15%, up from a five-year average of 9%. Our DCF-based fair value is EGP9.0/share, a downside of -3.1% with a calculated WACC of 19.5%. In spite of AMOC s favorable position, the recent capital increase in FY2018 has impacted the target price negatively. Despite high investment budget, we expect AMOC to offer a c.9% 2018e dividend yield. AMOC s 2018e PE is at 9.5x, below the Reuters sector average PE of 17.85x and industry average of 25.9x. Financial Indicators and Valuation Multiples AMOC EGX30 Rebased Source: Investing.com & AOLB Research Year 30 Jun 2017a 2018e 2019f 2020f 2021f Revenue (EGP mn) 9,589 10,957 12,070 12,953 13,659 Net profit (EGPm) 1,100 1,267 1,683 1,904 2,106 EPS (EGP mn) EPS (% YoY) 152.8% -92.3% 32.8% 13.1% 10.6% PE (x) EV/EBITDA (x) P/CF (x) 10.5 NA ROAE (%) 40% 34% 35% 35% 35% P/BV (x) Dividend yield (%) 16% 9.4% 10.6% 11.9% 13.2% Based on Closing Price of 5 th February Source: AMOC and AOLB Estimates Sally Fawzy Mikhail Senior Equity Analyst SMikhail@arabeyaonline.com Mariam Wael Equity Analyst Mwael@arabeyaonline.com

2 Contents Industry Dynamics...2 Strong world growth rate entices oil demand...2 An extension of the cuts through 2018 is expected...2 Oil prices rebound owing to OPEC production cut resolution...3 Egypt Overview & Outlook...4 Moderate reserves...4 Market undersupplied...4 Net importer of petroleum products...4 Government dominance...5 Company overview...7 Stock Split & capital increase...7 GDRs on LSE...7 Business Operation...9 Low Sulphur fuel-oil Refinery...9 Solid ties for feedstock and marketing...9 Innovative Development Strategy...9 Fully liberal petroleum products prices with high correlation with oil prices AMOC s refining margin narrowing by tops global standard Brent cracking margin New entry to compress AMOC s market share Backed by strong domestic demand and prices rebound Exports contribute 12% of total revenues Financial Analysis & Forecast Low leverage & High Cash Single-digit dividend yield Revenues to grow 14% Gross Margin to widen EBITDA and Bottom-line expansion Valuation

3 Industry Dynamics Strong world growth rate entices oil demand The world annual real GDP growth forecast is 3.7% in 2018e, same as in 2017, according to the World Bank. World oil demand in 2Q2017 grew strongly by 2.2m b/d (2.3% YoY), significantly above its trend of 1.2m b/d, due to strong growth among Organization for Economic Co-operation and Development (OECD) countries. For 2017, global oil demand is revised up, averaging 96.99m b/d. For 2018e, world oil demand is projected to climb by 1.52m b/d (1.4% YoY) to a record high 98.51m b/d (World Bank and OPEC). Higher supply growth expectation from the US and Canada As stated by Organization of the Petroleum Exporting Countries (OPEC), global crude oil supply is revised down due to actual data of 4Q2017 to stand at 96.5m b/d in For 2018e, driven by higher growth expectation for the US and Canada, the global oil supply is anticipated to increase 1.3m b/d to 97.82m b/d in 2018e, with 0.68m b/d undersupplied. This would leave little room for additional OPEC production; we expect OPEC crude oil production at 32.42m b/d in 2018f, equivalent to 2017 level. Annual Brent Crude Oil Prices & Oil Balance Source: EIA & OPEC Notes: Oil Balance = World Supply World Demand a 2015a 2016a 2017a 2018f Balance (mn barrel/day) Annual Prices (USD/barrel) 0 An extension of the cuts through 2018 is expected OPEC crude oil production has declined by 0.2mb/d in According to OPEC, this is partly resulting from the Declaration of Cooperation (DoC) which reflects an agreement by 12 members to cut output by 1.2m b/d in the first six months of The agreement has been extended to March Saudi Arabia committed to the largest reduction, with the exemption of Libya and Nigeria. The agreement received a wide-ranging support of another 10 non-opec countries which agreed to reduce output by 0.55m b/d, led by Russia and Mexico (OPEC and World Bank). The agreement was successful because compliance with the promised cuts was high. An extension of the cuts through 2018 is expected. OPEC is likely to discuss inclusion of Libya and Nigeria to agreement of output limits. Nigeria has suggested it could do so when its production reaches 1.8m b/d. 2

4 Compliance with the production agreement by the 10 non-opec producers has been high due to actual cuts (Russia), field maintenance (Azerbaijan and Kazakhstan), and natural production declines (Mexico), as viewed by World Bank. Brent Crude Oil Price Trend (USD/Barrel) Invasion of Iraq and Sep 11 Attacks Global Crises Arab Spring OPEC's decision to maintain production OPEC decision to cut production Source: EIA Oil prices rebound owing to OPEC production cut resolution In 2017 prices recovered moderately due to oil balance undersupply. With projected widened gap between supply and demand, on 11 th January, the Brent Crude Oil stood at USD 70.36/b, a USD 5.98 above the December average. The January 2018 record is the highest since 3 December 2014 and the strongest rebound since 20 January 2016 low at USD 26.01/b (1.7x growth). The increase is due to strong demand, falling inventories, and greater compliance by OPEC and non-opec producers with agreed production targets that began in January With projected increases in U.S. shale production, the global market is unlikely to tighten significantly in According to US Energy Information Agency (EIA), Brent Crude Oil stood at USD 54.15/b in 2017 and projected at USD 59.74/b, in We forecast Brent crude oil at an average of USD69/b in 2018, supported by continued production cuts from the DoC and strong economic and demand growth. 3

5 Egypt Overview & Outlook Moderate reserves According to British Petroleum (BP) 2017 Energy Outlook, Egypt enjoys 3.5bn barrels of oil reserves at end of 2016 (0.2% of total worldwide oil reserves), ranking third in Africa following Libya and Nigeria at 48.4bn barrels and 37.1bn barrels, respectively. Egypt Reserves to Production (R/P) ratio is at 13.7x versus 44.3x for Africa. Egypt is the largest non-opec oil producer and the second largest gas producer in Africa. Market undersupplied Egypt's oil production is in short of demand. In 2016, total production was 691k bpd, while consumption recorded 853k bpd, exceeding supply by a 162k bpd deficit. Egypt s main petroleum products exports are naphtha, fuel oil, and waxes, while gasoil and LPG are its main imports. In FY2015, Egypt has increased its imports from the key petroleum, namely; LPG s 2.2m tons, Gasoline 2.1m tons, and Gasoil 6.1m tons. AMOC is an exporter of fuel oil and waxes, while oils, gas oils, naphtha, gasoline and LPG are directed to the domestic market through its parent company Egyptian General Petroleum Corporation (EGPC). Foreign oil companies' investments rose to USD 8.1bn on exploration and development in FY2017 from USD 6.6bn in the previous fiscal year, an increase of 22.7%. Egypt expects the investments of foreign oil companies to exceed USD 10bn in the current FY2018. The new investments should narrow the shortage in supply. Net importer of petroleum products According to Central of Bank of Egypt (CBE), investments in oil refineries reached EGP869.5m in FY2017 (a 20% growth YoY), however the sector witnessed a 3.1% contraction in FY2017 (down from a growth of 2.5% in FY2016). To meet local demand from petroleum products, the government paid USD 6.9bn to petroleum products imports during FY2017, up from USD 6.2bn a year earlier, 12% of Egypt s total import bill. FY2017 petroleum products exports were only USD 2.2bn (a 26% increase YoY), causing a USD 4.7bn gap. The domestic market consumes around 75mn tons of petroleum products annually, and Egypt s oil sector supplies 60% of the local needs and the rest is imported. In an attempt to drop the budget deficit to 9.4% in FY2018 compared to 12.5% in FY2017, the government took steady steps to reduce energy subsides. The petroleum subsidies recorded EGP22bn in 9M2017, only 28% of Egypt s total subsidies, compared with 36.7% in FY2016 and 49% in FY

6 Egypt is not considering an increase in fuel prices before 30 June 2018, the government is planning to lift fuel subsidies gradually until they are entirely removed within few years. The government started cutting fuel subsidies as part of an economic program which also involved floating the currency implemented to help secure a USD 12bn International Monetary Fund (IMF) loan deal. Government dominance Egypt is the biggest oil refiner in Africa with a total of ten refining companies operating 12 refineries, where South Africa runs second. The sector (eight companies) is currently dominated by the state, with nine out of ten oil refineries are controlled by the government-owned Egyptian General Petroleum Corporation (EGPC), directly or indirectly. AMOC is owned indirectly by EGPC through Alexandria Petroleum Company, Misr Petroleum, and Petroleum Cooperative. In 2016, Egypt's maximum oil refineries combined capacity reached 732,550 bpd), according to EGPC. Additions of 6,550 bpd come in result of robust capacity upgrades over the past five years. EGPC is the sole supplier of feedstock to all refineries, and the main customer for end products destined for the local market at international prices. Sector upgrade Egyptian Refineries Capacities & Main Shareholder Capacity Company Main Shareholder (Million tonnes/p.a.) APC 5.0 EGPC CORC 10.0 EGPC NPC 6.0 EGPC APRC 4.0 EGPC SOPC 3.0 EGPC ASORC 4.5 EGPC MIDOR 5.8 EGPC AMOC 1.7 Alex Petroleum Egypt s Total Capacity 40.0 Source: Ministry of Petroleum and AMOC Global refiners have announced new refinery additions or expansions to existing capacities of 7m b/d from 2017 to 2021, exceeding projected global petroleum demand growth of less than 5.5 million bpd, during the same period. The Middle East is contributing with 20% of announced projects (1.4m b/d) during the next 5 years. However, Africa is characterized with both high refinery construction costs and low capacity utilization. The projected refining capacity increases in Africa, during the next five years, is below anticipated demand growth and is driven mainly by the 2020 transition to low-sulfur bunker fuel. Egypt s total refinery capacities stood at 810k bpd in 2016, while the actual oil refinery throughput is at 508k bpd in 2016, with 62% utilization rate (BP Statistical Review World Energy 2017). This is because some oil refineries are old and date back to 1913, namely El Nasr, with the exception of 5

7 Middle East Oil Refinery (MIDOR) and AMOC. As Egypt produces only sour oil, most of its petroleum products are at the heavy end of the spectrum. AMOC and MIDOR, however, owing to the more advanced technology used, are able to produce a range of light products, e.g. waxes. In early 2017, the Ministry of Petroleum announced an USD 8.3bn budget to upgrade eight oil refineries within four years to increase production to meet accelerating local demand, curb import bill and control budget deficit. Hence, the Middle East Oil Refinery (MIDOR), the more advanced one, will be listed on the Egyptian Stock Exchange (EGX) to raise funds for future developments for the eight other state-run oil refining companies, as well as raising AMOC s free float. Private Sector Entry through PPP The sector is witnessing only one new entrant; Egyptian Refining Company (ERC) new USD 3.7bn processing plant at capacity of 4.2mn tons per year of liquid products, brining Egypt s total refining capacity at 44.2mtpa. The ERC refining portfolio is 2.3mn tons of diesel, 600k tons of jet fuel, 522k tons of gasoline, in addition 600k tons of sulfur and coke as well as butane gas and naphtha. The facility will ramp up output to 98% of capacity by the end of ERC is owned by Egyptian and Arab private investors, Egyptian public institutions, international development institutions (IFC, DEG and FMD) and EGPC with 24% stake. ERC will further process products from Cairo Oil Refinery Company (CORC) to produce additional high-quality petroleum products including approximately 2.3mtpa of diesel for the domestic market. ERC is partnering with EGPC, CORC and PPC (Petroleum Pipeline Company) (EGPC affiliates) in publicprivate-partnership (PPP) agreement, which entails CORC selling to ERC atmospheric residue to be used as feedstock; EGPC purchasing ERC s end products at international prices; and PPC providing storage and transportation facilities. ERC will sell its products to EGPC at international prices minus 1% under a 25-year off-take deal. 6

8 Company overview Alexandria Mineral Oils Company (AMOC) was founded in 1997 and is headquartered in Alexandria, Egypt. AMOC was listed on EGX in 2004, the sole refinery publically traded, with 18.7% free float. AMOC Shareholders Structure 10.20% 3.60% 3.60% 18.70% AMOC is indirectly owned by the 5.40% Egyptian (EGPC) through Alexandria Petroleum Company (20%). Major stake of AMOC, 53% of the company, is owned by state-owned 20% 25.30% banks, the biggest of which is the National Bank of Egypt through its 8.70% investment arm, Al-Ahly Capital Source: AMOC Holding (25.3%), and Misr Bank (8.6%), and Misr Insurance Company (5.4%). 4.50% Free Float Misr Life Insurance Co. Al Ahli Capital Holding Misr Capital Investmens Alexandria Petroleum Co Misr Insurance Co Local Pension Funds Misr Petroleum Co Cooperative Petroleum Co Enhancing stock liquidity for secondary offering AMOC s management have been focusing on gaining more exposure in the capital market, AMOC s Extra-Ordinary General Assembly and General Assembly have convened on the 25th of February 2017 and approved issuance of Global Depository Receipts (GDRs) equals 10% of the company s capital and a 1:10 stock split. On August 1, 2017, AMOC joined the EGX 30 and EGX 20 capped indices. Stock Split & capital increase On April 19, 2017, AMOC undertook a 1:10 stock split at a par value of EGP1/share and 861mn shares. In December 2017, AMOC increased the issued and paid capital from EGP 861mn to EGP 1.29bn, through free shares. The increase was EGP 430.5mn distributed over 430.5mn shares, at par value of EGP1/share. The increase in capital was financed through the general reserve, recorded EGP 627.8mn. The capital increase was through distributing dividends through 1:2 bonus shares. GDRs on LSE Alexandria Mineral Oils Co (AMOC) signed a contract with BNY Mellon to issue global depositary receipts (GDRs) on the London Stock Exchange (LSE). AMOC also signed a deal with Baker McKenzie in London and Cairo offices to provide the company with relevant legal services to be listed on LSE s GDRs. Owning 25.31% of AMOC, Al Ahli Capital decided to transfer 39.5% of its stake in AMOC (10% of total shares) to GDRs for trading in the LSE in early

9 Secondary offering The government has announced proceeding with the privatization program through listings on the Egyptian Stock Exchange (EGX) through IPOs and secondary offerings. The government announced the IPO of ENPI to take place on 1Q2018, as well as MIDOR. AMOC is thought to be a candidate for secondary offering. According to the Chairman of AMOC, Amr Mostafa, the company plans increasing its EGX listing by another 10-20% of its shares; the listing will come out of the principal shareholder s stake or from more than one shareholder s stake. 8

10 Business Operation Low Sulphur fuel-oil Refinery AMOC is a second stage refinery, where it refines low Sulphur fuel-oil. AMOC engages in the production of oil and paraffin wax. Its products include fully-refined hydro-treated and unhydro-treated paraffin waxes; transformer, base, and fuel oils; and automatic transmission fluids. The refinery s main product portfolio includes two variants of paraffin wax and automatic transmission oils, three categories of base oil, transformer oils and fuel oils. They are produced in two separate complexes; one for lubricants and other oils. The second is for gas oil production. The refinery is ISO 9001:2008 and ISO 14001:2004 certified as well as OHSAS 18001:2007 certified. Solid ties for feedstock and marketing AMOC is engaged in a feedstock supply agreement with EGPC through sister companies Alexandria Petroleum Company and Al-Amreyah AMOC s Designed Capacity Products tons p.a. I Lube Oil Complex Transmission Oil (A.T.F.) 5,500 Transformer Oil (T.O.) 16,500 Base Oil 88,000 Total Oils 110,000 Waxes 27,000 Subtotal 137,000 II Gas Oil Complex Primary Products: Gas Oil 460,000 Naphtha 98,000 LPG 43,000 Subtotal 601,000 Secondary Products: Fuel Oil 560,000 Heavy Residual 431,000 Sulphur 4000 Subtotal 995,000 Total Capacity 1,733,000 Source: AMOC Petroleum Company. AMOC s primary focus is meeting local demand, where it has an off-take agreement for more than 88% of its products with EGPC to satisfy domestic needs; the remaining is exported or sold locally to private sector companies. AMOC owns 40% stake in Alexandria Waxes Company a joint venture with the German Oil International Sasol as an exclusive off-taker to AMOC s wax production in international markets. AMOC is considering raising its stake in Alexandria Wax Products from 40% to 55%, through acquiring a stake from Sasol, which owns 51% of Alexandria Wax. Innovative Development Strategy AMOC is adopting an innovative development strategy that is set-out to function in three parallel pivots. AMOC s Extra-Ordinary General Assembly and General Assembly approved adding new items to the activity scope: including compatible processes such as producing furnace oil, oil blending and packing for others, crude refining at MIDOR and producing diesel and gasoline with taking into 9

11 account the provisions and regulations needed to issue the necessary license in order to implement the above processes. I- Revamp of operational and production facilities for enhanced yields Improvement of the core operational facilities and production facilities is highlighted in AMOC signed an agreement with Axens Group to build a new oil complex with an investment cost of around USD 800mn that will help increase the local refinery s production across the board. In 2017, AMOC-AXENS revamping contract to develop the second phase of Middle Distillates De-waxing Unit (MDDU) units with a total investment cost of USD 50mn. AMOC is working with Axens on the revamp project for producing Euro five standards products in addition to production of Diesel and currently the production process is undergoing pilot testing and conducting economic modeling. Petroleum Projects and Technical Consultations Company (Petrojet) undergone a concrete structure at a total cost of EGP 10.8mn, with a value of EGP 12.9mn, operating in October Processing new feed blend by replacing high economic value feed (soft wax + aromatic extract) which will improve the products quality. II- Extended arms of partnership for utilization of non-functioning assets In utilization of a handsome cash balance of EGP 1.46bn as end of September 2017 (1QFY2018), AMOC aspires to purchase crude oil, process it in the Egyptian refineries and sell the final products to EGPC according to the international prices. Also, AMOC aims to reduce dependency on the domestic suppliers by utilizing the international market, and importing a portion of raw materials needs. In April 2017, AMOC agreed to process 500 barrels/month at MIDOR. This step increased revenue by USD6mn in FY2017, at USD 2/barrel average profit margin. In May 2017, AMOC signed a deal with Dana Gas to initially refine 1,500 barrels/ day, ultimately increase to 4,000 barrels/day. On October 17, 2017, a toll contract was signed between AMOC and Petromin of Saudi Arabia, whereby AMOC packages and blends about 10k ton/year of Lube Oils for Petromin at AMOC S facilities against toll fee, yet to be increased to 50k ton/year in successive stages. Dealing with Arabian Company for Oil and Derivatives to purchase 1,200 tons of main unrefined oils at EGP 1,095/ton as of October

12 EGPC contracting with Iraqi company SOMO on the import of 24mn barrels of Basra crude oil, where AMOC imports and refines 260k barrels monthly through In terms of exports, AMOC signed an agreement in July 2017 to export a number of petroleum products including fuel oil (mazut) to the State Oil Company of Azerbaijan Republic. Tanta lab is to process an extra monthly shipment from 45k to 60k barrels at an expected profit of USD 3/barrel Fully liberal petroleum products prices with high correlation with oil prices In measuring R-squared (coefficient of determinations) to test the correlation among variables, where Brent Crude Oil is the benchmark, R-squared for Gasoline, Gasoil (Solar), and Fuel Oil (Mazot) are 89%, 99%, and 98%, respectively. R-squared indicates the variables are highly correlated and that 89%, 99%, and 98% price movements of Gasoline, Gasoil (Solar), and Fuel Oil (Mazot), respectively are explained by price movements in the benchmark Brent Crude Oil. AMOC s Petroleum Products Correlation with Brent Crude Oil Price Trend (USD/Barrel) Brent Crude Gasoline Rebased Gasoil (Solar) Rebased Fuel Oil (Mazot) Rebased Source: EIA In regression analysis, we have two scenarios for 2018e Brent Crude Oil; scenario I: annual average Brent Crude Oil at USD59.74/b and scenario II: annual average Brent Crude Oil at USD69/b. Accordingly, AOLB projects 2018e Gasoline, Gasoil, and Fuel Oil prices under scenario I at USD1.88/b, USD1.66/b, and USD1.78/b, respectively. Under scenario II, AOLB projects 2018e Gasoline, Gasoil, and Fuel Oil prices at USD2.06/b, USD1.91/b, and USD2.03/b, respectively. AMOC s petroleum product prices will follow the same pattern, since EGPC s contracts stipulate that international prices are the benchmark for both feedstock supply and end-product sales. 11

13 AMOC s refining margin narrowing Refining Margins (%) by tops global standard Brent 25% cracking margin 20% The refining industry works on margins on top of the feedstock cost. The 12 - year average refining margin for Brent cracking stands at 15% 10% 5% 5%, while AMOC s 12 year 0% operating margin records 14%. However, the gap between the two curves is narrowing, indicating a Brent Cracking Margin Source: EIA & AOLB Research compression in AMOC s operating margin, yet 500 bps above the standard margin AMOC (Operating Margin) New entry to compress AMOC s market share The petroleum sector has launched a plan to upgrade Egypt s total oil refinery capacity to 44.2mtpa by end of 2018e, compared with the current capacity of 40mtpa (+10.5% growth), in order to meet the local demand for refined products, particularly gasoil and LPG. So far, confirmed new entrant of ERC of Citadel Capital, with a capacity of 4.2mtpa and an investment of USD 3.7bn. This new capacity with full utilization by the end of 2018e, when it comes on-stream, will cut AMOC s market share from the current 4% to 3.6% by end of 2018e. Nevertheless, AMOC s market position is secure to benefit from accelerated demand and rising prices. Egypt Refineries Market Share in 2017 vs. 2018e 2017 NPC 15% CORC 25% ASORC 11% AMOC 4% APRC 10% APC 13% SOPC 7% MIDOR 15% 2018 ERC 9.5% ASORC 10.2% NPC 13.6% CORC 22.7% AMOC 3.6% APRC 9.1% APC 11.3% MIDOR 13.2% SOPC 6.8% Source: AMOC & AOLB Research 12

14 Backed by strong domestic demand and prices rebound Egypt is net importer of fuel oil, gasoil, LPG, Naphtha, and lube base oils. Thus, AMOC is well backed by strong local demand, where is produces around 4% of Egypt s total production for LPG and Naphtha,7% of Egypt s total production for Gasoil, 11% of Egypt s fuel oil and 30% of Egypt s lube base oils. AMOC has an off take agreement with EGPG for LPG, Naphtha, Gas Oil and Fuel oil production sold at international prices. Growth in petroleum product sales are closely tied to industrial activity (fuel oil and naphtha), the auto industry (gas oil), and population and household formation rates (LPG). According to AOLB estimates, the 2018e global economic growth rate is expected to steadily grow at 3.7% and the economic growth rate in Egypt is expected at 4.6%. The industrial activity exhibited moderate growth at 3.7% in FY2017, 0.4% in Q42017 in particular, and expected to achieve 4.7% growth in FY2018e. On the other hand the auto industry witnessed 31.6% contraction in 2017 and expecting a moderate growth of 10% in 2018e. AMOC Domestic Market Share (mtpa) LPG & Naphtha Fuel Oil Egypt's Production Amoc's Production Egypt's Imports 1 Egypt's Production Amoc's Production Egypt's Imports Gasoil Base Oils Egypt's Production Amoc's Production Egypt's Imports Egypt's Production Amoc's Production Egypt's Imports Source: AMOC 13

15 Exports contribute 12% of total revenues Since priority is for domestic market, any domestic market surplus can be exported. AMOC main exports are waxes through the German Sasol Oil International (51% ownership of Alex Wax), an exclusive distributer for AMOC in international market. Main export markets include: Mexico, Germany, Morocco, Nigeria, Ethiopia, South Africa, India, and Bangladesh. In FY2018e, Wax contribution is USD52.7mn (EGP935.6mn), where total exports comprise 12% to total revenues. 14

16 Financial Analysis & Forecast Alexandria Mineral Oils Company (AMOC.CA) Low leverage & High Cash AMOC has built up a handsome cash balance at EGP 1.47bn, thus the company did not resort to debts to supply its operation upgrades, where the Debt/Equity ratio stood as low as 0.01x in We don t expect AMOC to resort to debt in the future, since the full amortization of its debts outstanding in 2014, particularly with the prevailing high lending rate at 19.75%. AMOC is benefiting from high deposits rates, and expected to record an EGP89.07m of interest income in FY2018e. Single-digit dividend yield Traditionally, AMOC is a high divined-paid stock, however due to extensive operation upgrades in DDM unit, 2018e dividends is expected to declined 83%, to record a 9% dividend yield, down from a 53% payout ratio in ALOB forecasts this trend to continue in On the other hand, with the conclusion of upgrades, we forecast a higher dividend yields starting 2019 at 10.5% and 11.9% in Revenues to grow 14% Throughout 2018e, AMOC is to produce 433k tons of Gas Oil, 867k tons of Fuel Oil, 83k tons of naphtha and 31k tons of butane. It also produced 181k tons of oils and waxes. The refinery s main export product was paraffin wax, which topped 62k tons, making USD52.7mn in proceeds. Backed by local domestic demand, petroleum products prices rebound (c. 10.3% YoY), and partnerships agreements, AOLB forecast AMOC s revenue to increase to EGP10.9bn in FY2018e, 14% YoY growth, while total refinery utilization rate increases to 94.5%, up from 92.8% in The stable economic outlook will have a positive effect on AMOC s revenue, impacting both prices and volumes. AMOC s export sales are projected to stabilize at 12% of total sales in the coming couple of years to record USD1.3bn in 2018, 18% YoY growth and increase thereafter to 13% in 2020, while sales to the local market (comprising 88% of sales) are forecast to increase to EGP9.6bn in 2018e, 14% YoY growth. Sales CAGR is 16% Revenues & Utilization Rate Revenues Breakdown for 2018e % % 96% 94% % 90% 88% e 2019f 2020f Revenues (EGP bn) Utilization Rate (%) 39% EGP10.96bn 1% 15% 9% 2% 5% 29% Lube Oil Waxes LPG Naphtha Gas Oil Fuel Oil Other Revenues Source: AOLB Estimates 15

17 Gross Margin to widen We forecast AMOC to maintain an average gross profit margin of 19% throughout our forecast period, up from 11% over , in the near term; we expect its gross profit margin to widen to 17% in 2018e, up from 13% in Although higher crude oil prices translate into higher petroleum products prices, they would also result in higher feedstock costs. However, AOLB projects petroleum products prices rises at 15% YoY to exceed crude oil prices increases, resulting in narrowing of COGS/Sales ratio to 83% in 2018e, down from 87% in 2017, where feedstock constitutes 89.5% of total costs. AMOC is requiring 1.6mtpa of Low Sulfur Fuel Oil (LSFO) per annum feedstock. Average revenue per ton is expected at EGP 6,323 in 2018e versus EGP 5,534 in 2017, while average cost per ton is projected at EGP 5,277 in 2018e versus EGP 4,822. Gross Profit (EGP/Ton) Gross Profit Margins EGP 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000-1,409 1,235 1, a 2017a 2018e 2019f 2020f Sales/Ton COGS/Ton 20% 18% 16% 14% 12% 10% 18% 19% 17% 12% 13% 2016a 2017a 2018e 2019f 2020f Source: AOLB Estimates EBITDA and Bottom-line expansion AOLB forecast AMOC s EBITDA to increase to EGP1.6bn in FY2018e, 49.5% YoY growth, while the EBITDA margin to expand to 15.5%, up from 11.9% in Egypt s oil refineries are subject to 22.5% corporate tax rate for profits below EGP10mn and 25% rate above EGP10mn, while oil exploration companies are subject to 40%. The company is subject to effective tax rate of 26%, due to lack of debt balance to enjoy a tax break, while taxes projected at EGP363mn in

18 The forex recorded a surge in gains by EGP275.1mn in 2017 due to devaluation of the pound, since some bank deposits are in US dollars of EGP1.1bn (USD64.5mn), 58% of total deposits. We expect forex losses of 24.7mn due to slight ease of the exchange rate to USD/EGP 17 through 1H2018. The interest income is projected to reach EGP89mn, due to a large bank deposits in Egyptian pounds of EGP1.4bn, 42% of total bank deposits. While the interest expense is minimal at EGP3.6mn in 2018, due to small short-term bank loans of EGP30mn. AOLB forecast AMOC s net profit to grow to EGP1.26bn in FY2018e, 15% YoY growth, while the NP margin to expand to 12%, up from 11% in Net profit CAGR is 16%. EBITDA & EBITDA Margin Net Profit & NPM EGP (mn) 2,500 2,000 1,500 1, % 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% EGP (mn) 2,500 2,000 1,500 1, % 14.0% 12.0% 10.0% a 2017a 2018e 2019f 2020f EBITDA EBITDA Margin 6.0% a 2017a 2018e 2019f 2020f Net profit NPM 8.0% Source: AOLB Estimates 17

19 Valuation Our DCF valuation indicates a fair value of EGP9.0/share, a -5.2% downside from current levels. The valuation is based on five years of explicit forecasts and a terminal value using a 3% long-term growth rate. Since AMOC's debt-to-equity ratio was as low as 0.01x at end-2018e - minor short-term debt balance - AMOC's cost of debt is fairly low at 9%. We used a WACC of 19.5%, where the cost of equity is 20%. AMOC s 2018e P/E is 9.5x. AMOC trades below the Reuters Oil & Gas sector average at 17.9x and Refinery Industry average of Assumptions for Calculation of WACC (%) Symbol Assumptions Risk-free Rate of Return Rf 14.7% Long-term Cost of Debt Kd 9.0% Equity Risk Premium Rp 7.0% Beta B 0.7 Tax Rate t 25.0% Weight of Debt Wd 1.0% Weight of Equity We 99.0% Cost of Equity Ke 20.0% WACC Dr 19.5% Source: AMOC, CBE, AOLB calculations 18

20 FINANCIAL STATEM ENTS P ERFORM ANCE RATIOS Year to 30 Jun e 2019f 2020f Year to 30 Jun e 2019f 2020f Income statement (EGP thousands) Growth and margins R evenue 4,375,587 9,589,696 10,957,440 12,070,551 12,953,527 Revenue growth (%) (31.9) Cost of goods sold (3,750,196) (8,277,780) (9,241,445) (9,848,699) (10,428,268) EBITDA growth (%) Other operating expenses (113,262) (173,856) (195,431) (218,580) (243,961) EBIT growth (%) EB IT D A 512,128 1,138,060 1,520,564 2,003,273 2,281,298 Pre-tax growth (%) Depreciation/amortization (82,205) (79,369) (81,038) (82,254) (83,487) Reported net profit growth (%) EB IT 429,923 1,058,690 1,439,526 1,921,020 2,197,810 EBITDA margin (%) Net interest income/(expense) 65,402 84,537 81, , ,159 EBIT margin (%) Associates Pre-tax margin (%) Other income/(expense) 32, ,508 21,020 77,567 68,837 Net margin (%) Exceptional items (net of tax) 19,948 27,888 41,832 46,016 50,617 Effective tax rate (%) P re-tax profit 548,024 1,446,624 1,583,908 2,145,784 2,442,424 Liquidity Tax (113,259) (346,780) (306,526) (450,479) (525,258) Capex/depreciation (x) (0.0) M inority interest Current ratio (x) Preference dividends Quick ratio (x) Reported net profit 434,765 1,099,844 1,277,382 1,695,305 1,917,166 Working capital/revenue (%) Dividends (477,169) (592,047) (1,306,694) (1,380,709) (1,561,691) Receivable days Adjustments (one-off) Inventory days Retained earnings (41,758) 508,501 (28,608) 314, ,475 Payable days Restated net profit: Cash operating cycle (days) Recurrent net profit (excl. excep & adjs) 434,120 1,099,140 1,276,678 1,695,305 1,917,166 R isk measures Fully-diluted net profit 434,120 1,099,140 1,276,678 1,695,305 1,917,166 Dividend cover (x) Payout ratio (%) Cashflow (EGP thousands) Net interest cover (x) nm nm nm nm nm P re-tax profit 548,024 1,446,624 1,583,908 2,145,784 2,442,424 Net debt/equity (incl M I) (%) nm nm nm nm nm - associates' profits Net debt/equity (excl M I) (%) nm nm nm nm nm + associates' dividends R eturns + depreciation/amortization 82,205 79,369 81,038 82,254 83,487 Return on avg cap employed (%) tax paid (113,259) (346,780) (306,526) (450,479) (525,258) WACC (%) increase (-decrease) in provisions (1,232) (12,500) Return on avg equity (excl MI) (%) (profit)/+loss on disposal of FAs Company cost of equity (%) /- others Gross cash flow 515,739 1,166,713 1,358,420 1,777,558 2,000,653 SHARE DATA / VALUATION - capital expenditure 2,790 (12,353) (31,370) (31,989) (32,468) Share data (Incr)/decr in working capital 21, ,892 (1,121,774) (126,157) (142,668) Issued shares (m) , , ,291.5 Free cash flow 539,625 1,442, ,276 1,619,413 1,825,517 Weighted avg shares (m) , , ,291.5 Other inflows/ (outflows): Fully diluted shares (m) , , , acq of subsids/other investments Basic EPS - weighted avg (EGP) /- minority interests YoY change (%) (92.3) dividends paid (357,877) (444,035) (980,021) (1,035,532) (1,171,269) Fully diluted EPS (EGP) proceeds from share issues YoY change (%) (92.3) proceeds from disp of FA/subsids Recurring EPS - weighted avg (EGP) /- others (118,667) (86,814) 649,322 63,611 (178,041) YoY change (%) (92.3) Net cash flow 63, , , , ,207 Gross DPS (EGP) CFPS (EGP) N et cash/ (debt) start 971,339 1,034,420 1,945,823 2,250,901 2,898,393 NBV/share (EGP) Net cash / (debt) end 1,034,420 1,945,823 2,250,901 2,898,393 3,374,600 Valuation PER (Basic) (x) Balance sheet (EGP thousands) PER (FD) (x) Fixed assets 2,161,311 2,169,077 2,210,319 2,242,308 2,274,777 PER (Recurrent) (x) Depreciation (1,047,847) (1,126,349) (1,207,387) (1,289,640) (1,373,127) P/CFPS (x) Net fixed assets 1,113,464 1,042,728 1,002, , ,649 Price/Book value (x) Long-term investments ,026 1,077 Dividend yield (%) Intangible assets Basic EPS Cagr 2018e-2020f (%) nm G-PE (Basix) (x) nm Lo ng-term assets 1,114,395 1,043,659 1,003, , ,726 FD EPS Cagr 2018e-2020f (%) nm G-PE (FD) (x) nm C urrent assets Recurrent EPS Cagr 2018e-2020f (%) nm G-PE (Recurrrent) (x) nm Cash & cash equivalents 1,038,515 1,975,890 2,280,968 2,928,460 3,404,667 EV/EBITDA (x) Receivables 166, , , , ,782 EV/EBIT (x) Inventory 288, , , , ,118 EV/revenue (x) Other non-cash assets 163, , , , ,212 M arket cap/revenue (x) Total current assets 1,656,507 3,320,717 4,260,414 5,083,101 5,748,779 Earnings yield (%) C urrent liabilities Current borrowings 4,095 30,067 30,067 30,067 30,067 PROGRESSIVE QUARTERLY RESULTS SNAPSHOT FOR CURRENT YEAR:FY2018 Payables 23, , , , ,412 Qtly income statement (EGP m) 1Q 2Q 1H 3Q 9-mths Other current liabilities 190, , , , ,706 Turnover 3,529 nm nm nm nm N et current assets/ (liabilities) 1,438,991 2,067,090 3,484,069 4,257,718 4,876,594 Operating profit 451 nm nm nm nm N et assets 2,553,386 3,110,749 4,487,979 5,211,412 5,779,320 Reported net profit 403 nm nm nm nm Lo ng-term liabilities Basic EPS (EGP) 0.4 nm nm nm nm Long-term debt YoY Growth (%) 4 nm nm nm nm Other LT liabilities 113,863 90,896 94,876 99, ,443 T o tal LT liabilities 113,863 90,896 94,876 99, ,443 OT H ER IN F OR M A T ION Issued share capital 861, ,000 1,291,500 1,291,500 1,291,500 Top two major shareholders: 12-mth High/Low: EGP Reserves (incl prefs, t/stock etc) 1,142,851 1,058,304 1,236,261 1,539,344 1,882,154 1) Al Ahli Capital Holding Avg daily vol (000): 1,994.5 Retained earnings 435,672 1,100,548 1,865,341 2,281,513 2,502,223 2) Alexandria Petroleum Co Latest results: 1QFY2018 Shareho lders' funds 2,439,523 3,019,852 4,393,103 5,112,357 5,675,877 Free float: 18.7 Next results: 2QFY2018 M inority interests Reuters code: AM OC.CA M ajor business: Oil Refinery Capital employed 2,553,386 3,110,749 4,487,979 5,211,412 5,779,320 SOURCES: AOLB Research, Company data 19

21 Recommendation Rating Buy Hold Sell Above 15% From 5% - 15% Below 5% Disclaimer This report is based on publicly available information. It is not intended as an offer to buy or sell, nor is it a solicitation of an offer to buy or sell the securities mentioned. The information and opinions in this report were prepared by the AOLB Research Department from sources it believed to be reliable at the time of publication. AOLB accepts no liability or legal responsibility for losses or damages incurred from the use of this publication or its contents. AOLB has the right to change opinions expressed in this report without prior notice. 20

22 Research Department Sally Mikhail Senior - Equity Analyst SMikhail@arabeyaonline.com Mariam Wael Equity Analyst MWael@arabeyaonline.com Micheal Armia Head of Technical Analysis MArmia@arabeyaonline.com Omar Hussein Head of Retail Trading OHussein@arabeyaonline.com Reham Aboul Atta Head of Institutions desk RYasser@arabeyaonline.com Moataz Ashmawy Managing Director MHassan@arabeyaonline.com Laila Tarek El Ghawass Managing Director - Branches LTarek@arabeyaonline.com Commercial Website: Trading Website: For more info, kindly contact us on our hotline