|Management attribute strong revenue growth in 9MFY16/17 to EGP flotation
Despite a c.8% YoY drop in total production in 9MFY16/17, as a result of a 26 day production halt in 1QFY16/17 (force majeure), revenue surged c.158% YoY. Management pointed to a significant increase in product prices as the main driver of revenue growth, with average selling prices increasing substantially in EGP terms (LPG +112%, Naphtha +107%, Gasoil +100%, Fuel Oil +162%, Base Oil +75%, and Waxes +72%), thanks to flotation.
Margin expansions in 9MFY16/17 was on the back of EGP flotation and an improved product mix
EBITDA margin for 9MFY16/17 increased by 260 bps YoY to 12.54%. Management attributed the margin expansion to three main reasons:1) Refining margins being translated using a higher exchange rate, 2) Gross profit per ton increasing from $35/ton in 9MFY15/16 versus $46/ton in 9MFY16/17, and 3) An improvement in the product mix; increasing the weight of lighter/more profitable products, whilst lowering fuel oil’s contribution.
FX gains and investment income shore up the bottom line
AMOC recorded FX gains of c.EGP250 million (+551% YoY) as a result of the revaluation of USD deposits following the EGP flotation. Moreover, AMOC’s investment income from the JV with South African company Sasol in the Alexandria Wax Company has increased by c.40% in 9MFY16/17 compared to the same period last year. Looking at organic earnings growth, AMOC recorded a c.116% YoY increase for the 9MFY16/17.
AMOC’s cash management strategy
AMOC’s near 100% utilization rate has pushed it to make use of its strong cash position by processing crude oil at third part facilities (namely MIDOR) and selling it back to EGPC for a slight profit. According to management, AMOC has already processed 250,000 barrels at a profit of USD345,000 to be booked in 4QFY16/17. AMOC will continue to process crude oil at MIDOR and has struck a deal with EGPC to be allocated 500,000 barrels per month; which should add USD8.4 million per annum to bottom line.
Moreover, AMOC has agreed with Dana Gas to secure crude condensates, which will be processed at third party facility and then sold to EGPC. Currently, AMOC is processing 1,500 barrels per day for two months, and is expecting to increase this amount to 4,000/barrels per day in July 2017.
AMOC’s CAPEX plan
AMOC is planning to spend USD50 million over the next three years to upgrade its Gasoil and light product’s specifications to meet Euro 5 standards. Management iterated that this upgrade is expected to increase revenues by USD6-7 million per annum, through improved product quality which will translate into higher selling prices. The capex could be financed through debt.
GDRs and the EGX listing of extra shares
Management stated that it has hired Bank of New York (BNY) and Baker Mckinsey to act as global custodian and legal counsel respectively, in issuance of GDRs in the London Stock Exchange; and are currently awaiting regulatory approval.
On the listing of GDRs and a 20% stake in AMOC’s shares on the EGX, AMOC shareholders have yet to reach a final decision as to whether they are planning a capital increase or a major shareholder will liquidate its position.
Positive impression overall, but keep an eye on Oil
Overall, the meeting has indicated to us that management are embarking on a significant change with regards to communicating with investor and improving overall disclosure. We believe that AMOC’s use of third party refineries is a positive step towards increasing revenue streams especially with Egyptian refineries still producing below their full capacity.
On the other hand, we do not believe that AMOC’s CAPEX plan meets expectations given AMOC’s cash rich position as well as Egypt’s deficit in crude refining products. We believe this limits AMOC’s upside triggers given the EGP floatation has already taken place and an environment of low oil prices is expected to continue in the near future.