FIRST IMPRESSION | AMOC EY
FV Upgrade in Sight as AMOC Embarks on Bold Initiatives
Analyst – Industrials
May 7, 2017
Alexandria Mineral Oils Company (AMOC) held its first earnings release event on May 4, 2017. The event is one of the first steps in the execution of AMOC’s new strategy of enhancing communication with investors. Below are the key highlights.
EGP floatation and enhanced product mix underpin 9M2016/2017 improved operational performance
Management commenced the event by commenting on 9M2016/2017 results. As a reminder, in 9M2016/2017 AMOC achieved revenues amounting to EGP6.6 billion (up 106% y-o-y) and net income of EGP854 million (up 205% y-o-y and including EGP246 million in FX gains as a result of the revaluation of AMOC’s USD deposits post floatation). Management indicated the floatation of the EGP was a significant factor behind the growth in revenues as well as the expansion in margins, given that AMOC sells its products at the equivalent of international prices while its fixed costs are priced in EGP. Two more factors contributed to higher margins: 1) AMOC’s product prices increased in USD terms, and thus gross profit per ton expanded in USD terms; and 2) AMOC was able to enhance its product mix by lowering the contribution of low/negative spread heavy fuel oil (HFO), relative to lighter more expensive distillates, from 57.4% in 9M2015/2016 to 54.3% in 9M2016/2017.
Product quality enhancement project underway
AMOC produces light distillates, specifically high-margin diesel, which have specifications that do not meet international standards and are thus priced at a discount. Accordingly, AMOC’s BoD approved early 2017 a plan to upgrade the company’s Middle Distillates Dewaxing Unit (MDDU) to enhance the specifications of diesel and light distillates to Euro 5 standards. This project is expected to increase the prices of light distillates and thus significantly widen AMOC’s margins. The project is expected to come on stream by 2020, at an initial investment cost of USD50 million. Even though AMOC is a debt-free company, it intends to finance this project through debt and the company is already in the process of requesting loans from several banks. However, the exact debt/equity ratio to finance project is not clear yet, and management should finalize negotiations in that regard by end July/August 2017. According to management, this project is expected to increase AMOC’s revenues by USD6-7 million annually (c.EGP100-125 million/year).
Tapping into crude oil refining
We remind readers that AMOC is a second stage refinery that refines HFO, unlike first stage refineries that refine crude oil. In an effort to put its sizable cash balance (EGP1.2 billion as of end 9M2016/2017) to better use, AMOC decided to process crude oil in third-party facilities. AMOC first buys crude oil on EGPC’s behalf, which partially relieves the EGPC from its liquidity squeeze. It then refines and processes the crude oil in a third-party facility, such as MIDOR. Finally, AMOC sells the refined products back to EGPC to earn a certain spread. In April 2017, AMOC engaged in processing a shipment of 250,000 barrels of crude oil at the MIDOR facility, which brought in a net profit of USD345,000 (EGP6.2 million) to be booked in 4Q2016/2017. Based on management guidance, AMOC intends to increase monthly shipments of crude oil to MIDOR’s facility to 500,000 barrels per month. Management also indicated that AMOC could exploit its cash balance by acquiring stakes in sister companies and companies outside of the oil refining industry, such as fertilizer companies.
Stock split and GDR program to enhance stock liquidity
AMOC has been discussing several efforts to improve the liquidity of its stock, including a 1:10 stock split approved in February 2017. The stock has been trading at the post-split price starting April 19, 2017. AMOC also intends to list a portion of its shares as GDRs. The firm has already selected Bank of New York as the global custodian for its GDR issuance and Baker and McKinsey as the company’s legal counsel. While the exact timing of the GDR issuance is not clear, management indicated that the company will list on the London Stock Exchange once local regulatory approvals are obtained in a few weeks’ time. Management also indicated that the government’s planned timeline for the floating of 10-20% of AMOC’s shares, as part of an ongoing privatization program, is still unclear.
FV upgrade inevitable, reiterate BUY recommendation
We are currently in the process of updating our FV estimate for AMOC, in order to take into account: 1) higher margins post EGP floatation, as our EGP11.44/share FV estimate assumes a conservative GPM that averages 11% during the forecast horizon versus 14.4% during 9M2016/2017; 2) the firm’s USD50 million project to enhance the quality of its light distillates, which would significantly boost prices and profitability; and 3) AMOC’s decision to refine crude oil in third party facilities. Given that these developments are not incorporated in our model or our old FV estimate, we eye an upgrade to the current FV estimate of EGP11.44/share. We also remind readers that AMOC already beat our FY2016/2017 net profit estimate of EGP636.4 million with its record EGP853.5 million in 9M2016/2017. Accordingly, and until we specify our new FV estimate, we advise clients to build long positions in the stock as the current price level already offers an upside potential of 24% to our old FV estimate.