We recommend a HOLD on Sidi Kerir’s shares with a target price of EGP 13.32, using DCF Model. Our recommendation is based on the company’s performance especially in 2014 and Q1 2015, which showed tighter profit margins on the back of higher production cost and lower sales price. Thereby, we believe this will be the new normal in the petrochemical industry in light of the current oil price and the narrowing oil/gas ratio, which lost Sidi Kerir some of its advantage in exports compared to companies that use oil as a feedstock. However, the depreciating pound and the large local market for Sidi Kerir will both contribute to its sustainability despite expected lower profits for year 2015, noting that the company remains debt free.
Revenues registered EGP 554 Million in Q1 of 2015, 9.31% lower than that in the same period last year. COGS as a % of revenues increased during Q1 2015 significantly to reach 65.79%, the highest among all quarters since 2013.Consequently, profits decreased by 27% from Q1 of 2014 to Q1 2015 to settle at EGP 167 Million. We believe that the company’s cost structure has changed following the lift of energy subsidies in Egypt, which entails a smaller gross margin averaging 35%. We expect this to pressure the profits and we estimate them to reach EGP 648 million in 2015.
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SIDI KERIR Q1 2015 Update