Egypt Kuwait : EKH Earnings Release Q2 2017

Egypt Kuwait Holding Co. Releases Q2 2017 Earnings Results

EKH delivers strong US dollar growth in attributable net income despite currency devaluation and thanks to its investment strategy and increased operational efficiency

Key Highlights of Q2 2017

USD 79.1 mn

in Revenues

USD 20.4 mn

in Gross Profit

26%

Gross Profit Margin

USD 17.0 mn

in Operating Income

21%

Operating Margin

USD 17.0 mn

Attributable EBITDA

USD 21.0 mn

in Net Income

USD 16.9 mn

in Attributable Net Income

Key Highlights of H1 2017

USD 182.5 mn

in Revenues

USD 58.8 mn

in Gross Profit

32%

Gross Profit Margin

USD 47.2 mn

in Operating Income

26%

Operating Margin

USD 41.5 mn

Attributable EBITDA

USD 48.9 mn

in Net Income

USD 39.3 mn

in Attributable Net Income

Group Revenue

USD mn EGP mn

182.5 194.2

14 August 2017 | Cairo | Egypt Kuwait Holding Company (EKHO.CA on the Egyptian Exchange and EKHOLDING on the Kuwaiti Exchange), one of the MENA region's leading investment companies, reported today its consolidated results for the second quarter of 2017.

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1H16 1H17

EKH reported an Attributable Net Income of USD 16.9 million in Q2 2017 on Revenues of USD 79.1 million, up 28.1% y-o-y and with a six-percentage point margin expansion to 21%. Improved bottom- line profitability during the quarter came despite the translation of underlying company financials into US dollars from Egyptian pounds, and even as Revenues recorded a 12% y-o-y decline owing to the translation effect. The company's ability to grow bottom-line in US dollar terms is thanks to higher fertilizer capacity utilization, increased higher-margin energy distribution business, and management's prudent cost efficiency measures. In EGP terms, Revenues increased by c.86% y-o-y in Q2 2017 and translating into a c.170% y-o-y growth in Attributable Net Income.

Attributable Net Income

USD mn EGP mn

In H1 2017, EKH reported Revenues of USD 182.5 million, down only 6% y-o-y despite the currency translation effect, with growth in EGP terms recording an almost two-fold increase in top-line during the six-month period. Meanwhile, Attributable Net Income recorded a 12.1% y-o-y increase in US dollar terms to USD 39.3 million in H1 2017, with a four-percentage point margin expansion to 22%.

Comments from the Chairman, Mr. Moataz Al-Alfi

EK Holding's stance has been clear since the advent of the Egyptian government's ambitious economic reform program: Whatever the short-term dislocations, the reforms will be net positive for the economy as a whole - and will open new opportunities for our companies.

We have since anchored our investment strategy to a clear view at the macro level and paid careful attention to growth initiatives, import substitution plays, exports and prudent cost control. Today, we are reaping the rewards, with strong on-the-ground growth that has allowed us to create new shareholder value in US dollar terms despite a c.50% currency devaluation and the translation of subsidiary results from Egyptian pounds in dollars on our consolidated financial statements.

The results speak for themselves: Our top-line growth in EGP terms outpaced the impact of the devaluation during both the second quarter (+86%) and the first half (+98%). Meanwhile, our ability to drive higher-margin business and push through increased efficiencies and cost control saw us expand bottom-line profitability in US dollar terms, with Net Attributable Income climbing 28% y-o-y in Q2 and 12% in H1 2017. In EGP terms, we have recorded triple-digit growth.

Diversity across our portfolio of investments has seen us capitalize on macroeconomic themes at both ends of the spectrum. The float of the Egyptian pound favored Sprea Misr's sulfonated naphthalene formaldehyde (SNF) lineup. Today, SNF is an import substitution play in the local market, and our global cost-competitiveness in USD terms sees Sprea well-positioned to grow its export base. The quarter just ended saw Sprea Misr deliver top-line growth of c.102% in EGP terms, ensuring it kept pace with impact of the devaluation as revenues remained flat in USD terms y-o-y despite the float. We continued to equip this high-growth company with the resources it needs to unlock its potential, including new SNF capacity that will grow Sprea's export revenues to as much as 50% by 2019. At the same time, the company is in advanced stages of expanding its product offering to include the production of medium density fibreboard (MDF), the market for which shares the same favorable dynamics as the SNF market.

The float of the Egyptian pound has also benefitted AlexFert, with the company's position as a leading global fertilizer supplier increasingly strengthened, and its natural gas feedback stock remaining consistent thanks to the government's improved external finances. Consequently, AlexFert continued to operate at utilization rates above its nameplate capacity during Q2 2017, generating top-line growth of 11% y-o-y to USD 36.4 million, an almost five-fold increase in net profit and a nine-percentage point expansion of its net margin. The company is also set to benefit from the recently approved natural gas act, which is effectively moving to a freer market and turns the government into regulator rather than a supplier. With the gas market set to open to competition and private sector imports, shortages that plagued 2014-15 are now behind us and AlexFert will have more sources and better prices for its primary feedstock.

Natural gas deregulation also plays well in favor of our gas distribution arm, NatEnergy, with the government's proposed new role as a regulator set to promote increased market efficiency and competitiveness. Meanwhile, the government's clear commitment to lifting energy subsidies and further liberalizing the sector is shifting household economics away from compressed natural gas cylinders and in favor of connection to the national grid. This sets up NatEnergy for increased volumes of installations.

We remain optimistic that a new pricing agreement with the government will be finalized, allowing us to resume subsidized, government-contracted grid connections and fully capitalizing on the base of raw materials secured for some 60,000 clients at pre-float rates.

Even as NatEnergy anticipates the upward revision in government connection fees, it has been actively carrying out so-called "infill" connections, connecting individual homes to the grid at market (non- subsidized) prices. The company thus connected c.16,000 clients in H1 2017 versus c.7,500 in the same period last year. Higher-margin connections using pre-float raw materials have allowed the company to limit the effect of volume-driven top-line contraction on the segment's bottom-line, while also extracting higher net profit margin. Management's ability to navigate the market's rapidly shifting dynamics, while at the same time pushing through higher efficiencies and extracting value from ancillary services, have positioned NatEnergy as a lean and agile energy distributor with the superior industry margins.

Well into the second half of the year, I am increasingly confident in the prospects of the Egyptian economy and with it EKH's ability to continue capturing the upside. We have successfully navigated the most challenging of times and managed to grow our businesses thanks to a carefully implemented investment strategy and asset restructuring initiative. We will continue deploying our resources in the most prudent and efficient way and in parallel deliver tangible growth and value creation for our shareholders in excess of currency translation pull-backs.

81%

of Group Revenues in H1 2017

Revenues

USD mn EGP mn

Fertilizers & Petrochemicals

EKH has investments in two operational companies in the Fertilizer & Petrochemical Segment: Alexandria Fertilizers Company (AlexFert) and Sprea Misr for Production of Chemicals & Plastics Company. A third investment. The company's Fertilizer & Petrochemical investments encompass products ranging from urea, ammonium nitrate and melamine to formaldehyde and liquid and powder glue. With more than 10 years of nitrogen fertilizer operational expertise, EKH has targeted investments with access to key export markets including the United States and Europe, diverse products across several industries and strong cash-flow generating businesses.

Fertilizers & Petrochemicals in US$ mn unless otherwise indicated	Q2 2016	Q2 2017	% Change	H1 2016	H1 2017	% Change
Revenues	62.8	65.4	4%	134.5	147.9	10%
Gross Profit Margin	21%	22%	1 ppt	24%	28%	4 ppt
EBITDA Margin	26%	27%	1 ppt	28%	33%	5 ppt
Net Profit	8.6	10.8	25%	21.3	33.6	57%
Net Profit Margin	14%	16%	2 ppt	16%	23%	7 ppt
Net Profit attributable to EKH	8.0	8.0	-	17.3	22.4	29%
Total Fertilizer Sales

(Tons)

160,360

201,905

328,456

421,691

The Fertilizer & Petrochemical segment continued to deliver solid results in the second quarter of 2017, posting revenue growth of 4% y-o-y to USD 65.4 million driven by strong operational results at both Sprea Misr and AlexFert. Revenue growth came despite the translation of subsidiaries' Egyptian pound financials into US dollars on the consolidated level. On-the-ground organic growth coupled with prudent cost management of the segment's primarily EGP-denominated costs led to enhanced profitability, with the segment's bottom-line gaining 25% y-o-y in Q2 2017 to USD 10.8 million, yielding a two-point expansion in net profit margins to 16%. The segment's strong performance is even

more pronounced in the six-month period, where a 10% y-o-y growth in top-line to USD 147.9 million

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saw net profit hit USD 33.6 million, up 57% y-o-y and with a margin of 23% versus 16% in H1 2016.

Sprea Misr reported a two-fold increase in top-line to EGP 529.3 million in Q2 2017 as it continued to capitalize on its position as an import substitute with a growing export footprint. On a year-to-date basis, the company posted similarly strong results with revenues up 108% y-o-y in H1 2017 to EGP 1,099.8 million. In USD terms, Sprea's top-line remained largely flat during both the three and six- month periods even as the Egyptian Pound lost more than 50% of its value. Moving down the income statement, Sprea's gross profitability during Q2 2017 returned to normal, sustainable levels at 29%, down from inflated highs of 36% in the same period last year. Higher gross profit margins in Q2 2016 were driven by the company's ability to source US dollars at official bank rates, which were significantly lower than the more accurate parallel market rates, and in-turn artificially drove down cost of raw materials. Management views this, along with the low cost of debt during 2016, as one-time events with margins at their current level being more reflective of the business' nature.

Sprea's growth was driven by both price and volumes, with the company ramping-up capacities at its sulfonated naphthalene formaldehyde (SNF, an additive for ready-mix concrete) facilities and production having increased by c.45% y-o-y in Q2 2017 to over 9,000 tons. Sprea Misr was also successful in hedging against the Egyptian Pound's devaluation by successfully linking 100% of its pricing to the US Dollar. Additionally, Sprea's production resiliency affords it flexibility in reacting to shifting market dynamics and the ability to constantly open new avenues for growth. In that regard, the company is currently exploring opportunities that complement its businesses such as the production of medium density fibreboard (MDF), a product that shares similar dynamics to the SNF market, not to mention venturing deeper into the SNF value chain itself.

Meanwhile, AlexFert continued to operate at utilization rates higher than its nameplate capacity at c.101% thanks to consistent natural gas availability. Higher utilization rates have allowed the company to deliver top-line growth even as urea prices faced downward pressure during Q2 2017 - in-line with management's expectations - with AlexFert recording revenue growth of 11% y-o-y to USD 36.4 million for the three-month period. On a year-to-date basis, the company posted revenues of USD 86.0

million in H1 2017, up 20% y-o-y, and filtering into a net profit of USD 18.0 million, a 177% y-o-y increase and a 12 percentage-point expansion in net profit margin.

Management notes that following the trough of demand seasonality witnessed in the quarter just ended, urea prices have already started to pick up in the second half of the year. As such, AlexFert is poised for further improvement in the coming quarters with strong top-line growth and continued profitability enhancement.

14%

of Group Revenues in H1 2017

Revenues

USD mn EGP mn

Energy & Energy-Related

Egypt Kuwait Holding has investments in two companies in the Energy and Energy-Related Segment: NatEnergy and the Egyptian Tanker Company (ETC). EKH builds and operates gas distribution networks in Egypt through its 100%-owned subsidiary NatEnergy, which covers a wide spectrum of activities, including the transportation of natural gas to power stations and the independent production of power. The company's energy investments also include a local and global marine transport of crude oil and petroleum products through ETC.

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Energy & Energy-Related

in US$ mn unless otherwise indicated Q2 2016 Q2 2017 % Change H1 2016 H1 2017 % Change Revenues 19.9 12.0 (40%) 42.2 25.2 (40%)

Gross Profit Margin 38% 39% 1 ppt 37% 35% (2 ppt)

EBITDA Margin 35% 38% 3 ppt 35% 35% -

Net Profit 6.9 5.0 (28%) 14.3 9.3 (35%)

Net Profit Margin 34% 41% 6 ppt 34% 37% 3 ppt

Net Profit attributable to EKH 6.4 4.1 (36%) 12.1 7.8 (36%)

The Energy & Energy-Related segment posted revenues of USD 12.0 million in Q2 2017, down 40% y-o-y owing to the effect of translating NatEnergy subsidiaries NatGas and Fayoum Gas' EGP- denominated financials in US dollars. In EGP terms, the segment recorded a 27% y-o-y increase in top- line in Q2 2017 even as management opted to halt government-subsidized installations pending an upward revision in fees post the float of the Egyptian Pound. Meanwhile on a year-to-date basis, segment performance mirrored the second quarter with revenues down 40% y-o-y to USD 25.2 million in H1 2017, while in EGP terms revenues climbed 25% y-o-y to EGP 447.2 million.

Management's view is that given the regulated nature of the industry, improved performance by NatEnergy will be driven by reshuffling the company's product mix and increasingly target the higher- margin infill clients within its concessions, extracting higher value from post-installation services and pushing through increased operational efficiencies. As such, during the quarter just ended NatEnergy connected a total of 16,726 individual homes to the grid at market (non-subsidized) prices, or 100% of its total installations during the period compared to less than 40% of the 19,370 clients connected in Q2 2016. Higher-margin connections coupled with prudent cost management saw the company record a 52% y-o-y increase in bottom-line to c.EGP 88 million in Q2 2017, along with a six-percentage point margin expansion to 41%. The natural gas market is poised for significant growth during the coming period particularly as energy subsidies are rolled back and with liquefied natural gas (LNG) and compressed natural gas (CNG) prices on the rise. Management expects a shift in consumer behavior to favor grid connections and in-turn a significant acceleration in the pace of business going forward.

Meanwhile, the company's electricity generation play Kahraba record strong top-line growth of 80% y-o-y, albeit at lower margins given the company's strategy to retain its client base and market share amidst a competitive environment. Nevertheless, tight cost controls led to a somewhat flat bottom-line of c. EGP 9.6 million during Q2 2017 despite the company incurring income taxes for the first time this year. Going forward, Kahraba is set to benefit from the recent hike in electricity prices passed in June 2017, in-time for its capacity expansion plans which remain on track, with some 30 MW in new capacities to be added within the coming months - bringing the total to 70 MW.