Investment

The Company

Egypt Kuwait Holding (EKH) is one of the largest and fastest-growing direct investment companies in the Middle East, with total assets exceeding $2.1bn as of December 2013. The company is a handson, long-term investor seeking majority stakes and management control and has a strong record of successfully developing and operating greenfield projects. It consolidates itself into three major lines of business:

• Fertilisers & petrochemicals: two operational investments and a start-up scheduled to begin in late 2014.

Investments include the manufacturing of a wide range of products including urea, ammonium nitrate, melamine, formaldehyde, and liquid and powder glue.

• Energy & energy-related: three investments in oil and gas E&P, building and operating gas distribution networks, and local and global marine transport of crude oil and petroleum products.

• Diversified: a wide array of other investments that include cement manufacturing, telecommunications, infrastructure, cooling systems and insurance. The company delivered some improved operational results in 2013, with core revenue (excluding oil trading business) increasing 7% y-o-y to $500m and core operating income growing 10% y-o-y to $203m. EKH’s core operating margin stood at 41%, up from 40% in 2012. The improved set of results was mainly driven by the company’s energy business, following the resumption of operations in the South Sudan oil concession in May 2013 after more than a year of shutdown. The concession is the company’s chief contributor to its oil segment, with production currently standing at 180,000 barrels per day (bpd), which is expected to rise to 200,000 bpd in 2015. However, concerns remain given the political instability in the country.

The fertiliser segment, on the other hand, reported a 50% y-o-y drop in operating profit to $87m on lower volumes and margins. Volumes suffered from reduced natural gas supply, while margins dropped mainly on the back of lower international prices of urea (90% of segment revenue). Margins were likewise impacted by a disadvantaged market mix with local volume, which is sold at roughly half the export price, comprising 16% of total sales, up from 12% the year before.

On the group level, the company’s net income remained largely unchanged at $85m, mainly on the back of a 21% y-o-y increase in net financing costs, in addition to an unfavourable base effect given a $16m capital gain recorded in the previous year. This implied a ROAE of 11.2%, compared with an average 20% over the past 10 years. As of December 2013, EKH recorded a strong net cash position of $72m.

Development Strategy

Although limited natural gas supply is unlikely to be resolved in 2014, EKH is set to benefit from a full year of operations in its South Sudan oil concession, which is expected to reflect positively on the company’s earnings. EKH has also set a number of initiatives for 2014, including the capitalisation on shale gas discovery in the US by setting up a $2bn nitrogen-based fertiliser plant in the state of Idaho. The company expects to finalise engineering, procurement, and construction contract negotiations in 2H14 and has recently raised $109m in a rights issuance to existing shareholders to help fund the company’s equity contribution to the project.

Other initiatives for 2014 include starting commercial production at its 34%-owned mining grade ammonium nitrate plant, Egyptian Hydrocarbon Corporation; doubling high-pressure laminate sheet production capacity at 100%-owned Sprea Misr; launching a global infrastructure fund; finalising the acquisition of an operative gas concession in Egypt; and looking into doubling capacity at its 30%-owned 1.8-tonnes-perannum cement producer, Building Materials Industries Company. The plant is designed to make use of multiple sources of power, including coal, which should pay off after the Egyptian government recently decided to allow cement plants to import coal as part of their energy mix. It has a four-month lead time for coal handling equipment, and is awaiting final announcements on import regulations and carbon emission taxation.