· 2017. 10. 23. · This report is based on publicly available information. It is not intended as...

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This report is based on publicly available information. It is not intended as an offer to buy or sell, nor is it a solicitation of an offer to buy or

sell the securities mentioned. The information and opinions in this report were prepared by the AOLB Research Department from sources it

believed to be reliable at the time of publication. AOLB accepts no liability or legal responsibility for losses or damages incurred from the use

of this publication or its contents. AOLB has the right to change opinions expressed in this report without prior notice.

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Table of Contents

Page Number Subject

2 Summary and Investment Conclusion

Business Summary

Company’s Overview

EFIC Production Processes

Different Scenarios for Annual Product Mix

3-41 Company’s New Design Production Capacities After Bringing New Projects into Stream

Uses of Company’s Products

Financial Analysis of Historical Performance

Fertilizers Industry Analysis (Local and International Outlook)

Challenges to EFIC Expansion Plans

Trends of International Prices of Raw Materials Used by EFIC

Forecasts Assumptions

42 Risks

43 Recommendation

44 Historical, Forecasted Statements and Ratio Analysis

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Current Market Price: EGP 14.40 /Share

Estimated Fair Value: EGP 23.05/Share Recommendation: Buy

Share Data

EGX Code EFIC.CA Sector Chemicals Financial Year December Par Value EGP 10/share 52-Week High/Low EGP 14.7/6.00 52-Week Average Daily Volume 598,786 52-Week Average Daily Turnover EGP 5.714mn

Share Performance

Valuation DCF Analyst Hesham El Shebeini Ext 5195

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

يلبر

أ-

16

يوما

-1

6

يوون

ي-

16

يوول

ي-

16

سطس

غأ

-1

6

برتم

سب-

16

برتو

أك-

16

برفم

نو-

16

برسم

دي-

16

يرناي

-1

7

يررا

فب-

17

سار

م-

17

EGX30 Versus EFIC Share Performance

EGX30 EFIC.CA

Summary and Investment Conclusion

We initiated our coverage for The Egyptian Financial and Industrial (EFIC.CA) and we have estimated the fair value at EGP 23.05/share versus a current market price of EGP 14.40/share. We do believe that the company will benefit in the coming period from the expected positive outlook for the phosphate fertilizers industry in Egypt. The company will have to increase its export sales in the coming period in order to benefit from floatation of the Egyptian Pound and also to avoid competition in the local market as several large and new phosphate fertilizers manufacturing companies are expected to come on stream in Egypt within the next two years. The company is planning to secure internal finance for implementing development plans in the coming period. Also other options are currently under consideration by the management of the company to secure the finance required to develop its production plants, to increase production capacity, to add new products and to develop its current products shape. The other options include selling about 40% stake of its subsidiary “Suez Company for Fertilizers Production – SCFP” to a strategic investor or floating it through an IPO on the EGX.

EGP Million A2015 A2016 F2017 F2018 F2019 F2020 F2021

Sales Revenue

842.28 884.02 1,718.1 1,745.8 1,741.0 1,745.0 1,767.1

Revenue Growth

-0.7% 5.0% 94.4% 1.6% -0.3% 0.2% 1.3%

Gross Profit 244.56 271.14 503.60 495.91 470.56 426.26 418.52

GPM 29.0% 30.7% 29.3% 28.4% 27.0% 24.4% 23.7%

EBITDA 185.0 207.4 422.3 398.1 363.5 311.5 298.5

EBITDA Margin

22.0% 23.5% 24.6% 22.8% 20.9% 17.8% 16.9%

Net Profit 78.50 108.19 234.71 210.14 182.38 151.45 148.71

Net Profit Growth

-18.2% 37.8% 116.9% -10.5% -13.2% -17.0% -1.8%

NPM 9.3% 12.2% 13.7% 12.0% 10.5% 8.7% 8.4%

Total Equity 975.2 1,005.0 1,167.3 1,253.1 1,324.3 1,379.7 1,447.5

EPS in EGP 1.13 1.56 3.23 2.89 2.51 2.08 2.04

DPS in EGP 0.49 0.49 0.59 1.29 1.16 1.00 0.83

P/E 12.71 9.22 4.46 4.99 5.75 6.92 7.05

P/B 1.02 0.99 0.90 0.84 0.79 0.76 0.72

DY 3.4% 3.4% 4.1% 9.0% 8.0% 7.0% 5.8%

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Business Summary

Company’s Overview

The old and official profile of the company states that Egyptian Financial & Industrial Company (EFIC.CA) is the giant phosphate fertilizer producer in Egypt as it dominates about 70% of the Egyptian market for phosphate fertilizers and it has successfully penetrated the export markets in five continents.

EFIC produces, sells and exports five main products:

1- Commercial Sulpheric Acid (CSA) 2-Single Super Phosphate SSP both Powdered (PSSP) and Granulated (GSSP) 3-Compound Nitrogen and Phosphate Fertilizer (NPK) 4-Ammonium Sulphate Fertilizer (AS) 5-Di-Calcium Phosphate (DCP) EFIC produces the above mentioned products through its current five production lines which are distributed over the company’s three factories. Two production lines in Kafr El Zayat factory in Delta region of Egypt, two production lines in Assiut factory in Upper Egypt and one production line in Suez Company for Fertilizer Production (SCFP) which is a subsidiary that is 99.8% owned by EFIC. SCFP is located at Red Sea Port City of Al Ain Al Sokhna in Suez Governorate. The following table shows the designed production capacities of the company’s current factories:

Designed Annual Production Capacities of Egyptian Financial & Industrial (EFIC.CA)

Plants Products in Thousand Tons/Year

CSA PSSP GSSP NPK AS DCP

Kafr El-Zayat Plant 170 450 300 0 0 0

Assiut Plant 210 450 300 0 0 0

Suez Company for Fertilizers Production (SCFP) 425 300 150 50 300 20

Total Capacities 805 1200 750 50 300 20 Source: Company Data.

It is worth noting that Kafr El-Zayat factories have been constructed at Gharbeya governorate, 120km north of Cairo, in a distinguish site, in the middle of agricultural land of Delta, where production started in 1936. With the growing local demand of fertilizers after the erection of the High Dam, another factory was constructed in Mankabad at Assiut governorate in 1967, 400km south of Cairo, where production started in 1970. The Suez Company for Fertilizers Production (SCFP) was established in 2002 while the commercial production started in 2005.

It is worth mentioning that the operations at one of the CSA production lines at Assiut plant has been in suspension since 2010 leaving only one production line with annual design production capacity of 126k tons/year of CSA. Also the operations of the two GSSP production lines at Kafr El-Zayat plant have

been in suspensions since 2008 leaving the mentioned plant without any possibility to produce GSSP since 2008.

The following charts show the company’s designed production capacities according to both the product segment and the geographical distribution. The absolute values of the company’s demonstrated design production capacities for every product are independent as some products will be used as inputs in the production of other products. In other words the mentioned capacities are not additive as for example the CSA product will be the main input for producing AS and PSSP. Then PSSP can be used as an input for producing GSSP, NPK and DCP. Also the surplus of CSA can be sold as a final product. It is also worth mentioning that almost all of the company’s final products can be sold in the local market while only GSSP and CSA that can be exported.

Source: Company Data and AOLB Research

805

1200

750

50 300

20

EFIC's Designed Production Capacity in Thousand Tons/Year (Product Segment)

CSA

PSSP

GSSP

NPK

AS

DCP

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EFIC Production Processes

This section briefly explains the production process of every product of the company’s current main products which are Sulphuric Acid (CSA), Powder Single Super Phosphate (PSSP), Granulated Single Super Phosphate (GSSP), Di-calcium Phosphate (DCP) and Ammonium Sulphate (AS).

Sulphuric Acid (H₂SO₄) (CSA)

The company through its production lines located at Kafr El-Zayat, Assiut and Suez manufactures Commercial Grade Sulphuric Acid (H₂SO₄ with 98.5% concentration) through sealed contract process. The company has five production lines for CSA. Two production lines located at Kafr El-Zayat factory with production capacity of 170k tons/year, two production lines at Assiut factory with production capacity of 210k tons/year and one production line at Suez factory with production capacity of 425k tons/year. The characteristics of the produced CSA are colorless, oily liquid with density of 1.847 metric ton/m³. The company used to import the raw Sulfur required for producing CSA from Saudi Arabia, Iran and Russia. The imported raw Sulfur is then transported from ports to the company’s plants sites by lorry. The operation of one of the CSA production lines at Assiut plant has been suspended since 2010. It is worth noting that the company uses 330kg of sulfur to produce 1 ton of sulfuric acid.

The production process of the Commercial Sulphuric Acid (CSA) can be simplified by the following figure

It is worth noting that during the production process of CSA (mentioned above) SO₂ gas is produced. The SO₂ gas along with 1050 C° passes the fire tube Waste Heat Boiler to achieve the following two purposes:

Reduce the SO₂ Gas temperature to be 475 C° as required in the sequence process.

Generate a steam that will be used in : o Providing the steam required in the Acid Plant o Travel to the Power House to drive steam turbine. This process generates the majority of the company’s internal electricity requirements.

920

960

1,245

EFIC's Designed Production Capacities in Thousand Tons/Year (Geographical Distribution)

Kafr El-Zayat Plant

Assiut Plant

Suez Compnay for FertilizersProduction (SCFP)

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The company emphasized that for each 1 metric ton of Sulphuric Acid produced, approximately 1.20 ton of Superheating Steam produced (35bar, 400 C°) and hence 248kw of electricity are generated. Therefore, the local industry for the production of phosphate fertilizers seems not to be energy-intensive or completely based on the availability of natural gas or fossil fuel as is the case for the local industry for the production of nitrogen fertilizers in which natural gas represents about 60% of the cost of production.

Regarding the Acid Storage Tanks, the produced Sulphuric Acid (H₂SO₄) stored in acid storage tanks made from carbon steel. The company has 14 storage tanks with capacity up to approximately 50k metric tons of CSA.

Powder Single Super Phosphate (PSSP)

The majority (approximately 75%) of the produced concentrated Sulphuric Acid 98.5% is mainly used in the production of the Powder Single Super Phosphate (PSSP). Main ingredients are Rock Phosphate and Diluted Sulphuric Acid with 70% concentration. The Rock Phosphate mined in the Red Sea area and Upper Egypt and transported to plant sites by lorry & trains and barges. Rock phosphate conveyed from the storage area to grinding facilities using Roll Mills which grind the rock into powder with finesse 98% at 100mesh.

The company has the following Grinding Mills:

Kafr El-Zayat has two Roll Mills each with outlet capacity of 30 metric ton/hr.

Assiut has 1 mill with outlet capacity of 30 metric ton/hr and two mills with outlet capacity of 20 metric ton/hr.

SCFP (Suez) has 1 mill with outlet capacity of 25 metric ton/hr.

Fine Phosphate is transported to ground Phosphate Hopper to be used for PSSP production. Dilution and Cooling systems are used to dilute the concentrated Sulphuric Acid 98.5% to 70% concentrations and to cool down the produced Diluted Acid (178 C°) because the Dilution process is exothermic. Dilution Process (as a result of mixing water with Concentrated Sulphuric Acid) and cooling system is sophisticated systems due to the highly corrosive effect of the Diluted Acid. Then the Diluted Sulphuric Acid (DSA) is pumped to PSSP production plant. PSSP plant is designed to use a 70% (concentration) Sulphuric Acid and the recycled scrubber liquor and ground phosphate rock. This process is based on the most technically and economically up to date feasible process and is compatible with Environment Protection Requirements. It is worth noting that PSSP reaction is carried out in either Broad Field process and in Kafr El-Zayat and Assiut Factories or as Reaction Belt as in SCFP plant. Broad Field Mixer has been developed specially for PSSP manufacture is a large two stage horizontal paddle mixer. The

two-stage design ensures complete mixing and good chemical reaction (quality) of SSP powder. Varying speed drive and adjustable paddle configuration allows selection of optimum mixing conditions for all phosphate rocks with Acid.

The outlet PSSP fertilizer is then conveyed to storage area to be cured for two weeks before bagging to the market. A combined venture and cyclonic scrubber cleans the exhaust gases. This equipment selection is according to the latest proven technology applied in this field and complies with Egyptian Environmental Law.

The Company has the following PSSP production capacities:

Kafr El-Zayat plant has one machine with design capacity of 70 metric ton/hr and two machines with design capacity of 37 metric ton/hr. The plant’s design capacity for PSSP is 450k ton/year.

Assiut plant has one machine with design capacity of 70 metric ton/hr and two machines with design capacity of 37 metric ton/hr. The plant’s design capacity for PSSP is 450k ton/year.

SCFP plant has one machine with design capacity of 55 metric ton/hr of PSSP. The plant’s design capacity for PSSP is 300k ton/year.

It is worth noting that for producing one ton of PSSP, the consumed materials are 680 kg of Ground Phosphate (finesse 98% at 100 mesh flow rate t/hr) and 380 kg of (70%) Concentrated Sulphuric Acid (CSA)

The production process of PSSP can be simplified by the following figure

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Granulated Single Super Phosphate (GSSP)

Cured Powder Single Super Phosphate (PSSP) conveyed from the storage area to the Granulation Plant. Granulation process has to follow the following sequence:

In order to recondition the feeding cured PSSP, the lump sizes (if exist due to storage) has to be crushed to prepare the powder for the granulation process by using a cutter

The feeding material (the inlet cured PSSP and the recycled material) must be mixed homogeneously.

The mixed powder feed to the Granulator (either the Pans or Drum) water and may be steam injected (sprayed) over the PSSP.

It is worth mentioning that one ton of GSSP can be produced by using 1.5 ton of PSSP.

The company has the following Granulation Plants:

Four production lines at Kafr El-Zayat and Assiut plants with production rate of 35 ton/hr. The two plants have design capacity for GSSP of 700k ton/year. The operation of the GSSP two production lines at Kafr El-Zayat plant have been suspended since 2008 because of a decision by the Ministry of Environment.

Two production lines at SCFP plant with production rate of 35 ton/hr. The plant has a design capacity for GSSP of 150k ton/year.

The production process of GSSP can be simplified by the following figure

Ammonium Sulphate (AS)

The company produces Ammonium Sulphate (AS) through its Suez Plant only (SCFP). SCFP has two production lines for Ammonium Sulphate (AS) with production capacity of 900 metric ton/day. The company’s design capacity for AS is 300k ton/year.

The Ammonium Sulphate (AS) fertilizer is manufactured by the reaction between the Concentrated Sulphuric Acid (CSA) (H₂SO₄ 98.5%) with Evaporated Ammonia. For producing one metric ton of AS, the consumed materials are approximately as follows:

750 kg of H₂SO₄ 98.5% and

250 kg of Ammonia NH4

The concentrated acid (H₂SO₄ 98.5%) pumped from SCFP acid storage tanks to the acid daily storage tanks located in Ammonium Sulphate plants. Liquid ammonia pumped from Egyptian Fertilizer Company (EFC neighbor to SCFP) through an Ammonia Pipe Line to the Ammonia Daily Tank with 40% space with Ammonia Vapor & pressure 7 bar, and accordingly an Ammonium Temperature 13 C°. The Ammonia Vapor Pressure pumping the Ammonia Liquid to the Ammonia Evaporator where the Ammonia Evaporated by inject a steam (7.0 bar, 180 C°), and then fed it to the Crystallizer External Tube. The Sulphuric Acid (98.4%) reacts with the Ammonia Vapor Producing Ammonium Sulphate circulated by the External Circulation Pump to the Crystallizer.

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The production process of Ammonium Sulphate (AS) can be simplified by the following figure

Di-Calcium Phosphate (DCP)

The Company produces Di-Calcium Phosphate (DCP) through its Suez plants only (SCFP). The SCFP Company has one production line for Di-Calcium Phosphate with a design production capacity of 62.5 metric ton/day and 20k metric ton/year. The company uses 2.78 metric ton of SSP (15% P₂O₅, 4% free acid) to produce 1 metric ton of DCP.

DCP is used in the production of animal food, therefore, the Fluoride content ( < 0.1% ) is the most important figure to be monitored and achieved. It is the bottleneck of this process. The knowhow of this process has been registered for The Indian Company AVT, who was the contractor for the DCP plant. This knowhow transferred to SCFP. The knowhow of the DCP plant based on the extraction of water soluble phosphate from SSP (MCP) and by adding lime milk with very restricted pH control, DCP is developed and then it can be separated.

The production process of DCP can be simplified by the following figure:

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Important Note on EFIC’s Production Process

From the above mentioned brief about the company’s production process it can be said that the company’s most important products are CSA and SSP. The annual

production of CSA will be allocated for producing SSP and AS. The produced SSP can be used in producing PSSP, NPK and DCP. The produced PSSP can be used in

producing GSSP.

Therefore, the company enjoys a great level of flexibility regarding determining the size of its annual production of SSP and AS. The produced SSP can be totally

directed to the production of PSSP which can be divided into two parts. The first part can be sold in the local market and the other part can be used in producing

GSSP which can be exported or sold in the local market. The production of the other products that can be derived from the SSP which are NPK and DCP can be

determined based on the demand and the pre-production purchase orders submitted to the company by its clients. Also the company can determine whether the

produced CSA can be totally allocated for the production of SSP and its derivatives (PSSP, GSSP, NPK, DCP) or part of the CSA can be allocated for the production

of AS.

Also it is possible for the company to sell part of its annual production of the CSA but this will be decided only after using the majority of the annual production of

CSA in the production of the AS and the SSP and its derivatives. For simplicity (and also it is close to reality) we have considered PSSP is much like SSP as it can be

sold in the local market as a final product or it can be used as an input for producing GSSP, NPK and DCP. It is worth mentioning that NPK can be produced by

adding nitrogen to PSSP and the company produces it only for export and based on clients’ request. Accordingly, the NPK is not produced regularly by the

company’s normal production operations as is the case for the other products.

Different Possible Scenarios Regarding the Company’s Annual Product Mix

In fact a part of the company’s current production lines are not on the stream such as one production line for producing CSA at Assiut Plant that has been in suspension since 2010 and two production lines for producing GSSP at Kafr El-Zayat plant that have been in suspension since 2008. Therefore, the company’s current total design production capacities for CSA and GSSP will be 721k tons/year and 450k tons/year respectively.

If we assumed in line of the above mentioned facts that the company will operate at its full capacity, so it will be able to produce 721k tons/year of CSA. Since 380kg of CSA will be required to produce one ton of PSSP, so the company will use only 456k tons/year of CSA to produce 1,200k tons/year of PSSP so the company is now operating at its full capacity regarding the two products (CSA and PSSP). The company will use 600k tons of its annual production of PSSP to produce 400k tons/year of GSSP as 1.5 tons of PSSP will be required to produce only one ton of GSSP. The company will use also another 13.9k tons of PSSP per year to produce 5k tons/year of DCP as 2.78 tons of PSSP will be required for producing one ton of DCP. Therefore the annual sales of PSSP as final product will be 586.1k tons/year. The company will have a surplus amounting to 265k tons/year of CSA. Then the company can operate at its full capacity too regarding the production of AS which means that the company can use 225k tons/year of CSA to produce 300k tons/year of AS (That is the maximum design operation capacity)

since producing one ton of AS will require using 750kg of CSA. Accordingly, the company will end up having a surplus amounting to 40k tons/year of CSA that can be sold directly in the market.

According to this scenario the company’s end products per year will be as follows:

41k tons/year of CSA

586.1k tons/year of PSSP

400k tons/year of GSSP

300k tons/year of AS

5k tons/year of DCP

This scenario refers to a maximum design production capacity of 1,332.1k tons per year of the above mentioned products.

It is worth noting that the company is able to use all or part of the annual production of PSSP to convert it into GSSP or it can use part of its PSSP to convert it into NPK by adding Nitrogen to it or also can use the PSSP in producing DCP.

Anyway, in this study the estimated 1,332.1k tons/year will be used as an approximate number for the company’s total current design production capacity.

It is worth noting that the estimated 1,332.1k tons/year will be the company’s total design production capacity in case of assuming that the parent company which is EFIC that includes Kafr El-Zayat & Assiut plants are operating jointly with its subsidiary which is SCFP in the way that the surplus of CSA at SCFP will be used to increase EFIC’s PSSP annual production so it can operate at full capacity or that generally any surplus of main inputs such as CSA or PSSP at any of the company’s three plants can be used to produce the value added products (final products) at any production line of the three plants that seem to have low utilization rate or that is not operating at high capacity.

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The following table shows the utilization capacities of EFIC (Kafr El-Zayat & Assiut plants) and Suez Company for Fertilizers Production (SCFP) in case of

operating independently from each other:

Production and Operating Capacities of EFIC and SCFP (The Case of Operation Independently)

Assumed Annual Production Capacities (000 Tons/Year) FY2013 FY2014 FY2015

Annual Sales of EFIC (Kafr El-Zayat & Assiut) 569.68 584.52 481.10

Design Production Capacity 581.00 581.00 581.00

Annual Sales/Design Production Capacity (Utilization Rate) (EFIC) 98% 101% 83%

Design Production Capacity 601.79 601.79 601.79

Annual Sales of Suez Company for Fertilizers Production (SCFP) 334.10 384.85 391.75

Annual Sales/Design Production Capacity (Utilization Rate) (SCFP) 56% 64% 65%

Company's Total Annual Sales 903.78 969.37 872.84

Company's Total Annual Design Capacity 1,182.79 1,182.79 1,182.79

Company's Annual Utilization Rate (The Case of Independent Operation) 76% 82% 74% Source: Company Data and AOLB Research

Due to the inability to obtain the accurate numbers of the company’s actual production volumes in tons per year for the mentioned period and particularly in an independent classification that separates annual production volumes of the parent company (EFIC) from its subsidiary (SCFP), it has been decided to use the actual sales per year in tons as a percentage to the assumed or the estimated design capacity in tons as an approximate for the company’s utilization rate (operation rate).

It is worth noting that we have estimated the historical arithmetic average and the historical median of the company’s actual sales volumes to actual production for the period from FY2005 to FY2010 and the results were 80% and 78% after eliminating one year of the period as it has been considered an outlier. Since the results were high it has been deemed strong enough to justify using the actual sales in tons/year (instead of actual production in tons/year) to estimate the annual utilization rates.

The above mentioned table indicates that the company’s total utilization rates were 76%, 82% and 74% in FY2013, FY2014 and FY2015, respectively in case of the independent operation as previously illustrated. However, in case of the joint operations between EFIC and SCFP, the total design capacity will be 1,332k tons/year in the way that will make the annual utilization rates for the total company equal to 67.8%, 72.8% and 65.5%, respectively in the same mentioned period (from FY2013 to FY2015)

The table also demonstrates that the utilization rates for EFIC (Kafr El-Zayat & Assiut) were 98%, 101% and 83% in FY2013, FY2014 and FY2015, respectively versus utilization rates of 56%, 64% and 65% for SCFP in FY2013, FY2014 and FY2015, respectively.

It is essential here to highlight two points in this area, the first is that the annual design utilization capacities for every company of EFIC (Kafr El-Zayat and Assiut) and SCFP has been estimated based on a specific combination of products that were targeted by every company in every single year. In other words, the actual sales data for every company of the parent and the subsidiary in the past two years which are FY2014 and FY2015 have been used in determining the annual design production capacity for every company. The second point is that the case of assuming the joint production between the two companies (the parent and the subsidiary) seems to be the best choice for them both as in this case the two companies will have a bigger room for higher production prospects. Despite the fact that he joint production between the parent and its subsidiary could be in their favor both but the assumptions used in this report regarding the forecasted production volumes and the projected sales values of the parent and its subsidiary have been built on the assumption of the independent operations for each company. Therefore, any surplus of the main inputs such as CSA or PSSP achieved at any company will be sold directly in the market whatever is the utilization rate at the other company’s production lines that could use the mentioned input in producing other higher value added products.

The following charts and tables demonstrate the actual sales volumes in thousand tons/year for every company of the parent and the subsidiary and for the consolidated data for the whole company in the past two years (FY2014 and FY2015)

Actual Sales Breakdown in 000 tons/year for The Parent only FY2014 FY2015

CSA 58.50 56.27

PSSP 379.36 304.10

GSSP 146.66 120.73

Total Sales 584.52 481.10 Source: Company Data and AOLB Research


0.00

100.00

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400.00

CSA PSSP GSSP

The Parent Co (Kafr El-Zayat and Assiut) Actual Sales Breakdown in Thousand Tons

FY2014 FY2015

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Actual Sales Breakdown of the Subsidiary (SCFP) in 000 tons/year FY2014 FY2015

CSA 60.34 87.37

PSSP 73.16 51.68

GSSP 166.76 149.34

AS 79.90 100.73

DCP 4.68 2.62

Total Sales 384.85 391.75 Source: Company Data and AOLB Research


The Parent Co (Kafr El-Zayat and Assiut) Acutal Sales Breakdown in Thousand Tons for FY2015

CSA

PSSP

GSSP

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CSA PSSP GSSP AS DCP

The Subsidiary (SCFP) Actual Sales Breakdown in Thousand Tons

FY2014 FY2015

The Subsidiary (SCFP) Actual Sales Breakdown in Thousand Tons for FY2015

CSA

PSSP

GSSP

AS

DCP

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The following table and charts demonstrate the company’s actual consolidated sales volumes

EFIC's Actual Sales Breakdown in Thousand Tons FY2014 FY2015 FY2014 Share FY2015 Share

CSA 118.84 143.64 12.3% 16.5%

PSSP 452.52 355.78 46.7% 40.8%

GSSP 313.42 270.07 32.3% 30.9%

AS 79.90 100.73 8.2% 11.5%

DCP 4.68 2.62 0.5% 0.3%

Total Sales 969.37 872.84 100.0% 100.0% Source: Company Data and AOLB Research



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EFIC.CA's Actual Sales Breakdown in Thousand Tons

FY2014 FY2015

EFIC.CA's Actual Sales Breakdown in Thousand Tons for FY2015

CSA

PSSP

GSSP

AS

DCP

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Company’s Annual Design Production Capacity After Bringing New Projects into Stream

The company announced that it has shifted new PSSP production line from its new project at Al Ain Al Sokhna to its plant located in Assiut with the new production line to have an annual design production capacity of 350k tons/year of PSSP and to come on stream starting 2H2017.

The company has also announced that a new production line for PSSP is currently being installed at the company’s new industrial complex at Al Ain Al Sokhna in Suez Governorate, with the mentioned line to have an annual design production capacity of 350k tons/year of PSSP. The date for commencing the operation of this line is yet to be determined.

It is worth noting that the company’s new industrial complex at Al Ain Al Sokhna in Suez Governorate is totally owned by EFIC (Kafr El-Zayat & Assiut) and is not an affiliate to the company’s SCFP subsidiary.

It is worth mentioning that the company’s two new PSSP production lines that should come on stream in the coming period at Assiut plant and at EFIC’s new industrial complex in Al Ain Al Sokhna will require 266k tons/year of CSA in order to operate at full capacity to produce 700k tons of PSSP. As producing one ton of PSSP will require 380kg of CSA, therefore, to produce 350k tons/year of PSSP 133K tons/year of CSA will be required to be used with specific amounts of rock phosphate (The Production Process segment of this report illustrates in details the production process for every product).

Here it is important to highlight that the mentioned new two production lines for PSSP have not been considered in our estimates for the company’s production and sales forecasts for the period from FY2017 up to FY2021. The two new PSSP lines have not been taken into account by this report as we think that the real economic feasibility from them can be achieved only if the company added new production units for CSA but since the company’s current CSA production capacities will be the same, then the only benefits that can be achieved to the company will depend on waiving the sale of CSA as a final product in the market and using it as an input for the PSSP and then as GSSP. The mentioned new lines have the capability to produce PSSP and to convert it into GSSP. Anyway, the benefits will not be very material as we have already forecasted that the company is planning to lower its sales of CSA as final product in the forecasted period in order to utilize the current production lines of the other products (other than the CSA). Using the new PSSP lines will be just a replacement for the current PSSP production lines unless the company decides to install new production capacities for CSA.

The following table and charts illustrating the company’s actual sales breakdown in the past three years:

Company's Actual Sales Breakdown in 000 Tons/Year FY2013 FY2014 FY2015

CSA 113.26 118.84 143.64

PSSP 430.90 452.52 355.78

GSSP 274.00 313.42 270.07

AS 84.29 79.90 100.73

DCP 0.82 4.68 2.62

NPK 0.50 0.00 0.00

Total Sales 903.78 969.37 872.84 Source: Company Data and AOLB Research


The above mentioned table and chart demonstrate that the company’s annual sales volumes reached 903.7k tons, 969.3k tons and 872.8k tons in FY2013, FY2014 and FY2015, respectively, versus a total annual design capacity (maximum capacity) of 1,332.1k tons/year which could indicate an annual operation capacity of 67.8%, 72.8% and 65.5% respectively in the mentioned three years.

The above mentioned table and chart also demonstrate that both the PSSP and the GSSP have represented 78%, 79% and 72% of the company’s total sales volumes throughout the period from FY2013 to FY2015 while the PSSP sales represented 48%, 47% and 41%, respectively while the GSSP sales represented 30%, 32% and 31%, respectively throughout the mentioned three years.

The CSA sales represented 13%, 12% and 16% of the company’s total sales volumes in FY2013, FY2014 and FY2015, respectively, while the AS sales represented 9%, 8% and 12% of the company’s total sales volumes in FY2013, FY2014 and FY2015 respectively. On the other hand, the company’s total sales of NPK and DCP remained very limited if measured in thousand tons per year.

The mentioned data shows that the company’s annual sales of AS and CSA have been characterized by up trends in the mentioned period. The up-trend in the AS could be a positive signal as it is a final product while the up-trend in the annual sales of the CSA could be a negative signal as it is an intermediate product that can be used in producing final products with higher economic value.

The company’s new PSSP production lines that yet to come on stream will require 266k tons/year of CSA to operate at full capacity to produce 700k tons/year (for example) which means that the company must be planning to cease the sale of CSA in the coming period. The above mentioned table shows that the company has already sold 113k and 118.8k tons/year of CSA in FY2014 and FY2015, respectively.

Bringing the new PSSP line at Assiut plant into stream starting 2H2017 as well as bringing the other new PSSP line at Al Alin Al Sokhna Complex into stream will require securing about 133k tons/year of CSA for every line to operate at its own full capacity. The current operating CSA production lines will not be able to secure the required amount of CSA.

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EFIC's Actual Sales Breakdown in Thousand Ton

FY2013 FY2014 FY2015

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The company’s new PSSP production lines that yet to come on stream will require 266k tons/year of CSA to operate at full capacity to produce 700k tons/year (for example) which means that the company must be planning to cease the sale of CSA in the coming period. The above mentioned table shows that the company has already sold 113k and 118.8k tons/year of CSA in FY2014 and FY2015, respectively.

Bringing the new PSSP line at Assiut plant into stream starting 2H2017 as well as bringing the other new PSSP line at Al Alin Al Sokhna Complex into stream will require securing about 133k tons/year of CSA for every line to operate at its own full capacity. The current operating CSA production lines will not be able to secure the required amount of CSA.

Therefore, the company has to cease selling CSA as a final product and also has to try to buy CSA from a third party or it has to re-launch its CSA production line at Assiut plant that had been suspended from operations since 2010 or the company has to consider implementing a new production line for producing CSA. It is worth mentioning that implementing a new CSA production line was supposed to have an investment cost of EGP 500mn according to the official EGP/USD exchange rate that was prevailing in the Egyptian banks before November 3, 2016. The Central Bank of Egypt (CBE) adopted floating exchange rate regime starting November 3, 2016 which has increased the EGP/USD exchange rate to levels much higher than what was prevailed in the banks before November 3, 2016. Accordingly the current investment cost for implementing a new production line for CSA will be about EGP 945-1,000mn according to EGP/USD exchange rate of EGP 17-18.

Different Uses of Company’s Products

1. Commercial Sulphuric Acid (CSA)

Manufacture of phosphoric fertilizers

Manufacture of ammonium Sulphate fertilizers

Manufacture of potassium (Potash) Sulphate fertilizers

Manufacture of ferrous Sulphate, copper Sulphate and aluminum Sulphate

Manufacture of different chemicals, petrochemicals and synthetic detergents

Water treatment

In sulphonation, nitration and military industries

In Manufacture of “Rayon”

In medicines and chemical laboratories

Oil refining

Insecticides

2. Powder Single Super Phosphate (PSSP)

Supplying plants with phosphorus element which is one of the three essential elements required for plant nutrition

Supplying plants with sulphur & calcium required for plant nutrition

Fixing plant roots in soil helping them combat pests

Giving plants a better chance to carry out their bio-functions, such as germination, vegetation and ripeness

3. Granular Single Super Phosphate (GSSP)

Supplying plants with phosphorus element which is one of the three essential elements required for plant nutrition

Supplying plants with calcium and sulphur elements required for plant nutrition

Fixing plant roots in soil helping them combat pests

Appropriate to great extent for requirements of a clean environment

Used to fertilize desert and calcareous lands (new lands)

Perfectly used in automatic/mechanical fertilization

Reduced loss during fertilization

Slow release properties, it has a prolonged effect, suitable for plant requirements

Used for all crops to increase its productivity

4. Ammonium Sulphate (AS)

Fertilizer for alkaline soils

Agricultural spray adjuvant for water-soluble insecticides, herbicides and fungicides

In laboratory use

Food additive (used as an acidity regulator in flours and breads)

In the preparation of other ammonium salts

In flame retardant compositions acting much like Diammonium phosphate

5. Compound Nitrogen and Phosphate Fertilizer (NPK)

Supply plant with nitrogen and phosphorous elements which are essential macro-nutrients

Supply plant with calcium and sulphur

Fixing plant roots in soil and strengthens them against pests

Giving plant more opportunity for carrying out its biological functions including sprouting, vegetation growth and crop ripeness

Represents the ideal conditions for decreasing both alkalinity and salinity of the soil to be reclaimed and improving productivity of cultivated lands

Preferably used in both desert and calcareous soils

Used as slow release fertilizer

Treated to mix with nitrogenous fertilizers without any hydrolysis or caking

6. Di-Calcium Phosphate (DCP)

Is mainly used as a dietary supplement in prepared breakfast cereals, animal food, enriched flour and noddle products

Is used as a tableting agent in some pharmaceutical preparations

Is used in poultry feed

Is used in toothpastes as a tartar control agent

Is used as polishing agent

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Financial Analysis of FY2015 Results

Egyptian Financial and Industrial (EFIC.CA) FY2014 FY2015 Change

Consolidated Income Statement (EGP mn)

Sales Revenue 851.42 843.28 -1.0%

Cost of goods sold -588.51 -597.72 1.6%

Gross profit 262.90 245.56 -6.6%

Other operating revenues 6.24 4.30 -31.1%

Other operating expenses -0.63 0.00 -100.0%

SG&A -57.27 -59.42 3.8%

BOD remuneration & compensations -2.46 -5.45 121.2%

EBITDA 208.78 185.00 -11.4%

Depreciation and amortization -31.75 -38.76 22.1%

EBIT 177.03 146.23 -17.4%

Interest income 0.14 0.32 130.5%

Interest expenses -55.55 -55.72 0.3%

Net interest income/expense -55.41 -55.40 0.0%

Pretax income 121.62 90.83 -25.3%

Current income tax -20.43 -10.59 -48.2%

Deferred income tax -5.12 -1.75 -65.9%

Net profit after tax 96.06 78.50 -18.3%

Net profit attributed to shareholders 96.00 78.45 -18.3%

Net profit attributed to minority interest 0.06 0.05 -20.9%

Number of shares 69.30 69.30 0.0%

EPS in EGP 1.39 1.13 -18.3% Source: Company Financial Statements and AOLB Research

Egyptian Financial and Industrial (EFIC.CA) posted a consolidated net profit after minority interest of EGP 78.45mn for FY2015 hence marking 18% decline compared to EGP 96mn in FY2014. The decline in the company’s net profit was mainly attributed to a 1% decline in the company’s consolidated top line which led to a 6.6% decline in the company’s gross profit thus reducing the GPM from 31% in FY2014 to 29% in FY2015. The company posted consolidated sales revenues of EGP 843.28mn for FY2015 compared to EGP 851.42mn in FY2014 while it has posted a gross profit of EGP 245.56mn for FY2015 compared to EGP 262.90mn in FY2014. The company posted EBIT of EGP 146.23mn for FY2015 hence marking 17.4% decline compared to EGP 177.03mn in FY2014. The decline in EBIT was due to a 4% increase in the SG&A, 22% increase in the depreciation & amortization expenses as well as a 31% decline in the other operating revenues.

The decline in the company’s consolidated top line in FY2015 was mainly due to a 10% decline in the company’s consolidated sales volume which reached 872.84k tons versus 969.37k tons in FY2014. The decline in the company’s consolidated sales volume in FY2015 was mainly attributed to a 17.7% decline in the sales volume of the company’s plants at Kafr El-Zayat and Assiut which posted sales volume of

481.10k tons in FY2015 versus 584.52k tons in FY2014. The company’s subsidiary which is Suez Company for Fertilizers Production (SCFP) posted sales volume of 391.75k tons in FY2015 hence marking a 1.8% increase compared to 384.85k tons in FY2014. However, the increase of only 6.89k tons in the sales volume of SCFP in FY2015 was very limited compared to the decline of 103.42k tons that has been achieved in the sales volume of Kafr El-Zayat and Assiut plants in FY2015. It is worth noting that EFIC terminology used in this report can sometimes refer to the company as a whole (including subsidiary SCFP) or in other occasions refers to Kafr El-Zayat and Assiut plants only. However, the word consolidated will be used wherever the company as the whole is the subject.

The following table demonstrates the company’s consolidated sales value for FY2015 compared to FY2014 in product wise:

Egyptian Financial & Industrial Sales Breakdown (EGP mn) FY2014 FY2015 Change

Concentrated Sulpheric Acid (CSA) 78.02 98.81 26.7%

Powder Single Super Phosphate (PSSP) 343.90 275.12 -20.0%

Granular Single Super Phosphate (GSSP) 292.08 294.01 0.7%

Ammonium Sulphate (AS) 122.38 161.88 32.3%

Di-Calcium Phosphate (DCP) 11.66 7.40 -36.6%

Compound Nitrogen and Phosphate (NPK) & Other Products 1.00 3.50 249.0%

Production for Third Parties 2.37 2.56 7.9%

Total 851.42 843.28 -1.0%

According to the above table, it can be said that the decline in the company’s consolidated sales value in FY2015 was mainly attributed to a 20% decline in the sales value of PSSP as well as just 0.7% increase in the sales value of GSSP in the way that the two products sales value have represented 67.5% of the company’s total consolidated sales revenues in FY2015 down from 74.7% in FY2014. However, the decline in the company’s consolidated sales value in FY2015 has been limited to just 1% due to the significant increases in the sales value of other products as the sales values of AS and CSA have increased by 32% and 27%, respectively in FY2015 compared to their levels in FY2014 in the way that have increased their contribution to the company’s total consolidated annual sales to 19% and 12%, respectively in FY2015 compared to 14% and 9%, respectively in FY2014.

In order to determine the impacts of the changes in both the sales volumes and the prices trends, the following tables have been prepared based on the data released by the company. The following tables demonstrate the company’s sales value in EGP million and the company’s sales volumes in thousand tons. The mentioned data have been arranged in product wise, market wise (local and export) as well as geographical distribution to distinguish Kafr El-Zayat & Assiut plants’ sales from the sales achieved by Suez company (SCFP).

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Kafr El-Zayat and Assiut Sales Value in EGP Million FY2014 FY2015 Change

CSA

Local Sales 40.75 41.25 1.2%

Export Sales 1.14 0.59 -48.1%

Total Sales 41.89 41.84 -0.1%

PSSP

Local Sales 292.78 240.99 -17.7%

Export Sales 0.00 0.00

Total Sales 292.78 240.99 -17.7%

GSSP

Local Sales 78.50 83.25 6.0%

Export Sales 64.22 71.23 10.9%

Total Sales 142.72 154.48 8.2%

Other products 3.35 5.03 49.9%

Total Sales 480.75 442.33 -8.0%


Kafr El-Zayat and Assiut Sales Volumes in Thousand Tons FY2014 FY2015 Change

CSA

Local Sales 57.02 55.59 -2.5%

Export Sales 1.48 0.68 -53.9%

Total Sales 58.50 56.27 -3.8%

PSSP

Local Sales 379.36 304.10 -19.8%

Export Sales 0.00 0.00

Total Sales 379.36 304.10 -19.8%

GSSP

Local Sales 82.01 58.92 -28.2%

Export Sales 64.65 61.80 -4.4%

Total Sales 146.66 120.73 -17.7%

Other products NA NA NA

Total Sales (Excluding Other Products) 584.52 481.10 -17.7%


Suez Company for Fertilizers Production (SCFP) Sales Value in EGP Million FY2014 FY2015 Change

CSA

Local Sales 36.13 54.54 51.0%

Total Sales 36.13 54.54 51.0%

PSSP

Local Sales 49.90 36.28 -27.3%

Export Sales 1.22 0.00 -100.0%

Total Sales 51.12 36.28 -29.0%

GSSP

Local Sales 74.18 71.00 -4.3%

Export Sales 75.17 71.17 -5.3%

Total Sales 149.36 142.18 -4.8%

AS

Local Sales 122.38 159.97 30.7%

Total Sales 122.38 159.97 30.7%

DCP

Local Sales 11.66 7.76 -33.5%

Total Sales 11.66 7.76 -33.5%

Other Products

Local Sales 0.02125 0.233 996%

Total Sales 370.67 400.95 8.2% Source: Company Data and AOLB Research

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Suez Company for Fertilizers Production (SCFP) Sales Volume in Thousand Tons FY2014 FY2015 Change

CSA

Local Sales 60.34 87.37 44.8%

Total Sales 60.34 87.37 44.8%

PSSP

Local Sales 71.71 51.68 -27.9%

Export Sales 1.45 0.00 -100.0%

Total Sales 73.16 51.68 -29.4%

GSSP

Local Sales 81.58 78.81 -3.4%

Export Sales 85.19 70.54 -17.2%

Total Sales 166.76 149.34 -10.4%

AS

Local Sales 79.90 100.73 26.1%

Total Sales 79.90 100.73 26.1%

DCP

Local Sales 4.68 2.62 -44.1%

Total Sales 4.68 2.62 -44.1%

Other Products

Local Sales NA NA

Total Sales (Excluding Other Products) 384.85 391.75 1.8% Source: Company Data and AOLB Research

The following table shows the local and export average selling prices of the company’s different products in FY2015 compared to its levels in FY2014:

Local and Export Prices in EGP/Ton FY2014 FY2015 Change

CSA

Local Price 655.02 670.00 2.3%

Export Price 772.80 869.50 12.5%

PSSP

Local Price 759.70 779.33 2.6%

Export Price 844.77 -

GSSP

Local Price 933.34 1,119.96 20.0%

Export Price 930.32 1,076.02 15.7%

AS

Local Price 1,531.57 1,588.00 3.7%

DCP

Local Price 2,489.67 2,960.31 18.9% Source: Company Data and AOLB Research

The above table demonstrates that the local price of CSA has increased by 2.3% in FY2015 while its export price has increased by 12.5% in FY2015 compared to its

level in FY2014. The local price of PSSP has increased by 2.6% in FY2015 compared to its level in FY2014. The company has not exported PSSP in FY2015. The prices

of GSSP have increased by 20% in the local market and 15.7% for the company’s exports in FY2015 compared to its levels in FY2014. The prices of the company’s

local sales of AS and DCP have increased by 3.7% and 18.9%, respectively in FY2015 compared to its levels in FY2014.


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ConcentratedSulpheric Acid

(CSA)

Powder SingleSuper

Phosphate(PSSP)

Granular SingleSuper

Phosphate(GSSP)

AmmoniumSulphate (AS)

Di-CalciumPhosphate

(DCP)

Production forThird Parties

EFIC.CA Sales Revenues by Product in EGP mn for FY2014 & FY2015

FY2014 FY2015

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*The company did not exported PSSP in FY2015 that is why the export price of PSSP in FY2015 was not available. Source: Company Data and AOLB Research

34.9%

32.6%

19.2%

11.7% 0.9%

0.4%

0.3%

EFIC.CA Sales Revenues Breakdown for FY2015

GSSP

PSSP

AS

CSA

DCP

NPK

Production for Third Parties

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FY2014 FY2015

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Local Prices of Company's Products in EGP/Ton

FY2014 FY2015

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Export Prices in EGP/Ton

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Fertilizers Industry

Introduction

Agriculture is a very important business activity for the human kind as it is responsible for producing the food required for both human and the different types of animals. The animal wealth in itself is considered a main source of food for human kind as well as a main source of raw materials for many important industries and a source of organic fertilizers. Agriculture is also important for producing several types of plants and harvests that are used in different types of industries other than the food and beverage industry such as drugs manufacturing industries, energy, spinning & weaving and perfumes industries etc.

In general the use of fertilizers particularly the manufactured-types has become essential for having economically feasible agricultural industries as boosting agricultural production horizontally through expanding the agricultural areas by implementing land reclamation projects and vertically by increasing the agricultural productivity, cannot be achieved without intensive and regular use of fertilizers.

From a scientific perspective, the manufactured-types of fertilizers are divided into major/essential chemical elements and minor chemical elements. The essential chemical elements are Nitrogen fertilizers (N), Phosphoric fertilizers (P) and Potassium/Potash fertilizers (K) while the minor chemical elements are Calcium, Magnesium, Sulfur, Iron, Zinc, Copper, Manganite, Molybdenum and Boron.

With the number of the world population undergoes positive annual growth rate year-on-year the need for increasing food production has been essential. For the world to increase the agriculture production it must follow bilateral policies that aim at a vertical and a horizontal boost to the agricultural production. The vertical growth in production can be achieved through increasing the land productivity that can be achieved by using the nitrogen type of the manufactured-fertilizers in the first place while the other chemical elements of the manufactured-fertilizers will also be needed as well. The horizontal growth in the land agriculture production can be achieved by expanding the land area used in agriculture which can be achieved by using the phosphate fertilizers in the first place in addition to the use of the remaining chemical elements of the manufactured-type of the fertilizers as well but only after about 30-40 days of growing the crops.

According to estimates made by The International Fertilizer Industry Association (IFA), the world’s demand for the manufactured-type of the fertilizers of the three major chemical elements (three essential elements) were estimated at 187.9mn metric tons in FY2014/2015 (of which the world’s demand for Nitrogen fertilizers (N) was 114.3mn metric ton, the world’s demand for Phosphate fertilizers (P₂O₅) was 42.6mn metric ton and the world’s demand for Potash (K₂O) fertilizers was 31mn metric tons in FY2014/2015) versus 184.2mn metric tons in FY2013/2014 (which were divided into 112.3mn tons of N, 41.7mn tons of P and 30.2mn tons of K fertilizers). According to the IFA also, the world’s demand for the same type of the main fertilizers are estimated to reach 200.2mn tons in FY2018/2019 of which 119.8mn tons of N, 46.2mn tons of P₂O₅ and 34.2mn tons of K₂O will be demanded.

From the above mentioned data, it can be said that the Nitrogen fertilizers (N) represent 60.8% of the world’s total demand for the essential three elements of the manufactured fertilizers which amounting to 187.9mn tons in FY2014/2015 while the other two essential elements which are P₂O₅ and K₂O have represented 22.7% and 16.5% respectively of the world’s total annual demand in FY2014/2015.

As for the world’s total supply or production of the major three chemical elements of the manufactured fertilizers, IFA estimated that it has been 159.59mn tons, 48.14mn tons and 45.17mn tons of Nitrogen (N), Phosphoric acid (P₂O₅) and Potash (K₂O) fertilizers in FY2015, respectively. The IFA has also forecasted the world’s potential supply of the three essential elements fertilizers to reach 176.49mn tons, 52.03mn tons and 51.44mn tons, respectively in FY2018 so that the world’s potential supply of the mentioned three elements fertilizers can increase to 279.96mn tons in FY2018 up from 252.9mn tons in FY2015 with the potential supply of the N fertilizers, P₂O₅ fertilizers and K₂O fertilizers to grow by 11%, 8% and 14%, respectively during the period from FY2015 to FY2018.

IFA has estimated the world’s total annual demand for the three essential fertilizers to be 161.23mn tons, 47.71mn tons and 38.28mn tons, respectively in FY2018 thus indicating an expected surplus of 15.26mn tons of N, 4.32mn tons of P and 13.16mn tons of K, respectively in FY2018. It is worth noting that the world’s estimated potential supply of the three essential elements fertilizer products have been calculated based on the effective capacity which is the maximum achievable production which are always below the annual maximum production capacity. It is also worth noting that the estimated world’s demand for the three essential elements fertilizer products includes both the fertilizer demand and the non-fertilizer demand.

Phosphate Outlook

According to The International Fertilizer Industry Association (IFA), the global phosphate rock supply would grow 18% over FY2013 estimates to reach 258mn metric tons in FY2018. Morocco, China and Saudi Arabia will account for 62% of this 40mn metric ton increment. The global phosphoric acid (P₂O₅) capacity for FY2018 is projected at 61.5mn metric tons, representing a net increase of 7.2mn metric tons over FY2013. Between 2013 and 2018 a total of 30 new acid units are currently planned for completion, of which two-thirds will be outside China. Large capacity additions will occur in Morocco, Saudi Arabia, China and Brazil. Global supply of phosphoric acid (P₂O₅) is estimated at 52mn metric tons in 2018. Between 2013 and 2018 global phosphoric acid supply would increase by overall 6.7mn metric tons representing an average annual growth rate of 3% over 2013.

Global phosphoric acid (P₂O₅) demand is forecast to grow at an annual rate of 2% over 2013 to reach 48mn metric tons in 2018. Global phosphoric acid supply/demand showed a stable potential balance over the past years up to 2015, but starting 2016 it has moderately increased in the way that it will continue its ascending trend till it reaching 4.3mn metric tons by 2018, representing 8% of potential supply.

About 22 new units for processed phosphates are planned between 2013 and 2018. China would account for one-third of them. Morocco and Saudi Arabia would add another seven new facilities.

Global capacity of the main processed phosphate fertilizers would grow by 5.1mn metric tons (P₂O₅) between 2013 and 2018 to 47.7mn metric tons (P₂O₅). The expansion of DAP capacity would account for 80% of this increase.

Diammonium phosphate (DAP) (chemical formula (NH4)2HPO4, IUPAC name diammonium hydrogen phosphate) is one of a series of water-soluble ammonium phosphate salts that can be produced when ammonia reacts with phosphoric acid.

DAP is used as a fertilizer when applied as plant food, it temporarily increases the soil pH, but over a long term the treated ground becomes more acidic than before upon nitrification of the ammonium. It is incompatible with alkaline chemicals because its ammonium ion is more likely to convert to ammonia in a high-pH environment. The average pH in solution is 7.5–8. The typical formulation is 18-46-0 (18% N, 46% P2O5, 0% K2O).

https://en.wikipedia.org/wiki/Salts

https://en.wikipedia.org/wiki/PH

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DAP can be used as a fire retardant. It lowers the combustion temperature of the material, decreases maximum weight loss rates, and causes an increase in the production of residue or char. These are important effects in fighting wildfires as lowering the pyrolysis temperature and increasing the amount of char formed reduces that amount of available fuel and can lead to the formation of a firebreak. It is the largest component of some popular commercial firefighting products.

DAP is also used as a yeast nutrient in winemaking and mead brewing; as an additive in some brands of cigarettes purportedly as a nicotine enhancer; to prevent afterglow in matches, in purifying sugar; as a flux for soldering tin, copper, zinc and brass; and to control precipitation of alkali-soluble and acid-insoluble colloidal dyes on wool.

Future Global Outlook for Phosphate and Potash

Using phosphate and potash in farming not only improves production quality but also increases crop yields. Therefore, experts predict that the world’s demand for both types of fertilizers will continue to grow as the world’s population increases and the amount of arable land decreases.

The US Geological Survey (USGS) expects that the world consumption of phosphorus pentoxide fertilizers will increase to 48.2mn tons by 2019 up from 43.7mn tons in 2015. Also it has been estimated that the world’s phosphate rock production is expected to increase gradually as well, rising from 223mn tons in 2015 up to 255mn tons in 2019. Most of the mentioned increase will likely to come from the expansion of existing mines in Morocco and the development of a new mine in Saudi Arabia. However, there are a number of other phosphate projects expected to come on stream by 2019 as well – they are in Algeria, Australia, Brazil, China, Egypt, Jordan, Kazakhstan, Peru, Russia and Tunisia.

Production of Rock Phosphate in Egypt

According to US Geological Survey (USGS), Egypt’s phosphate production remained flat for 2015 at 5.5mn tons. An August 2014 report issued by the Central Metallurgical Research and Development Institute noted that newly discovered phosphate ores are now being mined from an area in the Nile Valley. According to USGS, Egypt’s phosphate reserves are currently estimated at 1.25bn tons.

The majority of Egypt’s annual production of rock phosphate is currently produced by two companies namely Phosphate Misr Company and El Nasr Mining Company.

Phosphate Misr Company

Phosphate Misr which was established in 2009, is one of two major companies that produces phosphate rocks in Egypt with production capacity of around 5mn tons per year from one of the biggest reserves in the world “Abu Tartour”. On the other hand, the company has announced that it is planning to sign a new contract for the exploration and exploitation of new sites in the South of Egypt where it is expected to increase its production capacity of phosphate rocks in the near future. Abu Tartour Plateau is located in the desert, 50 km west of El-Kharga city, capital of New Valley Governorate. The plateau is situated in the southern sector of Egypt in the Western desert at 300 km west of Assiut city at the river Nile, 650 km south of Cairo city and 700 km west of Safaga port at the Red Sea coast. The plateau is perfectly connected to the urban through a first class network of a heavy load asphaltic road. The tremendous Phosphate Ores of the Plateau are currently being exploited by Phosphate Misr. The phosphate seam spread all over the plateau covering an area of about 1,200 km, only one tenth of that area had been geologically explored by mean of 375 surface drill holes, indicating the presence of about 715mn ton of phosphate reserves having an average seam thickness of about 3.5 meters.

El Nasr Mining Company

El Nasr Mining Company (NMC) is one of the biggest mining companies in Egypt and it is a subsidiary of Egypt’s Metallurgical Industries Holding Company. NMC has been established in 1960 under the name of El Nasr Phosphate Company. The company’s business activities extend from Alexandria in the North of Egypt to Aswan in the south of the country. In July 2000, Red Sea Phosphate Company was merged with El Nasr Phosphate Company, accordingly, the name of the resulted entity changed into El Nasr Mining Company (NMC). In April 2001, phosphate mines of Abu Zabaal Fertilizer Company were merged with El Nasr Mining Company. The company produces different mining products such as Phosphate, Talc, Quartz, Ilmenite, Gypsum, Magnetite etc. The company produces Rock phosphate which is used in fertilizers industry & Phosphoric Acid, Insecticides Industry and Iron & Steel Industry.

Producers of Phosphate and Potash Fertilizers in Egypt

Polyserve Group

Polyserve was established in 1990 as a privately owned international trading company, and has succeeded in penetrating the international markets of Europe, Asia, Africa and Latin America. With the headquarters based in Cairo, Egypt, the company is considered a major Egyptian Company with international recognition and presence. In addition to the company’s main fertilizer trading business, Polyserve is active in other businesses that serve and support the trading operations such as stevedoring, bulk handling and storage, in land transportation, local distribution and bulk blending.

The company’s main products are Nitrogen fertilizers, Phosphate fertilizers, Potash fertilizers and Sulfur.

Polyserve Holding Company comprises:

1. Polyserve Fertilizers & Chemicals 2. Polyserve Export, Import & Trade Co 3. Polyserve East Africa LTD 4. Abu Zaabal Fertilizers & Chemicals Co 5. Aswan Fertilizers & Chemical Industries Co 6. Polyserve Agriculture and Food Industry Co

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Polyserve Group has the following sister companies:

1. Arabian Oils, Grains and Chemicals Complex Co (AFOFCO) 2. Ferchem Masr Fertilizers and Chemicals (Ferchem Co) 3. International Company for Agricultural Crops 4. International Company for Fertilizers and Chemicals 5. Sanabel Sea Services Co 6. Tridex for Trade Co 7. Liquifert Co

Armed Forces’ Phosphate Fertilizers Manufacturing Companies in Egypt

Egyptian Armed Forces is increasingly playing an important role in the chemical and fertilizers industry in Egypt through implementing new and large chemicals and fertilizers manufacturing firms. The Egyptian Armed Forces owns Al Nasr Company for Intermediate Chemicals which has implemented an industrial complex for chemical industries at Al-Fayoum. Al-Fayoum Chemical Industries Complex consists of two phases. The first phase which has been implemented on 210k sqm consists of:

1. Liquid and Solid Aluminum Sulphate Manufacturing Plant with annual production capacities of 150k tons of liquid aluminum Sulphate and 25k tons of solid aluminum Sulphate.

2. Sulphuric Acid Manufacturing Plant with annual production capacity of 150k tons. 3. Granular Single Super phosphate Manufacturing Plant with annual production capacity of 150k tons. 4. Sulphate Potassium Manufacturing Plant with annual production capacity of 22k tons of SP fertilizers in addition to 26k tons/year of Hydrochloric Acid.

The second phase of Al-Fayoum Chemical Industries Complex which also has been implemented on 210k sqm, consists of the following:

1. Liquid Aluminum Sulphate Manufacturing Plant with annual production capacity of 200k tons. 2. A plant for manufacturing compound fertilizers with annual production capacity of 150 tons. 3. Phosphoric Acid (50% density) Manufacturing Plant with annual production capacity of 100k tons. 4. Sulphuric Acid Manufacturing Plant with annual production capacity of 150k tons.

Al-Fayoum Chemical Industries Complex which is owned by Al-Nasr Company for Intermediate Chemicals that is affiliated to the Egyptian Armed Forces, has a total production capacity of 575k tons/year of Phosphate, Potash, Compound and Phosphoric Acid fertilizers which aims at serving the agriculture sector in Egypt and exporting to thirty three countries, namely, Italy, France, UK, Poland, Romania, Greece, Cyprus, Dominican, Brazil, Costa Rica, United Arab Emirates, Saudi Arabia, Oman and Sudan.

Egyptian Armed Forces’ Compound & Phosphate Fertilizers Manufacturing Industrial Complex at Al Ain Al Sokhna

The Chairman of Al-Nasr Company for Intermediate Chemicals was reported to have said that the Egyptian President had approved the company’s expansion plans which include implementing a number of new projects at the company’s main location in Abu Rawash and in the Company’s Al-Fayoum Industrial Complex as well as implementing the largest Compound & Phosphate Fertilizers Manufacturing Complex in the industrial zone of Al Ain Al Sokhna. The top official added that Al Ain Al Sokhna new fertilizers project is designed to host nine new plants which will be implemented within 30-months of the announcement date. The mentioned fertilizers manufacturing complex will comprise the following plants:

1. Two plants for producing concentrated Sulphuric acid (CSA) with production capacity of 3,800 ton/day. 2. Two plants for producing commercial phosphoric acid (CPA) with production capacity of 1,200 ton/day. 3. Two plants for producing pure phosphoric acid with production capacity of 300 ton/day. 4. A plant for producing Granular Diammonium Phosphate (DAP) with production capacity of 1,200 ton/day. 5. A plant for producing Crystalized Diammonium Phosphate (CDAP) with production capacity of 300 ton/day. 6. A plant for producing Granular Triple Super Phosphate fertilizers with production capacity of 750 ton/day in addition to a unit for treatment of Fluorosilic acid

with production capacity of 600 ton/day.

The Egyptian Armed Forces’ plans regarding Al-Fyoum Chemical Industries Complex which will produce 575k tons of fertilizers per year and Al Ain Al Sokhna fertilizers production complex which is assumed to produce about 1mn tons per year is about to represent a real competitive threat to EFIC in the coming years. Inevitably the map of the local production of phosphate fertilizers in Egypt will experience a significant change in the years ahead. The era where EFIC is said to have possessed a market share of 70% or so of the phosphate fertilizers in the local market is about to end. Not to mention the other projects that will be implemented by the private sector this time which are currently in the pipe line as well.

In the following parts of this report we have illustrated the local supply and demand for phosphate fertilizers based on the current arable land in Egypt and after considering the country’s new land reclamation projects in addition to the arable land that is lost per year due to converting it into other purposes other than the agricultural business.

Also in the following parts of this report we have illustrated the international supply and demand and potential balance for Nitrogen, Phosphate and Potash fertilizers in

the coming years. The mentioned data have been classified according to the countries and region classifications adopted by FAO and UN and the other international

bodies such as the World Bank and the IMF.

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Abu Tartour Project for Phosphate Fertilizers by Alliance Including ABUK.CA

Official sources announced that an alliance of seven companies and a governmental authority agreed to seek USD 650-700mn in loans to implement a phosphate fertilizers manufacturing project worth USD 1bn at New Valley Governorate. The same sources added that the mentioned project which aims at producing Phosphoric acid and phosphate fertilizers will have an annual production capacity of 500k tons. The Chairman of Abu Qir Fertilizers (ABUK.CA) said that the mentioned alliance comprises Middle East Gas Co, PETROJET, Engineering Co for the Petroleum and Process Industries (ENPPI), Abu Qir Fertilizers (ABUK.CA), Saudi-Egyptian Industrial Investment Co in addition to Egyptian Mineral Resources Authority with the mentioned list to own 60% stake of the project that will be divided equally among them. The remaining 40% stake will be equally owned by Phosphate Misr Company and Al Ahly Capital Holding that is an affiliate of the National Bank of Egypt. (Al Mal)

EVERGROW for Specialty Fertilizers Evergrow is established in the 2006, It is engaged in manufacturing & marketing of specialty fertilizers. Evergrow is manufacturing a wide range of products that include; 100% water soluble solid, liquid and suspension NPK fertilizers, 100% water soluble phosphorus fertilizer; MAP/MKP/urea phosphate, 100% water soluble, standard & granulated Sulphate of potash, potassium nitrate and 100% water soluble crystal and liquid calcium nitrate. The company’s first industrial complex was established in Abo Rawash Industrial Zone, 6th October City, Giza, Egypt on 4k sqm as the first Egyptian factory specialized in manufacturing all kinds of fully soluble, and granular Potassium Sulphate, Mono-Ammonium Phosphate (MAP), Mono Potassium Phosphate (MKP), Urea Phosphate (crystal and liquid-UP), different formulas of solid, liquid and suspension NPK, Calcium nitrate (crystal and liquid), Copper Sulphate, Calcium chloride and hydrochloric acid as well. As the demand on Evergrow products in the local and international market increases; in 2011 the company established the second huge production complex in Sadat Industrial Zone, Menofia Governorate, Egypt on 12k sqm to manufacture its requirements from Phosphoric, Sulphuric and Nitric acids and to increase its production capacity from Potassium Sulphate and to produce Calcium chloride for non-agricultural purposes after establishing the new production plants in 2016 and 2017 the annual production capacity will be reaching 885k ton in 2016 and more than 1mn tons/year in 2017 and number of labors will be more than 4000. The company invested more than USD 260mn which were planned to increase to USD 3bn in 2016 and then to USD 4.5bn in 2017.

Analysis of Phosphate Industry Based on Local and International Perspectives

Threat of Substitutes

The company’s main product at the time of writing this report are phosphate fertilizers (P₂O₅) while the company is progressing toward commencing the production of Potash fertilizers (Potassium) (K) in the coming year at the latest. Therefore, we will assume, at least for the purpose of the industry analysis, that the company’s current products are Phosphate and Potash fertilizers. The substitutes to the mentioned fertilizers products could be organic fertilizers that result from wastes of cattle whether it has been industrially treated or not. The substitutes also include alluvial soil that can be formed by rains and shifted to lands by rivers streams. The mentioned two substitutes are currently available only in limited places in the world besides that they are also far from being enough to satisfy the requirements of the agriculture in the way needed to produce the food for an increasing number of populations all over the world. Also the mentioned two substitutes can be used in other purposes other than the fertilizers as the wastes of cattle can be used in generating energy. Also it can be noted that rains which are important in itself as a source of natural fertilizers in a direct way or which contributes in an indirect manner in creating alluvial soil which can then be used as natural fertilizers, are not available everywhere, all the time and in a regular and enough amounts. The role of phosphate and potash fertilizers in the agriculture industry is considered very important particularly for the plans of horizontal expansion in which new land areas are being reclaimed to increase the cultivated land areas. Also the quality of agriculture products can be improved by using both phosphate and potash fertilizers. From a different perspective, the company’s main products can be used in other purposes than being used as fertilizers. The other purposes include industrial uses in oil & refining industry, drugs manufacturing industry, pesticides manufacturing industries as well as chemical and military industries. It is also worth noting that small-scale agriculture in which small areas are cultivated by fragmented farmers and small companies can sometime make the other type of fertilizers such as Nitrogen fertilizers treated as if it were substitutes for phosphate and potash fertilizers. Scientifically, this issue is far from reality as the different chemical elements will be required for any plant and using one element will not replace the plant’s need for the other element. Sometimes the low purchasing power of the farmers and the desire to cut costs may force them to avoid using some types of chemical fertilizers and resort to another even if it were different in the chemical elements. Also the EFIC company could be faces challenges for its sales and margins growth in the coming years particularly in the local market as the company’s total products are currently designed to be solid products while the share of liquid fertilizers are increasingly getting momentum in the local market which should alert EFIC to the expected shape of the fertilizers industry in the local market in the years to come.

Therefore, we can assume to a high extent that the threat of substitutes is low to moderate.

Bargaining Power of Suppliers

The most important raw materials used in the manufacturing of phosphate fertilizers are sulfur, rock phosphate and ammonia. From an international perspective, the mentioned materials are

available and the supply of it to some extent exceeds the demand for it. Also despite the fact that there are different uses for such products but the use of it in the manufacturing of fertilizers remains one of the best uses and the most feasible economically particularly for the raw material producers. There are a large number of sulfur suppliers as they are most likely to be oil refining companies whether in the local market or overseas. The rock phosphate is available in the local market as it is produced by two companies in Egypt and despite the fact that Egypt owns large proven reserves of rock phosphate but the fact that it is produced only by Phosphate Misr Company and Al Nasr Mining Company could stir doubts about a probable monopoly market structure for such input. Also it is worth noting that the fertilizers manufacturing companies are considered the major and the most important buyers of rock phosphate, ammonia and sulfur. However, different uses of sulfur particularly the military uses do exist.

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We do believe that the bargaining power of suppliers is low to moderate.

Bargaining Power of Consumers

The most important consumers to the company’s products of phosphate fertilizers are the local farmers and the agricultural firms in the local market in addition to the export markets which include Brazil, Russia, Albania and Asian countries. Despite the fact that the number of agricultural firms in the local market is large as is the number of the farmers and despite the fact that most of the farmers and agriculture firms could be small in size with small areas of land under control but the consumers cannot be described as fragmented. Since specific unions such as the Farmers Syndicate exists in addition to the role of the Ministry of Agriculture along with the role of the Ministry of Supply and Internal Trade, the pricing power of the fertilizers manufacturing companies are always under review and control by the government even for the private sector companies and particularly if the price increase was intended to increase the producers’ profit margins and profitability in general not as a mandatory move to overcome the results of increases in the prices of raw materials, taxes etc. The intervention of the government in the market is the factor that determines the bargaining power of consumers in this industry and without it, the fertilizers manufacturing companies could have a strong pricing power against their consumers.

Therefore, the bargaining powers of consumers are moderate to high.

Barriers to Entry

We do believe that accessing these types of industries will not only require new licenses which needs government approval along with a price that must be paid by the investor to the government but it will also requires approvals from security officials in the country as the inputs and outputs of these types of industries could have uses other than the civil purposes. Also this industry is considered a capital intensive industry in addition to the approvals that must be obtained from the Ministry of Environment which will require significant environmentally measures that could prevent the production of certain products and/or impose high costs to make the production process compatible with environment safe

requirements. The reputation in the local and international markets are very important and it cannot easily obtained as it needs a proven track record that can only be obtained after several years of operations. Also the reputation and strong name for the company’s products in both the local and international markets can only be obtained after winning some international and local accredited awards or quality certificates such as ISO certificates. The fertilizers manufacturing industry is also subject to scientific research so the Research and Development expenditures also play an important role in distinguishing any company’s products from the products of the competitors. Innovation, scientific knowledge and practical experience are considered very important barriers to entry.

We do believe that this industry has high barriers to entry.

Rivalry Among Industry Incumbents

Regarding the local market, the phosphate and potash fertilizers manufacturers are very limited in number and the company seems to have enjoyed a market structure which allows it a large market share.

Even the company was recently accused by The Egyptian Competition Authority (ECA) that it has violated competition rules in the local market through coordinating with its competitors in the local market to maintain a fixed price for their products. The company denied the ECA’s charges and attempted to reach an amicable solution for the mentioned charges. The international market seems to be much bigger than the local market and is characterized by strong competition.

The most important point here is that the Egyptian Armed Forces have new and giant phosphate and potash fertilizers manufacturing plants that either have recently accessed the local and international markets or about to enter the mentioned markets within a period of thirty months. The Armed Forces projects are expected to have annual capacity or more than 1.5mn tons of fertilizers products including phosphate and potash fertilizers. Accordingly, and with the fact that the civil investments of the armed forces are tax exempt in the local market, the armed forces’ projects will have strong competitive advantages over their competitors. Not to mention the other private sector producers of phosphate fertilizers such as Evergrow, Polyserve Group and the new projects which are still in the pipeline such as Abu Tartour project that will be implemented by Abu Qir Fertilizers and its partners.

Therefore, we are expecting the rivalry among incumbents to become high within a time horizon of thirty months particularly in the local market. However, if the agriculture in Egypt is to move in a parallel way with the theoretically or the academically determined amounts of phosphate fertilizers that must be provided per feddan per year within every crop, therefore, the current and the expected local production of phosphate fertilizers will not exceed the local demand by significant amounts and the phosphate fertilizers companies will have low rivalry among each other.

EFIC Expansion Plans (Al Ain Al Sokhna Complex)

The Company has a new project located at Al Ain Al Sokhna in Suez Governorate other than the Suez Company for Fertilizer Production (SCFP) which is a subsidiary that is 99.8% owned by EFIC. The mentioned new project comprises two production lines for PSSP with total annual production capacity of 700k tons/year. Recently the company has managed to shift one of the mentioned two PSSP production lines to its plant located in Assiut. The PSSP production line which has been moved to Assiut plant has already been installed there with the commercial production to start in 2H2017. The new PSSP plant that has been installed in Assiut has annual production capacity of 350k tons/year. The company also has completed most of the installation works for the other new PSSP production line which is located at its new industrial complex in Al Ain Sokhna. The mentioned production line has an annual production capacity of 350k tons/year of PSSP. The timing for commencing the commercial operations of EFIC’s Al Ain Sokhna Industrial complex is yet to be determined. It is worth noting that EFIC’s new industrial complex at Al Ain Al Sokhna in Suez is a direct investment owned by EFIC and is not a subsidiary such as SCFP.

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The company’s decision to move one of the new PSSP production lines from its new Industrial Complex at Al Ain Al Sokhna to Assiut plant has been taken because of the following reasons:

To increase the company’s PSSP exports to Africa in the coming years through utilizing the Assiut plant which is closer to African market and the river shipping which will be available from Assiut.

To utilize the CSA units located at Assiut plant and to lower the operation load for the CSA units located at Suez plant

To cut land cargo costs of rock phosphate as Assiut plant is already close to rock phosphate mines in Upper Egypt.

The company emphasized that measures are currently underway to re-launch the operation of GSSP two production lines at Kafr El-Zayat plant that have been

suspended since 2008 and also to re-launch operations of one CSA production line at Assiut plant that has been suspended since 2010. It is worth noting that the

current CSA production line which is operating in Assiut plant has an annual production capacity of 126k tons/year.

Prospects of Phosphate Demand and Supply in The Local Market

Planted Area in Egypt in 000 Feddans (000 Acres)

Year Planted Area Annual Change

2006 8,411 0.31%

2007 8,423 0.14%

2008 8,432 0.11%

2009 8,783 4.16%

2010 8,741 -0.48%

2011 8,619 -1.40%

2012 8,799 2.09%

2013 8,954 1.76%

2014 8,916 -0.42%

2015 9,096 2.02% Source: Central Agency for Public Mobilization and Statistics (CAPMAS) and AOLB Research

Development of Reclaimed Land in Egypt in 000 Feddans (000 Acres)

Year Reclaimed Land

2006/2007 2.2

2007/2008 2.1

2008/2009 0.7

2009/2010 0

2010/2011 0

2011/2012 3.2

2012/2013 0.5

2013/2014 0.4

2014/2015 2.4 Source: Central Agency for Public Mobilization and Statistics (CAPMAS) and AOLB Research

Self-Sufficiency Percentage for Some Food Commodities in Egypt

Food Commodity 2011 2012 2013 2014 2015

Wheat 48.80% 55.70% 56.7% 52.1% 49.1%

Maize 51.0% 67.7% 56.8% 65.1% 56.2%

Rice 98.9% 102.3% 108.8% 100.4% 102.6%

Beans 37.3% 38.8% 27.8% 33.8% 31.0%

Lentil 2.2% 1.6% 0.8% 1.3% 1.6%

Potatoes 113.4% 109.0% 103.4% 112.6% 110.2%

Fresh Vegetables 101.2% 101.2% 103.6% 103.1% 102.6%

Citrus 140.7% 134.9% 142.8% 125.6% 138.8%

Fresh Fruits 106.9% 98.5% 97.8% 99.2% 96.2%

Red Meat 82.2% 85.7% 74.3% 71.9% 57.5%

Chicken Meat 97.1% 96.6% 94.1% 94.8% 93.0%

Fresh Fish 89.3% 85.5% 88.9% 87.0% 89.0%

Eggs 100.0% 100.0% 100.0% 100.0% 100.0%

Milk 100.0% 100.0% 100.0% 100.1% 100.1% Source: Central Agency for Public Mobilization and Statistics (CAPMAS) and AOLB Research

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Source: Central Agency for Public Mobilization and Statistics (CAPMAS) and AOLB Research

Phosphate Fertilizers Producers in Egypt Design Production Capacities in 000 Tons/Year

Abu Zaabal Fertilizers and Chemicals 790

Egyptian Financial and Industrial Co* 581

Polyserve for Fertilizers and Chemicals 320

Suez Company for Fertilizers (SCFP) (EFIC) 601.79

EVERGROW 1,000

Abu Qir Fertilizer’s New Project** 500

Armed Forces Industrial Complex in Al Ain Al Sokhna*** 1,000

Armed Forces Al-Fayoum Chemical Industries Complex 575

Total 5367.79 Source: AOLB Research and Chamber of Chemical Industries.

*EFIC design production capacity has been estimated by AOLB Research after excluding the lines that are currently off-stream such as CSA line in Assiut and two lines for GSSP at Kafr El-Zayat. Also, the estimated design annual capacity excludes the new PSSP lines with total capacities of 700k tons/year that will come on stream in the coming years.

**Abu Qir Fertilizer’s new phosphate fertilizers project is expected to come on stream starting FY2018.

*** Armed Forces’ new industrial complex for phosphate fertilizers in Al Ain Al Sokhna is to come on stream within 2017.

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140.0%

160.0%

Self-Sufficiency Percentage for Some Food Commodities in Egypt (2015 Preliminary Data by CAPMAS Egypt)

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Local Demand for Phosphate Fertilizers in Egypt

Agriculture academics and experts in Egypt stated that local demand for phosphate fertilizers depend on several factors such as the type of the soil, the irrigation methods, the type of crop, the type of fertilizers itself weather it was liquid or illiquid fertilizers and the number of farming times on the same land area per year. For example, the farm land at Delta region in Egypt is said to be far from economic feasible cultivation without using phosphate fertilizers while the newly reclaimed areas would require phosphate fertilizers after the first three years of commencing agriculture or so but this could be only applicable based on the type of its soil.

The agriculture academics have also estimated the average consumption of phosphate fertilizers in Egypt to be 200-400kg per acre for every crop. Therefore, if we assume that every acre in Egypt’s planted area will be cultivated twice a year this means that every acre will require about 400-800kg of phosphate fertilizers per year. In our assumption we assumed that the average consumption will be just 400kg of phosphate fertilizers per acre per year in Egypt. As for the planted area, we have assumed that the country’s 1.5mn feddans reclamation project will be implemented within the next five years starting 2017. We assumed that Egypt will add 300k feddans (acres) to its planted area every year starting 2017 up to 2021 while the country’s planted area will lose about 10k acres per year due to converting planted area into other uses than agriculture such as housing purposes and real estate business. The mentioned assumption resulted in the following findings:

1. Net planted area in Egypt will rise from 9,117k acres in 2016 to 10,277k acres in 2020. 2. Egypt’s local demand for phosphate fertilizers will rise from 3,646.63k tons/year in 2016 to 4,110.63k tons/year in 2020. It is worth noting that these

estimates have been estimated based on the above mentioned assumptions which take the agriculture academics’ viewpoints into consideration. In fact, the Egyptian farmers could be relying more on nitrogen fertilizers and ignoring the phosphate fertilizers in the way that negatively affects the size of agriculture production in Egypt. Therefore, our estimates for the local demand could be theoretically correct but in the practical life in Egypt, these amounts could be higher than the actual demand.

3. Egypt’s local production capacities of phosphate fertilizers are forecasted to rise from 3,867.79k tons/year in 2016 to 5,718k tons/year in 2020 after taking into considerations the new projects that are currently in the pipe line and that will be brought into stream sequentially over the mentioned period.

4. Egypt’s potential balance (supply minus demand) of phosphate fertilizers, which deemed to be the amount available for export, are forecasted to rise from 221.15k tons/year in 2016 to 1,607.15k tons/year in 2020, based on the assumption that the estimated local demand must be satisfied first and then the surplus will be exported. Occasionally, the private sector companies could target external markets regardless of the size of the demand in the local market.



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Estimated Demand, Supply and Potential Balance of Phosphate Fertilizers in Egypt (000 Tons)

Estimated Local Production of Phosphate Fertilizers in Egypt

Estimated Local Demand for Phosphate Fertilizers in Egypt

Estimated Phosphate Fertilizers Available for Export

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The World’s Demand and Supply of Fertilizers

The following charts and tables have been prepared based on the World Fertilizers Trends and Outlook to 2018 Publication issued by The Food and Agriculture Organization (FAO) of the United Nations.

Source: The Food and Agriculture Organization (FAO) and AOLB Research



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World Nitrogen Fertilizers Demand World Nirogent Fertilizers Supply Potential Balance

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Phosphate Fertilizers (P₂O₅) in Thousand Tons

World Phosphate Fertilizers Demand World Phosphate Fertilizers Supply Potential Balance

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Potash Fertilizers (K₂O) in Thousand Tons

World Potash Fertilizers Demand World Potash Fertilizers Supply Potential Balance

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The above mentioned charts demonstrate that the world’s potential balance (supply minus demand) is positive regarding Nitrogen fertilizers and Potash fertilizers while it has been projected to be negative regarding phosphate fertilizers. It is worth noting that we have amended the FAO outlook for phosphate fertilizers in the way that the estimated potential balance for phosphate fertilizers will be subject to the supply of phosphate fertilizers versus the demand for phosphate fertilizers. In fact if we estimated the potential balance based on the available phosphate which will then be divided into fertilizers and non-fertilizers demand, the potential balance could be positive.

The above mentioned charts demonstrated also that the following regions represent the countries with a current negative potential balance regarding phosphate fertilizers. These countries should be the most important export markets that can be targeted by the Egyptian phosphate fertilizers manufacturing companies including EFIC in the years ahead.

South Asia includes Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka.

Latin America & Caribbean includes Argentina, Bolivia, Brazil, Chile, Columbia, Cuba, Columbia, Mexico, Peru, Paraguay and Venezuela etc.

West Europe includes German, France, Belgium, Greece, Italy, Iceland, Ireland, Netherland, Denmark, Norway, Portugal, Spain, UK, Switzerland etc.

World and Regional Nitrogen Fertilizer Demand Forecasts (000 Tonnes N) (FAO)

2013 2014 2015 2016 2017 2018

World 111,389 113,147 115,101 116,514 117,953 119,418

Africa 3,506 3,652 3,765 3,886 4,012 4,148

North Africa 1,861 1,924 1,966 2,005 2,042 2,080

Sub-Saharan Africa 1,645 1,728 1,799 1,881 1,970 2,068

Americas 21,974 22,134 22,502 22,772 23,135 23,538

North America 14,204 14,107 14,199 14,196 14,281 14,407

Latin America & Caribbean 7,770 8,027 8,303 8,576 8,854 9,131

Asia 69,207 70,675 71,933 72,743 73,534 74,294

West Asia 3,121 3,007 3,153 3,193 3,228 3,263

South Asia 22,068 22,680 23,111 23,500 23,875 24,218

East Asia 44,018 44,988 45,669 46,050 46,431 46,813

Europe 14,996 15,092 15,292 15,481 15,618 15,765

Central Europe 2,831 2,893 2,944 2,994 3,046 3,098

West Europe 8,098 8,137 8,119 8,093 8,066 8,042

East Europe & Central Asia 4,067 4,062 4,229 4,394 4,506 4,625

Oceania 1,706 1,594 1,609 1,632 1,654 1,673 Source: The Food and Agriculture Organization (FAO) and AOLB Research

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World's Regions With Negative Potential Balance (Supply Minus Demand) of Phosphate Fertilizers in Thousand Tons

South Asia Lantin America & Caribbean West Europe Oceania Central Europe

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World and Regional Phosphate Fertilizer Demand Forecasts (000 Tonnes P₂O₅) (FAO)

2013 2014 2015 2016 2017 2018

World 41,728 42,707 43,803 44,740 45,718 46,649

Africa 1,384 1,431 1,467 1,509 1,551 1,593

North Africa 596 614 634 655 676 697

Sub-Saharan Africa 788 817 833 854 875 896

Americas 11,400 11,617 11,844 12,123 12,450 12,751

North America 4,830 4,795 4,765 4,784 4,853 4,900


Asia 24,022 24,584 25,346 25,847 26,358 26,852

West Asia 1,043 1,033 1,155 1,210 1,276 1,320

South Asia 7,658 8,058 8,511 8,770 9,028 9,290

East Asia 15,321 15,493 15,680 15,867 16,054 16,242

Europe 3,776 3,849 3,940 4,039 4,124 4,207

Central Europe 697 729 757 786 815 842

West Europe 1,876 1,898 1,905 1,911 1,912 1,909


Oceania 1,146 1,226 1,206 1,222 1,235 1,246 Source: The Food and Agriculture Organization (FAO) and AOLB Research

World and Regional Potash Fertilizer Demand Forecasts (000 Tonnes K₂O) (FAO)

2013 2014 2015 2016 2017 2018

World 30,060 31,045 31,831 32,628 33,520 34,457

Africa 559 573 620 669 728 772

North Africa 148 150 152 158 161 167

Sub-Saharan Africa 411 423 468 511 567 605

Americas 10,999 11,275 11,463 11,652 11,879 12,182

North America 4,673 4,699 4,689 4,680 4,712 4,775


Asia 13,951 14,596 15,038 15,510 16,009 16,519

West Asia 234 245 258 266 275 286

South Asia 2,721 3,118 3,266 3,436 3,607 3,778

East Asia 10,996 11,233 11,514 11,808 12,127 12,455

Europe 4,207 4,244 4,351 4,435 4,538 4,614

Central Europe 704 725 746 772 800 820

West Europe 2,159 2,191 2,216 2,227 2,244 2,260


Oceania 344 357 359 362 366 370 Source: The Food and Agriculture Organization (FAO) and AOLB Research

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World and Regional Nitrogen Supply Demand and Balance Forecasts (000 Tonnes N) (FAO)

2013 2014 2015 2016 2017 2018

World

NH₃ Capacity (as N) 173,668 178,370 187,018 193,776 199,716 201,470

NH₃ Supply Capability (as N) 148,999 152,769 159,590 165,785 172,058 176,490

N Available for Ferts. 116,700 118,624 123,209 127,260 131,890 134,756

Potential N Balance 5,311 5,477 8,108 10,746 13,937 15,338

Africa

NH₃ Capacity (as N) 7,187 8,281 9,479 10,428 12,705 12,705




Americas

NH₃ Capacity (as N) 23,687 24,314 25,402 28,528 29,592 29,608



Potential N Balance -5,981 -6,073 -5,601 -3,483 -2,939 -3,233

North America

NH₃ Capacity (as N) 14,214 14,348 14,828 17,128 17,785 17,785




Latin America & Caribbean

NH₃ Capacity (as N) 9,473 9,966 10,574 11,400 11,807 11,823



Potential N Balance -690 -870 -569 -368 -306 -513

Asia

NH₃ Capacity (as N) 102,576 105,006 109,590 111,756 113,211 113,894




West Asia

NH₃ Capacity (as N) 14,459 14,459 14,459 14,459 15,914 16,511




South Asia

NH₃ Capacity (as N) 17,463 17,463 18,280 18,361 18,361 18,361




East Asia

NH₃ Capacity (as N) 70,654 73,084 76,851 78,936 78,936 79,022




Europe

NH₃ Capacity (as N) 38,400 38,936 40,714 41,231 42,390 43,175




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Central Europe

NH₃ Capacity (as N) 6,416 6,464 6,545 6,684 6,717 6,718




West Europe

NH₃ Capacity (as N) 9,917 9,917 9,917 9,917 9,917 9,917




East Europe & Central Asia

NH₃ Capacity (as N) 22,067 22,555 24,252 24,630 25,756 26,540




Oceania

NH₃ Capacity (as N) 1,818 1,833 1,833 1,833 1,818 2,088


N Available for Ferts. 802 724 641 542 514 582

Potential N Balance -904 -870 -968 -1,090 -1,140 -1,091 Source: The Food and Agriculture Organization (FAO) and AOLB Research

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World and Regional Phosphate Supply Demand and Balance Forecasts (000 Tonnes P₂O₅) (FAO)

2013 2014 2015 2016 2017 2018

World

H₃PO₄ Capacity 54,345 55,605 57,670 58,620 60,410 61,510

H₃PO₄ Supply Capability 45,421 46,865 48,301 49,487 50,959 52,189

H₃PO₄ Available for Ferts. 39,112 40,420 41,539 42,641 43,895 43,977

Potential H₃PO₄ Balance -2,616 -2,287 -2,264 -2,099 -1,823 -2,672

Africa

H₃PO₄ Capacity 8,448 8,858 9,818 10,268 10,268 10,268



Potential H₃PO₄ Balance 5,227 5,455 6,084 6,634 7,102 7,261

Americas

H₃PO₄ Capacity 12,446 12,446 12,056 12,056 12,056 13,016




North America

H₃PO₄ Capacity 9,641 9,641 9,251 9,251 9,251 9,251





H₃PO₄ Capacity 2,805 2,805 2,805 2,805 2,805 3,765




Asia

H₃PO₄ Capacity 26,433 27,283 28,673 29,173 30,963 31,013




West Asia

H₃PO₄ Capacity 3,727 4,257 4,272 4,272 5,812 5,812




South Asia

H₃PO₄ Capacity 2,170 2,170 2,345 2,345 2,345 2,345




East Asia

H₃PO₄ Capacity 20,536 20,856 22,056 22,556 22,806 22,856



Potential H₃PO₄ Balance 242 920 1,332 1,420 1,674 1,633

Europe

H₃PO₄ Capacity 6,418 6,418 6,523 6,523 6,523 6,613



Potential H₃PO₄ Balance -123 -183 -331 -394 -479 -492

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Central Europe

H₃PO₄ Capacity 922 922 922 922 922 922

H₃PO₄ Supply Capability 365 365 365 365 365 365

H₃PO₄ Available for Ferts. 272 272 271 271 271 270

Potential H₃PO₄ Balance -425 -457 -486 -515 -544 -572

West Europe

H₃PO₄ Capacity 565 565 565 565 565 565


H₃PO₄ Available for Ferts. -49 -33 -119 -119 -119 -119



H₃PO₄ Capacity 4,931 4,931 5,036 5,036 5,036 5,126




Oceania

H₃PO₄ Capacity 600 600 600 600 600 600


H₃PO₄ Available for Ferts. 465 464 464 464 464 464

Potential H₃PO₄ Balance -681 -762 -742 -758 -771 -782 Source: The Food and Agriculture Organization (FAO) and AOLB Research

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World and Regional Potash Supply Demand and Balance Forecasts (000 Tonnes K₂O) (FAO)

2013 2014 2015 2016 2017 2018

World

Potash Capacity 49,740 50,531 54,690 56,703 60,263 60,716

Potash Supply Capability 42,616 43,568 45,175 46,974 49,742 51,439

Potash Available for Ferts. 40,513 41,340 42,828 44,508 47,153 48,724

Potential K₂O Balance 10,453 10,295 10,997 11,880 13,633 14,267

Africa

Potash Capacity 0 0 0 0 0 0

Potash Supply Capability 0 0 0 0 0 0

Potash Available for Ferts. -81 -84 -86 -89 -92 -95

Potential K₂O Balance -640 -657 -706 -758 -820 -867

Americas

Potash Capacity 20,091 20,511 23,661 25,136 25,456 25,491




North America

Potash Capacity 18,148 18,568 21,718 23,193 23,513 23,548





Potash Capacity 1,943 1,943 1,943 1,943 1,943 1,943



Potential K₂O Balance -4,721 -4,977 -5,182 -5,386 -5,587 -5,834

Asia

Potash Capacity 9,527 9,585 10,365 10,665 10,665 10,863




West Asia

Potash Capacity 3,960 3,960 3,960 3,960 3,960 3,960




South Asia





East Asia

Potash Capacity 5,567 5,625 6,405 6,705 6,705 6,903




Europe

Potash Capacity 20,122 20,435 20,664 20,902 24,142 24,362




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Central Europe




Potential K₂O Balance -752 -775 -797 -825 -854 -876

West Europe

Potash Capacity 5,590 5,590 5,455 5,425 5,525 5,585





Potash Capacity 14,532 14,845 15,209 15,477 18,617 18,777




Oceania




Potential K₂O Balance -351 -364 -366 -369 -373 -377 Source: The Food and Agriculture Organization (FAO) and AOLB Research

International Price Trends of the major raw materials used by EFIC

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Forecasts Assumptions

EFIC (Kafr El-Zayat & Assiut) in 000/Tons A2013 A2014 A2015 A2016 F2017 F2018 F2019 F2020 F2021

Actual and Forecasted Sales Volumes 569.68 584.22 508.10 640.01 648.40 610.30 550.70 506.50 496.50

Assumed Total Design Production Capacity 581.00 581.00 581.00 581.00 581.00 581.00 581.00 581.00 581.00

Annual Sales Volume/Total Design Production Capacity 98.1% 100.6% 87.5% 110% 111.6% 105.0% 94.8% 87.2% 85.5% Source: ASCOM (ASCM.CA) Financial Statements.

SCFP in 000/Tons A2013 A2014 A2015 A2016 F2017 F2018 F2019 F2020 F2021

Actual and Forecasted Sales Volumes 334.10 384.85 397.09 386.74 383.41 388.77 392.13 390.96 386.77


Annual Sales Volume/Total Design Production Capacity 55.5% 64.0% 66.0% 64.3% 63.7% 64.6% 65.2% 65.0% 64.3% Source: ASCOM (ASCM.CA) Financial Statements.

EFIC.CA (The Whole Company) in 000/Tons A2013 A2014 A2015 A2016 F2017 F2018 F2019 F2020 F2021

Actual and Forecasted Sales Volumes 903.78 969.07 905.18 1,026.75 1,031.81 999.07 942.83 897.46 883.27


Annual Sales Volume/Total Design Production Capacity 76% 82% 77% 87% 87% 84% 80% 76% 75%

Total Design Capacity under joint operation assumption*

1332.1 1332.1 1332.1 1333.1 1333.1 1333.1 1334.1 1334.1 1334.1

Annual Sales Volume/Total Design Production Capacity (Joint Production)

67.8% 72.7% 68.0% 77.0% 77.4% 74.9% 70.7% 67.3% 66.2%

*Our forecasts which have been used in the valuation were built based on the assumption of independent operations of the two companies. The assumption of joint operations has been demonstrated only for more information but it has been used in the forecasts. The assumption of joint operation states that any surplus of main inputs such as CSA or PSSP at any company of the group can be used in producing high value added products by the other company.

Selling Prices in EGP/Ton A2013 A2014 A2015 A2016 F2017 F2018 F2019 F2020 F2021

CSA Local Prices 720.53 714.59 742.00 706.90 1,287.58 1,338.00 1,386.00 1,434.00 1,466.00

CSA Export Prices 785.18 969.52 869.50 1,010.80 1,437.58 1,488.00 1,536.00 1,584.00 1,616.00

PSSP Local Prices 731.35 771.78 792.47 749.88 1,417.58 1,468.00 1,516.00 1,564.00 1,596.00

GSSP Local Prices 946.00 909.36 837.77 756.56 1,767.58 1,818.00 1,866.00 1,914.00 1,946.00

GSSP Export Prices 1,202.76 993.40 1,152.53 1,060.21 1,840.00 1,920.00 2,000.00 2,096.00 2,144.00

AS Local Prices 1,644.96 1,531.57 1,607.01 1,432.29 2,575.16 2,676.00 2,772.00 2,868.00 2,932.00

DCP Local Prices 2,486.15 2,489.67 2,823.74 3,145.00 5,386.81 5,578.40 5,760.80 5,943.20 6,064.80 Source: Company Data and AOLB Research.

Prices of Raw Materials in USD/Ton A2013 A2014 A2015 A2016 F2017 F2018 F2019 F2020 F2021

International Price of Sulfur 160 70 150 110 100 98 98 98 98

International Price of Rock Phosphate 100 110 120 110 105 100 95 95 95

International Price of Ammonia 500 450 450 300 270 270 270 270 270 Source: ASCOM (ASCM.CA) Financial Statements.

It is worth mentioning that the EGP/USD exchange rate of EGP 16 has been used in determining the selling prices and the sales values of the company’s

export sales which are limited to GSSP and CSA only while the remaining products are only produced for sale in the local market.

Also the EGP/USD exchange rate used in projecting the prices of sulfur and the company’s annual costs of sulfur was EGP 16 throughout the company’s

forecasted period. As for the prices of the other raw materials such as Rock Phosphate and Ammonia, we have used an EGP/USD exchange rate of EGP 10 in

converting its forecasted international prices into local prices throughout the forecasted period. The mentioned exchange rate for Ammonia and Rock

phosphate has been used for three reasons, the company does not willing to disclose the production costs in a manner other than the way disclosed in its

financial statements, our analysis for the company’s historical costs imply that the inputs that can be obtained from the local market such as Ammonia and

Rock phosphate can be obtained at significant discounts compared to its international market prices and finally because we do believe that the government

may provide such inputs at subsidized prices since the country has enough reserves of it, particularly for Rock Phosphate from which Egypt is deemed to

possess reserves estimated at 1.25bn tons.

We have assumed that the company will have to adjust its selling prices in the local market to match with the international prices of its products, however,

the adjustment will always lead to lower local selling prices than the export prices for the same product particularly in USD terms. The mentioned adjustment

will come into effect starting 2017. Also the selling price adjustment must be matching with the prices of the raw materials which also will be subject to

international prices such as sulfur that is imported, however, for the other raw materials such as ammonia and rock phosphate we have assumed that it will

be to some extent sold to the company at discount compared to its international prices as if it were a government policy to favor its local industries. Selling

high value added products that are manufactured from the phosphate ore should be preferred to selling it as raw material, therefore, the Egyptian

government should favor the phosphate fertilizers manufacturing companies by supplying them with phosphate ore at discount prices compared to

international prices.

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The equations or the formulas illustrated in the production process segment of this report about the CSA, PSSP, GSSP, AS and DCP have been to a high

extent considered in making our forecasts regarding the company’s estimated production and sales in the forecasted period. The mentioned equations

include:

330 Kg of sulfur will be required for producing one ton of CSA.

380 Kg of CSA will be required for producing one ton of PSSP.

1.5 ton of PSSP will be required for producing one ton of GSSP.

750 Kg of CSA will be required for producing one ton of AS.

2.78 ton of PSSP will be required for producing one ton of DCP.

680 Kg of Ground Phosphate will be required for producing one ton of PSSP.

250 Kg of Ammonia will be required for producing one ton of AS.

The above mentioned equations to a high extent have been considered in our forecasts for the company’s production and sales volumes, however, the accumulated

inventory level of previous years has also been considered.

We have assumed that the company will distribute annual cash dividends to its shareholders that represent 40% of the company’s annual earnings

throughout the forecasted period, in line with the historical average.

We have assumed that the annual capital expenditure will be about EGP 10mn starting FY2018 and up to FY2021.

We have assumed that the sequential access of the new competitors to the local market starting FY2017 and thereafter will result in increasing the annual

share of the company’s export sales in the forecasted period at the expense of the share of the local sales.

Since the historical production and sales data published by the company indicated that the NPK product share of the production and sales values was

immaterial and that the company can produce it only based on the client’s specific orders in the way that the company can produce it in one year and

ceases its production in another. Accordingly, we have not made any forecasts regarding this input. It is worth noting that NPK is mainly for export and it

can be produced from adding nitrogen to PSSP.

The following table and charts demonstrate our forecasts for the company sales values in EGP million and sales volumes in thousand tons classified into local and

export sales and in product wise as well. It is worth noting that the company’s Chairman was reported to have said that the company targets increasing its export sales

volumes to 250-300k tons in FY2017. In fact our forecasts reflected an uptrend in the company’s exports sales value and volume in the forecasted period from FY2017

to FY2021. However, we have been much more conservative regarding the targeted export volumes than the Chairman’s estimates.

EFIC.CA Sales Values in EGP mn and Volumes in 000/Tons

A2013 A2014 A2015 A2016 F2017 F2018 F2019 F2020 F2021

Consolidated Local Sales Value in EGP mn 694.36 709.65 701.25 753.44 1,457.09 1,432.98 1,339.41 1,284.25 1,287.66

Consolidated Local Sales Volume in 000 tons 796.47 816.61 772.16 884.14 889.29 835.55 741.45 677.00 659.00

Consolidated Export Sales in EGP mn 120.65 141.76 145.41 145.41 261.03 312.88 401.59 460.80 479.52

Consolidated Export Sales Volume in 000 tons 107.32 152.46 133.02 142.61 142.52 163.52 201.38 220.46 224.27

Consolidated Sales Value 815.01 851.42 846.66 898.84 1,718.12 1,745.86 1,741.00 1,745.05 1,767.18

Consolidated Sales Volume 903.78 969.07 905.18 1,026.75 1,031.81 999.07 942.83 897.46 883.27

EFIC Total Sales Value Share 56.2% 56.5% 52.2% 57.3% 56.5% 54.4% 51.4% 49.3% 48.9%

SCFP Total Sales Value Share 43.8% 43.5% 47.8% 42.7% 43.5% 45.6% 48.6% 50.7% 51.1% Source: Company’s Data and AOLB Research.

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500.00

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700.00

A2013 A2014 A2015 A2016 F2017 F2018 F2019 F2020 F2021

Actual and Forecasted Total Annual Sales Volume in Thousand Tons

Assiut & Kafr El-Zayat Total Sales Volume SCFP Total Sales Volume

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Source: Company’s Data and AOLB Research.

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1,000.00

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A2013 A2014 A2015 A2016 F2017 F2018 F2019 F2020 F2021

Actual and Forecasted Total Sales Value in EGP Million

Assiut & Kafr El-Zayat Sales Value SCFP Total Sales Value

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A2013 A2014 A2015 A2016 F2017 F2018 F2019 F2020 F2021

Actual and Forecasted Local and Export Sales Volumes in Thousand Tons

Assiut & Kafr El-Zayat Local Sales Volume Assiut & Kafr El-Zayat Export Sales Volume

SCFP Local Sales Volume SCFP Export Sales Volume

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1,000.00

1,200.00

1,400.00

1,600.00

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A2013 A2014 A2015 A2016 F2017 F2018 F2019 F2020 F2021

Actual and Forecasted Local and Export Sales Values in EGP Million

Assiut & Kafr El-Zayat Local Sales Value Assiut & Kafr El-Zayat Export Sales Value

SCFP Local Sales Value SCFP Export Sales Value

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A2013 A2014 A2015 A2016 F2017 F2018 F2019 F2020 F2021

Actual and Forecasted Consolidated Sales Volumes in Thousand Tons

Consolidated Local Sales Volume Consolidated Export Sales Volume Total Consolidated Sales Volume

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1,000.00

1,500.00

2,000.00

A2013 A2014 A2015 A2016 F2017 F2018 F2019 F2020 F2021

The Actual and Forecasted Consolidated Sales Value in EGP Million

Consolidated Local Sales Value Consolidated Export Sales Value Total Consolidated Sales Value

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1,000.00

1,200.00

1,400.00

1,600.00

1,800.00

2,000.00

A2013 A2014 A2015 A2016 F2017 F2018 F2019 F2020 F2021

Actual and Forecasted Consolidated Sales Value By Product Segment (EGP Million)

Sales Revenues of CSA Sector Sales Revenues of PSSP & GSSP Sector

Sales Revenues of AS Sector Sales Revenues of DCP Sector

Sales Revenues of Other Products

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A2013 A2014 A2015 A2016 F2017 F2018 F2019 F2020 F2021

Actual and Forecasted Sales Volumes in Product Segment (000/Tons)

Sales Volume of CSA Sector Sales Volume of PSSP Sector Sales Volume of GSSP Sector

Sales Volume of AS Sector Sales Volume of DCP Sector

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Risks

The company used to enjoy a large local market share in the field of phosphate fertilizers in the past years but with new and much modern and

technologically developed local phosphate fertilizers manufacturing companies coming into stream, the company’s local market share seems to be in its

gradual and inevitable downtrend. The Armed Forces’ new industrial complexes at Al Fayoum which already came into stream recently in addition to

another larger new phosphate fertilizers manufacturing complex which is scheduled to come on stream in 2017 or 2018 will have together an annual

production capacity of more than 1.5mn tons. There are other local players as well such as Polyserve Group (which owns Abu Zaabal Company) and

Evergrow Company in addition to the new project which is currently in the pipeline that will be implemented in Abu Tartour by Abu Qir Fertilizers

(ABUK.CA) and its partners which is expected to come into stream within 2018 or a litter after. We have estimated the local production of phosphate

fertilizers to increase from 3,867.79k tons/year in 2016 to about 5,718k tons/year in 2020 (after considering and bringing all the new projects which are

currently in the pipeline into stream) while the local demand for phosphate fertilizers has been estimated at 3,646.63k tons/year in 2016 and is

estimated to rise to 4,110.63k tons/year in 2020 (according to the assumptions regarding the local planted area and the conservative approach

regarding the minimum amounts of phosphate fertilizers that must be used per acre per year according to scientific and academic agricultural

viewpoints). Accordingly, Egypt is expected to have a positive potential balance (supply minus demand) of about 1,607.15k tons/year of phosphate

fertilizers by 2020 which means that the available options for EFIC and its local peers will be to export or to cut production and operate at lower

utilization rates or to enter into price wars over the local market shares. In our opinion, the export will be the way to success giving that Egypt is now

enjoying favorable competitive advantages after the floatation of the Egyptian Pound and that several countries all over the world still have significant

negative potential supply balance regarding phosphate fertilizers and finally because Egypt is one of the country’s that deemed to have promising

reserves of rock phosphate in the way that gives Egypt more vertical integration in this industry and a higher competitive advantage in the export

markets against international competitors.

The company’s PPE closing balances from the most recent financial position indicates that the company have equipment that are aged and that the

remaining useful life estimated in years is lower than the years elapsed of the asset’s estimated useful life. The company’s management was reported to

have said that it is considering a plan to float 40% of its subsidiary (Suez Company for Fertilizers Production – SCFP) or selling it to a strategic investor in

order to use the proceeds

in developing and expanding the company’s current production equipment. The mentioned scenarios are still under consideration. The company was

reported to have received an acquisition offer in the past period form a strategic investor but the deal seems not to have been welcomed by the

company’s BOD. It is worth noting that receiving an acquisition offer from a strategic investor is most likely to result in an offering price higher than our

estimated fair value since the acquirer will have to value synergies potential in addition to the controlling interest (if any).

The company’s mix of products are in solid shape or it can be classified as illiquid phosphate fertilizers that are soluble. The empirical studies referred to

a growing local and even international market shares for the liquid phosphate fertilizers in the recent periods at the expense of the illiquid phosphate

fertilizers particularly for the large-scale agricultural investments. The ordinary farmers in Egypt are still to a high extent accustomed to illiquid

phosphate fertilizers.

The company’s exports comprises only CSA and GSSP while a growing agricultural investment companies in the local and international market seems to

be demanding the double and triple super phosphate fertilizers other than the Granular Single Super Phosphate (GSSP) or the PSSP that is considered

the company’s current main outputs.

It is worth noting that our estimation for the expected local demand of phosphate fertilizers in Egypt has been built on the scientific and academic

agricultural viewpoints which stated that every acre (feddan) is supposed to consume about 200-400Kg of phosphate fertilizers for every crop. We also

assumed that every acre of land will be cultivated in Egypt twice per years, implying an annual demand of 400-800Kg of phosphate fertilizers per acre

per year. In our estimation of the country’s annual total demand we have used only the average local demand to be 400Kg of phosphate fertilizers by

acre per year. The Agricultural experts stated also that not all of the planted areas will be in need for phosphate fertilizers as the new cultivated land will

be in need only after three years of agriculture while other factors will affect the local demand for phosphate fertilizers such as irrigation method, types

of crops, small- or large-scale agricultural investments etc. we have estimated the expected local demand of phosphate fertilizers in Egypt based on the

expected total planted areas in the country. Also it is worth noting that the majority of farmers in Egypt are not strictly observing the minimum amounts

of phosphate fertilizers that must be used per acre per crop per year as the purchasing power and the desire to cut costs could have its says in the

farmer’s calculations of its crop costs. These means that our calculations for the expected local demand of phosphate fertilizers in Egypt in the coming

years could be subject to downward revision. Again export will be important for the company in the coming years.

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Valuation and Recommendation

Valuation Summary (EGP Million) A2016 F2017 F2018 F2019 F2020 F2021

EBIT 166.53 379.78 355.51 321.10 269.10 256.16

Interest expense 71.76 70.82 58.21 60.89 47.42 41.60

Tax rate 0.23 0.23 0.23 0.23 0.23 0.23

Depreciation 40.88 42.49 42.57 42.38 42.38 42.35

WC Investment -32.67 143.08 135.15 -40.25 95.17 -10.68

FC Investment

0.00 -10.00 -10.00 -10.00 -10.00

FCFF

334.09 298.05 360.42 243.07 310.07

PV of FCFF

287.77 221.06 228.91 132.31 143.57

Estimated Beta 0.63

After tax cost of debt

13.29% 13.29% 13.29% 13.29% 13.29%

Cost of Equity

16.98% 16.98% 16.98% 16.98% 16.98%

WACC

16.10% 16.11% 16.34% 16.42% 16.65%

Perpetual Growth Rate 3%

Equity Risk Premium 14.94%

Terminal value 2,340.01

PV of terminal value 1,083.49

Enterprise value 2,097.11

Cash 22.62

Debt 441.89

Minority interest 0.83

Outstanding no of shares (in million) 72.77

FVPS (EGP) 23.05

Source: AOLB Research

The DCF method based on the above mentioned parameters resulted in a fair value of EGP 23.05/share which implies a potential increase of 60% above the company’s current market price of EGP 14.40/share as on the report’s date. Accordingly, we recommend buying the stock.

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Historical, Forecasted Statements and Ratio Analysis

Consolidated Income Statement (EGP Million) A2014 A2015 A2016 F2017 F2018 F2019 F2020 F2021

Consolidated Revenues 848.04 842.28 884.02 1,718.12 1,745.86 1,741.00 1,745.05 1,767.18

Consolidated COGS 588.51 597.72 612.89 1,214.52 1,249.94 1,270.44 1,318.79 1,348.65

Gross Profit 259.53 244.56 271.14 503.60 495.91 470.56 426.26 418.52

Other operating revenues 6.24 4.30 4.39 0 0 0 0 0

Other operating expenses -0.63 0.00 1.80 0 0 0 0 0

SG&A 57.27 59.42 63.14 77.32 90.78 100.98 109.94 114.87

BOD remuneration & compensations 2.46 5.45 3.18 4.00 7.04 6.09 4.83 5.15

EBITDA 208.78 185.00 207.42 422.28 398.09 363.49 311.49 298.51

Depreciation and amortization 31.75 38.76 40.88 42.49 42.57 42.38 42.38 42.35

EBIT 177.03 146.23 166.53 379.78 355.51 321.10 269.10 256.16

Interest income 0.14 0.32 0.12 0.00 0.00 0.00 0.00 0.00

Interest expenses 55.55 55.72 71.76 70.82 58.21 60.89 47.42 41.60

Net interest income/expense 55.41 55.40 71.64 70.82 58.21 60.89 47.42 41.60

FX gains/loss 0.00 0.00 42.70 0.00 0.00 0.00 0.00 0.00

Investment income 0.00 0.00 0.01 0.00 0.00 0.00 0.00 0.00

Pretax income 121.62 90.83 137.60 308.96 297.31 260.22 221.69 214.56

Current income tax 25.55 12.34 29.41 74.25 87.17 77.84 70.23 65.84

Net profit after tax 96.06 78.50 108.19 234.71 210.14 182.38 151.45 148.71

Net profit attributed to shareholders 96.00 78.45 108.14 234.57 210.00 182.25 151.35 148.61

Net profit attributed to minority interest 0.06 0.05 0.05 0.14 0.13 0.12 0.11 0.11

Number of shares 69.30 69.30 69.30 72.77 72.77 72.77 72.77 72.77

EPS in EGP (attributed to shareholders) 1.39 1.13 1.56 3.22 2.89 2.50 2.08 2.04 Source: Company Financial Statements and AOLB Research Estimates

Consolidated Balance Sheet Statement (EGP Million) A2014 A2015 A2016 F2017 F2018 F2019 F2020 F2021

Fixed assets 1,124.40 1,107.02 1,103.80 1,122.33 1,119.57 1,087.20 1,054.81 1,022.46

Projects under construction 52.71 94.51 92.44 31.42 1.60 1.60 1.60 1.60

Long term investments 0.31 0.31 0.31 0.31 0.31 0.31 0.31 0.31

Installments of long term financial leasing 42.21 31.83 21.12 16.90 12.67 8.45 4.22 0.00

Total non-current assets 1,219.62 1,233.67 1,217.67 1,170.95 1,134.16 1,097.55 1,060.94 1,024.37

Inventory 247.32 284.53 270.01 505.49 505.54 505.10 536.31 537.66

Account receivables & debtors 129.08 144.22 175.26 349.96 367.97 388.83 425.18 428.77

Dues from related parties

3.16 17.79 17.79 17.79 17.79 17.79 17.79

Cash and cash equivalents 53.98 10.89 22.62 14.38 17.56 61.39 24.04 36.75

Total current assets 430.38 439.64 485.69 887.62 908.86 973.12 1,003.33 1,020.96

Total assets 1,650.01 1,673.31 1,703.36 2,058.57 2,043.02 2,070.67 2,064.27 2,045.33

Banks overdraft 198.88 295.88 272.60 252.60 322.60 272.60 242.60 142.60

Current portion of long term debts 60.00 80.82 100.00 0.00 0.00 0.00 0.00 0

Suppliers, creditors and account payables 135.90 113.56 150.29 372.29 242.29 312.29 292.29 312.29

Dues to Tax Authority 1.60 2.13 0.47 0.47 0.47 0.47 0.47 0.47

Income tax 20.43 10.59 29.15 74.25 87.17 77.84 70.23 65.84

Dues to related parties 33.49 24.04 35.17 35.17 35.17 35.17 35.17 35.17

Provisions 5.35 4.66 3.71 3.71 3.71 3.71 3.71 3.71

Total current liabilities 455.66 531.66 591.39 738.48 691.40 702.08 644.47 560.08

Issued and paid in capital 693.02 693.02 693.02 727.67 727.67 727.67 727.67 727.67

Reserves 108.71 165.36 173.55 197.57 222.43 247.29 272.15 297.02

Retained earnings 41.73 37.55 33.80 7.38 92.83 166.94 228.43 274.15

Cash Dividend

-4.38 43.28 93.89 84.06 72.95 60.58

Net profit for the period 96.00 78.45 108.14 234.71 210.14 182.38 151.45 148.71

Shareholders’ equity 939.46 974.38 1,004.14 1,166.35 1,251.95 1,323.04 1,378.37 1,446.10

Minority interest 0.68 0.79 0.83 0.98 1.11 1.24 1.34 1.45

Total equity 940.14 975.16 1,004.97 1,167.32 1,253.06 1,324.28 1,379.71 1,447.55

Long term liabilities 38.45 29.03 19.29 15.07 10.84 6.62 2.39 0.00

Long term debts 180.00 100.00 50.00 100.00 50.00 0.00 0.00 0

Deferred tax liabilities 35.70 37.45 37.70 37.70 37.70 37.70 37.70 37.70

Total long term liabilities 254.15 166.48 106.99 152.77 98.55 44.32 40.10 37.70

Total equity and liabilities 1,649.96 1,673.31 1,703.35 2,058.58 2,043.01 2,070.67 2,064.27 2,045.33 Source: Company Financial Statements and AOLB Research

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Egyptian Financial and Industrial (EFIC.CA) F2017 F2018 F2019 F2020 F2021

Cash Flow Statement (EGP mn)

Operating Cash Flows

Pretax profit 308.96 297.31 260.22 221.69 214.56

Depreciation and amortization 42.49 42.57 42.38 42.38 42.35

Settlements 57.93 -17.57 -5.81 -14.19 -24.18

Changes in salaries & wages 9.88 6.67 7.01 7.36 7.72

Changes in other accrued liabilities -24.93 18.46 13.40 10.94 22.14

Changes in inventory -235.48 -0.06 0.44 -31.21 -1.35

Changes in receivables and debtors -174.70 -18.01 -20.86 -36.35 -3.59

Changes in suppliers, creditors and payables 222.00 -130.00 70.00 -20.00 20.00

Changes in minority interest -0.14 -0.13 -0.12 -0.11 -0.11

Changes in income tax -26.42 -53.97 -67.88 -57.49 -52.66

Net Cash Flows from Operating Activities 179.60 145.27 298.78 123.02 224.88

Investment Operating Cash Flows

Purchase of PPE and PUC 0.00 -10.00 -10.00 -10.00 -10.00

Proceeds from the sale of PPE 0.00 0.00 0.00 0.00 0.00

Proceeds from reversed VAT 0.00 0.00 0.00 0.00 0.00

Net Cash Flows from Investment Activities 0.00 -10.00 -10.00 -10.00 -10.00

Financing Cash Flows

Changes in overdraft -20.00 70.00 -50.00 -30.00 -100.00

Cash dividends -43.28 -93.89 -84.06 -72.95 -60.58

Changes in long term loans -50.00 -50.00 -50.00 0.00 0.00

Interest expenses -70.82 -58.21 -60.89 -47.42 -41.60

Net Cash Flows from Financing Activities -184.10 -132.09 -244.94 -150.37 -202.18

Net Change in Cash and Cash Equivalents -4.50 3.18 43.84 -37.35 12.70

Cash and Cash Equivalent at the beginning of the period

18.88 14.38 17.56 61.39 24.04

Cash and Cash Equivalent at the end of the period 14.38 17.56 61.39 24.04 36.75 Source: AOLB Research

Ratio Analysis A2014 A2015 A2016 F2017 F2018 F2019 F2020 F2021

Liquidity ratios

Cash ratio 0.118 0.020 0.032 0.019 0.025 0.087 0.037 0.066

Current ratio 0.94 0.83 0.82 1.20 1.31 1.39 1.56 1.82

Activity ratios

Receivables turnover 6.57 5.84 5.04 4.91 4.74 4.48 4.10 4.12

Days of sales outstanding (DSO) 55.56 62.50 72.36 74.35 76.93 81.52 88.93 88.56

Inventory turnover 2.38 2.10 2.27 2.40 2.47 2.52 2.46 2.51

Days of inventory on hand (DOH) 153.39 173.75 160.80 151.91 147.63 145.12 148.43 145.51

Total assets turnover 0.51 0.50 0.52 0.83 0.85 0.84 0.85 0.86

Solvency ratios

Debt-to-assets 0.29 0.30 0.26 0.18 0.19 0.13 0.12 0.07

Debt-to-equity 0.51 0.52 0.44 0.31 0.31 0.21 0.18 0.10

Interest coverage 3.19 2.62 2.32 5.36 6.11 5.27 5.68 6.16

Profitability ratios

Gross profit margin 30.6% 29.0% 30.7% 29.3% 28.4% 27.0% 24.4% 23.7%

EBITDA margin 24.6% 22.0% 23.5% 24.6% 22.8% 20.9% 17.8% 16.9%

Net profit margin 11.3% 9.3% 12.2% 13.7% 12.0% 10.5% 8.7% 8.4%

Return on assets 5.8% 4.7% 6.4% 11.4% 10.3% 8.8% 7.3% 7.3%

Return on equity 10.2% 8.0% 10.8% 20.1% 16.8% 13.8% 11.0% 10.3% Source: AOLB Research. All mixed ratios have been estimated by using end of year balance sheet items.

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