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Alexandria Mineral Oils Company (AMOC.CA)...2018/02/06 · 2 Alexandria Mineral Oils Company...
Transcript of Alexandria Mineral Oils Company (AMOC.CA)...2018/02/06 · 2 Alexandria Mineral Oils Company...
Alexandria Mineral Oils Company (AMOC.CA)
Initiation of Coverage – February 6th, 2018
Source: Investing.com
*Price as of 5th of 2018
*Values in EGP
Major Shareholders
Al Ahli Capital Holding 25.30% Alexandria Petroleum
Co 20%
Local Pension Funds 10.20%
Source: Investing.com & AOLB Research
Investment Summary
AMOC is backed by strong domestic demand and rising
international prices of end products. Egypt is a net importer of
most of AMOC’s end products. Brent crude oil prices surged to
an average of USD54.1 (+23.8%) in 2017 and expected to cement
further to record and average of USD59.7 (+10.3% YoY) in 2018e.
Since Petroleum products are highly correlated with crude oil
prices at R-squared average of 97%. Thus, we expect AMOC’s
products prices to follow suit.
On the downside, risks are present of crude oil price volatility
and higher competition with the entry of ERC (4.2mn tons).
Thus, AMOC is upgrading MDD unit and upscaling product mix to
withstand the competition and improve margins through
agreements with market participants. AMOC should achieve
average net margin of 15%, up from a five-year average of 9%.
Our DCF-based fair value is EGP9.0/share, a downside of -3.1%
with a calculated WACC of 19.5%. In spite of AMOC’s favorable
position, the recent capital increase in FY2018 has impacted the
target price negatively. Despite high investment budget, we
expect AMOC to offer a c.9% 2018e dividend yield. AMOC’s
2018e PE is at 9.5x, below the Reuters sector average PE of
17.85x and industry average of 25.9x.
Financial Indicators and Valuation Multiples
Year 30 Jun 2017a 2018e 2019f 2020f 2021f
Revenue (EGP mn) 9,589 10,957 12,070 12,953 13,659 Net profit (EGPm) 1,100 1,267 1,683 1,904 2,106 EPS (EGP mn) 0.85 0.98 1.30 1.47 1.63 EPS (% YoY) 152.8% -92.3% 32.8% 13.1% 10.6% PE (x) 10.85 9.47 7.13 6.30 5.70 EV/EBITDA (x) 8.1 6.0 4.6 4.0 3.6 P/CF (x) 10.5 NA 8.27 7.32 6.37 ROAE (%) 40% 34% 35% 35% 35% P/BV (x) 4.0 2.7 2.3 2.1 1.9 Dividend yield (%) 16% 9.4% 10.6% 11.9% 13.2%
Based on Closing Price of 5th
February Source: AMOC and AOLB Estimates
Recommendation SELL
Fair Value EGP 9.0 Market Price EGP 9.29 Downside -3.1%
Stock Data
Reuters Code AMOC.CA
Authorized Capital (mn) 2,000
Issued Capital (mn) 1,291
No. of shares 1,291
Par Value 1.0
Market Cap (mn) 11,998
Price 9.23
Highest (1yr range) 9.89
Lowest (1yr range) 4.87
Average (1yr range) 7.37
Free Float 18.7%
Sally Fawzy Mikhail
Senior Equity Analyst
Mariam Wael
Equity Analyst
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AMOC EGX30 Rebased
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Alexandria Mineral Oils Company (AMOC.CA)
Initiation of Coverage – February 6th, 2018
Contents Industry Dynamics .........................................................................................................................................2
Strong world growth rate entices oil demand .......................................................................................................2
An extension of the cuts through 2018 is expected ...............................................................................................2
Oil prices rebound owing to OPEC production cut resolution ...............................................................................3
Egypt Overview & Outlook .............................................................................................................................4
Moderate reserves .................................................................................................................................................4
Market undersupplied ............................................................................................................................................4
Net importer of petroleum products .....................................................................................................................4
Government dominance.........................................................................................................................................5
Company overview ........................................................................................................................................7
Stock Split & capital increase .................................................................................................................................7
GDRs on LSE ............................................................................................................................................................7
Business Operation .................................................................................................................................................9
Low Sulphur fuel-oil Refinery .................................................................................................................................9
Solid ties for feedstock and marketing ...................................................................................................................9
Innovative Development Strategy ..........................................................................................................................9
Fully liberal petroleum products prices with high correlation with oil prices .................................................... 11
AMOC’s refining margin narrowing by tops global standard Brent cracking margin.......................................... 12
New entry to compress AMOC’s market share ................................................................................................... 12
Backed by strong domestic demand and prices rebound ................................................................................... 13
Exports contribute 12% of total revenues ........................................................................................................... 14
Financial Analysis & Forecast ........................................................................................................................ 15
Low leverage & High Cash ................................................................................................................................... 15
Single-digit dividend yield ................................................................................................................................... 15
Revenues to grow 14% ........................................................................................................................................ 15
Gross Margin to widen ........................................................................................................................................ 16
EBITDA and Bottom-line expansion .................................................................................................................... 16
Valuation ..................................................................................................................................................... 18
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Alexandria Mineral Oils Company (AMOC.CA)
Initiation of Coverage – February 6th, 2018
Industry Dynamics
Strong world growth rate entices oil demand
The world annual real GDP growth forecast is 3.7% in 2018e, same as in 2017, according to the World
Bank. World oil demand in 2Q2017 grew strongly by 2.2m b/d (2.3% YoY), significantly above its
1995-2016 trend of 1.2m b/d, due to strong growth among Organization for Economic Co-operation
and Development (OECD) countries. For 2017, global oil demand is revised up, averaging 96.99m b/d.
For 2018e, world oil demand is projected to climb by 1.52m b/d (1.4% YoY) to a record high 98.51m
b/d (World Bank and OPEC).
Higher supply growth expectation from the US and Canada
As stated by Organization of the Petroleum
Exporting Countries (OPEC), global crude oil
supply is revised down due to actual data of
4Q2017 to stand at 96.5m b/d in 2017. For
2018e, driven by higher growth expectation
for the US and Canada, the global oil supply
is anticipated to increase 1.3m b/d to
97.82m b/d in 2018e, with 0.68m b/d
undersupplied. This would leave little room
for additional OPEC production; we expect
OPEC crude oil production at 32.42m b/d in
2018f, equivalent to 2017 level.
An extension of the cuts through 2018 is expected
OPEC crude oil production has declined by 0.2mb/d in 2017. According to OPEC, this is partly
resulting from the Declaration of Cooperation (DoC) which reflects an agreement by 12 members to
cut output by 1.2m b/d in the first six months of 2017. The agreement has been extended to March
2018. Saudi Arabia committed to the largest reduction, with the exemption of Libya and Nigeria. The
agreement received a wide-ranging support of another 10 non-OPEC countries which agreed to
reduce output by 0.55m b/d, led by Russia and Mexico (OPEC and World Bank).
The agreement was successful because compliance with the promised cuts was high. An extension of
the cuts through 2018 is expected. OPEC is likely to discuss inclusion of Libya and Nigeria to
agreement of output limits. Nigeria has suggested it could do so when its production reaches 1.8m
b/d.
Annual Brent Crude Oil Prices & Oil Balance
Source: EIA & OPEC Notes: Oil Balance = World Supply – World Demand
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-0.5 -0.68 0
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2014a 2015a 2016a 2017a 2018f
Balance (mn barrel/day) Annual Prices (USD/barrel)
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Alexandria Mineral Oils Company (AMOC.CA)
Initiation of Coverage – February 6th, 2018
Compliance with the production agreement by the 10 non-OPEC producers has been high due to
actual cuts (Russia), field maintenance (Azerbaijan and Kazakhstan), and natural production declines
(Mexico), as viewed by World Bank.
Oil prices rebound owing to OPEC production cut resolution
In 2017 prices recovered moderately due to oil balance undersupply. With projected widened gap
between supply and demand, on 11th January, the Brent Crude Oil stood at USD 70.36/b, a USD 5.98
above the December average. The January 2018 record is the highest since 3 December 2014 and
the strongest rebound since 20 January 2016 low at USD 26.01/b (1.7x growth). The increase is due
to strong demand, falling inventories, and greater compliance by OPEC and non-OPEC producers with
agreed production targets that began in January 2017.
With projected increases in U.S. shale production, the global market is unlikely to tighten
significantly in 2018. According to US Energy Information Agency (EIA), Brent Crude Oil stood at USD
54.15/b in 2017 and projected at USD 59.74/b, in 2018. We forecast Brent crude oil at an average of
USD69/b in 2018, supported by continued production cuts from the DoC and strong economic and
demand growth.
Brent Crude Oil Price Trend (USD/Barrel)
Source: EIA
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Arab Spring
Global Crises
Invasion of Iraq and Sep 11 Attacks
OPEC's decision to maintain production
OPEC decision to cut
production
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Alexandria Mineral Oils Company (AMOC.CA)
Initiation of Coverage – February 6th, 2018
Egypt Overview & Outlook
Moderate reserves
According to British Petroleum (BP) 2017 Energy Outlook, Egypt enjoys 3.5bn barrels of oil reserves
at end of 2016 (0.2% of total worldwide oil reserves), ranking third in Africa following Libya and
Nigeria at 48.4bn barrels and 37.1bn barrels, respectively. Egypt Reserves to Production (R/P) ratio is
at 13.7x versus 44.3x for Africa. Egypt is the largest non-OPEC oil producer and the second largest gas
producer in Africa.
Market undersupplied
Egypt's oil production is in short of demand. In 2016, total production was 691k bpd, while
consumption recorded 853k bpd, exceeding supply by a 162k bpd deficit. Egypt’s main petroleum
products exports are naphtha, fuel oil, and waxes, while gasoil and LPG are its main imports. In
FY2015, Egypt has increased its imports from the key petroleum, namely; LPG’s 2.2m tons, Gasoline
2.1m tons, and Gasoil 6.1m tons. AMOC is an exporter of fuel oil and waxes, while oils, gas oils,
naphtha, gasoline and LPG are directed to the domestic market through its parent company Egyptian
General Petroleum Corporation (EGPC).
Foreign oil companies' investments rose to USD 8.1bn on exploration and development in FY2017
from USD 6.6bn in the previous fiscal year, an increase of 22.7%. Egypt expects the investments of
foreign oil companies to exceed USD 10bn in the current FY2018. The new investments should
narrow the shortage in supply.
Net importer of petroleum products
According to Central of Bank of Egypt (CBE), investments in oil refineries reached EGP869.5m in
FY2017 (a 20% growth YoY), however the sector witnessed a 3.1% contraction in FY2017 (down from
a growth of 2.5% in FY2016). To meet local demand from petroleum products, the government paid
USD 6.9bn to petroleum products imports during FY2017, up from USD 6.2bn a year earlier, 12% of
Egypt’s total import bill. FY2017 petroleum products exports were only USD 2.2bn (a 26% increase
YoY), causing a USD 4.7bn gap. The domestic market consumes around 75mn tons of petroleum
products annually, and Egypt’s oil sector supplies 60% of the local needs and the rest is imported.
In an attempt to drop the budget deficit to 9.4% in FY2018 compared to 12.5% in FY2017, the
government took steady steps to reduce energy subsides. The petroleum subsidies recorded
EGP22bn in 9M2017, only 28% of Egypt’s total subsidies, compared with 36.7% in FY2016 and 49% in
FY2015.
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Alexandria Mineral Oils Company (AMOC.CA)
Initiation of Coverage – February 6th, 2018
Egypt is not considering an increase in fuel prices before 30 June 2018, the government is planning to
lift fuel subsidies gradually until they are entirely removed within few years. The government started
cutting fuel subsidies as part of an economic program – which also involved floating the currency –
implemented to help secure a USD 12bn International Monetary Fund (IMF) loan deal.
Government dominance
Egypt is the biggest oil refiner in Africa with a total of ten refining companies operating 12 refineries,
where South Africa runs second. The sector (eight companies) is currently dominated by the state,
with nine out of ten oil refineries are controlled by the government-owned Egyptian General
Petroleum Corporation (EGPC), directly or indirectly. AMOC is owned indirectly by EGPC through
Alexandria Petroleum Company, Misr
Petroleum, and Petroleum
Cooperative.
In 2016, Egypt's maximum oil refineries
combined capacity reached 732,550
bpd), according to EGPC. Additions of
6,550 bpd come in result of robust
capacity upgrades over the past five
years.
EGPC is the sole supplier of feedstock
to all refineries, and the main customer
for end products destined for the local
market at international prices.
Sector upgrade
Global refiners have announced new refinery additions or expansions to existing capacities of 7m
b/d from 2017 to 2021, exceeding projected global petroleum demand growth of less than 5.5
million bpd, during the same period. The Middle East is contributing with 20% of announced projects
(1.4m b/d) during the next 5 years. However, Africa is characterized with both high refinery
construction costs and low capacity utilization. The projected refining capacity increases in Africa,
during the next five years, is below anticipated demand growth and is driven mainly by the 2020
transition to low-sulfur bunker fuel.
Egypt’s total refinery capacities stood at 810k bpd in 2016, while the actual oil refinery throughput is
at 508k bpd in 2016, with 62% utilization rate (BP Statistical Review World Energy 2017). This is
because some oil refineries are old and date back to 1913, namely El Nasr, with the exception of
Egyptian Refineries Capacities & Main Shareholder
Company Capacity
(Million tonnes/p.a.) Main Shareholder
APC 5.0 EGPC
CORC 10.0 EGPC
NPC 6.0 EGPC
APRC 4.0 EGPC
SOPC 3.0 EGPC
ASORC 4.5 EGPC
MIDOR 5.8 EGPC
AMOC 1.7 Alex Petroleum
Egypt’s Total Capacity 40.0
Source: Ministry of Petroleum and AMOC
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Alexandria Mineral Oils Company (AMOC.CA)
Initiation of Coverage – February 6th, 2018
Middle East Oil Refinery (MIDOR) and AMOC. As Egypt produces only sour oil, most of its petroleum
products are at the heavy end of the spectrum. AMOC and MIDOR, however, owing to the more
advanced technology used, are able to produce a range of light products, e.g. waxes.
In early 2017, the Ministry of Petroleum announced an USD 8.3bn budget to upgrade eight oil
refineries within four years to increase production to meet accelerating local demand, curb import
bill and control budget deficit. Hence, the Middle East Oil Refinery (MIDOR), the more advanced one,
will be listed on the Egyptian Stock Exchange (EGX) to raise funds for future developments for the
eight other state-run oil refining companies, as well as raising AMOC’s free float.
Private Sector Entry through PPP
The sector is witnessing only one new entrant; Egyptian Refining Company (ERC) new USD 3.7bn
processing plant at capacity of 4.2mn tons per year of liquid products, brining Egypt’s total refining
capacity at 44.2mtpa. The ERC refining portfolio is 2.3mn tons of diesel, 600k tons of jet fuel, 522k
tons of gasoline, in addition 600k tons of sulfur and coke as well as butane gas and naphtha. The
facility will ramp up output to 98% of capacity by the end of 2018. ERC is owned by Egyptian and
Arab private investors, Egyptian public institutions, international development institutions (IFC, DEG
and FMD) and EGPC with 24% stake.
ERC will further process products from Cairo Oil Refinery Company (CORC) to produce additional
high-quality petroleum products including approximately 2.3mtpa of diesel for the domestic market.
ERC is partnering with EGPC, CORC and PPC (Petroleum Pipeline Company) (EGPC affiliates) in public-
private-partnership (PPP) agreement, which entails CORC selling to ERC atmospheric residue to be
used as feedstock; EGPC purchasing ERC’s end products at international prices; and PPC providing
storage and transportation facilities. ERC will sell its products to EGPC at international prices minus
1% under a 25-year off-take deal.
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Alexandria Mineral Oils Company (AMOC.CA)
Initiation of Coverage – February 6th, 2018
Company overview
Alexandria Mineral Oils Company
(AMOC) was founded in 1997 and is
headquartered in Alexandria, Egypt.
AMOC was listed on EGX in 2004,
the sole refinery publically traded,
with 18.7% free float.
AMOC is indirectly owned by the
Egyptian (EGPC) through Alexandria
Petroleum Company (20%). Major
stake of AMOC, 53% of the
company, is owned by state-owned
banks, the biggest of which is the
National Bank of Egypt through its
investment arm, Al-Ahly Capital
Holding (25.3%), and Misr Bank (8.6%), and Misr Insurance Company (5.4%).
Enhancing stock liquidity for secondary offering
AMOC’s management have been focusing on gaining more exposure in the capital market, AMOC’s
Extra-Ordinary General Assembly and General Assembly have convened on the 25th of February
2017 and approved issuance of Global Depository Receipts (GDRs) equals 10% of the company’s
capital and a 1:10 stock split. On August 1, 2017, AMOC joined the EGX 30 and EGX 20 capped
indices.
Stock Split & capital increase
On April 19, 2017, AMOC undertook a 1:10 stock split at a par value of EGP1/share and 861mn
shares. In December 2017, AMOC increased the issued and paid capital from EGP 861mn to EGP
1.29bn, through free shares. The increase was EGP 430.5mn distributed over 430.5mn shares, at par
value of EGP1/share. The increase in capital was financed through the general reserve, recorded EGP
627.8mn. The capital increase was through distributing dividends through 1:2 bonus shares.
GDRs on LSE
Alexandria Mineral Oils Co (AMOC) signed a contract with BNY Mellon to issue global depositary
receipts (GDRs) on the London Stock Exchange (LSE). AMOC also signed a deal with Baker McKenzie
in London and Cairo offices to provide the company with relevant legal services to be listed on LSE’s
GDRs. Owning 25.31% of AMOC, Al Ahli Capital decided to transfer 39.5% of its stake in AMOC (10%
of total shares) to GDRs for trading in the LSE in early 2018.
AMOC Shareholders Structure
Source: AMOC
18.70%
4.50%
25.30%
8.70%
20%
5.40%
10.20%
3.60% 3.60%
Free Float
Misr Life Insurance Co.
Al Ahli Capital Holding
Misr Capital Investmens
Alexandria Petroleum Co
Misr Insurance Co
Local Pension Funds
Misr Petroleum Co
Cooperative PetroleumCo
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Alexandria Mineral Oils Company (AMOC.CA)
Initiation of Coverage – February 6th, 2018
Secondary offering
The government has announced proceeding with the privatization program through listings on the
Egyptian Stock Exchange (EGX) through IPOs and secondary offerings. The government announced
the IPO of ENPI to take place on 1Q2018, as well as MIDOR. AMOC is thought to be a candidate for
secondary offering. According to the Chairman of AMOC, Amr Mostafa, the company plans
increasing its EGX listing by another 10 - 20% of its shares; the listing will come out of the principal
shareholder’s stake or from more than one shareholder’s stake.
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Alexandria Mineral Oils Company (AMOC.CA)
Initiation of Coverage – February 6th, 2018
Business Operation
Low Sulphur fuel-oil Refinery
AMOC is a second stage refinery, where it
refines low Sulphur fuel-oil. AMOC engages in
the production of oil and paraffin wax. Its
products include fully-refined hydro-treated and
unhydro-treated paraffin waxes; transformer,
base, and fuel oils; and automatic transmission
fluids.
The refinery’s main product portfolio includes
two variants of paraffin wax and automatic
transmission oils, three categories of base oil,
transformer oils and fuel oils. They are produced
in two separate complexes; one for lubricants
and other oils. The second is for gas oil
production. The refinery is ISO 9001:2008 and
ISO 14001:2004 certified as well as OHSAS
18001:2007 certified.
Solid ties for feedstock and marketing
AMOC is engaged in a feedstock supply
agreement with EGPC through sister companies
Alexandria Petroleum Company and Al-Amreyah
Petroleum Company. AMOC’s primary focus is meeting local demand, where it has an off-take
agreement for more than 88% of its products with EGPC to satisfy domestic needs; the remaining is
exported or sold locally to private sector companies. AMOC owns 40% stake in Alexandria Waxes
Company a joint venture with the German Oil International Sasol as an exclusive off-taker to AMOC’s
wax production in international markets. AMOC is considering raising its stake in Alexandria Wax
Products from 40% to 55%, through acquiring a stake from Sasol, which owns 51% of Alexandria
Wax.
Innovative Development Strategy
AMOC is adopting an innovative development strategy that is set-out to function in three parallel
pivots. AMOC’s Extra-Ordinary General Assembly and General Assembly approved adding new items
to the activity scope: including compatible processes such as producing furnace oil, oil blending and
packing for others, crude refining at MIDOR and producing diesel and gasoline with taking into
AMOC’s Designed Capacity
Products tons p.a.
I Lube Oil Complex
Transmission Oil (A.T.F.) 5,500
Transformer Oil (T.O.) 16,500
Base Oil 88,000
Total Oils 110,000
Waxes 27,000
Subtotal 137,000
II Gas Oil Complex
Primary Products:
Gas Oil 460,000
Naphtha 98,000
LPG 43,000
Subtotal 601,000
Secondary Products:
Fuel Oil 560,000
Heavy Residual 431,000
Sulphur 4000
Subtotal 995,000
Total Capacity 1,733,000
Source: AMOC
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Alexandria Mineral Oils Company (AMOC.CA)
Initiation of Coverage – February 6th, 2018
account the provisions and regulations needed to issue the necessary license in order to implement
the above processes.
I- Revamp of operational and production facilities for enhanced yields
Improvement of the core operational facilities and production facilities is highlighted in
AMOC signed an agreement with Axens Group to build a new oil complex with an investment
cost of around USD 800mn that will help increase the local refinery’s production across the
board.
In 2017, AMOC-AXENS revamping contract to develop the second phase of Middle Distillates
De-waxing Unit (MDDU) units with a total investment cost of USD 50mn. AMOC is working
with Axens on the revamp project for producing Euro five standards products in addition to
production of Diesel and currently the production process is undergoing pilot testing and
conducting economic modeling.
Petroleum Projects and Technical Consultations Company (Petrojet) undergone a concrete
structure at a total cost of EGP 10.8mn, with a value of EGP 12.9mn, operating in October
2017.
Processing new feed blend by replacing high economic value feed (soft wax + aromatic
extract) which will improve the products quality.
II- Extended arms of partnership for utilization of non-functioning assets
In utilization of a handsome cash balance of EGP 1.46bn as end of September 2017 (1QFY2018),
AMOC aspires to purchase crude oil, process it in the Egyptian refineries and sell the final
products to EGPC according to the international prices. Also, AMOC aims to reduce dependency
on the domestic suppliers by utilizing the international market, and importing a portion of raw
materials needs.
In April 2017, AMOC agreed to process 500 barrels/month at MIDOR. This step increased
revenue by USD6mn in FY2017, at USD 2/barrel average profit margin.
In May 2017, AMOC signed a deal with Dana Gas to initially refine 1,500 barrels/ day,
ultimately increase to 4,000 barrels/day.
On October 17, 2017, a toll contract was signed between AMOC and Petromin of Saudi
Arabia, whereby AMOC packages and blends about 10k ton/year of Lube Oils for Petromin at
AMOC’S facilities against toll fee, yet to be increased to 50k ton/year in successive stages.
Dealing with Arabian Company for Oil and Derivatives to purchase 1,200 tons of main
unrefined oils at EGP 1,095/ton as of October 2017.
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Alexandria Mineral Oils Company (AMOC.CA)
Initiation of Coverage – February 6th, 2018
EGPC contracting with Iraqi company SOMO on the import of 24mn barrels of Basra crude oil,
where AMOC imports and refines 260k barrels monthly through 2018.
In terms of exports, AMOC signed an agreement in July 2017 to export a number of
petroleum products including fuel oil (mazut) to the State Oil Company of Azerbaijan
Republic.
Tanta lab is to process an extra monthly shipment from 45k to 60k barrels at an expected
profit of USD 3/barrel
Fully liberal petroleum products prices with high correlation with oil prices
In measuring R-squared (coefficient of determinations) to test the correlation among variables,
where Brent Crude Oil is the benchmark, R-squared for Gasoline, Gasoil (Solar), and Fuel Oil (Mazot)
are 89%, 99%, and 98%, respectively. R-squared indicates the variables are highly correlated and that
89%, 99%, and 98% price movements of Gasoline, Gasoil (Solar), and Fuel Oil (Mazot), respectively
are explained by price movements in the benchmark Brent Crude Oil.
In regression analysis, we have two scenarios for 2018e Brent Crude Oil; scenario I: annual average
Brent Crude Oil at USD59.74/b and scenario II: annual average Brent Crude Oil at USD69/b.
Accordingly, AOLB projects 2018e Gasoline, Gasoil, and Fuel Oil prices under scenario I at USD1.88/b,
USD1.66/b, and USD1.78/b, respectively. Under scenario II, AOLB projects 2018e Gasoline, Gasoil,
and Fuel Oil prices at USD2.06/b, USD1.91/b, and USD2.03/b, respectively. AMOC’s petroleum
product prices will follow the same pattern, since EGPC’s contracts stipulate that international prices
are the benchmark for both feedstock supply and end-product sales.
AMOC’s Petroleum Products Correlation with Brent Crude Oil Price Trend (USD/Barrel)
Source: EIA
0
50
100
150
200
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Brent Crude Gasoline Rebased Gasoil (Solar) Rebased Fuel Oil (Mazot) Rebased
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Alexandria Mineral Oils Company (AMOC.CA)
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AMOC’s refining margin narrowing
by tops global standard Brent
cracking margin
The refining industry works on
margins on top of the feedstock
cost. The 12 - year average refining
margin for Brent cracking stands at
5%, while AMOC’s 12 – year
operating margin records 14%.
However, the gap between the two
curves is narrowing, indicating a
compression in AMOC’s operating margin, yet 500 bps above the standard margin.
New entry to compress AMOC’s market share The petroleum sector has launched a plan to upgrade Egypt’s total oil refinery capacity to 44.2mtpa
by end of 2018e, compared with the current capacity of 40mtpa (+10.5% growth), in order to meet
the local demand for refined products, particularly gasoil and LPG. So far, confirmed new entrant of
ERC of Citadel Capital, with a capacity of 4.2mtpa and an investment of USD 3.7bn. This new capacity
with full utilization by the end of 2018e, when it comes on-stream, will cut AMOC’s market share
from the current 4% to 3.6% by end of 2018e. Nevertheless, AMOC’s market position is secure to
benefit from accelerated demand and rising prices.
Refining Margins (%)
Source: EIA & AOLB Research
Egypt Refineries Market Share in 2017 vs. 2018e
Source: AMOC & AOLB Research
0%
5%
10%
15%
20%
25%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Brent Cracking Margin AMOC (Operating Margin)
AMOC 4%
APRC 10%
APC 13%
MIDOR 15%
SOPC 7%
CORC 25%
NPC 15%
ASORC 11%
2017 AMOC 3.6%
APRC 9.1% APC
11.3%
MIDOR 13.2%
SOPC 6.8%
CORC 22.7%
NPC 13.6%
ASORC 10.2%
ERC 9.5% 2018
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Alexandria Mineral Oils Company (AMOC.CA)
Initiation of Coverage – February 6th, 2018
Backed by strong domestic demand and prices rebound
Egypt is net importer of fuel oil, gasoil, LPG, Naphtha, and lube base oils. Thus, AMOC is well backed
by strong local demand, where is produces around 4% of Egypt’s total production for LPG and
Naphtha,7% of Egypt’s total production for Gasoil, 11% of Egypt’s fuel oil and 30% of Egypt’s lube
base oils.
AMOC has an off take agreement with EGPG for LPG, Naphtha, Gas Oil and Fuel oil production sold
at international prices. Growth in petroleum product sales are closely tied to industrial activity (fuel
oil and naphtha), the auto industry (gas oil), and population and household formation rates (LPG).
According to AOLB estimates, the 2018e global economic growth rate is expected to steadily grow at
3.7% and the economic growth rate in Egypt is expected at 4.6%. The industrial activity exhibited
moderate growth at 3.7% in FY2017, 0.4% in Q42017 in particular, and expected to achieve 4.7%
growth in FY2018e. On the other hand the auto industry witnessed 31.6% contraction in 2017 and
expecting a moderate growth of 10% in 2018e.
AMOC Domestic Market Share (mtpa)
LPG & Naphtha Fuel Oil
Gasoil Base Oils
Source: AMOC
2.3
0.13
2
Egypt's ProductionAmoc's ProductionEgypt's Imports
9
1
5
Egypt's ProductionAmoc's ProductionEgypt's Imports
7
0.48
7
Egypt's ProductionAmoc's ProductionEgypt's Imports
0.33
0.3
0.1
Egypt's ProductionAmoc's ProductionEgypt's Imports
14
Alexandria Mineral Oils Company (AMOC.CA)
Initiation of Coverage – February 6th, 2018
Exports contribute 12% of total revenues
Since priority is for domestic market, any domestic market surplus can be exported. AMOC main
exports are waxes through the German Sasol Oil International (51% ownership of Alex Wax), an
exclusive distributer for AMOC in international market. Main export markets include: Mexico,
Germany, Morocco, Nigeria, Ethiopia, South Africa, India, and Bangladesh. In FY2018e, Wax
contribution is USD52.7mn (EGP935.6mn), where total exports comprise 12% to total revenues.
15
Alexandria Mineral Oils Company (AMOC.CA)
Initiation of Coverage – February 6th, 2018
Financial Analysis & Forecast
Low leverage & High Cash
AMOC has built up a handsome cash balance at EGP 1.47bn, thus the company did not resort to
debts to supply its operation upgrades, where the Debt/Equity ratio stood as low as 0.01x in 2017.
We don’t expect AMOC to resort to debt in the future, since the full amortization of its debts
outstanding in 2014, particularly with the prevailing high lending rate at 19.75%. AMOC is benefiting
from high deposits rates, and expected to record an EGP89.07m of interest income in FY2018e.
Single-digit dividend yield
Traditionally, AMOC is a high divined-paid stock, however due to extensive operation upgrades in
DDM unit, 2018e dividends is expected to declined 83%, to record a 9% dividend yield, down from a
53% payout ratio in 2017. ALOB forecasts this trend to continue in 2018. On the other hand, with the
conclusion of upgrades, we forecast a higher dividend yields starting 2019 at 10.5% and 11.9% in
2020.
Revenues to grow 14%
Throughout 2018e, AMOC is to produce 433k tons of Gas Oil, 867k tons of Fuel Oil, 83k tons of
naphtha and 31k tons of butane. It also produced 181k tons of oils and waxes. The refinery’s main
export product was paraffin wax, which topped 62k tons, making USD52.7mn in proceeds.
Backed by local domestic demand, petroleum products prices rebound (c. 10.3% YoY), and
partnerships agreements, AOLB forecast AMOC’s revenue to increase to EGP10.9bn in FY2018e, 14%
YoY growth, while total refinery utilization rate increases to 94.5%, up from 92.8% in 2017. The
stable economic outlook will have a positive effect on AMOC’s revenue, impacting both prices and
volumes.
AMOC’s export sales are projected to stabilize at 12% of total sales in the coming couple of years to
record USD1.3bn in 2018, 18% YoY growth and increase thereafter to 13% in 2020, while sales to the
local market (comprising 88% of sales) are forecast to increase to EGP9.6bn in 2018e, 14% YoY
growth. Sales 2018-2022 CAGR is 16%
Revenues & Utilization Rate Revenues Breakdown for 2018e
Source: AOLB Estimates
4.4
9.6 10.9
12.1 12.9
88%
90%
92%
94%
96%
98%
100%
-
2
4
6
8
10
12
14
2016 2017 2018e 2019f 2020f
Revenues (EGP bn) Utilization Rate (%)
15%
9%
2% 5%
29%
39%
1% EGP10.96bn Lube Oil
Waxes
LPG
Naphtha
Gas Oil
Fuel Oil
OtherRevenues
16
Alexandria Mineral Oils Company (AMOC.CA)
Initiation of Coverage – February 6th, 2018
Gross Margin to widen
We forecast AMOC to maintain an average gross profit margin of 19% throughout our forecast
period, up from 11% over 2013-2017, in the near term; we expect its gross profit margin to widen to
17% in 2018e, up from 13% in 2017. Although higher crude oil prices translate into higher petroleum
products prices, they would also result in higher feedstock costs.
However, AOLB projects petroleum products prices rises at 15% YoY to exceed crude oil prices
increases, resulting in narrowing of COGS/Sales ratio to 83% in 2018e, down from 87% in 2017,
where feedstock constitutes 89.5% of total costs. AMOC is requiring 1.6mtpa of Low Sulfur Fuel Oil
(LSFO) per annum feedstock. Average revenue per ton is expected at EGP 6,323 in 2018e versus EGP
5,534 in 2017, while average cost per ton is projected at EGP 5,277 in 2018e versus EGP 4,822.
EBITDA and Bottom-line expansion
AOLB forecast AMOC’s EBITDA to increase to EGP1.6bn in FY2018e, 49.5% YoY growth, while the
EBITDA margin to expand to 15.5%, up from 11.9% in 2017.
Egypt’s oil refineries are subject to 22.5% corporate tax rate for profits below EGP10mn and 25% rate
above EGP10mn, while oil exploration companies are subject to 40%. The company is subject to
effective tax rate of 26%, due to lack of debt balance to enjoy a tax break, while taxes projected at
EGP363mn in 2018.
Gross Profit (EGP/Ton) Gross Profit Margins
Source: AOLB Estimates
12% 13%
17%
18% 19%
10%
12%
14%
16%
18%
20%
2016a 2017a 2018e 2019f 2020f
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
2016a 2017a 2018e 2019f 2020f
EGP
Sales/Ton COGS/Ton
313
711 1,045
1,235 1,409
17
Alexandria Mineral Oils Company (AMOC.CA)
Initiation of Coverage – February 6th, 2018
The forex recorded a surge in gains by EGP275.1mn in 2017 due to devaluation of the pound, since
some bank deposits are in US dollars of EGP1.1bn (USD64.5mn), 58% of total deposits. We expect
forex losses of 24.7mn due to slight ease of the exchange rate to USD/EGP 17 through 1H2018.
The interest income is projected to reach EGP89mn, due to a large bank deposits in Egyptian pounds
of EGP1.4bn, 42% of total bank deposits. While the interest expense is minimal at EGP3.6mn in 2018,
due to small short-term bank loans of EGP30mn.
AOLB forecast AMOC’s net profit to grow to EGP1.26bn in FY2018e, 15% YoY growth, while the NP
margin to expand to 12%, up from 11% in 2017. Net profit 2018-2022 CAGR is 16%.
EBITDA & EBITDA Margin Net Profit & NPM
Source: AOLB Estimates
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
-
500
1,000
1,500
2,000
2,500
2016a 2017a 2018e 2019f 2020f
EGP (mn)
EBITDA EBITDA Margin
8.0%
10.0%
12.0%
14.0%
16.0%
-
500
1,000
1,500
2,000
2,500
2016a 2017a 2018e 2019f 2020f
EGP (mn)
Net profit NPM
18
Alexandria Mineral Oils Company (AMOC.CA)
Initiation of Coverage – February 6th, 2018
Valuation
Our DCF valuation indicates a fair value of EGP9.0/share, a -5.2% downside from current levels. The
valuation is based on five years of explicit forecasts and a terminal value using a 3% long-term
growth rate. Since AMOC's debt-to-equity ratio was as low as 0.01x at end-2018e - minor short-term
debt balance - AMOC's cost of debt is fairly low at 9%. We used a WACC of 19.5%, where the cost of
equity is 20%. AMOC’s 2018e P/E is 9.5x. AMOC trades below the Reuters Oil & Gas sector average at
17.9x and Refinery Industry average of 25.9.
Assumptions for Calculation of WACC (%)
Symbol Assumptions
Risk-free Rate of Return Rf 14.7%
Long-term Cost of Debt Kd 9.0%
Equity Risk Premium Rp 7.0%
Beta B 0.7
Tax Rate t 25.0%
Weight of Debt Wd 1.0%
Weight of Equity We 99.0%
Cost of Equity Ke 20.0%
WACC Dr 19.5%
Source: AMOC, CBE, AOLB calculations
19
Alexandria Mineral Oils Company (AMOC.CA)
Initiation of Coverage – February 6th, 2018
F IN A N C IA L ST A T EM EN T S P ER F OR M A N C E R A T IOS
Year to 30 Jun 2016 2017 2018e 2019f 2020f Year to 30 Jun 2016 2017 2018e 2019f 2020f
Inco me statement (EGP tho usands) Gro wth and margins
R evenue 4,375,587 9,589,696 10,957,440 12,070,551 12,953,527 Revenue growth (%) (31.9) 119.2 14.3 10.2 7.3
Cost o f goods so ld (3,750,196) (8,277,780) (9,241,445) (9,848,699) (10,428,268) EBITDA growth (%) 8.2 122.2 33.6 31.7 13.9
Other operating expenses (113,262) (173,856) (195,431) (218,580) (243,961) EBIT growth (%) 9.7 146.3 36.0 33.4 14.4
EB IT D A 512,128 1,138,060 1,520,564 2,003,273 2,281,298 Pre-tax growth (%) 14.1 164.0 9.5 35.5 13.8
Depreciation/amortization (82,205) (79,369) (81,038) (82,254) (83,487) Reported net profit growth (%) 27.8 153.0 16.1 32.7 13.1
EB IT 429,923 1,058,690 1,439,526 1,921,020 2,197,810 EBITDA margin (%) 11.7 11.9 13.9 16.6 17.6
Net interest income/(expense) 65,402 84,537 81,529 101,182 125,159 EBIT margin (%) 9.8 11.0 13.1 15.9 17.0
Associates 0 0 0 0 0 Pre-tax margin (%) 12.5 15.1 14.5 17.8 18.9
Other income/(expense) 32,751 275,508 21,020 77,567 68,837 Net margin (%) 9.9 11.5 11.7 14.0 14.8
Exceptional items (net o f tax) 19,948 27,888 41,832 46,016 50,617 Effective tax rate (%) 20.7 24.0 19.4 21.0 21.5
P re-tax pro f it 548,024 1,446,624 1,583,908 2,145,784 2,442,424 Liquidity
Tax (113,259) (346,780) (306,526) (450,479) (525,258) Capex/depreciation (x) (0.0) 0.2 0.4 0.4 0.4
M inority interest 0 0 0 0 0 Current ratio (x) 7.6 2.6 5.5 6.2 6.6
Preference dividends 0 0 0 0 0 Quick ratio (x) 6.3 2.1 4.6 5.2 5.6
R epo rted net pro f it 434,765 1,099,844 1,277,382 1,695,305 1,917,166 Working capital/revenue (%) 9.9 5.2 7.4 7.4 7.7
Dividends (477,169) (592,047) (1,306,694) (1,380,709) (1,561,691) Receivable days 14.4 13.5 19.0 19.1 19.3
Adjustments (one-off) 645 704 704 0 0 Inventory days 29.3 21.8 28.1 27.6 28.5
R etained earnings (41,758) 508,501 (28,608) 314,596 355,475 Payable days 2.2 17.0 24.8 19.4 19.4
R estated net pro f it : Cash operating cycle (days) 41 18 22 27 28
Recurrent net profit (excl. excep & adjs) 434,120 1,099,140 1,276,678 1,695,305 1,917,166 R isk measures
Fully-diluted net profit 434,120 1,099,140 1,276,678 1,695,305 1,917,166 Dividend cover (x) 0.9 1.9 1.0 1.2 1.2
Payout ratio (%) 109.8 53.8 102.3 81.4 81.5
C ashflo w (EGP tho usands) Net interest cover (x) nm nm nm nm nm
P re-tax pro f it 548,024 1,446,624 1,583,908 2,145,784 2,442,424 Net debt/equity (incl M I) (%) nm nm nm nm nm
- associates' profits 0 0 0 0 0 Net debt/equity (excl M I) (%) nm nm nm nm nm
+ associates' dividends 0 0 0 0 0 R eturns
+ depreciation/amortization 82,205 79,369 81,038 82,254 83,487 Return on avg cap employed (%) 16.4 37.4 37.9 39.6 40.0
- tax paid (113,259) (346,780) (306,526) (450,479) (525,258) WACC (%) 19.5 19.5 19.5 19.5 19.5
+ increase (-decrease) in provisions (1,232) (12,500) 0 0 0 Return on avg equity (excl M I) (%) 17.7 40.3 34.5 35.7 35.5
- (profit)/+loss on disposal o f FAs 0 0 0 0 0 Company cost o f equity (%) 21.8 21.8 21.8 21.8 21.8
+/- o thers 0 0 0 0 0
Gro ss cash f lo w 515,739 1,166,713 1,358,420 1,777,558 2,000,653 SH A R E D A T A / VA LUA T ION
- capital expenditure 2,790 (12,353) (31,370) (31,989) (32,468) Share data
(Incr)/decr in working capital 21,096 287,892 (1,121,774) (126,157) (142,668) Issued shares (m) 86.1 86.1 1,291.5 1,291.5 1,291.5
F ree cash f lo w 539,625 1,442,252 205,276 1,619,413 1,825,517 Weighted avg shares (m) 86.1 86.1 1,291.5 1,291.5 1,291.5
Other inflows/ (outflows): Fully diluted shares (m) 86.1 86.1 1,291.5 1,291.5 1,291.5
- acq of subsids/other investments 0 0 0 0 0 Basic EPS - weighted avg (EGP) 5.06 12.78 0.98 1.30 1.47
+/- minority interests 0 0 0 0 0 YoY change (%) 28.0 152.8 (92.3) 32.8 13.1
- dividends paid (357,877) (444,035) (980,021) (1,035,532) (1,171,269) Fully diluted EPS (EGP) 5.06 12.78 0.98 1.30 1.47
+ proceeds from share issues 0 0 0 0 0 YoY change (%) 28.0 152.8 (92.3) 32.8 13.1
+ proceeds from disp of FA/subsids 0 0 0 0 0 Recurring EPS - weighted avg (EGP) 5.06 12.78 0.98 1.30 1.47
+/- o thers (118,667) (86,814) 649,322 63,611 (178,041) YoY change (%) 28.0 152.8 (92.3) 32.8 13.1
N et cash f lo w 63,081 911,403 305,078 647,492 476,207 Gross DPS (EGP) 5.00 5.50 0.88 0.98 1.11
CFPS (EGP) 5.99 13.55 1.05 1.38 1.55
N et cash/ (debt) start 971,339 1,034,420 1,945,823 2,250,901 2,898,393 NBV/share (EGP) 28.33 35.07 3.40 3.96 4.39
N et cash / (debt) end 1,034,420 1,945,823 2,250,901 2,898,393 3,374,600 Valuat io n
PER (Basic) (x) 1.9 0.7 9.7 7.3 6.4
B alance sheet (EGP tho usands) PER (FD) (x) 1.9 0.7 9.7 7.3 6.4
Fixed assets 2,161,311 2,169,077 2,210,319 2,242,308 2,274,777 PER (Recurrent) (x) 1.9 0.7 9.7 7.3 6.4
Depreciation (1,047,847) (1,126,349) (1,207,387) (1,289,640) (1,373,127) P/CFPS (x) 1.6 0.7 9.0 6.9 6.1
N et f ixed assets 1,113,464 1,042,728 1,002,933 952,668 901,649 Price/Book value (x) 0.3 0.3 2.8 2.4 2.2
Long-term investments 931 931 977 1,026 1,077 Dividend yield (%) 52.6 57.9 9.2 10.3 11.6
Intangible assets 0 0 0 0 0 Basic EPS Cagr 2018e-2020f (%) nm G-PE (Basix) (x) nm
Lo ng-term assets 1,114,395 1,043,659 1,003,910 953,694 902,726 FD EPS Cagr 2018e-2020f (%) nm G-PE (FD) (x) nm
C urrent assets Recurrent EPS Cagr 2018e-2020f (%) nm G-PE (Recurrrent) (x) nm
Cash & cash equivalents 1,038,515 1,975,890 2,280,968 2,928,460 3,404,667 EV/EBITDA (x) 20.2 9.1 6.8 5.2 4.5
Receivables 166,548 541,425 600,408 661,400 709,782 EV/EBIT (x) 24.0 9.8 7.2 5.4 4.7
Inventory 288,235 702,797 721,592 769,008 857,118 EV/revenue (x) 2.4 1.1 0.9 0.9 0.8
Other non-cash assets 163,210 100,604 657,446 724,233 777,212 M arket cap/revenue (x) 2.8 1.3 1.1 1.0 0.9
T o tal current assets 1,656,507 3,320,717 4,260,414 5,083,101 5,748,779 Earnings yield (%) 53.1 134.4 10.4 13.8 15.6
C urrent liabilit ies
Current borrowings 4,095 30,067 30,067 30,067 30,067 PR OGR ESSIV E QU A R TER LY R ESU LTS SN A PSHOT FOR C U R R EN T Y EA R :FY 2 0 18
Payables 23,008 747,062 506,381 539,655 571,412 Qtly inco me statement (EGP m) 1Q 2Q 1H 3Q 9-mths
Other current liabilities 190,413 476,498 239,898 255,661 270,706 Turnover 3,529 nm nm nm nm
N et current assets/ ( liabilit ies) 1,438,991 2,067,090 3,484,069 4,257,718 4,876,594 Operating profit 451 nm nm nm nm
N et assets 2,553,386 3,110,749 4,487,979 5,211,412 5,779,320 Reported net profit 403 nm nm nm nm
Lo ng-term liabilit ies Basic EPS (EGP) 0.4 nm nm nm nm
Long-term debt 0 0 0 0 0 YoY Growth (%) 4 nm nm nm nm
Other LT liabilities 113,863 90,896 94,876 99,055 103,443
T o tal LT liabilit ies 113,863 90,896 94,876 99,055 103,443 OT H ER IN F OR M A T ION
Issued share capital 861,000 861,000 1,291,500 1,291,500 1,291,500 Top two major shareholders: 12-mth High/Low: EGP9.77-5.37
Reserves (incl prefs, t/stock etc) 1,142,851 1,058,304 1,236,261 1,539,344 1,882,154 1) A l Ahli Capital Holding Avg daily vo l (000): 1,994.5
Retained earnings 435,672 1,100,548 1,865,341 2,281,513 2,502,223 2) A lexandria Petro leum Co Latest results: 1QFY2018
Shareho lders' funds 2,439,523 3,019,852 4,393,103 5,112,357 5,675,877 Free float: 18.7 Next results: 2QFY2018
M inority interests 0 0 0 0 0 Reuters code: AM OC.CA M ajor business: Oil Refinery
C apital emplo yed 2,553,386 3,110,749 4,487,979 5,211,412 5,779,320 SOUR C ES: A OLB R esearch, C o mpany data
20
Alexandria Mineral Oils Company (AMOC.CA)
Initiation of Coverage – February 6th, 2018
Recommendation Rating
Buy Hold Sell
Above 15% From 5% - 15% Below 5%
Disclaimer
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.
21
Alexandria Mineral Oils Company (AMOC.CA)
Initiation of Coverage – February 6th, 2018
Research Department
Sally Mikhail Mariam Wael
Senior - Equity Analyst Equity Analyst
[email protected] [email protected]
Micheal Armia
Head of Technical Analysis
Omar Hussein Reham Aboul Atta
Head of Retail Trading Head of Institutions desk
[email protected] [email protected]
Moataz Ashmawy Laila Tarek El Ghawass
Managing Director Managing Director - Branches
[email protected] [email protected]
Commercial Website: www.arabeyaonline.com
Trading Website: www.aolbeg.com
For more info, kindly contact us on our hotline 16225