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Companynote
CitadelCapitalPrivateequity|Egypt MENAresearch
Risksoverdone;maintainOverweight
RightsissueandOPICloanboostlongtermcapitalbyUSD325m,whichshouldhelpmeetpotentialcapitalcommitmentsonthe
platformslevel
Liquidityconcernsarelargelyoverdoneasthecompanyisclosetofinalizingadebtrefinancingdealandasotheroptionsareavailable
Valuationstillhighlycompellingdespiteac39%cutinourTPtoEGP4.19/share;wemaintainourOverweightrating
Long
term
capital
boosted
by
USD325m:
Citadel
Capital
successfully
completeditsUSD175mcapitalincreaseinOctober,addingUSD120min
newcashtoitsbalancesheetytd.Thecompanyhasalsoreceivedformal
boardapprovalforanew10year,USD150mfinancingfacilityfromthe
OverseasPrivateInvestmentCorporation(OPIC),which,togetherwiththe
capitalincrease,givesthecompanyatotalofUSD325m(EGP2bn)worthof
longtermcapital.Inourview,thisshouldprovidetheflexibilityneededto
meetpotentialcapitalcommitmentsontheplatformslevel,giventhat
USD83mofthefundsfromtheOPIChasnotyetbeenearmarked.
Fundinggapnotclosed,butconcernsareoverdone:WeestimateCitadel
Capitalscashneedsfor4Q112013eatcUSD269m(EGP1.6bn),with
USD67mrelatedtoplatforms,USD170mrelatedtodebtrepayment,and
USD31minrunningcosts.ThisimpliesafundinggapofcUSD76mfor2013e.
Nevertheless,webelievethatliquidityconcernsarelargelyoverdonegiven
thenumberoffinancingoptionsavailable.Accordingtomanagement,the
companyisclosetofinalizingadebtrefinancingdealthatshouldrollover
itsexistingdebtforanother5years.Otheroptionsincludesmall
divestitures(USD50m),recoveringloansadvancedtoplatforms,and
continuedsupportfromCitadelCapitalPartners(CCP).
Weseelimiteddownsidefromhere;maintainOverweight:WecutourTP
forCitadelCapitalc39%toEGP4.19/shareaswetakeamoreconservative
approach,valuing
the
company
based
on
adiscount
to
its
average
trading
P/Bmultipleandaccountingforpotentialassetimpairments.OurnewTPis
atac31%discounttothePNAVpublishedinOctoberandimpliesa
potentialreturnof35%.WethereforemaintainourOverweightratingon
thestock.Thecurrentvaluationishighlycompelling,inourview,withthe
companytradingata37%discounttoits2011ebookvalue.Theequity
closureoftheEgyptianRefiningCompany(ERC),atechnicalbreakthrough
attheNationalOilProductionCompany(NOPC)/RallyEnergy,andadebt
refinancingdealcouldallprovestrongsharepricecatalystsforthestock.
Keyindicators 2010 2011e 2012e 2013e
BVPS(EGP) 5.02 4.91 4.82 4.74
P/B 0.6x 0.6x 0.6x 0.7x
Source:Companydata,HC
Overweight
Targetprice(EGP) 4.19
Currentprice(EGP) 3.09
Potentialreturn 35%
Bloomberg CCAP EY
Reuters CCAP.CA
Mcap(EGPm) 2,693
Mcap(USDm) 449
Freefloat 35%
Dailyvolume(USDm) 2.119
Foreignown.
limit
N/A
Foreignownership N/A
Note:Allpricesasof1December2011
Priceperformance
5December2011
AhmedHafez
Senioranalyst
+20235357384
Pleaserefertoimportant
disclosuresandanalyst
certificationsonpages57
ofthisreport.
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CitadelCapital
Privateequity|Egypt
5December2011
2
LongtermcapitalboostedbyUSD325m
On19
October,
Citadel
Capital
announced
the
successful
completion
of
its
USD175m
(cEGP1.1bn)capitalincrease,addingUSD120m(EGP718m)innewcashtoitsbalance
sheetytd.Shareholderssubscribedto210mnewshares,including52.5mpreferred
shares,ataparvalueofEGP5/share.Accordingtomanagement,longtermGulfinvestors
werekeybackersofthecapitalincrease,whichwasinitially42%subscribed,andwere
joinedbyleadinginternationalandregionalinstitutionalinvestors.Afterthecapital
increase,CCPsstakeinthecompanyisexpectedtodecreasetoc26%fromc33%.
Morerecently,CitadelCapitalannouncedthatitreceivedformalboardapprovalforanew
10year,USD150m(EGP900m)financingfacilityfromtheOPIC.This,addedtotheproceeds
ofthecapitalincrease,willgivethecompanyatotalofEGP2bn(USD325m)worthoflong
termcapital
by
the
end
of
2011,
which
we
believe
should
provide
the
flexibility
to
both
acceleratethedevelopmentofexistinginvestmentsandtopursuecompellingnew
opportunitiesintheeventofanimprovementinthebusinessclimate,giventhatUSD83m
ofthefundsfromtheOPIChasnotyetbeenearmarked.Managementalsobelievesthis
shouldensurethatall19platformcompaniesweatheranyadditionaleconomicheadwinds.
CitadelCapitalscashneeds(EGPm)
2010 2011e 2012e 2013e 2014e
Netprofit (298) (92) (81) (64) (53)
Depreciation 9 5 5 5 5
Netprovisions 174 (9) 0 0 0
Impairments 116 0 0 0 0Gainonsaleofassets (28) 0 0 0 0
Other 8 (2) 0 0 0
Changeinworkingcapital(1)
401 (240) (34) 2 2
Operatingcashflow 381 (339) (111) (58) (47)
Paymentsforinvestments (644) (257) (300) 0 0
Proceedsfromsaleofassets 28 0 0 0 0
Other 46 (3) (1) (1) (1)
Investingcashflow (570) (261) (301) (1) (1)
Debtrepayment 0 (227) (227) (794) 0
Totalcashneeds (189) (827) (639) (853) (48)
Source:Companydata,HC
Note:(1)IncludesduesfromCCPandloansgiventoplatformcompanies
butfundinggapnottotallyclosed
WeestimateCitadelCapitalscashneedsfor4Q112013eatcUSD269m(EGP1.6bn),with
USD67mrelatedtoplatforms,USD170mrelatedtodebtrepayment,andUSD31min
runningcosts.GiventhenatureoftheOPICsproject,webelievetheguaranteed
USD150mloanfacilityishighlyunlikelytobeusedtofinanceexistinginvestments,thatis
toreplaceoutstandingdebt.WeestimateacashpositionofcUSD26masoftheendof
3Q11,whichimpliesafundinggapofcUSD76mfor2013e.Givenboththe
macroeconomicandpoliticalchallengesinEgypt,coupledwithturbulentmarketsanda
gloomyglobaleconomicoutlook,considerableexitsarehighlyunlikelyinthecoming12
18months,
in
our
view.
Nevertheless,
we
believe
that
liquidity
concerns
are
largely
overdone,giventhenumberoffinancingoptionsavailable.
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Privateequity|Egypt
5December2011
3
On12November2011,managementstatedinapressreleasethatitexpectstoadda
furtherUSD50mtoitscashbalancethroughaseriesofsmalldivestitures(rebalancingits
portfolio)over
the
coming
months
at
the
same
time
as
it
starts
to
partially
recover
loans
advancedtoplatformandportfoliocompanies.ThecompanyrecoveredUSD22m
(EGP133m)worthofloansin2Q11.
CitadelCapitalhasalsostatedthatitisclosetofinalizingadebtrefinancingdealthat
shouldrolloveritsexistingdebtforanother5years,whichshouldgiveitsbalancesheeta
significantboost,inourview.Finally,webelieveCCPwillcontinuetoprovidefullsupport
tothecompanywhenneeded.
ValuationCutTPtoEGP4.19/shareandmaintainOverweight
Wecut
our
TP
for
Citadel
Capital
to
EGP4.19/share
from
EGP6.88/share
as
we
move
to
a
moreconservativeP/Bbasedvaluation.Onourcalculations,thestocksP/Bmultiplehas
averaged1.3xsinceitstartedtradingonthestockexchange.Givenourviewthat
challengingmacroeconomicenvironmentwillcontinueforatleastthecoming12months
onboththelocalandglobalfronts,webelievethestockshouldbetradingatadiscount
toitshistoricaverage.
OtherprivateequitycompaniesaroundtheworldthatweseeassimilartoCitadelCapital
tradeatc86%oftheir200911averageP/Bmultiples,withthecurrentmultiples
averaging1.1x.Weassumea20%discounttoCitadelCapitalsaveragetradingP/B,
bringingthemultipleto1x,which,inourview,isafloorvaluationforthecompany.
Wealsoadjustourbookvaluetoreflectpotentialassetimpairments.Wenowexclude
100%ofNOPC/RallyEnergysequityinvestmentsandconvertiblesasthetechnical
difficultiesinbringingtheassetssubstantialreservesintoproductioncontinue.Wealso
exclude50%ofNationalPetroleumCompanysequityinvestmentsandconvertibleson
thebackofitssubstantialequityinvestmentinNOPC/RallyEnergy.
CitadelCapitalvaluationsummary(EGPm)
Bookvalue(2011e) 4,280
Potentialinvestmentimpairments (580)
NationalPetroleumCompany (190)
NOPC/RallyEnergy
(390)
Potentialimpairmentsofconvertibles (108)
NationalPetroleumCompany (29)
NOPC/RallyEnergy (79)
Adjustedbookvalue(2011e) 3,592
200911averageP/Bmultiple 1.3x
@20%discount 1.0x
Targetprice(EGP/share) 4.19
Currentprice(EGP/share) 3.09
Potentialreturn 35%
Source:HC
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OurnewTPimpliesa2011eP/Bmultipleof0.85xandapotentialreturnof35%over1
DecembersclosingpriceofEGP3.09/share.WethereforemaintainourOverweightrating
onthe
stock.
The
current
valuation
is
highly
compelling
despite
current
difficulties,
in
our
view,withthecompanyssharesunderperformingthemarketbyc36%overthepast6
months.TheequityclosureofERC,atechnicalbreakthroughatNOPC/RallyEnergy,anda
debtrefinancingdealcouldallprovestrongsharepricecatalystsforthestock.OurTPis
atac31%discounttothePNAVguidancepublishedbythecompanyinOctober2011.
Risks
Downsideriskstoourvaluationinclude(1)higherthanexpectedassetimpairments,(2)
failuretosecurenecessaryfinancing,(3)theweakmacroeconomicenvironmentand
politicalinstabilitycontinuingbeyond2013,and(4)higherthanexpectedoperatingcosts.
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CitadelCapital
Privateequity|Egypt
5December2011
5
Disclaimer
HCBrokerage,whichisanaffiliateofHCSecurities&Investment(referredtohereinasHC)afullfledgedinvestmentbankprovidinginvestmentbanking,
assetmanagement,
securities
brokerage,
research,
and
custody
services
is
exclusively
responsible
for
the
content
of
this
report.
The
information
used
to
producethisdocumentisbasedonsourcesthatHCbelievestobereliableandaccurate.Thisinformationhasnotbeenindependentlyverifiedandmaybe
condensedorincomplete.HCdoesnotmakeanyguarantee,representation,orwarrantyandacceptsnoresponsibilityorliabilityfortheaccuracyand
completenessofsuchinformation.Expressionofopinioncontainedhereinisbasedoncertainassumptionsandtheuseofspecificfinancialtechniquesthat
reflectthepersonalopinionoftheauthorsofthecommentaryandissubjecttochangewithoutnotice.
TheinformationinthesematerialsreflectsHCsequityratingonaparticularstock.HC,itsaffiliates,and/ortheiremployeesmaypublishorotherwiseexpress
otherviewpointsortradingstrategiesthatmayconflictwiththeviewsincludedinthisreport.PleasebeawarethatHCand/oritsaffiliates,andthe
investmentfundsandmanagedaccountstheymanage,maytakepositionscontrarytotheincludedequityrating.
Thismaterialisforinformationalpurposesonlyandisnotanoffertosellorthesolicitationofanoffertobuy.Ratingsandgeneralguidancearenotpersonal
recommendationsforanyparticularinvestororclientanddonottakeintoaccountthefinancial,investment,orotherobjectivesorneedsof,andmaynotbe
suitablefor,anyparticularinvestororclient.Investorsandclientsshouldconsiderthisonlyasinglefactorinmakingtheirinvestmentdecision,whiletaking
intoaccountthecurrentmarketenvironment.Foreigncurrencydenominatedsecuritiesaresubjecttofluctuationsinexchangerates,whichcouldhavean
adverseeffectonthevalueorpriceof,orincomederivedfrom,theinvestment.InvestorsinsecuritiessuchasADRs,thevaluesofwhichareinfluencedby
foreigncurrencies,
effectively
assume
currency
risk.
Neither
HC
nor
any
officer
or
employee
of
HC
accepts
liability
for
any
direct,
indirect,
or
consequential
damagesorlossesarisingfromanyuseofthisreportoritscontents.
Copyright
Nopartorexcerptofthisresearchreportscontentmayberedistributed,reproduced,orconveyedinanyform,writtenororal,toanythirdpartywithout
priorwrittenconsentofthefirm.TheinformationwithinthisresearchreportmustnotbedisclosedtoanyotherpersonuntilHChasmadeitsinformation
publiclyavailable.
Issuerofreport:
HCBrokerage
BuildingF15B224,SmartVillage
KM28CairoAlexandriaDesertRoad
6October12577,Egypt
Telephone:+202
3535
7666
Fax:+20235357665
Website:www.hcsi.com
IMPORTANTDISCLOSURES
Analystcertification:
I,AhmedHafez,certifythattheviewsexpressedinthisdocumentaccuratelyreflectmypersonalviewsaboutthesubjectsecuritiesandcompanies.Ialso
certifythatIdonotholdabeneficialinterestinthesecuritiestraded.
Analystdisclosures:
Theanalystoramemberoftheanalystshouseholddoesnothaveafinancialinterestinthesecuritiesofthesubjectcompany(including,without
limitation,anyoption,right,warrant,future,longorshortposition).
Theanalystoramemberoftheanalystshouseholddoesnotserveasanofficer,director,oradvisoryboardmemberofthesubjectcompany.
TheanalystscompensationisnotbaseduponHCsinvestmentbankingrevenueandisalsonotfromthesubjectcompanyinthepast12months.
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CitadelCapital
Privateequity|Egypt
5December2011
6
HCdisclosures:
Companyname:CitadelCapital Disclosure:3,4,6,8,9
1. HCoritsaffiliatesbeneficiallyown1%ormoreofanyclassofcommonequitysecuritiesofthesubjectcompany.
2. HCoritsaffiliateshavemanagedorcomanagedapublicofferingofsecuritiesforthesubjectcompanyinthepast12months.
3. HCoritsaffiliateshavereceivedcompensationforinvestmentbankingservicesfromthesubjectcompanyinthepast12months.
4. HCoritsaffiliatesexpecttoreceiveorintendtoseekcompensationforinvestmentbankingservicesfromthesubjectcompanyinthenext3
months.
5. HChasreceivedcompensationforproductsorservicesotherthaninvestmentbankingservicesfromthesubjectcompanyinthepast12months.
6. Thesubjectcompanycurrentlyis,orduringthe12monthperiodprecedingthedateofdistributionofthisresearchreportwas,aclientofHC.
7. HCmakesamarketinthesubjectcompanyssecuritiesatthetimethisreportwaspublished.
8. HChasreceivedcompensationforproductsorservicesotherthaninvestmentbankingservicesfromaffiliatesofthesubjectcompanyinthepast
12months.
9. Affiliatesofthesubjectcompanycurrentlyare,orduringthe12monthperiodprecedingthedateofdistributionofthisresearchreportwere,
clientsofHC.
TheHCratingsystemconsistsof3separateratings:Overweight,Neutral,andUnderweight.
Theappropriateratingisdeterminedbasedontheestimatedtotalreturnofthestockoveraforward12monthperiod,includingbothshareappreciation
andanticipateddividends.
Overweightratedstocksincludeapublished12monthtargetprice.Thetargetpricerepresentstheanalystsbestestimateofthemarketpriceina12
monthperiod.HCcautionsthattargetpricesarebasedonassumptionsrelatedtothecompany,industry,andinvestorclimate.Assuch,targetprices
remainhighlysubjective.
Thedefinitionofeachratingisasfollows:
Overweight(OW):Estimatedtotalpotentialreturngreaterthanorequalto20%
Neutral(N):Estimatedtotalpotentialreturngreaterthanorequalto0%andlessthan20%
Underweight(UW):Estimatedtotalpotentialreturnlessthan0%
NR:NotRated
SP:Suspended
StocksratedOverweightarerequiredtohaveapublished12monthtargetprice,whileitisnotrequiredonstocksratedNeutralandUnderweight.
DistributionofHCratings
Rating Count Percent Percentprovidedinvestmentbankingservicesinpast12months
Overweight(OW) 38 52.78 0.00
Neutral(N) 27 37.50 0.00
Underweight(UW) 7 9.72 0.00
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CitadelCapital
Privateequity|Egypt
5December2011
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CitadelCapitalasof01/12/2011
Date Recommendation Targetprice
16/11/2009 NotRated EGP18.83
09/12/2009 Overweight EGP14.83
19/04/2010 Overweight EGP13.14
28/02/2011 Overweight EGP9.86
06/07/2011 Overweight EGP6.88
16/11/2011(1)
Overweight EGP6.88
05/12/2011 Overweight EGP4.19
Note:(1)Changeofanalyst
AllHCemployeesanditsassociatepersons,includingtheanalyst(s)responsibleforpreparingthisresearchreport,maybeeligibletoreceivenonproductor
servicespecificmonetarybonuscompensationthatisbaseduponvariousfactors,includingtotalrevenuesofHCanditsaffiliates,aswellasaportionofthe
proceedsfromabroadpoolofinvestmentvehiclesconsistingofcomponentsofthecompensationgeneratedbydirectors,analysts,oremployeesandmay
affecttransactionsinandhavelongorshortpositionsinthesecurities(optionsorwarrantswithrespectthereto)mentionedherein.
Althoughthestatementsoffactinthisreporthavebeenobtainedfromandarebaseduponrecognizedstatisticalservices,issuerreportsor
communications,orothersourcesthatHCbelievestobereliable,wecannotguaranteetheiraccuracy.
Allopinionsandestimatesincludedconstitutetheanalystsjudgmentasofthedateofthisreportandaresubjecttochangewithoutnotice.HCmayaffect
transactionsasagentinthesecuritiesmentionedherein.
Thisreportisofferedforinformationpurposesonlyanddoesnotconstituteanofferorsolicitationtobuyorsellanysecuritiesdiscussedhereininany
jurisdictionwheresuchwouldbeprohibited.
Additionalinformationavailableuponrequest.
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