Bill Gates Is Bullish About This Egyptian Stock

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Billionaire Bill Gates is leading a group of elite investors to invest as much as $1 billion into Orascom Construction (NASDAQOTH: ORSCY), an Egyptian construction and fertilizer company.  Orascom has announced to launch an exchange offer on all of its global depositary receipts (GDRs) for shares in a subsidiary, OCI NV. The offer is backed by a group of investors including Cascade Investment, the investment vehicle of Bill Gates, Southeastern Asset Management, and Davis Selected Advisors.

Fertilizer brings the most income

Orascom, under the management of Egyptian billionaire Nassef Sawiris, is operating mainly in construction and fertilizer activities. The majority of Orascom’s revenue, $3 billion or 54.4% of the total 2011 revenue, was generated from its construction business. In 2011, Fertilizer generated nearly $2.38 billion in revenue. However, the fertilizer business contributed a lot towards Orascom's operating income, about $862 million, whereas the construction business generated only $260 million in 2011 operating income. Geographically, Orascom has done more businesses overseas. The revenue generated from Asia, Europe and other countries accounted for 72% of the total revenue, whereas the revenue from Egypt and Africa represented around 24.8% and 3.7% of the total sales respectively.

And also the fastest growing segment

The fastest growing segment in Orascom has been its fertilizer business. Since 2008, fertilizer business revenue has grown from $644.4 million to nearly $2.4 billion, marking an annualized growth of nearly 40%. During the same period, the construction business revenue has been fluctuating in the range of $3.04 billion to $3.33 billion. In the third quarter 2012, the EBITDA contribution from the fertilizer business has grown to nearly 80% of the total firm’s EBITDA, whereas the construction business generated only 20% of the total EBITDA. Orascom thought that it could grow its fertilizer EBITDA to $1 billion in 2012. As the fertilizer segment has become the significant revenue and income driver of the company, the name “Orascom Construction” doesn’t seem fit anymore. However, it seems that the market is valuing Orascom based on the little-growth construction business. Orascom is trading at $40.60 per share, with the total market capitalization of $8.28 billion. The enterprise value is $10.89 billion. The total EBITDA in 2011 was $1.4 billion. Thus, the market is valuing Orascom at nearly 7.8x trailing EV/EBITDA. 

The deal

The investor group including Bill Gates would acquire all of the company’s shares in exchange for OCI NV shares or $43 per share in cash. The fact that OCI NV would be trading in NYSE Euronext would give the company a lot of advantages. Nassef Sawiris commented that as an OECD listed company, it would substantially lower its borrowing cost, from 14% in Egypt to only 3%. In addition, it would allow the company to get deeper access to capital including the Eurobond market, in order to get to a larger investor base and to increase the liquidity.

Peers comparison

Compared to other peers in the fertilizer business, Orascom’s valuation is in the middle range. Terra Nitrogen (NYSE: TNH) is a smaller company with $4.48 billion market capitalization. Over the past 12 months, Terra Nitrogen has generated $775 million revenue and $557 million EBITDA. Even the revenue growth was only 4.6% within one year, the net income increased 16.1% to more than $300 million. The high growth in net income was due to the low price of natural gas, which was used in fertilizer manufacturing. The market is valuing Terra Nitrogen at 8x EV/EBITDA. Agrium (NYSE: AGU) is the biggest company among the three, with a $16.42 billion market capitalization. Trailing twelve months, Agrium’s EBITDA was $2.6 billion. It is valued the cheapest, at 6.31x EV/EBITDA. Recently, Agrium has been under pressure because its largest shareholder, Jana Partners, has been pushing Agrium to cut costs and spin off its retail business. 

Foolish bottom line

With the strong commitment from Bill Gates and the other two famous value funds, I think Orascom would have a lot of potential in the near future. In addition, the substantial growth of the fertilizer business and a decent valuation are definitely quite attractive to investors. 

hoangquocanh has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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