Growth in the rating's profit base should slow to +3.5% in 2022 (CFG Bank)

Growth in the rating’s profit base should slow to +3.5% in 2022 (CFG Bank)

After a jump in profits from the rating in 2021, the cruising speed should slow down sharply this year. The energy, cement and automotive sectors are expected to contribute the most to the decline in profit base.

The year 2022 is marked by high inflation which remained at 5.9% at the end of May. In the first quarter of 2022, listing revenue was partly driven up by a price effect. It rose by 15% during the first three months of the year to 71 billion dirhams.

But the rise in inputs will partly cut into the margins of listed companies this year and will impact, in a certain way, their profitability. In a note published on June 27, the research company CFG Bank presented its outlook for growth in the beneficiary mass of the rating in 2022. After jumping 65% in 2021 to 29 billion dirhams, the Profit mass adjusted for the rating should experience, this year, an overall sluggish growth of +3.5% to nearly 30.5 billion dirhamsaccording to CFG Bank’s expectations.

A heavy global economic context

This comes in a gloomy economic context marked by a sharp slowdown in economic growth, expected at +1% in 2022. It is slowed down in particular by the poor cereal season and persistent inflation. After massive injections of liquidity into stimulus plans and successive key rate cuts to revitalize demand, the logistical disruptions caused a negative supply shock. This shock was caused in particular “with the prolonged disruptions in global production and supply chains, due to China’s pursuit of its “zero Covid” strategy, and the surge in ocean freight prices linked with the container crisis”, emphasizes CFG Bank.

Then came the war in Ukraine, which had a very negative impact on the price of oil, which hit Morocco hard, with almost all of its energy needs being imported. “Inflation should rise to 5.3% in 2022, compared to an average of 1.1% observed over the last ten years”, indicates CFG Bank.

These conditions will impact the earnings of the listing this year. Here is how each sector should see its profit base evolve.

A mass profit driven by Mining and Banking

Taking into account inflation and the significant economic slowdown expected in 2022, the beneficiary mass of the rating should increase by 6.9% this year, according to CFG Bank. “Restated for exceptional items recorded in 2021, mainly including a BCP provision of approximately 1 billion dirhams relating to payments in payment, the adjusted profit base should register an increase of only 3.5% in 2022 compared to 2021. “, However, specifies the research company.

This adjusted profit mass is expected at 30.5 billion dirhams at the end of December. Some sectors will drive profits upwards. This is the case of mining, which will show the greatest improvement in profit mass with +326 MDH expected for a sector total of 1.27 billion MAD. This increase in mining profits will be driven by “the soaring prices of almost all the metals produced and the ramp-up of the mines recently entered into operation by Managem, such as the TRI-K mine in Guinea”, explains the research company.

Banks, according to CFG, will show an improvement of 221 MDH in their profit base to 11.4 MMDH, in particular thanks to the gradual normalization of the cost of risk over the period. “However, our assumptions include a slowdown in the pace of normalization of the cost of risk in 2022 to take into account the potential impact of a difficult national environment on the profitability of the banking sector”, specifies the research company. It is also possible that the rise in rates will have an impact on market activities and the profitability of banks.

The telecoms sector should see its profits increase by 171 million dirhams this year to nearly 6.2 billion dirhams, driven by the improvement in profitability levels and margins in Maroc Telecom’s African subsidiaries, which should more than offset the deterioration in the domestic market.

As for Marsa Maroc, it should see its profits increase from 146 MDH to 746 MDH. This year, the value should benefit from three advantageous factors: “The rise of its new activity, namely transhipment, launched in 2021 in the TC3 terminal of the Tanger Med II port, the increase in cereal imports following the poor agricultural campaign at the domestic level and the increase in hydrocarbon imports. »

Tourism, while overall it should generate a loss of 66 MDH this year, should above all see its profit mass improve by 106 MDH, due to a mechanical improvement in profitability thanks to the opening of borders and the increase in tourist arrivals.

Energy, autos and cement are expected to see lower profits

Inflation and the current economic situation marked by a deterioration in the purchasing power of demand will have a negative impact on certain sectors of the rating.

The energy sector will be the most heavily impacted, according to CFG Bank’s outlook. A drop of 184 million dirhams in profits is expected to nearly 2.4 billion dirhams, due to a sharp deterioration in the margins of hydrocarbon distributors, such as TotalEnergies Marketing Morocco. This decrease is due in particular to “the increase in the price of hydrocarbons internationally and the decision of distributors not to fully pass on this increase”.

The automotive sector should also be negatively impacted in its profits. A decline of 133 MDH in the profit mass is anticipated to 338 MDH in 2022. This is explained by two main factors. First, “the expected decline in sales volumes related to the lack of availability of new vehicles”. Second, “an unfavorable base effect”.

Finally, cement manufacturers should experience a deterioration in their profit base in 2022, with a drop of 100 MDH to 3 billion MAD. The decline should be justified by a fall in demand for cement, and therefore in sales volumes. This follows “the increase in the cost of raw materials which should lead to a slight slowdown in the pace of progress of construction sites”, underlines CFG Bank. The gross margin rates of listed operators, such as Ciments du Maroc and LafargeHolcim Maroc, are expected to decline due to the sharp rise in petcoke prices internationally.

What about the evolution and valuation of the stock market, and the perception of investors in an uncertain environment?

The market anticipates the impact of tight interest rates on the cost of capital

The rating had totally wiped out its 2020 losses in 2021. In the end, the adjusted profit mass in 2022 should almost equal that of 2019 at 30.5 billion dirhams against 30.7 billion dirhams. In terms of valuation, the market is currently trading at the same levels as in January 2020. to the annual results of the previous year published in March of the current year”, explains CFG Bank. This suggests that the market is currently valued, knowing precisely that the profit mass should equal that of 2019 and that the market is trading at the same level as January 2020.

The research company reminds that the market remains anchored in a bearish momentum. She sees this as a sign that investors are anticipating the impact of pressure on interest rates in terms of the cost of capital, and de facto on the valuation of listed companies. “Indeed, although at the end of its last board meeting held on June 21, Bank Al-Maghrib decided to keep the key rate unchanged at 1.50%, the rates on the secondary market for Treasury bills nevertheless increased since the beginning of the year”, notes CFG Bank. The 5-year maturity rate fell from 1.98% at the end of 2021 to 2.36% on June 27, 2022.

In addition to the economic slowdown, the State will have to face a deficit much higher than the pre-Covid period, at 6.3% in 2022 against 3.6% in 2019. “The State will not only have to finance this deficit, in an environment marked by an increase in international rates, but will also have to resort to innovative financing mechanisms such as PPPs”, underlines the research company. In the end, the rise in government financing needs is putting upward pressure on rates. This increase in rates will nevertheless depend on various factors, such as Morocco’s ability to finance itself internationally, the evolution of compensation costs or even the evolution of the key rate by the end of the year.

“A sharp rise in rates will cause the cost of capital to rise, and de facto a decline in valuation levels, further accelerating the bearish direction of the market. Thus, beyond the evolution of the beneficiary mass in 2022, the levels of market valuation will remain dependent on the evolution of rates on the secondary market for Treasury bills”, concludes the note.

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