Egypt: Elsewedy Electric – 3Q results, 4Q revaluations

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renaissance-capital-logoElsewedy’s 3Q results have already recorded positive trends despite the official Egyptian pound flotation happening only in November. We expect the fourth quarter to be distorted by working capital revaluation, however, absolute profitability is likely to remain at record highs. We revise our model and increase our TP to EGP100/share (from EGP91/share). We retain our BUY rating.

9M16 results and conference call messages

On 16 November, Elsewedy reported robust 9M16 results that exceeded our expectations. The top line increased by 7% YoY to EGP15,427mn, while the gross profit margin improved to 27%, vs 15% in 9M15. EBITDA increased 89% to EGP3,171mn – 78% of our FY16 forecast. The bottom line was also favourable, affected by the Egyptian pound/dollar depreciation, and increased 121% YoY to EGP2,407mn. In terms of the key updates, according to the company the cables division margins could account for 18% vs the usual 12-13% using black market 2Q16-3Q16 exchange rates for FY16. It expects its engineering, procurement and construction (EPC) business margins to be at the highest level ever, namely 20-22% vs 18% in FY15. Elsewedy’s management believes that working capital will stay manageable in 2016-2017, with a strong cash position and open credit lines. The backlog has already been secured for 2016-2018, with an uplift owing to the FX situation and certain projects scheduled to come online.

Working capital revaluation could bring volatility in 4Q

Elsewedy is the largest beneficiary of the currency devaluation, with its dollar-linked turnkey business revenues vs Egyptian pound costs and ability to pass through dollar-denominated copper prices to its final consumers. Thus, we forecast EBITDA in 2016 of EGP3,823mn, a 66% YoY increase – the direct result of Egyptian pound weakness. However, considering that 80% of receivables, 80% of inventories and 50% of payables are denominated in dollars, a working capital revaluation might bring some volatility to the company’s financials in 4Q. We believe this should be comfortably offset by growth in operating cash flow in the long run, however, this might lead to a noticeable increase in net debt by year-end as the EGP4,824mn increase in working capital and EGP269mn in debt (owing to revaluation) would be offset by an EGP1,668mn rise in the value of Elsewedy’s cash position and EGP3,957mn operational cash flow. We forecast a short-term spike in the company’s leverage to a net debt/EBITDA level of 1.68x by YE16, with a recovery to 0.47x 12 months from now.

Reiterate our BUY on Elsewedy, increase TP to EGP100/share

The continuing backlog build-up of EPC projects both in Egypt and abroad, increased exports and the Egyptian pound devaluation (with our base case of EGP13/$ for FY17) leaves Elsewedy well positioned for a profitability and gross profit margin boost and to deliver an 8-13% dividend yield in the medium term, while a further Egyptian pound devaluation could bring further upside risk. On our estimates, should we mark the EGP (17.6231/$) and copper prices ($5,543.5/t) to current market, our fair value estimate would be EGP150/share, implying 87% potential upside and 2017 EBITDA forecast c. 74% higher than current Bloomberg consensus. We reiterate our BUY rating and increase our TP to EGP100/share.