Egypt: Elsewedy Electric…Devaluation-led 30% increase


renaissance-capital-logoWe view the Central Bank of Egypt’s (CBE) announcement today to move to a floating exchange rate regime and devalue the official exchange rate to EGP13/$ vs the c. EGP9/$ official rate as a significant boost to Elsewedy Electric’s valuation. The company should benefit from dollar-denominated revenues and the ability to offset weak dollar copper prices. We revise our exchange rate expectations, incorporate the recent buybacks and increase our TP 30% to EGP91/share, from EGP70/share. We reiterate our BUY, as we regard Elsewedy as one of the best proxies in Egypt on devaluation.

Egyptian pound devaluation to 13/$

The CBE has today announced that it has floated the Egyptian pound to EGP13/$ and is moving to a free float of the currency. As we have previously highlighted, Elsewedy Electric is one of the largest beneficiaries of EGP devaluation in Egypt, with turnkey revenue being dollar and euro-denominated vs largely Egyptian pound-denominated costs, currency devaluation inflating receivables and finance income and a weak pound helping to offset weaker dollar-denominated copper prices. Both of these trends support margins.

Blue-sky scenario in place

Given the announcement, we revise our EGP/$ forecasts and incorporate an EGP9.7/$ average exchange rate for 2016 on the back of the official rate for 9M16 and the new $13/$ reality for 4Q16. For 2017 we now assume EGP13/$ vs our previous EGP10.5/$ estimate. This leads us to increase our TP by slightly more than EGP19/share, with the remaining c. EGP1/share contribution coming from the two recent buybacks undertaken by the company in recent months to utilise excess cash in Egyptian pounds.

In our report from 3 October, we highlighted EGP/$ 13.5-14.5 as a blue-sky scenario for the company, implying 18% and 25% potential upside respectively in EBITDA from our base case scenario, and 21% and 28% potential upside on the bottom line. The new official exchange rate now supports our estimates, with the EGP4,981mn EBITDA for 2017 16% higher than our previous expectations and likely to grow 36% YoY, in our view. This implies even more attractive double-digit dividend yields, which we estimate at 10% for 2016 and 12% for 2017, while further currency weakness in 2017 is likely to bring even more upside risk. We show our Egyptian pound sensitivity scenarios in Figures 2-4.

Reiterate BUY, increase TP

We reiterate our BUY on the stock and increase our TP by 30% to EGP91/share, on the back of the favourable devaluation effect and the recent buybacks. We believe that Elsewedy offers great exposure to infrastructure and power sector development in Egypt, as well as the sub-Saharan and Gulf Co-operation Council (GCC) countries, with the company proving its ability to expand its backlog abroad as well as secure projects inside the country. We view Elsewedy Electric as one of the best proxies on today’s devaluation in Egypt.