Earnings Report /
Egypt

El Sewedy Electric: 1Q21 – Strong start to 2021 led by wires and cables; maintain Overweight

  • Wires and cables steal the show; cables segment reaps the benefits of high commodity prices

  • Two transformer plants acquired in Indonesia and Pakistan

  • Solid results confirm outlook; good entry point created with MSCI exclusion

Wires and cables steal the show

SWDY reported a robust set of 1Q21 consolidated results showing an attributable net profit of EGP700 million, surging by 75.0% YoY but down by 46.0% QoQ due to seasonality. NPM recorded 5.7% (+2.0pps YoY but -3.0pps QoQ). The company had a strong quarter on annual basis despite weaker sequential performance due to seasonality where Q4 is typically the strongest quarter especially for the Turnkey segment.

The key highlight is the Wires and Cables remarkable performance (51.2% of revenue) growing by 33.4% YoY and 13.9% QoQ. The segment

was spurred by rising prices and volumes; however, the turnkey segment performance was blunt on both annual and sequential basis on lower execution during the beginning of the year.

Consolidated 1Q21 revenues recorded EGP12,292 million, up 14.0% YoY but down 17.7% QoQ. Wires and cables segment is the largest contributor to top-line on an annual and sequential basis followed by positive annual growth in the other segments, except for turnkey.

Gross profit recorded EGP1,873 million in 1Q21 (+56.3% YoY but -33.4% QoQ), while GPM stood at 15.2% during the quarter, (+4.1pps YoY but -3.6pps QoQ ). The sequential drop in GPM resulted mainly from lower turnkey (30.6% of total GP) GPM of 12.6% versus 19.7% in 4Q20. 

Wires and cables (43.3% of total GP) saw a sequential drop in margins to 12.9% (+2.9pps YoY and -0.3pps QoQ) despite stronger GP/tonne coming from rising prices due to all-time high Copper prices and surging Aluminum Prices.

EBITDA stood at EGP1,280 million in 1Q21 (+94.3% YoY but -36.1% QoQ), while EBITDA margin dropped to 10.4% (+4.3pps YoY and -3.0pps QoQ). SG&A increased to EGP768 million (+6.2% YoY, +1.1% QoQ), with SG&A/Sales at 6.3% (-0.5pps YoY and +1.2pps QoQ).

The company shifted to a net debt position of EGP1,340 million on March 2021 end from a net cash position of EGP563 million on December 2020 end, versus net cash of EGP2,390 million on March 2020 end.

Cables segment reaps the benefits of high commodity prices

Wires and cables (51.2% of revenue) saw a strong quarter which was both price and volume driven. The segment’s revenues recorded EGP6,290 million (+33.4% YoY and +13.9% QoQ). Prices surged both annually by 15.7% and sequentially by 16.2%, which bode well for gross profit/tonne. Gross profit from the segment recorded EGP812 million (+71.6% YoY and 11.1% QoQ), Gross profit/tonne surged to EGP15,119/tonne (+22.1% YoY and +8.6% QoQ) on surging prices of Copper in 1Q21 (+49.6% YoY and 17.4% QoQ) and Aluminum (+22.4% YoY and +8.2% QoQ). The segment saw a sequential drop in margins to 12.9%, GPM (+2.9pps YoY and -0.3pps QoQ). We expect to see further growth in the segment on booming commodity prices reaching all-time highs and we believe that the GP/tonne is to reach the USD1,100 mark during the year.

Lackluster turnkey performance due to seasonality

Turnkey revenues (37.0% revenue weight) recorded EGP4,547 million (-7.9% YoY and -43.8% QoQ). The muted performance of the segment is attributed to seasonality where Q1 usually has lower execution than Q4. Turnkey GPM dropped to 12.6% in 1Q21 (+4.3pps YoY but -7.1pps QoQ).

The backlog grew to EGP49.8 billion by the end of 1Q21 up from EGP49.0 billion in 4Q20 which ensures the company’s strong awards momentum and pipeline remaining at a healthy position. 

Two transformer plants acquired in indonesia and pakistan 

Earlier this month, the company has announced acquiring two transformer plants in Indonesia (95% of PT CG Power Plant) and Pakistan (100% of Validus Engineering PVT LTD) for a total value of USD60 million (EGP0.4/SWDY share). The addition of both plants will bring the number of transformers factories to six and will more than double the annual production capacity to 30K MVA. We believe that this acquisition is value accretive and will increase the share of the high margin transformers sector (+25% GPM) in SWDY’s top line and gross profit. 

Solid results confirm outlook; good entry point created with MSCI exclusion

We expect the company’s performance to be healthy throughout FY21 on the back of strong sales momentum across almost all segments and promising expansion plans. 

We estimate FY21 top line of EGP51.6bn and bottom line of EGP3,547 million. The company has approved distributing a DPS of EGP0.40/share with a DY of 4.75% and FY20 payout ratio of 28.57%, with a record date of May 19, 2021, and a payment date of May 23, 2021. We expect that the same payout ratio to persist in line with expansion plans in 2021. 

Management announced the retirement of treasury shares previously acquired, totaling 13.4 million shares.

We think that the exclusion of SWDY from MSCI Egypt's Standard Index is an opportunity to seize any mispricing that could occur to the stock which isn’t driven by the fundamentals of the company. SWDY is trading at FY21 P/E 5.2x and EV/EBITDA of 3.7x, compared to the 3-year historical average of 6.5x and 5.5x