The trend of lagging volumes and soaring prices continues; annual revenue performance improves as sequential takes the backseat
ORWE reported a top-line of EGP3,247 mn for 2Q22, a rise of 13.8% YoY and a drop of 0.6% QoQ. Export revenues contributed 66% of total revenues at EGP2,140 mn (+8% YoY, -1.1% QoQ), while local sales increased by 27% YoY and 0.4% QoQ to reach EGP1,106 mn. Top-line performance was mainly backed by the increase in ASP by 24.9% YoY and 9.5% QoQ. However, volumes lagged behind noticeably by 8.6% YoY and 9.2% QoQ. 1H22 revenues recorded EGP6,511 mn compared to EGP5,615 mn recorded in the previous period (+16% YoY). ASP recorded during the period soared by 21.7% YoY, while volumes took a step back by declining 4.7% YoY.
Local revenues performance came in the green with EGP1,106 mn, a YoY rise of 27.2% and QoQ rise of 0.4%. Volumes grew by 3.9% YoY and declined by 8.1% QoQ. The main local revenues support came from the heightened ASP by 22% YoY and 9.2% QoQ. Local woven sales came nearly flat QoQ while soaring YoY by 24.8% to reach EGP874 mn for the quarter. Volumes lagged by 1% QoQ and climbed by 7.4% YoY. This was mainly due to significant demand for Grade B products. Tufted products followed the same trend as the woven of climbing YoY by 38.2% and declining QoQ by 8.3%. The annual rise was mainly due to diversifying distribution channels and including prominent local retailers. Tufted volumes rose YoY by 31.3%, dropping by 19.8% QoQ, while ASP climbed by 5.3% QoQ and 14.4% YoY. Non-woven felt sales came positive on both fronts by recording EGP61 mn (+3% YoY, +4.8%); the rise in prices by 27.5% YoY and 23.3% QoQ compensated the volume drop both annually and sequentially by 18.7% and 15%, respectively.
ORWE opened two new showrooms during 2Q22 to bring the total showrooms opened in 1H22 to seven. Management strategy is to increase the number of showrooms across Egypt for the coming three years to maintain the company’s market share.
ORWE’s export revenues recorded EGP2,140 mn (+8.0% YoY, -1.1% QoQ) supported by the increase in ASP by 25.7% YoY and 9.7% QoQ backed by local currency devaluation and implemented price increases, while volumes dropped noticeably by 13.7% YoY and 9.8% QoQ as inflation caused changes in consumers’ discretionary spending behaviour. Most regions continued 1Q22 momentum and recorded positive double-digit performance, while the US lagged. The Arab region continued to be one of the strongest performing markets, primarily from the company’s presence in Saudi Arabia. Arab market contribution to total revenues reached 8% during the quarter compared to 6% in 2021 and 3% in 2020. Also, demand from African countries like Morocco and Libya is rising significantly by 163% YoY. European sales climbed by 16% YoY as flow orders from Germany, France, and the UK strengthen as new clients are secured within the region. The US region sales dropped by 3% YoY as consumers are being pressured by energy and other inflationary pressures. Export woven sales recorded EGP1,659 mn (+10.1% YoY, -3.0% QoQ) as volumes dropped by 11.4% YoY and 15.4% QoQ. Compensating this drop is the rise in ASP YoY by 24.5% and 14.6% QoQ. Tufted exports revenues dropped by 1.6% YoY and climbed by 4.6% QoQ as volumes dropped by 20.9% YoY and climbed by 3.5% QoQ. This drop was due to the fact that the US region forms nearly 50% of tufted export segment revenues and, with the current slowdown in the region, sales are affected.
Bottom line pressured by increasing costs, higher finance expenses, and lower rebates
Gross profit for the quarter recorded EGP382 mn (-23.7% YoY, +7.1% QoQ) as COGS increased at a higher pace than top-line by 21.8% YoY to hit EGP2,864 mn due to the surging raw material costs, leading to a margin of 11.8%, versus 17.6% in 2Q21 and 10.9% in 1Q22. Margins improved sequentially due to the implementation of price increase strategy and enhanced product mix. 1H22 gross proft recorded EGP739 mn, compared to EGP982 mn in 1H21 (-24.7% YoY), leading to a margin of 11.3% versus 17.5% recorded in the previous period.
EBITDA for the quarter recorded EGP383 mn, a drop of 24.8% YoY and a rise of 10.3% QoQ, backed by a rise in SG&A expenses YoY by 18.9% as it and a decline by 3.7% QoQ, leading to an EBITDA margin of 11.8%, versus 17.9% in 2Q21 and 10.7% in 1Q22. 1H22 EBITDA came in at EGP731 mn, declining by 26.8% YoY, reflecting a margin of 11.2% compared to 17.8% recorded in the previous period.
Net interest expenses came in at EGP33 mn, compared to EGP7 mn the previous quarter and EGP5 mn in 2Q21. This was due to translation effect of foreign currency dominated borrowings and hikes witnessed on the USD Libor rate.
Other revenues consisting of export rebates came in at EGP74 mn, compared to EGP165 mn the previous quarter (-55.3% QoQ) and EGP16 mn recorded in 2Q21 (+361.3% YoY).
FX losses for the quarter recorded EGP20 mn, compared to EGP65 mn recorded in 1Q22 and EGP1 mn in 2Q21, mainly due to the further depreciation witnessed during the quarter.
Attributable net profit recorded EGP211 mn compared to EGP299 mn recorded in 2Q21 and EGP236 mn recorded in 1Q22 (-29.4% YoY, -10.7% QoQ). This drop is attributed to the trickling down of lower gross profit, lower export rebates, and increasing interest expenses.
Debt recorded EGP5,174 mn in at the end of 2Q22 (+47.3% YoY, +7.2% QoQ) due to local currency devaluation and the increase in working capital. On 30 June 2022, ORWE’s debt breakdown was 61% USD, 10% Euro, and 29% EGP, compared to 56% USD, 12% Euro, and 44% EGP on 30 June 2021.
Cash and treasury bills recorded EGP2.3 bn at the end of 2Q22 compared to EGP2.5 bn on December 31st 2021 due to payment of dividends. Cash breakdown is 22% Euro, 52% EGP, and 25% USD.
Brighter performance expected with export recovery and weaker currency
Despite heightened costs taking a toll on performance, ORWE would still benefit from the currency depreciation when it comes to export market sales value and, in turn, export rebates. The heightened net debt levels cast shadows over the bottom line amid a high-interest rate environment and weak local currency as 70% of the current debt levels are in foreign currencies. ORWE expects to end FY22 with a total export rebate within the range of EGP470 mn. As raw material prices cool down towards 2H22, and after passing on the increase in prices to the end consumer, profitability and margins are expected to pick up again and raise profitability, with the support of export rebates.
ORWE is currently trading at FY22 P/E and an EV/EBITDA of 4.4x.