Earnings Report /
Egypt

El Sewedy Electric: Cables and turnkey revenue growth and margins behind the surge

  • Solid revenue growth along with healthy margins; net debt rises

  • Cables segment reaps the benefits of high commodity prices

  • Turnkey segment recovers; backlog stable

Al Ahly Pharos Securities Brokerage
17 August 2021

Solid revenue growth along with healthy margins; net debt rises

SWDY reported a robust set of 2Q21 consolidated results showing an attributable net profit of EGP890 million (beating our estimates by 24%), surging by 73% YoY and by 27% QoQ. NPM inched up to 6.5% (+1.0pps YoY and 0.8pps QoQ). The company had a strong quarter on both an annual and quarterly basis owing to strong revenue growth seen across all segments except for renewables and meters.

All eyes are on the Wires and Cables segment after it continued to deliver stellar results for the second quarter during the year with EGP6.5 billion in segment topline (48% of overall topline, +84% YoY, +4% QoQ). Revenue was driven by a 40% YoY increase in volumes (-6% QoQ) and GP/tonne rising to EGGP15,817 (+19% YoY and +5% QoQ); which is in line with the GP/tonne that we alluded to back in March in our valuation update. However, the GPM of the segment slowed down to 11.7%, as a result of higher costs for Aluminum cables.

Turnkey came in second with a revenue share of EGP6.0 billion (44% of topline, +33% YoY, 32% QoQ). It is notable that the profitability of the segment was higher than cables with a growing GPM of 13.2% (+6.6pps YoY and +0.5pps QoQ) resulting in 41% of the consolidated gross profits.

The results came stronger than expected on the back of higher copper and aluminum prices in the cables segment and higher execution in turnkey projects with improving margins in addition to the support from the other segments.

Consolidated 2Q21 revenues recorded EGP13,720 million, jumping by 47% YoY and 12% QoQ. The 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 meters and renewables (which we think will revert to the norm next quarter).

Gross profit recorded EGP1,931 million in 2Q21 (+75% YoY and 3% QoQ). GPM stood at 14% during the quarter (+2.3pps YoY but -1.2pps QoQ). The drop in GPM resulted from lower GPM seen in the cables segment (specifically Aluminum cables).

EBITDA stood at EGP1,535 million in 2Q21 (+97% YoY and 20% QoQ). EBITDA margin increased to 11% (+2.8pps YoY, +0.8pps QoQ). SG&A increased to EGP784 million (+23% YoY, +2% QoQ), with SG&A/Sales at 5.7% (-1.1pps YoY and -0.5pps QoQ).

The company widened its net debt position to EGP4,007 million on June 2021 end from a net debt position of EGP1,340 million on March 2021 end, versus net cash of EGP674 million on June 2020 end.

Cables segment reaps the benefits of high commodity prices

Wires and cables (48% of revenue) saw a strong quarter which was both price and volume-driven. The segment’s revenues recorded EGP6,535 million (+84% YoY and +4% QoQ). Prices surged both annually by 29% and sequentially by 17%, which bode well for gross profit/tonne. Gross profit from the segment recorded EGP767 million (+61% YoY and -6% QoQ). Gross profit/tonne surged to EGP15,817/tonne (+19% YoY and +5% QoQ) on surging prices of copper in 2Q21 (+79% YoY and +14% QoQ) as well as those for Aluminum (+57% YoY and +15% QoQ).

The segment saw a sequential drop in GPM to 11.7% (40% of total GP, -1.7pps YoY, -1.2pps QoQ) due to higher costs in aluminum cables and lower margin product and market mix.

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.

Turnkey segment recovers backlog stable

Turnkey revenues (44% of revenue) recorded EGP6,006 million (+33% YoY and +32% QoQ). Turnkey GPM inched up to 13.2% (6.6pps YoY and 0.5pps QoQ) resulting in 41% of the consolidated gross profit. The backlog came muted at EGP49.7 billion by the end of 2Q21 from EGP49.8 billion in 1Q21. Despite high executions, the backlog stands strong which ensures the company’s strong awards momentum and pipeline remaining in a healthy position.

Acquisitions and expansion plans yet to reflect on financial performance

The management noted the following on the acquisitions in the transformers segment:

“The company expects to begin consolidating its latest investment in Indonesia during 3Q 2021 and continues to restructure its operations in Pakistan, a process which is expected to be complete by the end of 2021. On the turnkey projects front, we have built a strong project backlog in the GCC, Africa, and our home market of Egypt. We remain on the lookout for further opportunities to deploy the company’s infrastructural know-how in a profitable manner. To this end, we have established Tanzania as our hub for expanding our product offering in the cables, meters, transformers, and accessories sectors in East, Central, and Southern Africa markets where we see a bright future and exciting growth prospects. In Tanzania itself, we are fully on schedule with works at our landmark Rufiji hydropower dam project.”

Solid results confirm outlook and should catalyse stock performance

We expect the company’s performance to be healthy throughout 2H21 on the back of strong sales momentum across almost all segments and promising expansion plans.

We estimate FY21 top line of EGP51.6bn and the bottom line of EGP3,547 million. However, we think the company is well-positioned to beat our full-year estimates owing to higher-than-expected commodity prices and higher margins coming from the Turnkey segment.

It is worth mentioning that during July, the management signed a contract to acquire 99.25% of “The International Company for Cables” (SPA) shares, with a total transaction value of EGP410 million, leading to a transaction value per SWDY share of EGP0.19.

SWDY is trading at FY22 P/E 5.2x and EV/EBITDA of 4.2x, compared to the 3-year historical average of 6.5x and 5.5x.