Equity Analysis /

El Sewedy Electric: Neutral performance on shrinking turnkey operations

    Mark Adeeb
    Mai Ayoub

    Revenue down sequentially on turnkey operations

    SWDY reported 1Q19 revenue of EGP11,224mn, up 12.4% y/y and down 7.8% q/q. Top line declined sequentially on turnkey operations as the segment’s revenue declined 30.9% q/q. The GPM deteriorated on a quarterly basis to 16.1% versus 16.6% in 4Q18. Attributable net income came in at EGP957mn, down 31.7% y/y and 35.7% q/q. Bottom line declined on the back of 1) higher operating expense, 2) lower net interest income, 3) lower equity method income, and 4) higher tax expense (33.3% effective tax rate).

    Wires & cables sales grew on fewer inter-company sales

    Wires and cables revenues came in at EGP6,519mn, up 6.6% y/y and 7.0% q/q. Against our expectations and management guidance, sales volume declined 1.9% y/y and 2.3% q/q. Nevertheless, the segment’s revenue grew on the back of fewer inter-company transactions. Looking ahead, the strength in EGP could slow down the segment’s growth and the company’s competitiveness as a whole.

    Backlog provides visibility for 45 months

    Turnkey 1Q19 revenue came in at EGP3,200mn, up 33.0% y/y and down 30.9% q/q. The company’s backlog rose to EGP64bn, which provides visibility for 45 months. Looking ahead, we expect the turnkey segment to be the main driver for growth given that local operations accounted for 91% of the segment’s revenue, whereas Egypt’s contribution to backlog stood at 34%. It is worth noting that 1) strengthening EGP could have a negative impact on the segment’s margins in Africa and the GCC 2) the board has approved EUR42mn from national bank of Greece, USD350mn credit facility from Afrexim bank, USD100mn facility contract with Banque Misr for issuing letters of guarantee in Tanzania, and 3) establishing or acquiring a company in the UAE.

    Reiterate OW; Stock is oversold

    We reiterate our OW recommendation on an unchanged FV of EGP18.94/share. We factor in 1) FY19 revenue of EGP48.5bn, 2) GPM and EBITDA margins of 16.8% and 13.0%, respectively, 3) and attributable net income of EGP4,743mn. SWDY is currently trading at FY19 P/E of 6.6x and EV/EBITDA of 5.1x.