Earnings Report /
Egypt

El Sewedy Electric: Q4 19 review – Turnkey is the name of the game; reiterate Overweight

    Al Ahly Pharos Securities Brokerage
    20 February 2020

    Turnkey surpasses wires and cables

    SWDY reported 4Q19 revenue of EGP12,082mn, down 0.8% y/y and 7.0% q/q. Turnkey remains the key driver for growth and surpassed wires and cables in terms of both revenue contribution (contributing 48% vs 40% for wires and cables to total revenue) and margins for the 2nd quarter consecutively. 4Q19 GPM rose 741bps to 24.0%, thanks to turnkey margins which came in at 32.6%, offsetting the weakness in wires and cables GPM which recorded 11.5% vs 9.1% in 3Q19 and 15.3% in 4Q18. Attributable net income came in at EGP1,305mn, down 12.3% y/y but up 57.4% q/q. 

    EGP and commodity prices weigh down on wires and cables

    Wires and cables revenue came in at EGP4,776mn, down 21.6% y/y and 2.8% q/q. Top line declined 21.6% y/y on the back of 1) 10.1% annual decline in sales volume, 2) 10.8% strengthen in the EGP, and 3) 4.2% weakness in copper prices. Looking ahead, we expect this trend to continue in tandem with the fx rate movement. Accordingly, the GPM declined to 11.5% vs 15.3% in 4Q18 and gross profit/ton recorded EGP14,123, up 20% q/q and down 31% y/y. 

    Backlog provides visibility for 3 years

    Turnkey 4Q19 revenue came in at EGP5,853mn, up 26.4% y/y and down 10.7% q/q. The company’s backlog declined to EGP58.5bn, which provides visibility for 37 months. The segment’s GPM rose to 32.6% in 4Q19 due to the completion of several projects during the quarter. Looking ahead, we expect turnkey to be the main driver of growth owing to growing awards momentum outside Egypt. 

    Reiterate OW; SWDY trading at attractive multiples

    While we realise that the EGP strength mounts pressure on the stock performance, especially if factored in in perpetuity, we believe that the current market price factors in any foreseeable strength in the EGP and the stock is currently trading at attractive multiples. We recommend building positions at the current entry point. SWDY is trading at FY20P/E of 4.9x and EV/EBITDA of 3.8x. The company proposed DPS of EGP0.8, implying a DY of 6.2%. SWDY is currently our top pick among industrials given the recent decline in stock price.