Topline Growth Bounded by EGP Appreciation
ORWE’s revenues for FY19 came in at EGP10.1 billion (-2.6% YoY) owing to the -5.0% YoY decline in EGP-denominated prices and 2.5% expansion in volumes. On a quarterly-basis, topline amounted to EGP2.5 billion, up 8.7% QoQ but down 9.1% YoY, largely reflecting the sequential decline and annual expansion in export sales for the quarter.
Local Sales came in at EGP930 million in 4Q19, up 1.1% QoQ and 4.8% YoY. Annual local sales grew despite a -1.1% volume drop due to higher demand for grade A & B woven carpets where local ASP was hiked by +5.9% YoY. Quarterly, local revenues expanded slightly on the back of 1) more traffic in local showrooms as a result of the ‘buy one get one free’ offer introduced in November 2019, 2) a bigger retail outlet footprint (58% of local sales) through the addition of 12 new showrooms in 2019 and 3) a general shift towards more premium-grade A & B woven carpets and tufted pieces.
Export revenues recorded EGP1,620 million in 4Q19, up 13.5% QoQ but down 15.5% YoY. Annual exports declined on flat volumes and -15.5% lower ASP in EGP-terms owing to EGP/USD appreciation (-10.5% YoY in 2019) and in light of the existing pressure on global prices. Quarterly exports recorded growth on account of a +20.9% QoQ volume growth across all segments with more tilt towards the high-volume woven grade C product and a +c.16% QoQ increase in sales value in USD-terms.
Margin Expansion Supported by Lower RM and ‘Other Revenues’
4Q19 GPM came in at 11.8%, +1.0pps QoQ and +3.4pps YoY. GPM grew on lower polypropylene prices dropping to an average of USD1,087/ton in 3Q19 versus USD1,282/ton in 3Q18 (-15.2% YoY) and EGP appreciation. FY19 GPM amounted to 10.6% (+1.3 ppts) on the back of ORWE’s recent cost-cutting initiatives as well as the global decline in polypropylene prices.
4Q19 EBITDA margin recorded 11.3%, +0.3pps QoQ and +2.1pps YoY, growing at a lower rate than GPM owing to higher SGAs/revenues (+0.5pps QoQ and +1.3pps YoY).
NPM expanded to 9.4% in 4Q19, +4.3pps QoQ and +5.7pps YoY, and averaged around 7.6% for FY19. FY19 NPM improved annually on FX gains of EGP146 million (compared to EGP11 million gain in FY18) and lower tax expense (-7.3% YoY) translating into an FY19 effective tax rate of 11% vs 17% in FY18 . It is also worth noting that the net profit figure reported in FY19 includes ‘other revenues’ of EGP316 million, which consist of EGP218 million of export subsidy rebates (3.5% of FY19 export revenue) and EGP85 million reversal of free-zone fees.
Maintain EW on FV of EGP11.75; Stable Dividend Distribution
FY19 volumes came in lower than expected both on the export and local fronts. According to management, new contracts were introduced in 4Q19 and orders from top clients in the US resumed since then, hence the export volumes should start picking up by 1H20. On the local front, we believe Turkish competition will weigh down on ST volumes, since such dumping practices are unsustainable on the long-run. ORWE plans to counter the increased competition through 1) the focus on innovating and differentiating their products from the Turkish competitors, 2) adding 20 new showrooms throughout 2020 (2 already underway by Feb20) and 3) pursuing several hospitality projects principally in the New Administration Capital, along with several prominent hotels and universities. In order to support this, ORWE plans to add three weaving looms, one dying machine, and a wrapping machine for the woven segment, as well as two artificial grass machines, two rolling and backing machines for the tufted segment for a total capex of USD8-10 million.
With regard to 1Q20 margins, management had previously disclosed that effective polypropylene prices have a 3-month price lag, hence we believe 1Q20 margins will show relative improvement, since 4Q19 average polypropylene prices recorded USD1,013/ton versus 1,087/ton for 3Q19 (-6.7% QoQ) and 1,218/ton for 4Q18 (-16.8% YoY). Management budgets a more conservative at USD1,150/ton polypropylene price for FY20, versus the current spot price of USD1,090/ton.
Additionally, ORWE had received a total of EGP218 million in export rebates in 2019, with the current backlog standing at EGP579 million as of Jan 31, 2020. The company had also recently signed two protocols, for OWC and four of its subsidiaries for a collective value of EGP551 million paid over five years in the third quarter of each year, to settle the backlog of export incentives until 30th June 2019. Our current FV already incorporates an export collection of c.EGP135-149 million per year.
ORWE is trading at 2020 P/E of 10.0x and EV/EBITDA 5.5x. ORWE proposed FY19 dividends of EGP1.5/share for FY19 reflecting a dividend yield of 14%. We maintain our Equal weight on a TP of EGP11.75/share.