Equity Analysis /

Oriental Weavers: Analyst day highlights

    Al Ahly Pharos Securities Brokerage
    18 December 2019

    Results Overview 

    • 3Q19 topline recorded EGP2,347 million, down 9 % YoY and 11% QoQ, dragged annually by export revenues and sequentially by local and export revenues. 
    • During 9M19, revenues remained flat YoY on an EGP-basis at EGP7,583 million while volumes recorded a 4% YoY increase to 86 mn sqm. 
      • This came in as 9M19 local revenues (38% of topline) recorded 4% YoY growth in EGP-terms and a 2% YoY contraction in volume-terms, owing to the slowdown in the local market demand during 2Q19-3Q19, shift towards more premium tufted products and increasing penetration of attractively-priced products from Turkey.
      • Alternatively, 9M19 export sales (62% of topline) declined by 3% YoY in EGP-terms but grew by 1% YoY in USD-terms, dragged by the appreciation of the EGP over the period. 
    • 9M19 EBITA margin came in flat YoY at 11%, accounting for the reversal of free-zone fees of EGP87 million. The company also noted an FX gain of EGP123 million during the period.
    • ORWE collected EGP133 million of export rebates as of September 2019.

    Segment Updates 

    On the exports front

    • ORWE signed a protocol with the Ministry of Finance and Ministry of Trade & Industry for two of its subsidiaries ( Oriental Weavers International and Oriental Weavers Textiles) to settle the export backlog amount of EGP320 million in return for investing c.EGP606 million over the next five years (including EGP248 million capex invested during 2019). ORWE will receive the first tranche worth EGP70 million over the coming weeks, and afterwards the amount will be received on annual installments of EGP64 million every 3Q of the year. The company is also working on settling the backlog of its subsidiaries MAC and EFCO, worth EGP250 million. This adds up to annual inflows of EGP114 million in return for the export rebate backlog of ORWE as a whole.
    • America & Canada is ORWE’s largest export destination by far, reaching 58% of export sales by 9M19. However, the recent political and economic uncertainty in the US market dragged exports to region by 3% YoY during 9M19. Starting 4Q19, export orders from key US clients returned to normalized levels following weaker competition from Chinese competitors, with several new programs awarded during the quarter which will be reflected during 2020. Management is also shifting the focus of the business in the US towards online ordering, whether through ORWE’s own platform or through various online retailers. Likewise, sales to Latin America were affected by the recent protests in Chile, Colombia and Peru. Yet given that ORWE has a strategic partnership with the Latin American chain ‘Sodimac’, management expects a steady inflow of exports to the region. Management sees an overall increase of 5% YoY increase in exports to America in 2019, while 2020 notably includes signing contracts with ‘Home Depot’, ‘Walmart’ and ‘Costco’ for a total of c.USD20 million.
    • Europe constituted the second largest destination for ORWE’s 9M19 exports with 31%, although recording a 3% YoY decline in EGP-terms. ORWE has a comparative advantage to its Chinese counterparts as its sales to Europe are customs-duty free while rivals from China pay 8%. As part of the company’s expansion initiatives in the big European countries, ORWE signed a partnership agreement with French-based distributor ‘NK Sales’ with the aim to achieve twofold or threefold sales growth with the company by 2020.
    • Asia sales  grew by 3% YoY in 9M19, mainly owing to growth in Japan reaching USD6 million YTD and 30% growth YoY. ORWE targets further growth of 30% in Japan in 2020, supported by ORWE’s partnership with Japan’s largest furniture retailer ‘Nitori Co’ and the relative stability of the Japanese market. The company also plans to capitalize on its investment in packaging machines to export to other Asian markets with favorable demographics like Malaysia and Indonesia. ORWE is also positive on the Australian market upon securing a 100 thousand sqft promotion with the popular hardware store ‘Bunnings Warehouse’. ORWE continues to leverage on its 20 year presence in the Australian market and enjoy the minimal customs on shipments. Management sees an overall increase of 15-18% YoY increase in exports to Asian and Australian markets in 2020.
    • Africa and Middle East is one of ORWE’s smaller markets, however ORWE has ambitious plans to increase sales to the region whether through establishing showrooms in those countries or forming partnerships with major retailers/wholesalers.

    On the local front

    • 1H19 saw lower than expected volumes in the Egyptian market owing product dumping from Turkey. Through R&D, ORWE managed to create a comparable product to those of its competitors and introduce 100 new SKUs including an ‘carpet cover’ SKU priced at EGP100/piece to appeal to the grade C segment. To entice further demand, ORWE also introduced price promotions for mass-produced products including a ‘buy-one-get-one’ offer which was met by favorable demand. On the other end of the spectrum, ORWE is also considering the introduction a premium sub-brand in addition of the launch of its online platform to cater for the grade A and A+ segments, hence addressing all customer segments through various offerings. 
    • Although competition from Turkish players served as a key challenge for ORWE during 2019, management sees their practices as unfair (sold at a 20% discount to local products) and unsustainable. This is in the view that the textile market in Turkey is composed of many small workshops that are currently under financial distress owing to the economic situation in the country, and consequently liquidating their inventories at very cheap prices for a limited period of time.
    • Showrooms (52% of local revenues) saw strong growth over 9M19 (+7% YoY) as ORWE managed to increase its showroom network by 12 stores in 2019, thus expanding coverage to the heavily-populated areas like Nile Delta and Upper Egypt. For 2020, management plans to increase showrooms by 30 stores and achieve growth of 8-10% YoY.
    • Contracts and Hotels (3% of local revenues) continued its successful installations, recording a 9% YoY growth during 9M19. Among the projects installed during the third quarter were: VOX Cinemas at the new Almaza City Center, El Galalah resort – Ein El Sokhna, Le Méridien – Cairo Airport, and Blue Sky Nile Cruise – Luxor. This segment is a key beneficiary of the recent megaprojects and the impending move of hotels, banks and government buildings to the New Capital. Management expects sales from this segment to close in at EGP100 million in 2019 and to reach EGP120 million (+20% YoY) and 320 thousand sqm by 2020.
    • MAC management sees an opportunity in the tufted product segment in the US market following the scarceness of cheap labor in the US, the recent tariffs imposed on Chinese products  and the recession in Turkey which are all in ORWE’s favor. 

    2019 and 2020 Guidance

    • According to management, 4Q19 could witness a 8% YoY decrease in topline on account of the recent appreciation of the EGP resulting in a 2019e topline figure of EGP10.1 billion (-2% YoY). However, recent cost-cutting initiatives and the global decline in polypropylene prices should reflect in +2pps gross margin increase to 10% for 4Q19. This would translate into a net profit of EGP700 million in FY19 versus EGP500 to 550 million in FY18 (+27% YoY). 
    • For 2020, management budgets stable topline of EGP10.1 billion and a gross margin range of 10-11%. FY20 should also close in at a profit that is comparable to FY18 levels of EGP550 million, owing to the normalization of earnings following the reversal of free-zone fees taking place in 2019. 
    • While Polyproline prices currently stand at USD980/ton, management estimates for 2020 are more conservative at EGP1,150/ton. ORWE has 3 months stock at the spot price.
    • ORWE could propose dividends of at least EGP1.5/share for FY19, pending 4Q19 results, reflecting in a dividend yield of 14%.