Equity Analysis /
Egypt

Oriental Weavers: Local sales drive topline; operational costs pressure margins

    Farida Salama

    Exports Drag Quarter Performance; Local Sales Drive Annual Growth  

    Oriental Weavers (ORWE) recorded topline of EGP2,603 million in 1Q19, down 7% QoQ and up 4% YoY. Annual topline improvement was driven by an 11% growth in local sales (15% higher ASP and 4% lower volumes), while export sales came in flat (8% lower ASP and 9% higher volumes). Quarterly, revenues dipped on lower export sales (4% lower ASP and 12% lower volumes), which constitutes c.62% of total sales value.

    Annual Margin Contraction vs Sequential Expansion 

    GPM came in at 8.8%, up 1.1pps QoQ and down 2.4pps YoY. GPM improved sequentially on lower polypropylene prices (-7.7% QoQ). On an annual basis, COGS/revenues increased by 2.4pps due to increase in wages (+17 YoY) and ‘other expense’ (+43%YoY); offsetting the decrease in polypropylene prices to USD1,125 down from USD1,271 (-11% YoY). Annually, margins contracted further on discounts offered in an effort to offset increased Turkish competition, as well as consumers shifting towards lower margin products in the export market.  

    EBITDA margin settled at 9.9% in 1Q19, down 2.7pps YoY on account of higher S&D expense (+23% YoY), and GPM contraction YoY. NPM recorded 7.7%, up 4pps QoQ owing to an increase in FX gains (+369%), investment income (+16%), and lower income tax (-39% QoQ). However, NPM came in flat YoY (0.2pps).

    Maintain Overweight on FV of EGP14.60

    Despite lower European export volumes, ORWE recorded noticeable growth in the US, Africa and GCC of 6%, 22% and 49%, respectively. According to management, lower export volumes caused by shipment delays for the company’s top European customer (6% out of 1Q19 net sales) are expected to pick up in 2H19.  Also, new tariffs on Chinese imports to the US could push export volumes in the coming period, since Chinese products were their biggest competitor in the US market. 

    On the local market front, we believe improved demand and new products introduced to the middle-income consumer will continue to reflect on 2Q19 figures. Management also mentioned that effective polypropylene prices have a 2-month price lag, hence we believe 2Q19 margins could be relatively stable; based on the 1Q19 average of USD1,125 vs QTD of USD1,180. 

    ORWE is trading at 2019 P/E of 6.7x and EV/EBITDA 4.5x. We maintain our Overweight on a TP of EGP14.6/share.