Equity Analysis /
Egypt

Oriental Weavers: Q2 19 – Exports-driven top line; maintain Overweight

    Farida Salama
    Al Ahly Pharos Securities Brokerage
    8 August 2019

    Exports drive annual growth, muted local performance

    Q2 19 revenues recorded EGP2,634mn, up 1.2% qoq and 4.3% yoy (driven mainly by growth in export revenues).  

    Local sales came in at EGP990mn, flat qoq (+8% volumes, -7% ASP) and up 1% yoy (relatively flat volumes and ASP growth). Local revenues were pressured by low seasonality during Ramadan. Local market segments breakdown: 1) woven  sales  recorded 3% YoY growth (+2% volumes +1% ASP), 2) non-woven sales recorded growth of 25% YoY (+19% volumes, +5% ASP), and 3) tufted sales dropped by 6% YoY (-26% volumes, +27% ASP), focusing on higher qualities.  

    Export sales recorded revenues of EGP1,644, up 2% qoq (-4% volumes, +6% ASP) and 7% YoY (+14% volumes, -6% ASP). Annual exports growth came on account of 1) 15% YoY revenue growth in the US (35% higher volumes), 2) 4% higher sales to North and South America post the new tariffs imposed on China including contracts in the woven, non-woven and tufted segments, and 3) European exports recovery backed by the resumption of  shipments to the company’s top European customer (10% of sales), recording 37% yoy growth in Q2 19.

    Healthy margins growth backed by lower raw material costs

    GPM came in at 11.1%, up 2.3ppts qoq and 2ppts yoy. GPM improvement came on the back of: 1) lower raw material cost with polypropylene prices dropping to an average of US$1,187 in Q2 19 from US$1,218 in Q1 19. Polypropylene/COGS dropped to 24% (-7ppts yoy)  and 2) reversal of EGP13.8mn of free-zone fees that were booked in Q1 19. Raw material cost improvement were partially trimmed by higher ‘selling’ cost (+18% YoY), labor  cost (+16% yoy) and ‘other’ costs (+6% yoy). GPM improvement reflected on EBITDA margin to record 12%, up 2.2ppts qoq and 1.3pps yoy. NPM recorded 8.2% in Q2 19, up 0.4ppts qoq and 3.6ppts yoy. Despite provisions increasing 245% yoy, NPM growth remained resistant on the back of a 161% increase in ‘other revenues’, owing to EGP37mn in export rebates and EGP78.2mn of reversed free-zone fees.  

    Total reversed free-zone fees in Q2 19 was EGP92mn out of which EGP13.8mn were reflected in COGS, while the remaining EGP78.2mn were reflected in ‘other revenues’. 

    Maintain OW on FV of EGP14.60

    We believe volumes could pick up in the local market on the back of improved demand and seasonality in Q3 19. Polypropylene prices is on a downward trend since the beginning of FY 19. Hence, we believe that favorable polypropylene prices  could continue to improve margins in Q3 19 (Polypropylene prices dropped to US$1,105 QTD from US$1,187 in Q2 19) . On the export front, ORWE secured a contract in the tufted division with Walmart and Mohawk which could be reflected in Q4 19 figures. Also, the shipments for the company’s top European customer  is expected to remain stable going forward. We also believe that the new tariffs imposed on China still creates an opportunity for ORWE’s growth in the US market.  

    ORWE is trading at 2019 P/E of 8.0x and EV/EBITDA 5.1x. We maintain our Overweight on a TP of EGP14.6/share. ORWE is a dividend play with expected DY of 13.6% in 2019.