Local rise not enough to offset exports drop
Revenues came in at EGP2,977 mn, compared to EGP2,782 mn recorded in 3Q21 and EGP3,247 mn recorded in 2Q22 (+7.0% YoY, -8.3% QoQ). The decline in revenues came solely from the decline in export revenues as global inflationary pressures’ marks could be witnessed on consumers’ spending behaviors being directed further towards the necessities. Export revenues recorded EGP1,847 mn (-2.6% YoY, -13.7% QoQ), driven by the decline in volumes by 28.5% QoQ and 22.4% YoY, despite the increase in selling prices by 36.2% YoY and 11.3% QoQ. Local revenues climbed by 27.5% YoY and 2.1% QoQ to reach EGP1,130 mn for the quarter, backed primarily by the rise in ASP by 27.1% YoY and 12.9% QoQ and secondarily by volumes where they climbed by a minimal 0.3% YoY and dropped by 9.5% QoQ.
Local sales were the quarter’s main form of support by recording EGP1,130 mn, a rise of 27.5% YoY and 2.1% QoQ. The rise came backed by the incline in ASP by 27.1% YoY and 12.9% QoQ, while volumes’ contribution to the rise was minimal by growing 0.3% YoY yet dropping by 9.5% QoQ. The woven segment remains the biggest contribution to local sales by 83% for the quarter at EGP936 mn, an increase of 27.7% YoY and 7.1% QoQ, supported by the rise in ASP rather than volumes. The tufted segment was not as fortunate, achieving EGP127 mn, climbing by 49.8% YoY, but dropping by 6.9% QoQ. The sequential drop came by the deterioration in selling volumes at a pace higher than that of the increase in prices. The non-woven felt segment revenues came in EGP48.6 mn, rising YoY by 4.6% but dropping QoQ by 21.4%. Volumes dropped on both the annual and sequential levels by 24.6% and 17.5%, respectively, while ASP climbed by 38.7% YoY and dropped QoQ by 4.7%.
Export segment was the main reason in the decline in total sales for 3Q22. Despite ASP increasing annually and sequentially across all export segments, the drop in volumes due to changes in consumer behavior was of a faster pace and stronger momentum. Export woven segment sales recorded EGP1,412 mn (+4.8% YoY, -14.9% QoQ), volumes dropped by 20.3% YoY and 24.0% QoQ, while ASP rose by 31.5% YoY and 12.0% QoQ. The tufted segment took the strongest hit by recording EGP365 mn, showing a drop of 21.1% YoY and 6.6% QoQ, backed by volumes declining by 37.2% YoY and 18.5% QoQ, despite the rise in ASP by 25.7% YoY and 14.5% QoQ. Non-woven segment revenues recorded EGP67 mn, a drop of 20.2% YoY and 24.1% QoQ. The decline came despite opening businesses with 12 new clients during the quarter.
9M22 revenues recorded EGP9,488 mn compared to EGP8,397 mn, a rise of 13% YoY. This rise came supported by the local and export segments, where local revenues came in at EGP3,339 mn compared to a previous EGP2,663 mn, a rise of 25.4%, supported by a rise in volumes of 3.0% YoY and a rise in prices of 21.7% YoY. Exports revenues recorded EGP6,150 mn, versus a previous EGP5,734 mn (+7.2% YoY), backed by the rise in ASP by 26.1% YoY, while volumes dropped by 14.9% YoY.
Pressured gross profitability trickles all the way down despite higher export rebates
Gross profit for the quarter recorded EGP255 mn, compared to EGP425 mn in 3Q21 and EGP382 mn in 2Q22 (-40.2% YoY, -33.4% QoQ), leading to a margin of 8.5%, versus 15.3% in 3Q21 and 11.8% in 2Q22 (-6.7pps YoY, -3.2pps QoQ). Such a steep decline came backed by lower selling volumes and a decline in utilization rates, compared to the previous year where the factories were operating at full capacity, leading to a diseconomy of scale state. Also, the rise in raw materials cost had a clear impact on margins as well.
9M22 gross profit recorded EGP993 mn, compared to a previous EGP1,407 mn, a decline of 29.4% YoY. The main driver for the decline during 9M22 is the inflationary pressures driving all cost components by at least 8% YoY. GPM came in at 10.5%, versus 16.8% (-6.3pps YoY).
EBITDA for the quarter reached EGP262 mn, a YoY decline of 38.9% and QoQ by 31.8%. The drop came backed by the trickling down of a weak gross profit level and heightened SG&A expenses to reach EGP149 mn (+13.9% YoY, +1.9% QoQ), with their percentage to sales hitting 5% from a previous 4.7% in 3Q21 and 4.5% in 2Q22. EBITDA margin came in at 8.8%, versus 15.4% in 3Q21 and 11.8% in 2Q22 (-6.6pps YoY, -3.0pps QoQ).
9M22 EBITDA dropped by 30.5% YoY to record EGP993 mn, compared to EGP1,428 mn recorded in the previous period, leading to a margin of 10.5% versus 17.0% (-6.5pps). The drop came on the back of lower gross profitability for the period coupled with higher SG&A expenses.
Net interest expenses climbed to reach EGP42 mn in 3Q22, compared to EGP10 mn in 3Q21 and EGP33 mn in 2Q22. This rise came mainly backed by the translation effect of foreign currency dominated borrowings due to the EGP gradual deprecation, the rise in USD Libor rate, and the rise in working capital financing needs to account for the increase in commodity pricing and supply chain disruptions.
Attributable net profit for the quarter recorded EGP79 mn, below our expectations of EGP99 mn and below the recorded EGP260 mn of 3Q21 (-69.4% YoY) and the EGP211 mn recorded in 2Q22 (-62.4% QoQ), reflecting a NPM of 2.7%, versus 9.3% recorded in 3Q21 and 6.5% in 2Q22 (-6.7pps YoY, -3.8% QoQ). The decline came backed by the trickling down from a heavily-pressured gross profit and heightened net interest expenses, while the rise in export rebates (other revenues) by 115.7% YoY and 68.8% QoQ to reach EGP125 mn was not enough to cushion the fall.
9M22 attributable net profit came in at EGP527 mn, compared to a previous EGP858 mn dropping by 38.6% YoY despite exports rebates being magnified to EGP364 mn, versus EGP84 mn achieved in 9M21. NPM came in at a minimal 0.6% versus a previous 1.2% (-0.6pps YoY).
Debt level recorded EGP5.3 bn by 30 September 2022, compared to EGP4.8 bn in 30 June 2022 and EGP3.4 bn in 30 September 2021. The rise came mainly due to the local currency gradual depreciation and the increase in working capital financing needs. Debt breakdown came in as 56% in USD, 12% in Euro, and 31% in EGP.
Cash and treasury bills came in at EGP2.5 bn (+8.0% YoY, +5.4% QoQ) with a breakdown of 14% in Euro, 67% in EGP, and 19% in USD.
Overweight recommendation maintained by solid 4Q22 expectations
Despite a very weak quarter backed by unfavorable demand due to global inflationary conditions and heightened costs, our upside view on ORWE remains. The local currency devaluation is expected to give export sales a solid push, bringing volumes and values higher, while local revenue is expected to continue its track of increases backed by a diversified market offering and increasing prices. 4Q22 is expected to be a solid quarter for ORWE backed by 1) the devaluation effect to start supporting top-line, 2) large amount of export rebates, and 3) the sale of the group’s China factory occurring during the quarter, supporting bottom-line.
ORWE is currently trading at a FY23 P/E of 4.8x and an EV/EBITDA of 5.8x.