Topline in line with estimates; Margins cool off; Net Debt Rises
SWDY reported a neutral set of 3Q21 consolidated results showing an attributable net profit of EGP704 million (below our estimates by 24%, dropping 14% YoY and 21% QoQ). NPM declined to 4.7% (-2.5pps YoY and -1.8pps QoQ). The lacklustre bottom line was a result of weaker margins across all segments except for renewables despite high revenue growth enticed by the wires & cables segment (50% of revenues, +57% YoY, 14% QoQ) and Electrical products (2.3% of revenue, +96% YoY, +80% QoQ).
Consolidated 3Q21 revenues recorded EGP14,874 million, (+31% YoY and 8% QoQ). The wires and cables segment is the key driver of revenue growth due to the soaring Copper and Aluminum prices.
Gross profit recorded EGP1,711 million in 3Q21 (-15% YoY and -11% QoQ). GPM slowed down to 11.5% (-6.1pps YoY and -2.6pps QoQ). The drop in GPM resulted from weaker margins across the board but the slowdown in the cables segment caused the largest hit to the GPM.
EBITDA stood at EGP1.254 million in 3Q21 (-19% YoY and -18% QoQ). EBITDA margin dropped to 8.4% (-5.1pps YoY, -2.8pps QoQ).
The company widened its net debt position to EGP5,940 million by September 2021 end from a net debt position of EGP4,007 million by June 2021 end, versus net cash of EGP18 million by September 2020 end. The rise in debt balance is attributed to financing the company’s working capital mainly inventory and also for financing the acquisitions. Inventory came in at EGP 11,315.3 million as of 30 September 2021, up by 51% from the EGP 7,490.7 million booked at the end of 2020. Accounts receivable hit EGP 13,695 million as of 30 September 2021, while accounts payable rose by 18.4% between year-end 2020 and 30 September 2021, to reach EGP 6,787.6 million.
Cable prices spur segment growth; margins were squeezed on sales mix
Wires and cables (50% of revenue) saw strong revenue growth which was price-driven. The segment’s revenues recorded EGP7,440 million (+57% YoY and +14% QoQ). Prices surged both annually by 53% and sequentially by 10%, which improved gross profit/tonne. Gross profit from the segment recorded EGP633 million (-7% YoY and -18% QoQ). Gross profit/tonne grew to EGP16,273/tonne (+13% YoY, +3% QoQ) on strong copper prices in 3Q21 (+45% YoY but -2.5% QoQ) as well as for Aluminum (+53% YoY and +10% QoQ). However, volumes slightly decreased by 2% QoQ. The segment saw a drop in GPM to 8.5% (37% of total GP, -5.8pps YoY, -3.2pps QoQ) due to higher costs in aluminium and copper cables and lower margin product mix.
Turnkey segment relatively stable sequentially; Backlog grows
Turnkey revenues (40% of revenue) recorded EGP5,907 million (+14% YoY but -2% QoQ). Turnkey GPM dropped to 12.1% (-4.3pps YoY and -1.1pps QoQ) resulting in the highest share of the consolidated gross profit (42%). The backlog grew to EGP57.0 billion by the end of 3Q21 from EGP49.7 billion in 2Q21. Despite high executions, the backlog grew, which ensures the company’s strong awards momentum and pipeline remained in a healthy position.
Acquired transformers companies have been completely consolidated
Management noted that the two recent acquisitions of Indonesia’s CG Power System and Pakistan’s Validus Engineering Ltd, bringing global transformers manufacturing capacity to some 30,000 MVA per year.
Outlook remains positive, Maintain OW
We expect the company’s performance to be healthy throughout 4Q21 and in 2022 on the back of strong sales momentum across almost all segments and promising expansion plans. We estimate FY21 top line of EGP56.8bn and bottom line of EGP3.8 billion and FY22 topline of EGP59.6 billion and bottom line of EGP4.1 billion, however, we think the company is well suited to beat our full-year estimates owing to higher-than-expected commodity prices and higher margins coming from the Turnkey segment in 4Q21.
SWDY is trading at FY22 P/E 4.5x and EV/EBITDA of 3.5x, compared to the 3-year historical average of 6.5x and 5.5x.