Oriental Weavers: Valuation update – Recovery unlocks value despite higher polypropylene prices

  • Upgrade FV to 8.75 and recommendation to Overweight
  • Demand recovery supports export segment revenues and, to a lesser extent, local segment revenues
  • Export rebates constitute a significant portion of our valuation

Upgrade FV to 8.75 and recommendation to OW

We update our valuation on ORWE and revise our FV to EGP8.75/share (from EGP8.00/share) and change our recommendation to Overweight (from Equalweight) with an upside of 25%. We increase our FV to factor in recovery in the local and export markets as ORWE adapts to the market changes caused by the pandemic. Sales are expected to be solid in 2021, supported by exports revenues, with secured orders received through 3Q21. On the other hand, hikes in global polypropylene prices limits ORWE’s margins. However, it is noteworthy that the improvement in revenue assumptions has a greater effect on the fair value of ORWE more than that of increasing polypropylene prices. ORWE is one of the consumer sector’s dividend plays, and we forecast a dividends payout ratio of 80% for 2021 and 2022 and 70% for 2023, 2024, and 2025. This will result in dividends of approximately EGP0.7/share in the next five years with dividends yield of around 10-11%. ORWE is currently trading at a FY21 P/E of 7.9x and EV/EBITDA of 4.8x.  

Demand recovery supports export segment revenues and, to a lesser extent, local segment revenues

Export revenues recovered during 2H20 with a faster pace than local revenues with demand increasing more than expected as people spent more time shopping from home. ORWE had a huge flow of orders coming in 3Q20 and 4Q20 that resulted in having utilisation of the machines and productivity that almost reached levels of 90-95% and this has been reflected on the order flow from different markets in the world of extending with delivery dates to the end of 2021. Online sales, which represent 20% of export sales, witnessed a major uptrend with increased consumer demand for home improvement. However, relative appreciation of the EGP has softened the increase in this segment’s revenues in EGP-terms. According to our estimates, export revenues will reach EGP6.6 billion in FY21 (up c.16% from our previous estimate) and will reflect a 5-year CAGR of c.2%, driven by a c.1% average selling price CAGR and c.1% volume CAGR.

We remain conservative regarding growth of local market in 2021 as we expect a gradual slow growth. Accordingly, we lower our local revenues estimate slightly for FY21 by c.4% to EGP3.5 billion with 2020-2025 CAGR of c.6.6% (vs. the historical 5-year CAGR of c.4.6%), driven by a 5-year average selling price CAGR of c.3.5% and 5-year average volume CAGR of c.3.0%.

Export rebates constitute a significant portion of our valuation

Export rebates yield a value of EGP3.80/share, which constitutes c.43% of our FV of EGP8.75/share for ORWE. Accordingly, any changes in the existing export rebate program will have a significant effect on our valuation.

Margins are pressured as polypropylene prices surge

Margins jumped to 13.8% in 2020 as the company capitalised on lower polypropylene prices which averaged USD1,026/MT in 2020. However, starting from 2021, polypropylene prices surged due to strong market sentiment, high demand, and higher import offers from overseas supplier. Consequently, we expect polypropylene prices to increase by 32% YoY in 2021 to USD1,350/MT, in-line with ORWE’s budgeted PP prices, then we expect it to drop by 5% to USD1,281/MT in 2022 and stay stable at this level for perpetuity. This will result in GPM dropping by 3pps to 10.8% in 2021. Then, we expect GPM to gradually increase from 10.7% in 2022 to reach 11.6% in 2025 as PP prices stabilise and product mix improves along with economies of scale.

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