Equity Analysis /

El Sewedy Electric: We've seen better days

  • Cut revenue estimate by 29% to EGP36.8bn

  • Cut EPS estimate by 56% to EGP0.73

  • Company to maintain DPS of EGP0.8, DY of 10%

Company likely to shelf expansion plans

In light of the current circumstances, we expect the company to reduce or even completely put on hold its expansion plans in an attempt to reserve cash and boost liquidity. Our previous buy call rested on growth driven primarily by 1) the turnkey segment and 2) acquisitions. 

Gross profit/ton to dip below the USD700 mark

We previously expected wires and cable segment to slightly decline in FY20 on the back of strengthening EGP and weakening commodity prices. We now expect the segment’s revenue to decline 24% y/y and gross profit/ton to dip below the USD700 mark and gradually recover to USD1,050 by the end of our forecast horizon.

Single-digit turnkey margins to stay for a while

Turnkey segment is likely to deliver single-digit margins in FY20 and FY21 given that the company has completed fast-track mega projects and the backlog heavy skewness towards GCC and Tanzania. Accordingly, we expect turnkey revenues to decline to EGP16.3bn vs 19.2bn in FY19, the GPM to hover around the 9.0% mark, and awards to stand at USD328mn. While we realize that the government has to invest a sizable amount in the water sector to combat water shortage, we do not account for any investments as the situation remains fluid. Nevertheless, this could boost both awards momentum and margins in FY21.

Cut FV to EGP8.50 and EPS estimate by 56%; Downgrade to Equalweight

We cut our FV to EGP8.50 vs EGP15.50 previously on disappointing 1Q20 results which does not factor in Covid-19 impact. We expect the company’s performance to remain weak throughout FY20 on the back of both weakening sales and margins across almost all segments. We trim our revenue estimate by 29% to EGP36.8bn and our EPS estimate by 56% to EGP0.73. On a more positive note, we expect the company to maintain its dividend payout, thanks to its rich cash position which implies a DY of 10%. SWDY is trading at FY20 P/E10.9x and EV/EBITDA of 5.1x.

Comment on 1Q20 results

SWDY reports 1Q20 disappointing results

SWDY reported 1Q20 revenue of EGP10,779mn, down 4.0% y/y and 10.8% q/q. The GPM dived to 11.1% as turnkey margins dived to 8.3% vs 15.0% in 1Q19 and 32.6% in 4Q19. Wires and cable gross profit/ton stood at EGP12,383 vs EGP14,123 in 4Q19 and EGP22,477 in 1Q19. Attributable net income came in at EGP400mn, down 58.2% y/y and 69.3% q/q. It is worth noting that the negative performance was almost entirely driven by declining margins rather than sales volume.

Covid-19 impact yet to be reflected in 2Q20

It is worth noting that 1Q20 did not include Covid-19 negative impact. Looking ahead, we expect the impact to be fully felt in 2Q20. Accordingly we have trimmed both our sales estimate by 29% and GPM estimate to 11.1%. Additionally, we expect the awards momentum to cool down in 2H20. Accordingly, we factor in awards of USD328mn during FY20. Given current market conditions, we expect the company’s weak performance to weigh down on the stock price throughout FY20.