EUR 94.06 For Business Accounts Only

Egypt construction sector update | Value in a healthy market

Spending carrying on over 2021-23e; “Decent Life” a prioritised area. Infrastructure spending in Egypt is likely to maintain its thrust, as the government extends spending to road, rail, ports, water, and power connectivity (as opposed to mostly power generation over 2014-19). Separate to such EPC opportunities, the government’s “Decent Life” initiative (inaugurated in 2019 but garnering more policy attention as of late) carries an unprecedented EGP700bn budget. Its aim is overhauling basic infrastructure for 58mn residents (c56% of the population) currently residing in significantly under-invested areas.

OW Elsewedy Electric on valuation; FCFF to improve over 2022-24e, meaning stronger balance sheet, rising dividends. Elsewedy Electric offers a decent upside, as a pure valuation call, in light of: i) an attractive valuation (trading on a  2022e P/E of 6.2x, 60% discount to global cables peers), ii) healthy cash flows (FCFE yield of 20.9% in 2022e and 10.4% in 2023e), paving the way for iii) attractive dividend distribution (7.9% dividend yield in 2021e rising to 8.8% in 2022e) and deleveraging (EGP7bn in net debt reduction over 2021-2023e), which, in turn, supports earning stability, despite commodity price normalisation. We favour Elsewedy Electric in spite of its offering a lower upside than Orascom Construction (OC), on better share liquidity (6M average daily value of USD1.83mn vs. USD0.35mn for OC).

OC offers huge upside, but rerating could be delayed. OC offers the highest upside potential and dividend yield (13.6% in 2021e rising to 17.6% in 2022e) in our Egypt coverage universe. The latter is supported by strong FCFE generation (FCFE yield 2022e of 33.4%). OC trades on a 2022e P/E of 3.4x, 76% discount to global construction peers, which we see as highly unjustified. The company’s 2021e cash position solely explains c70% of its current market cap. We reiterate our OW call and raise our TP by 32%, on: i) rolling over our DCF and ii) 25% higher average awards p.a., given the spending momentum. However, we expect the rerating to remain linked to the broader EGX performance and any potential divestments, placing it as a medium-term play.

Elsewedy Electric and OC are currency hedged; Well-positioned to benefit from any regional pickup. We do not factor any potential pickup in the MENA construction market (mainly reconstruction of Libya), leaving it as an upside. Moreover, both companies are hedged against any potential EGP weakness. Lower-than-expected awards are our main downside risk, with every 5% lower-than-expected awards reducing our valuation for Elsewedy Electric and OC by 2.3% and 5.9%, respectively, all else constant.