EUR 30.86 For Business Accounts Only

Beyond an Egypt story; Upgrade to Overweight

Compelling valuation post sell-off. Post its MSCI EM inclusion in May-18, SWDY’s stock price continued losing steam, shedding c31% off its peak in April-18. The market’s focus on the normalisation of profits from the high base in 2017, as low-cost inventory depletes, overshadowed the robust re-rating in operations, in our view, with a 2015-2019e NI CAGR of 45% (2015 is a normalised base year prior to one-off inventory gains). The stock trades on a 2019e attributable P/E of 7.7x, reflecting a sizable c30-35% discount to cables and contracting peers, which we view as excessive, given SWDY’s superior returns (36% ROE in 2018e), and decent yields (7.5% 2018e D/Y). We raise our TP to EGP248/share (from EGP165 previously) and upgrade our rating to OW from N on higher turnkey awards from 2018 onwards and stronger performance at the metres segment (1H18 GP +27% y-o-y).   

Strong turnkey prospects in MEA to drive growth. We upgrade our turnkey award estimates for 2018 to USD1.3bn (1H18 accounts for 43% of our FY18 estimate) from USD1bn, reflecting stronger turnkey prospects for SWDY in the GCC (55% of 1H18 awards) and Africa regions in 2H18. This comes as the group capitalises on its strong track record, expanding its bidding space to the MEA region. We estimate a 2018 ending backlog of EGP36.8bn (+23% y-o-y), below management’s latest guidance of backlog exceeding EGP40bn in 2018.

Expect stronger 2H18 as turnkey billings recover. Despite a solid backlog (EGP34.5bn in 1H18, 2.2x 2017 revenue), turnkey revenues dropped 33% y-o-y on invoicing delays, which was negatively perceived by the market (stock lost 9.5% since 2Q18 results announcement). We expect a stronger 2H18, as turnkey billings recover (+102% h-o-h), fuelling higher cables volumes as well, since c43% of the backlog is T&D projects.

Highly liquid balance sheet offers flexibility. SWDY is closing 2018e with a cash balance of cEGP10.6bn, c28% of market capitalisation. In light of the lucrative spread between interest on EGP-denominated T-bills and its USD-denominated borrowing costs (1H18 net financing income c20% of bottom line), the company opts to maintain some leverage (1H18 net debt 0.2x LTM EBITDA). Over the medium-term, we see strong capacity for a positive surprise in dividends (vs. our current 55% pay-out) or share buybacks, unless a compelling growth opportunity presents itself – most likely in the IPP segment (solar or wind) ex-Egypt.