Discounted valuation, despite margin pressures
Cut TP by 20%; Maintain OW, on discounted valuation. Elsewedy underperformed EGX 30 by 23% y-t-d. Following a year of margin normalisation, we expect 2019 will still see some pressure on the company's profitability, with growth resuming starting 2020e, as execution ramps up from a sizable turnkey backlog (+92% y-o-y in 2018a). We cut our 2019 and 2020 net profit estimates by an average of 23%, to reflect higher-than-expected margin deterioration and declining interest income, on a sizable one-off 2019e capex bill. Accounting for the expected weakness (2019-20e NI CAGR of -6%), we still find the stock oversold, trading on a 2019e P/E of 8.5x, falling to 7.8x by 2020e (vs. 10x for cable and contracting peers).
2019 is the bottom. We cut our 2019e turnkey gross margin further to 14% (-400bps y-o-y), and 12% in 2020e (vs. 14% for ORAS’s MENA business), to reflect the low-margin nature of recent project additions from the MEA region. This, in addition to the lagged effect of backlog execution (c40% of 2018 backlog to contribute to revenue by 2020e) and lower interest income, should weigh on 2019 bottom line (-18% y-o-y). Starting 2020e, we look for bottom line growth (+9% y-o-y), as turnkey revenues reflect the new level of backlog.
Solid operating cash flow, balance sheet; Tanzania down payment a catalyst. We expect Elsewedy to deliver solid OCF in 2019e (c80% of EBITDA), supported by favourable working capital, on collecting the Tanzania project’s down payment due in 1H19, which should act as a catalyst for the stock, and Egypt’s fast-track project instalments (collectively >USD250mn). Despite higher 2019e capex outlays (2.5x normal run-rate) for the solar plant’s investment cost, the balance sheet remains in good shape (net cash of EGP102mn).
Pursuing growth at the expense of dividends. 2018 payout was cut to 35% (vs. c60% in FY15-17a). Management is considering an acquisition in the cables segment abroad, on which we currently have limited details. Accordingly, management remains cautious regarding dividends.
EI Sewedy Electric establishes and operates a production facility for power cables, transformers, terminators, joint accessories, copper and aluminum terminators either coated or not coated production. Co. is engaged in designing, building, managing, operating and maintaining power generation units and power nets. Co.'s activities can be divided into three segments: Power and Special Cables; Turnkey; Electric Products and Accessories.
CI Capital is a diversified financial services group and Egypt’s leading provider of leasing, microfinance, and investment banking products and services.
Through its headquarters in Cairo and presence in New York and Dubai, CI Capital offers a wide range of financial solutions to a diversified client base that include global and regional institutions and family offices, large corporates, SMEs, and high net worth and individual investors.
CI Capital leverages its full-fledged investment banking platform to provide market leading capital raising and M&A advisory, asset management, securities brokerage, custody and research. Through its subsidiary Corplease, CI Capital offers comprehensive leasing solutions, including finance and operating leases, and sale and leaseback, serving a wide range of corporate clients and SMEs. In addition, CI Capital offers microfinance lending through Egypt’s first licensed MFI, Reefy.
The Group has over 1,700 employees, led by a team of professionals who are among the most experienced in the industry, with complementary backgrounds and skill sets and a deep understanding of local market dynamics.
CI Capital has been recognized as the “Best Investment Bank in Egypt” by EMEA Finance for four years running from 2013-2016, and by Global Finance in 2014 and 2015.
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