EUR 21.58 For Business Accounts Only

Too cheap to ignore; Reiterate Overweight

Bumpy short-term outlook, but worth buying on yield. Higher polypropylene (PP) prices (+17% in 1H18 to USD1,300/t) and increased competition in export markets, mainly from Turkish players following the devaluation of the TRY, will weigh on 2H18-19e margins, in our view. We cut our TP by 20% to EGP16.0/share, on lower exports and higher PP prices pressuring margins and working capital. The stock remains compelling on valuation (2019e P/E of 6.9x vs. peers’ 12x), and offers the highest dividend yield within our research coverage (c17% in 2018e). We suspect OWC might exit the MSCI Small Cap index in the next SAIR Nov-18, as it falls below the required market cap threshold. However, we see limited outflows, given the stock’s low weight within the index.

Debt well-managed. As of 2018, OWC converted its entire debt (EGP2.5bn as of 1H18, net debt/EBITDA of 1.2x) to be FCY-denominated. This will continue to shield the company from the high cost of funding on the EGP; the majority of OWC’s debt is to finance working capital. The company plans to add 6-7 new looms in 2019e for cEUR800k/loom, increasing total capacity by c3%. We assume an additional 5 new looms p.a. over our forecast horizon, to cater to volume growth (c3.5% p.a.).

Locally resilient, overseas business struggling. We expect 2019-20e local sales to outgrow exports, by virtue of demand nature, as local demand stems from primary home demand (new marriages) rather than refurbishment, and on pricing power. Showroom (50% of local sales, +18% in 1H18) expansion (+12 in 2018 to 249) should further widen OWC’s reach in the local market. A weaker TRY (c70% of US rug imports is from Turkey) will increase competition in the US (c36% of sales). We look for revenue growth of 4% in 2019 (local +13%, export -1%), 3% of which is volume-driven (local +4%, export +2%) and 1% on pricing (local +9%, export -3%).

Oil prices and export rebate key watch factors. PP is highly correlated to oil prices (c55% of OWC’s CoGS is PP-linked). We assume 2% higher PP prices in 2019, falling by 3.3% in 2020, in line with market consensus. Each +/-1% in PP price yields -/+7% in our 2019e earnings. The FY19 fiscal budget factors EGP4bn in export rebate vs. EGP2.6bn in FY18. We remain cautious, nonetheless, given OWC’s slow pace of export rebate collection in 1H18. We assume 2019-22e rebate proceeds-to-export sales of 3.5% (c16% of EBITDA) vs. the historical run-rate of 5%. (c20% of EBITDA).