EFG-Hermes maintained, in a recent study, ELSWEDY ELECTRIC - (SWDY.CA) fair value (FV) at LE29/share (36% upside potential) and reiterate Buy rating. Hermes raised its clean earnings estimate by 14% to EGP570 million (EGP255 million in 2012) to reflect the net impact of: i) higher wire & cable and electrical products profitability; ii) cautious stance on turnkey projects; and iii) increased finance costs on higher debt. Hermes added that, it maintained outlook of a recovery in clean earnings over 2013-15; recovery in Egypt and sustained solid demand in Middle East and Africa are main factors. The unrest in the Middle East is a main risk, should an attack on Syria (and its consequences) affect trade / demand in near markets. Management clarified it can reach Iraq (orders produced in Egypt) through its border with Jordan. We expect gross profit to grow 20% in 2013 7% above our previous estimate) helped by: i) 24% growth in wire & cable purely on margin; with 2H2013 Y-o-Y growth softening to 17% from 31% in 1H2013 as the impact of low-cost inventory and favourable metal accounting diminishes; ii) 27% growth in electrical products on a shift to high-margin products (system meters) and markets in electrometers and higher volume and profitability in transformers. We assume no recovery in turnkey versus our previous 18% growth estimate (previous guidance was 30%) on underperformance of high-voltage projects in Egypt and delays in some projects in Africa. We expect 28% Y-o-Y growth in EBITDA to EGP1,535 million in 2013 on strong margin in 1H2013 and, partly, base effect in 2H2013 (weak 4Q2012). Our reported earnings forecast at EGP321 million reflects the booking of cEGP227 million in impairments on wind segment and Syrian assets in 1H2013. We believe earnings quality should improve in 2H2013 post the provisioning for several idle/risky assets. However, surprises are possible, given Elsewedy's multi-market, segment and currency exposure.
