El Sewedy reported EGP 12,082m in revenues for the fourth quarter 2019 (4Q19), down 0.8% year-on-year (YoY) and 7.0% quarter on quarter (QoQ) and announced its consolidated financial results for the full-year ending on 31 December 2019, with revenues up by 9.7% YoY to EGP 46,628.8m. The company's net profit after minority interest recorded EGP 4,021.8m, down by 19.4% YoY and represents a net profit margin of 8.6%. Pharos Research sees that turnkey remains the key driver for growth and surpassed wires and cables in terms of both revenue contribution (contributing 48% vs 40% for wires and cables to total revenue) and margins for 2Q consecutively. The 4Q19 GPM rose 741bps to 24.0%, thanks to turnkey margins which came in at 32.6%, offsetting the weakness in wires and cables' GPM, which recorded 11.5% vs 9.1% in 3Q19 and 15.3% in 4Q18. Attributable net income came in at EGP 1,305m, down 12.3% YoY but up 57.4% QoQ. Pharos said that while they realise that the EGP strength mounts pressure on stock performance, especially if factored in perpetuity, it believes that the current market price factors in any foreseeable strength in the EGP and the stock is currently trading at attractive multiples. "We recommend building positions at the current entry point. SWDY is trading at FY20P/E of 4.9x and EV/EBITDA of 3.8x. The company proposed DPS of EGP 0.8, implying a DY of 6.2%. SWDY is currently our top pick among industrials given the recent decline in stock price," it added. Pharos recommends SWDY as overweight with a Fair Value EGP 15.50. Elsewedy's CEO Ahmed Elsewedy said, "After a challenging year, 2019 marked a return to growth for Elsewedy, with revenues up by 9.7% YoY to EGP 46.6bn, which trickled down to EBITDA growth of 6.2% YoY to EGP 6.4bn. Our growth was particularly pronounced during the last quarter of 2019, with gross and EBITDA margins up 10.6 and 9.0 percentage points respectively QoQ." He said, "The year also saw a major shift in the contribution of our verticals, with the contribution of gross profit from our turnkey segment surpassing that of our principle business, wires and cables, and the gap between both segments' contribution to revenue becoming narrower by the year. We grew our revenue from turnkey projects by 45.4% YoY through the execution of our ever-growing backlog across Egypt, the rest of Africa and the Gulf Cooperation Council (GCC), enabling the segment to hold its own as an invaluable, principle vertical of our business with very strong growth potential. During the year, we successfully added several new power generation, transmission and distribution and civil engineering contracts to our pipeline and intend to grow the business further, leveraging on Elsewedy's brand and established track record." Naeem Research sees that overall, SWDY's result for the quarter impresses from all angles, the profit beat (exceeding our estimate by 24%), comes mainly on the back of strong margins recorded in the turnkey segment. The segment's margin, rose 19.9pps QoQ and 17.3pps YoY, to 32.6%; the highest, since 2Q16 – impacted positively by the booking of remaining revenues from the Beni Suef power project, the favourable effects of consolidating the solar photovoltaic project in Benban and the renewable energy entities in Greece. The segment's margin exceeded the management's pre-set target of 15% for the full year by 5pps. In addition, the wires and cables segment witnessed a 2.4pps QoQ improvement in gross margin to 11.5%; likely to be driven by a drop in raw material costs (copper, aluminum) and a stronger EGP (up 12% YoY). "Working capital declines by EGP 973m QoQ: As per our calculations, SWDY's net working capital outlay, which had witnessed a large increase (of EGP1.86bn QoQ) in 3Q19, saw a drop of 21% QoQ, amounting to EGP 9.7 bn as of December 2019; as a result, the balance sheet reverted back to a net cash position of EGP 768m (versus net debt of EGP 1.23bn as of September 2019," Naeem reported. While the company's proposed dividend for 2019 has increased proportionally on a YoY basis, with a large cash balance of EGP 9.7bn, its view is that management could be exploring additional investment opportunities pertaining to the turnkey business. Going forward for 2020, Naeem expects SWDY's operating performance to remain upbeat, but with margins to cool off/normalise, as the one-off Beni Suef project impact would not be repeated. Naeem continues to recommend SWDY as a BUY with EGP 17.16/share.
