El Sewedy Electric Company: Energy

THE COMPANY: El Sewedy Electric Company is a fully integrated energy-solutions provider, manufacturing and selling integrated energy products and services in seven energy segments. The company has 30 production facilities in 14 countries. It sells its products in 110 countries and caters to the infrastructure, industrial, commercial, and residential markets. El Sewedy Electric consolidates itself into three lines of business:

• Wires and cables, with a total annual capacity of 266,200 tonnes, is the company’s main pillar, contributing about 57% of the group’s gross profit;

• Electric products, which covers metres (4.75m-unit capacity), transformers (13,350-MVA capacity), wind turbines and other electrical products, including ceramic insulators, and explosion-proof products, contributes approximately 21% of gross profit;

• Turnkey, which involves the delivery of electricity-generating assets and transmission and distribution networks on an engineering, procurement and construction basis, had a backlog figure of LE4.5bn ($640.35m) as of December 2012 and contributed roughly 21% of gross profit.

DOWNTURN: Despite the relative resilience that El Sewedy demonstrated, the Arab Spring has clearly taken a toll on operations, with 2012 representing its most challenging year in at least two decades, according to management. As far as the company’s cable business is concerned, sales to Libya (13% of group sales before the Arab Spring) were more than halved, assets in Syria (9% of capacity) were operating at a utilisation rate of 20%, those in Yemen (4%) ran at 10%, and volumes in Sudan (4%) dropped 30% year-on-year (y-o-y) as the company moved to cash sales.

El Sewedy managed to largely maintain its volumes, but this came partially at the expense of margins, with the segment’s gross profit dropping a cumulative 15% since 2010. The turnkey division also suffered from project delays in Africa, which saw the segment’s gross profit drop 31% from its peak in 2011. At the group level, the company underwent some receivables clean-up, charging a record LE153m ($21.77m) to its income statement, which led earnings before interest, taxes, depreciation and amortisation (EBITDA) to drop 34% y-o-y to LE690m ($98.19m). Meanwhile, the company’s bottom line fell 77% y-o-y to LE117m ($16.65m) as it recorded LE97m ($13.8m) in foreign exchange losses from the devaluation of the Sudanese and Syrian currencies. As of December 2012, El Sewedy’s net debt stood at LE3.86bn ($549.28m), with a LE1.19bn ($169.34m) cash balance, which implies a net debt-toEBITDA ratio of 3.75x.

DEVELOPMENT STRATEGY: Management took a number of strategic decisions in 2012, which it says should impact the company positively going forward. These included improving operational efficiency; cutting down on capital, selling, general and administrative expenses; focusing more on profitability; hedging against currency exposure; and expanding into new markets.

After a couple of challenging years, we believe that the company’s earnings have largely bottomed out and that the worst is already behind us. Although there is still a potential downside in Egypt, we forecast double-digit growth in Algeria and Saudi Arabia, a partial recovery in Libya, and a resumption of exports to Iraq on a $56m contract awarded in September 2012. Moreover, we see a strong case for margin improvement, with high-margin countries like Libya, Iraq, Algeria and Egypt accounting for 70% of incremental cable sales over the coming five years. Another area of improvement should be the transformers segment, with the company having acquired the certifications needed to do business in Saudi Arabia, Kuwait and some African countries in 2012. We also remain positive on the turnkey division on the back of continued power spending due to either strong demographics (in countries like Egypt and Saudi Arabia) or low electricity access (in countries like Zambia, Cameroon and Ghana). Both Libya and Iraq could offer considerable upside risk to our numbers, with the latter planning to add 22 GW of generation capacity across the country by 2015.