Share analysis: El Sewedy Electric - Electrical Equipment

El Sewedy Electric 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 15 countries and caters to energy/infrastructure, industrial, commercial, and residential markets. El Sewedy Electric consolidates itself into three business lines:

• Wires and cables, with an annual capacity of 286,200 tonnes. This is the firm’s main line, contributing about 68% to the group’s gross profit;
• Electric products, including meters (capacity stands at 4m units), transformers (capacity is 7400 mega volt amps), and other electrical products, including ceramic insulators, fibreglass poles, and explosion-proof products. The segment contributes approximately 16% to gross profit; and
• Turnkey, which involves the delivery of electricity-generating assets and transmission and distribution networks. This is the firm’s fastest-growing segment, contributing 15% to gross profit.

Strong Performance

Despite booking impairments in its subsidiaries in Yemen and Nigeria and its Spanish wind operations, the company has delivered a year of exceptional performance, with its 2014 gross profit rising approximately 22% year-on-year to LE2.6bn ($354.4m), mainly on the back of stronger wires and cables, and turnkey operations. For the past couple of years, the cables segment has sustained a substantial margin improvement, with the division reporting a gross profit per tonne of LE8457 ($1152) in fiscal year 2014 and LE6497 ($885.50) in fiscal year 2013, up from LE5000 ($681.50) in 2012.

While dollar appreciation has partially contributed to margin expansion, the bulk was on the back of more favourable product and market mixes, which management believes is sustainable. As for the turnkey business, despite lower margins of 14-15%, which was a function of a shift in the company’s project portfolio toward the GCC and Middle East, and higher competition in sub-Saharan Africa, the company witnessed a remarkable pick up in project awards and executions, expanding its backlog to LE13.3bn ($1.8bn) as of June 2015, compelling it to acquire the remaining 25% stake in its main turnkey subsidiary. Besides contributions from an Iraqi power-generation project and work resumption on the company’s sub-Saharan African contracts, the company managed to establish itself as a main contractor in Egypt, which now represents 83% of its backlog.

On the group level, the company continued a balance sheet cleanup, charging LE606m ($82.6m) in impairment and provision charges during 2014 and offloading 16% of its debt balance, which set it on the path for stronger four-fold expansion on the net profit level, despite LE76m ($10.4m) in foreign exchange losses. As of December 2014, El Sewedy Electric’s net debt stood at LE2.97bn ($404.8m), with a LE1.28bn ($174.5m) cash balance.

Development Strategy

Over the past year, the Egyptian government has reiterated a prioritisation of energy-related projects, with the need to double the country’s generation capacity over the coming 10 years at an estimated investment cost of $35bn-40bn. The government has enacted measures to ensure it can meet power demand: allowing for coal-fired power plants, repaying debt to oil companies, awarding oil and gas concessions, securing two floating storage and regasification units for gas imports, driving a shift to smart meters and expanding the independent power project scheme.

We believe El Sewedy is well placed to capitalise on reforms, especially following the award of its first engineering, procurement and construction contract valued at $706m. The company was also awarded a €785m contract for a 4800-MW power plant, signed an memorandum of understanding to develop a 50-MW photovoltaic plant and is mulling another, valued at $1bn, for wind energy in Egypt’s Suez Gulf.