Today’s Trading Playbook
Amr Hussein Elalfy CFA | Head of Research
KEY THEMES
Large caps rebounded in November, paring most of its October losses. November marked the fourth positive month for EGX 30 and the seventh for EGX 70 EWI so far in 2020. It is also the fourth month in 2020 where both EGX 30 and EGX 70 EWI end in the green. EGX 30 was up 4.1% in November vs. +8.8% for EGX 70 EWI. Meanwhile, Elsewedy Electric [SWDY] held yesterday its Q3 2020 earnings conference call which we attended. Below, please find the key takeaways from the call according to our industrials analyst Dina Abdelbadie:
- Margins improvement: SWDY benefited from higher copper prices, better margins in Egypt, Saudi Arabia, and Algeria and better turnkey margins which are expected to stay unchanged in Q4 2020. SWDY expects revenues of EGP20bn from turnkey projects in 2020 (with expected growth of 10% in 2021 and 2022 each). Also, SWDY plans to trim its SG&A and overheads costs.
- Backlog and new awards: SWDY managed to accumulate EGP48.5bn worth of backlog through end of September 2020 and expects nearly the same level next year. SWDY is keeping an eye on projects inside and outside Egypt, especially water treatment and desalination stations. Total additions to backlog so far stand at EGP12-13bn (with the projects usually taking 2-3 years to complete). SWDY expects to end the year with around EGP15bn in new awards, noting that adding c.USD1bn in such tough conditions is not easy.
- Dividends: SWDY is yet to decide on its 2020 dividends, which will be determined after full-year results are released (perhaps by March). Meanwhile, SWDY expressed interest in expanding its business organically or inorganically, hence its dividend policy will factor in the need for cash to bring on new investments, which according to management, are more valuable than cash.
- Four things not to worry about: First, despite the decrease in its net cash position, SWDY still maintains a good level of debt which will help in any upcoming acquisition. Second, the transformers backlog decreased y/y in 9M 2020 but is expected to grow on a y/y basis by end of year. Third, operations in Tanzania are going well – at a slow pace but acceptable execution rate. Fourth, cable sales volume is expected to decrease by 7% y/y but should rebound in 2021, with collections on track as well.
- Promising Q3 2020 results: SWDY managed to improve its margins and keep a good level of new awards in such a tough year, but also looking for seizing the suitable acquisition opportunities. In view of Q3 2020 results, we are positive and optimistic about Q4 2020 results. We note that SWDY is traded at a TTM P/E of 6.5x and a TTM EV/EBITDA of 3.9x.
POSITIVE
SWDY: We have picked SWDY as one of the deeply-undervalued stocks several times so far in 2020. The first time was back on 6 July when we thought that Q1 2020 results were just a bump in the road, and it has so far proven to be the case. The stock is up 36% since then vs. -1% for EGX 30. The second time was on 16 July when we picked it as the only industrial stock we preferred. Then, we reiterated our call in August on four occasions (1, 2, 3, and 4). Also, we reiterated our call on SWDY early November and two days ago.