Elsewedy Electric [SWDY]: More Growth to Come
Geographical diversification to improve profitability
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Elsewedy Electric [SWDY]
Egypt / Industrials / Core Coverage Report
12M PT EGP12.7 (+44%, as of 28 Dec 2020)
Investment Rating: Overweight | Risk Rating: Medium
Key Insights
The worst is already behind
Elsewedy Electric [SWDY] has taken a dive after the COVID-19 outbreak on lockdown pressure locally and globally as well as shorter working hours. This steepened the operating pattern in terms of production and sales. Revenues slipped to EGP31.5bn (-9% y/y) in 9M 2020, and margins followed suit, yet hopes for a good quarter in the end of the year still live on.
Integrated energy solutions provider
SWDY offers several energy products, including cables, which have their use in the turnkey segment, and power generation parts, e.g. transformers and meters. With a strong brand locally as well as globally, SWDY was able to clinch a USD2.9bn contract for the largest turnkey project in Tanzania in a consortium with Arab Contractors late 2018, with a 45% share. Ten percent of the three-year project is completed so far.
Growth potential
SWDY is open for acquisitions across its business lines, which we think would be a good opportunity for the management to capitalize on its long experience and benefit from its presence worldwide. SWDY has a net cash position of EGP18mn in 9M 2020, which leaves a room for borrowing whenever a suitable opportunity arises. Also, expected growth in the high-margin segments, e.g. renewables, should help improve the company’s profitability.
Valuation, Investment Thesis, & Risks
Overweight, 12M PT EGP12.7 (+44%)
We valued SWDY based on an 8-year three-stage discounted cash flow (DCF) model, with a terminal WACC of 15.6%, terminal growth rate of 3.5% and a cost of equity of 18.6%. This approach produced a fair value of EGP10.7/share and a 12-month price target (12M PT) of EGP12.7/share (a 44% upside potential).
Investment thesis
We are positive on SWDY due to (1) its solid growth potential in Africa in terms of infrastructure and energy, in addition to being paid in U.S. dollars (less currency risk) with guaranteed payments (less credit risk), (2) Egypt’s need for electricity distribution and potential exports even if the country becomes self-sufficient in generating electricity, (3) its strong R&D team addressing new opportunities in Egypt by participating in upcoming tenders for smart meters, water desalination, or electric cars batteries, and (4) its potential participation in the reconstruction of Libya, Syria, and Iraq.
Risks
(1) Political risk in African countries, (2) Toughening competition may hinder margin improvement, (3) Currency risk as SWDY is still exposed to FX risk when it comes to having a long position in USD whether in debt or cash.
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Dina Abdelbadie
Equity Analyst
T +202 3300 5716