        Revenues: EGP10.1bn, -7% Y-o-Y, +1.4% Q-o-Q, -21.3% vs. EFGe 
        EBITDA: EGP1.3bn, -19.2% Y-o-Y, -4% Q-o-Q, -9% vs. EFGe 
        Net income: EGP972mn, -35.3% Y-o-Y, -30.7% Q-o-Q, -20.9% vs. EFGe 
        *Recurring earnings: EGP1.26bn, +26% Y-o-Y, -6% Q-o-Q, +3.3% vs. EFGe
       (*recurring earnings exclude FX gains/losses, capital gains and unusually high impairments)
 
Elsewedy Electric (SWDY) announced its 2Q18 financial results, with earnings of EGP972mn (-35.3% Y-o-Y, -30.7% Q-o-Q), which seemingly missed our estimate by a wide margin of 20.9%. However, the results were laden with one-offs, which if excluded would have brought earnings back to EGP1.26bn, in line with expectations (+3% vs. EFGe). These one-offs include: 
        an FX loss of EGP140mn relating to the company’s FX denominated debts, which we did not account for; and 
        higher-than-expected other costs, which mainly included an impairment in receivables of EGP157.5mn (vs. our estimate of EGP64mn). Management attributed the spike in other costs to the adoption of prudent policies, especially on provisions for turnkey project taxation.  
 
On the operational front, SWDY continued to enjoy yet another solid quarter with revenues of EGP10.1bn (-6.9% Y-o-Y, +1.4% Q-o-Q), while GP margins came in at c16.6% from c17.3% in 1Q18. While GP margins were 200bps ahead of our estimates, we attribute that mainly to a slight shift in revenue mix vs. our estimates as the turnkey segment missed on project executions. Below the operating line, SWDY continued to play the carry trade on its EGP cash holdings, which led it to book EGP249mn in net interest income (way ahead of our EGP150mn estimate). This play will likely continue with SWDY as long as interest rates in Egypt remain high. 
 
Overall, the main surprise was at the turnkey segment, while SWDY’s other core segments picked up and supported the group’s performance. 
        Turnkey segment: Executions seemed to be lagging a bit during 2Q18, albeit still in superb levels of cEGP3bn. Despite the lower-than-expected revenues from the turnkey segment, its GP margins remained relatively robust at 19% vs. our c14% estimate. Based on our discussion with management, the execution plans for some contracts were pushed ahead into 2H18, which should enjoy stronger turnkey contributions. 
        Cables division: GP margins/tonne saw a noticeable decline to cUSD1,125/t (-13% Q-o-Q, -36% Y-o-Y). This, however, is in line with our expectations and management guidance for a normalisation in margins to cUSD1,500-1,200/tonne as previous quarters saw inflated margins due to the build-up of low cost inventory (a policy that the company does not implement regularly). 
        Electrical products segment (meters, transformers, and accessories): Volumes were supportive during the quarter, while margins remained relatively higher than initially expected. 
 
SWDY continues to present an attractive investment proposition to us, as it trades at 8x P/E in 2018, with considerable downside protection, given: i) its solid balance sheet; ii) its ability to secure new business; and iii) the fact that c80% of its EBITDA is generated in foreign currency, which mitigates major currency risks. Dividends should also be supportive at a c6-7% during 2018, while the high interest rate environment on the EGP will continue to play in SWDY’s favour throughout the year. Accordingly, we reiterate our Buy rating on the name. 
 
Elsewedy Electric: EGP180.94 as of 14 Aug. 2018, Rating: Buy, TP: EGP230.00/share, MCap: USD2,214mn, SWDY EY/SWDY.CA
Ahmed Hazem Maher, Alaa Saleh