• 2016 earnings estimate looks conservative on margin; reiterate Buy Recurring earnings surged to EGP955mn (+64% Y-o-Y, 94% Q-o-Q), exceeding our estimate of EGP450mn on stronger cables and turnkey projects performances. Revenue grew 25% Q-o-Q and adjusted EBITDA 71%, supported by 6.3pp margin expansion to a record-high of 23.3%. The company booked an FX loss of EGP74mn vs. a gain of EGP267mn (on FC turnkey receivable) in 1Q16; hence, net income was EGP873mn vs. EGP758mn in 1Q16. We will likely revise our 2016 forecasts (recurring earnings of EGP2.0bn vs. EGP1.45bn in 1H16) mainly to factor in its 2Q16 margin surprise. We reiterate our Buy rating as it continues to benefit from power capacity expansion in Egypt, it recently won several projects in Egypt and the GCC, trades at low P/E, and offers a high single-digit dividend yield.
• Robust cable volumes sustain; GP/tonne expands likely on mix & FC Wire and cable revenue grew 10% Q-o-Q; cable volume remained at a solid level and GP/tonne expanded 16% likely on product (high voltage cables) and market mix as well as positive EGP devaluation impact. Cables volume growth has been notably strong since 4Q15, which we had assumed would subside in 2Q16 (on lower orders from the GCC) but obviously this has not materialised. Electrical products revenue and gross profit were flattish Q-o-Q with no major surprises in performance and backlogs.
• Turnkey projects positively surprise, Egypt fast track boosts margin Turnkey revenue grew 70% Q-o-Q on key projects in Egypt (fast track and Beni Suef), which beat our estimate as we expected deliveries’ acceleration in 2H16. Gross margin surprised at 34.5% vs. 24.2% in 1Q16 (on reduced contingencies/ costs of Egypt’s fast track project), well above management guidance of below 20% for 2016. The backlog remains solid at EGP20.4bn at end-June; Elsewedy won in June two transmission line contracts in Egypt (delivery over six months) for EGP671mn and a QAR80mn (EGP191mn) substation in Qatar (14 months). July-to-date, it has signed a USD190mn (EGP1.7bn) transmission line in Egypt (18 months) and a SAR80mn (EGP190mn) substation in Saudi Arabia (15 months).

Wafaa Baddour, CFA