• Cut FV, but remain Buyers mainly on compelling valuation We lower our fair value for OW by 29% to EGP10.3/share as we raise our WACC 110bps on a higher Egypt risk free rate and cut our earnings estimates 20% on average mostly on pricing pressures in export markets that are undercutting typical EGP depreciation benefits. We remain buyers (48% upside) as OW has underperformed the market YTD (-13% versus HFI’s +8%) and trades at a 2016 P/E of c7x, below its historical forward of c9x and peers’ c15x. Also, the classic story of OW being a net beneficiary of devaluation could come into play again if the EGP weakens further barring a worsened competitive landscape in export markets.
• Egypt the main revenue driver; exports yet to fully recover Local revenue (c45% of total) growth has been trending upwards to low-double-digits, driven by both volume growth (solid real estate demand) and pricing flexibility (c65% of 2015 local sales through OW’s own 230 outlets). The export front is fairly different, however, on several challenges, including: i) lesser exposure to a major European client that has proven difficult to recoup quickly; and ii) increased competition from Turkish and Chinese manufacturers on TRY and CNY devaluation and excess supply. The US remains the bright spot in exports as OW continues to secure new contracts.
• Competition restraining margin gains; rebate extension an upside risk Historically, OW’s margins have benefitted from EGP devaluation (due to export exposure) and polypropylene (PP; key input cost) price correction. Recently, however, stern export competition has given big-box retailers bargaining power, forcing producers like OW to reflect lower PP costs in discounts (the case in 2015 when gross margin was flattish despite a c30% drop in PP prices). We expect this dynamic to sustain in the short term. In Jan. 2016, Egypt’s export subsidy programme reverted back to the simpler pre-July 2014 formula (after 18 months of delayed payments) to encourage exports economy-wide. Better rebate collection will be the main earnings growth driver in 2016 (+8% Y-o-Y), in our view. Extending the programme until our terminal year (current plan is to phase it out by 2017) would raise our valuation by c30%.

Nada Amin
Hatem Alaa, CFA