• Earnings broadly in line; long-awaited PP margin impact materialises 4Q15 reported earnings of EGP63.5mn were up 8% Y-o-Y (+95% Q-o-Q). Recurring earnings before taxes and minority (adjusted for provisions as well as FX and investment gains/losses; we use pre-tax and minority figures given distortions to minority interest on one-offs at the 58%-owned subsidiary MAC in 3Q2015) fell 12% Y-o-Y and were broadly in line with our forecast (+3%) as gross margin gains mainly from lower polypropylene (PP) prices (-30% Y-o-Y) were offset by a decline in export rebates. Please note that all Y-o-Y comparisons in our comment are based on adjusted 4Q2014 figures as there was a temporary deconsolidation of Modern EFCO then.
• Revenue down on export challenges, but expected to improve Q4 revenue fell 6% Y-o-Y (-10% vs. EFGe, reported figure +4%) as exports dropped 14% Y-o-Y on weaker volumes from Europe and the US (both c84% of exports) on increased competition and a contract change with a major client. Local revenue grew 5% Y-o-Y as carpet & rug revenue average prices rose 13% Y-o-Y and it added 9 new showrooms in 2015.
• Rebates down Y-o-Y, but up threefold Q-o-Q on better collection Adjusted gross profit rose 6% Y-o-Y and gross margin expanded c110bps to 9.8% after three quarters of pressure on easing PP costs, improvements to operational efficiency and cost cutting. Adjusted EBIT fell 13% on lower export rebates (-48% Y-o-Y), but grew threefold Q-o-Q as it began collecting delayed payments after the old rebate system was reinstated. The EBIT margin lost c60bps Y-o-Y to 8.3% due to the lower rebates.
• Remain Buyers: good FX hedge at low valuation We remain buyers of OW as it is a natural hedge to EGP devaluation (exports c55% of revenue, imported raw materials c50% of CoGS) and we expect an improvement in export-rebate collection that should support earnings growth. A decree was passed in January 2016 cancelling the July 2014 programme (OW had been unable to collect new rebates since), returning to paying companies c6% of their export bill with added incentives for higher growth. Also we believe the stock trades at an attractive 2016e P/E of 7x.

Nada Amin
Hatem Alaa, CFA