• PP cost relief, better rebate collection drive bottom line; reiterate Buy Earnings rose 39% Y-o-Y in 2Q16 to EGP159.0mn as margin expansion, on lower commodity prices, finally began to appear and rebate collection improved. Excluding a EGP12mn tax provision and FX gains of EGP1mn, recurring earnings grew 56% Y-o-Y and beat our forecast by 11%. We remain buyers on valuation (c5x 2016e P/E) and expect sustained earnings growth in 2H16 on further benefits from low commodity prices and EGP devaluation. However, as noted in our last update, a key risk to margins is continued strong export competition that has given big-box retailers bargaining power, forcing producers like OW to pass-on the impact of lower PP costs.
• Revenue growth sluggish, up 1% Y-o-Y as exports remain pressured Local carpet & rug revenue (37% of total) rose 5% Y-o-Y on a 7% price increase (in early May as well as another round in July) to partially pass on higher USD costs to consumers. Volumes fell c5% as it completed the reconstruction of part of its local plant in June that saw a staggered halt of six looms (over 8 months) that has partly impacted volumes. The export carpet & rug revenue (31% of total) decline decelerated to 10% (vs. 19% Y-o-Y in 1Q16) as volumes fell 22% while average prices grew 15%. US exports remained a bright spot (+3%, 28% of total ORWE revenue), on new deals with major home-furnishing stores and burgeoning online sales. Had it not been for the 37% decline in sales of yarn and discounts offered to export customers, its export performance would have been better.
• Gross margin gains for first time in six quarters, rebates strong The gross margin widened c3.2pp Y-o-Y to 15.3%, on commodity benefits and product mix; OW also appears to have benefitted from devaluation. We expected a flattish margin as it had to pass on PP price drops to export clients due to fierce competition. EBITDA (including export rebate) rose 35% with the rebate improving nearly fourfold (c7% of exports versus c2% in 2Q15) on collection of delayed subsidies (related to the period prior to December 2015). SG&A costs grew c12% Y-o-Y likely on support to local sales growth, in our view.

Nada Amin
Hatem Alaa, CFA