• Reported earnings down on provisions & FX; reiterate buy on valuation Reported 1Q earnings of EGP103.3mn fell 29% Y-o-Y, partly deflated by provisions (tax settlement EGP10mn & contingent liability on potential MAC goodwill impairment EGP10mn) and FX losses (EGP50mn, repricing of FC loans and payables). Excluding one-offs, net income of EGP187.1mn, fell only 8% Y-o-Y (-4% vs. EFGe) on export challenges as i) some US clients began producing in-house instead of outsourcing to OW; ii) Europe/GCC clients are still drawing down on inventory; iii) exposure to a key European client is still falling; iv) competition from Chinese and Turkish producers affected tufted prices; and v) OW mostly passed on the decline in polypropylene (PP) prices to export clients, offsetting benefits of EGP devaluation. We remain buyers on valuation (c7x 2016e P/E) but as noted in our previous update, export competition has given big-box retailers bargaining power; producers are forced to pass-on lower PP costs offsetting typical benefits from devaluation.
• Revenue flattish as export revenue tumbles, local revenue solid Total revenue inched up 1% Y-o-Y and was fairly in line (-2%) as: i) local carpet & rug revenue rose 11% mostly on volumes (+12%), supported by new product lines, added capacity, three new showrooms (total of 232 outlets). Avg. prices were flattish, but the market accepted a partial price increase in April to pass on the EGP devaluation impact. Export revenue dropped 19% on volumes (-29%) due to the abovementioned factors (prices +15%). Other revenue (nonwoven felt, fibers/handmade, OW USA and OW China) grew 16% on strong sales at its US-based production facility.
• No margin expansion story again this quarter on export challenges Gross margin was flat Y-o-Y at 13.1%, below our forecast of 15.0% as some expected benefits from the PP price drop and EGP devaluation did not materialise. Accordingly, gross profit was nearly unchanged Y-o-Y (+1%) and came in 15% below our forecast. Also, the MAC plant was operating at less-than-optimum capacity due to export demand challenges that made it difficult to dilute fixed costs, affecting margins. However, the woven segment’s gross margin expanded c150bps with tufted margins being the main drag due to weak exports.

Nada Amin
Hatem Alaa, CFA