Oriental Weavers (OW) posted 3Q18 results, with headline earnings coming in at EGP96mn, down 12% Y-o-Y (-17% Q-o-Q). However, excluding non-recurring items (net provisions, FX losses/gains and EGP7.5mn income from the partial liquidation of an investment), earnings declined a sharper 21% Y-o-Y (+7% vs. EFGe on higher interest income) mostly as top-line growth was subdued and as margins remained under pressure (mostly on PP costs). Revenue inched down 2% Y-o-Y (in line with EFGe, +1%) to EGP2,566.7mn as total volumes declined 8% Y-o-Y; slight local revnue growth of 4% (35% of total) was offset by weaker export revenues (-5%), mostly on lower sales to key EU client

Headline gross margin contracted for the sixth consecutive quarter (-1.8pp Y-o-Y to 8.9% vs. EFGe of 8.7%), mostly because of a 16% increase in avg. PP prices (now at USD 1,294/tonne) and 43% hike in electricity tariffs. The company’s leverage management supported bottom-line, with interest expense declining 12% Y-o-Y (as the company settled nearly all its EGP debt in 2017) and recorded 85% growth in interest and treasury income (on cash balances, as well as investments in high-yield treasury bills and interest-bearing accounts). OW’s debt is 73.0% in USD, 26.5% in EUR and 0.5% in EGP.

The results set bears no major surprises and continues to illustrate challenges in offsetting polypropylene cost pressures that are compounded by the export volume slowdown (likely also on rising competition) and disappointing local volumes. We remain Buyers of the name as we believe short-term earnings weakness is currently priced in (2019e P/E of 7x) and as the company continues to offer one of the highest dividend yields in the market (16%). (Company disclosure, Nada Amin, Hatem Alaa)

Oriental Weavers: EGP9.15 as of 31 Oct. 2018, Rating: Buy, TP: EGP12.50/share, MCap: USD227mn, ORWE EY/ORWE.CA

Nada Amin
Hatem Alaa, CFA