HC Company: Devaluation of the Egyptian pound in favor of Orient Weavers Company
In a recent report, HC Brokerage presented their evaluation of Oriental weavers forecasting a strong 2024 mainly on higher selling prices and export rebates.
Pakinam El-Etriby, Consumers Analyst at HC commented that: “ ORWE navigated well supply chain disruption caused by the Russia-Ukraine War, in our view: In 2021, the company performed exceptionally well, operating at full capacity and achieving a gross margin of c16% mainly due to pent-up demand following the COVID-19 outbreak and 2020 lockdowns. However, following the outbreak of the Russia-Ukraine War in February 2022, its associated supply chain disruptions led ORWE’s international clients to stock up as a precautionary measure, leading its exports to notably decline by mid-2022, also impacted by the inflationary environment in the US and Europe. This trend continued into 2023; however, towards the end of 2023, exports began to recover gradually, reaching 17.5m sqm in 4Q23 (up c15% y-o-y). In the local market, demand started to recover by the end of 2022 to 12.9m sqm by 4Q22 (up by c21% y-o-y) as traders stocked up to hedge against further price increases following the March 2022 and October 2022 EGP devaluations. Despite the high inflation, local demand remained relatively stable throughout 2023, dropping by only c3% y-o-y to 43.1m sqm. As for polypropylene prices, ORWE’s main raw material making up c26% of its FY23 total COGS, its price fell by c10% y-o-y to USD1,361/ton in 2022 and c22% y-o-y to USD1,062/ton in 2023, despite a c34% y-o-y higher oil prices averaging USD99.1/bbl in 2022, yet it dropped c18% y-o-y to USD81.8/bbl in 2023. We attribute the decline in polypropylene prices in 2022 despite higher oil prices to weak demand and excess supply in the polypropylene grade used in carpet manufacturing, causing the commodity to decouple from oil prices in 2022.”
“We forecast ORWE’s revenue to grow at a 2025–29e revenue CAGR of c11% on higher average selling prices: “ We forecast ORWE’s revenues to grow at a CAGR of c11% over our 2025–29e forecast period, with volumes growing at a CAGR of c5% and average selling prices at a CAGR of c6%. In 2024, we expect ORWE’s local revenue to increase by c28% y-o-y to EGP8.23bn, propelled by c42% y-o-y increase in average local selling prices to EGP212/sqm, following the 6 March EGP floatation, despite a c10% y-o-y drop in volumes to 38.8m sqm. Furthermore, we expect exports to increase c41% y-o-y to EGP15.9bn, representing c66% of ORWE’s total sales, mainly on a c35% y-o-y surge in average exports selling prices to EGP217/sqm, capitalizing on the weaker EGP, and a c5% y-o-y rise in volumes to 73.0m sqm. During 1H24, we foresee a c5% y-o-y decline in export volumes to 32.5m sqm impacted by tensions in the Red Sea and a c15% y-o-y recovery in 2H24 to 40.6m sqm. Accordingly, we estimate a c36% y-o-y increase in total revenue to EGP24.1bn in 2024, primarily driven by a c37% y-o-y increase in average selling price to EGP215/sqm, despite a c1% y-o-y drop in total volumes to 112m sqm. ORWE targets increasing its exports to the US and Saudi markets to c70% of its total production in 2024 from c65% a year earlier, as it targets increasing its 2024 exports to the US market to c36% of total sales from c30% and to c40% within three years. Also, ORWE targets exporting c10% of its total production in 2024 to Saudi Arabia.” El-Etriby added.
We expect ORWE’s gross profit margin to average c14% over our 2025-29e forecast period: “ In 2024, we expect ORWE’s gross profit margin (GPM) to expand to c15% from c14% in 2023, on the higher selling prices, with the 37.4% y-o-y increase in selling price/sqm, exceeding the 36.6% y-o-y increase in average cost/sqm, on our numbers. Our 2024 COGS assumptions imply that c54% of total COGS are USD-denominated, including polypropylene. We assume it will increase by c5% y-o-y to USD1,110/ton in 2024, and also increase by an average of c2% over our 2025–29e forecast period. However, starting in 2025, we estimate GPM to start normalizing and reach 13.6% by FY29e, driven by steady selling price increases averaging only c6% versus an average cost increase of c7% over the forecast period, as given the nature of the industry, falling under consumer discretionary, we believe that demand for the company’s products is sensitive to price increases. We forecast EBIT margin to expand by 1.11 pp y-o-y to 13.8% in 2024, mainly driven by export rebates doubling y-o-y to EGP800m. Over 2025-29e, we expect export rebates to grow at a CAGR of c8%, reaching EGP916m by the end of our forecast period, in line with the Egyptian government’s efforts to offer immediate payments to exporters under its new export rebate program. We expect EBIT margin to average c12% over our forecast period and reach c11% by FY29e. Subsequently, we expect net profit margin (NPM) to increase by c1 pp y-o-y to c11% in 2024 and average c10% over 2025–29e.” Pakinam El-Etriby concluded.
