14 October 2009 E£72.22 E£72.10

14 October 2009
Recommendation
Neutral*
Target Price
E£72.22
El Sewedy Cables
Current Price
E£72.10
**
Construction and Building Materials | Egypt
Upside Potential
0.2%
Growing Too Fast?
0
Drop in gross profit margin is the ultimate challenge
Although no reduction in guidance figures was made for the cables business, (and we believe in the
continued growth in volumes for the cables division, with new plant expansions in Yemen and Ethiopia),
the declining profitability of this group represented in the gross profit per tonne will mean that El Sewedy
Cables will witness a gradual drop in its gross profit margin as copper and aluminum prices rise. According
to the latest management guidance, the gross profit per tonne of cable of E£4,500 compared to an
average of E£6,400/tonne as of Q2 2009, is a direct reflection of higher competition, as cable sales
penetrate new markets in Saudi Arabia, Yemen and Algeria. Although El Sewedy Cables is expanding into
more attractive businesses, the wire and cables segment still accounts for around 80% of the group’s
revenues, while contributing only 68% of the gross profits.
EPS FY09e
E£5.65
Reuters Code
SWDY.CA
Bloomberg Code
SWDY EY
Market Cap
E£9,531.6 million
US$1,693.0 million
Power to Ethiopia
El Sewedy Cables has announced the establishment of a cables plant in Ethiopia. The announcement
comes only 3 months before the commissioning of the plant, implying that the management guidance on
cables sales volume, CAPEX and debt assumptions already accounted for the establishment of the plant.
As a result, the announcement should have no impact on our valuation. According to El Sewedy Cables
management, most of the CAPEX for the plant has been fully spent. We are assuming that the new
expansion will start generating cash flows by 2010. Our optimism about this investment arises from both
the growth prospects and the potential profitability in Ethiopia
Enterprise Value
E£13,426.5 million
US$2,384.8 million
Shares Outstanding
132.2 million shares
Average Daily Turnover
E£18.2 million
52-week high/ low
Guidance lower on meters and wind, stable on cables
E£88.01/38.91
Shareholders’ Structure
75%|El Sewedy Family
25%|Free Float
E£
120
100
El Sewedy Cables
EGX30 Index
80
As per the latest management guidance, significant revisions were made to the meters and wind energy
business; both segments’ forecasts revised downwards (see segment assumptions sheets). Upon speaking
with El Sewedy Cables’ management, we learned that they are in the process of appointing a new CEO for
the meters business, who should assume responsibility on November 1st, 2009, implying a possible change
in forecasts based on the new plan. In the wind energy segment, the lower sales guidance was in part
related to the slowdown witnessed in demand from major EU clients that was caused by the liquidity
crunch. On the other hand, guidance on the cables business was maintained at the same levels, in terms
of sales volumes and profitability per tonne (E£4,500/tonne).
Turnkey projects are a source of optimism
60
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* Refer to back cover for investment ratings
th
**Closing of October 13 , 2009
Given the number of power projects under construction or in the planning phase in the region, we are
quite optimistic about the prospects of the turnkey segment. Furthermore, Egypt’s budget deficit will
encourage the government to rely more on the private sector to participate in power generation through
Public Private Partnership (PPP) projects. The experience and track record of El Sewedy Cables as a
contractor in the region enables it to penetrate other lines of business, such as power plant construction.
Nevertheless, competition in this area could drag the segment’s gross profit margin lower.
We lower our valuation for El Sewedy Cables by 8.2% from E£78.71 to
E£72.22
We lowered our valuation for El Sewedy Cables from E£78.71/share to E£72.22/share to account for lower
guidance and shrinking margins in the cables business. We assigned a 75% weight to our DCF valuation,
which yields E£65.54/share and 25% weight to our P/E comparable valuation, which yields E£92.26.
Selected Indicators
Ismail Sadek
[email protected]
Omar Taha
[email protected]
Please see the important disclosures
contained on the last page of this report.
2007a
2008a
2009e
2010f
Revenues (E£ mil.)
9,348
11,446
10,311
13,358
2011f
16,807
2012f
20,785
Gross Profit (E£ mil.)
1,146
1,527
1,466
1,656
2,043
2,469
984
1,096
1,052
1,264
1,610
1,882
EBITDA Margin (%)
10.5
9.6
10.2
9.5
9.6
9.1
Net Income (E£ mil.)
724
828
795
864
1,090
1,316
EPS (E£)
4.99
5.89
5.65
6.15
7.75
9.36
P/E (x)
14.4
12.2
12.8
11.7
9.3
7.7
EV/EBITDA (x)
13.6
12.3
12.8
10.6
8.3
7.1
ROE (%)
27.0
24.1
19.2
17.9
19.4
19.9
DPS (E£/share)
Year End December
EBITDA (E£ mil.)
0.00
1.00
1.00
1.00
1.00
1.00
Dividend Yield (%)
0.0
1.4
1.4
1.4
1.4
1.4
Net Debt/Equity (x)
0.4
0.9
0.6
0.4
0.4
0.2
Source: El Sewedy Cables, Beltone Financial estimates
El Sewedy Cables
El Sewedy Cables
Cables – Growing thinner
The indispensable
demand for power in
the region, driven by
the growth in
population, is the main
driver behind El Sewedy
Cables’ growth across
all business lines
The indispensable demand for power in the region, driven by the growth in population, is the main driver behind
El Sewedy Cables’ growth across all business lines. However, the value proposition of each segment depends on
the level of competition. For the cables segment, we believe the level of competition in the region has reached a
stage whereby consolidation within industry players is key to prevent a decline in profitability.
Table 1| Expanding presence in demanding markets
Power Allocation
(kwh/capita)
Egypt
El Sewedy Cables
Plant Capacity*
1,387
Syria
Algeria
Saudi Arabia
115,500
NA
28,550
916
17,770
6,873
13,500
Sudan
88
12,375
Yemen
401
12,000
15,684
4,500
2,422
NM
Qatar
World
Average
*Current Cable Production Capacity 2009 (in tonnes), some plants are still expanding
Source: EIA
The increasing
competition in the
cables business
segment will mean that
El Sewedy Cables will
witness a drop in its
gross profit margin
The increasing competition in the cables business segment will mean that El Sewedy Cables will witness a drop
in its gross profit margin as copper and aluminum prices rise. According to the latest management guidance, the
gross profit per tonne of cable of US$4,500 compared to an average of US$6,400/tonne as of Q2 2009, is a
direct reflection of more competition as cable sales penetrate new markets in Saudi Arabia, Yemen and Algeria.
It is true that an increase in sales volume should compensate for the reduced gross profit in absolute terms, but,
in relative terms, if we account for an increase in copper or aluminum prices, in the absence of an increase in
profitability, then the working capital requirements will have a negative impact on the segment’s value and the
group’s overall profitability. Although El Sewedy Cables is expanding into more attractive businesses, the wire
and cables segment still accounts for around 80% of the group’s revenues, while contributing only 68% of the
gross profits in 2009.
Figure 1| Rising copper prices puts pressure on cables margins
8,000
9,000
7,000
8,000
6,000
7,000
6,000
5,000
5,000
4,000
4,000
3,000
3,000
2,000
2,000
1,000
1,000
0
0
Q1 08
Q2 08
Q3 08
Q4 08
Q1 09
Q2 09
Q3 09f
GP/tonne (E£)
Q4 09f
Q1 10f
Q2 10f
Q3 10f
Q4 10f
Q1 11f
Q2 11f
Copper Price (US$)
Source: El Sewedy Cables, Beltone Financial estimates
2
El Sewedy Cables
Table 2| Cables assumptions
Cables Assumptions
Copper Cables Volumes
2008a
79,411
Aluminum Cables Volumes
2009e
108,906
2010f
125,000
2011f
135,000
2012f
170,000
24,687
26,441
35,000
45,000
57,000
104,099
135,347
160,000
180,000
227,000
Average Copper Price (US$)
7,678
5,811
6,387
6,731
6,933
Wire and Cables Revenues (E£ mn)
9,211
8,383
10,399
12,029
15,165
Average Gross Profit/tonne (E£)
6,369
5,785
4,950
4,653
4,653
991
974
973
1,018
1,235
Total Cables Volumes
Wire and Cables Gross Profit (E£ mn)
Source: El Sewedy Cables, Beltone Financial assumptions
We are expecting an increase in cables sales volumes throughout the forecast period, driven by the demand for
power generation, transmission and distribution across the MENA region. Simultaneously, we expect a modest
rise in copper and aluminum prices, which, together with the increase in sales volumes, should lead to an
increase in revenues by 29.6% in 2010, 20.9% in 2011 and 24.6% in 2012. On the other hand, the intensifying
competition in the region will limit the ability of El Sewedy Cables to raise its gross profit per tonne, thus
reducing the segment’s return on investment gradually.
Table 3| Main competitors in the region
Company
Country
Midal Cables
Bahrain
Electro Cables
Egypt
Giza Cables
Egypt
Jordan New Cable Company
Jordan
National Cables Industry and Electrical Cables
Jordan
Riyadh National Cables
Saudi Arabia
Saudi Cables
Saudi Arabia
Jeddah Cables
Saudi Arabia
Al Fanar
Saudi Arabia
Gulf Cables
Kuwait
Oman Cables
Oman
Midal Cables
Qatar
Ducab
UAE
Sharjah Cable Factory
UAE
Electrocab Emarat
UAE
Source: Company websites
Figure 2| Copper prices (in US$/tonne)
7,500
6,500
5,500
4,500
3,500
2,500
1-Sep-08
1-Nov-08
1-Jan-09
1-Mar-09
1-May-09
Copper Price (US$/tonne)
1-Jul-09
1-Sep-09
Source: Bloomberg
3
The intensifying
competition in the
region will limit the
ability of El Sewedy
Cables to raise its gross
profit per tonne, thus
gradually reducing the
segment’s return on
investment
El Sewedy Cables
Powering Ethiopia
El Sewedy Cables has announced the establishment of a cables plant in Ethiopia. The announcement comes only
3 months before the commissioning of the plant, implying that the management guidance on cables sales
volume, CAPEX and debt assumptions already accounted for the establishment of the plant. As a result, the
announcement should have no impact on our valuation. According to El Sewedy Cables management, most of
the CAPEX for the plant has been fully spent. The plant is 85.7% owned by El Sewedy Cables and has a
production capacity of 10,000 tonnes of cables (7,500 tonnes of copper cables and 2,500 tonnes of aluminum
cables). The new plant cost approximately US$36 million (E£201.6 million) and will be financed in a debt-toequity ratio of 60-40. We are assuming that the new expansion will start generating cash flows by 2010. Our
optimism about this investment arises from both the growth prospects and the potential profitability in Ethiopia.
Ethiopia’s investment profile is very similar to that of Sudan, for it has a population of around 75 million and a
power consumption rate of around 38 kwh/capita (compared to around 1,387 kwh/capita for Egypt).
Figure 3| Power consumption in Ethiopia (in billion kwh)
3.5
3.0
2.5
2.0
1.5
1.0
0.5
1980
1985
1990
1995
2000
2005
Net Consumption (Bn kwh)
Source: Bloomberg
There is an additional dimension to Ethiopia’s profile that makes this investment very attractive:
1.
According to El Sewedy Cables management, Ethiopia relies on imports for cables consumption
2.
Transportation in Ethiopia is very difficult, thus shielding El Sewedy from competition
Figure 4|| Ethiopia’s difficulty of transportation shields El Sewedy Cables from competition
4
Our optimism about this
investment arises from
both the growth
prospects and the
potential profitability in
Ethiopia
El Sewedy Cables
The Third Scenario - A Concern
Despite our positive outlook on El Sewedy’s greenfield project in Ethiopia, we are still concerned about the wire
and cables segment as a whole. To illustrate our view, we generated three cash flow scenarios for Ethiopia’s
project. These scenarios are based on our own assumptions of cable sales, copper prices and profitability. The
base case assumptions are:
•
A utilisation rate of 60% during the first year of operation
•
•
A price/tonne of cables, of E£52,388/tonne, which is linked to actual copper prices
Cash conversion cycle, based on the latest days of accounts receivables, inventory and payables
•
figures in H1 2009
A terminal growth rate of 4.5% and a WACC of 11%
Scenario 1: Growth in volumes at stable margins and flat copper prices
In the first scenario, we assumed a stable gross profit margin for the cable operation, leading to an increase in
the investment’s ROE as the plant’s utilisation rate increases. We also assumed working capital requirements
based on 85 days of accounts receivable, 90 days of inventory and 55 days of payables. By discounting the cash
flows beyond 2009, the terminal value at a WACC of 11% and a terminal growth rate of 4.5%, we obtain an EV
of around E£440.2 million. This is the best scenario because it allows El Sewedy to maintain the same gross
profit margins at any copper price.
Scenario 1| Growth in volumes at stable margins and flat copper prices
2009e
Volumes
Price/tonne (E£)
Revenues (E£ '000)
Gross Profit/tonne (E£)
Gross Profit (E£ '000)
Gross Profit Margin (%)
EBITDA (E£ '000)
EBITDA after min. (E£ '000)
ROE%*
CAPEX (E£ '000)**
WC (E£ '000)
FCF (E£ '000)
Terminal Value (E£ '000)
EV (E£ '000)
*Based on EBITDA after minority
0%
0%
2010f
6,000
52,388
314,330
6,400
38,400
12%
32,980
28,264
16%
2011f
10,000
52,388
523,884
6,400
64,000
12%
51,246
43,918
25%
2012f
10,000
52,388
523,884
6,400
64,000
12%
56,485
48,407
28%
2013f
10,000
52,388
523,884
6,400
64,000
12%
56,485
48,407
28%
2014f
10,000
52,388
523,884
6,400
64,000
12%
59,104
50,652
29%
2015f
10,000
52,388
523,884
6,400
64,000
12%
59,104
50,652
29%
(101,043)
(72,779)
(6,047)
(67,362)
(29,492)
(6,047)
16,218
58,579
(6,047)
42,360
(3,455)
47,197
(3,455)
47,197
758,779
(172,771)
(172,771)
440,150
** CAPEX after minority interest
Scenario 2: Growth in Volumes at declining margins and flat copper prices
In the second scenario, we assume flat copper prices, but a stable gross profit per tonne, which falls from the
current level of E£6,400/tonne to E£4,500/tonne, leading to a drop in the gross profit margin and a lower ROE.
Nevertheless, a stable copper price prevents further cash outflow from inventory build-up. By discounting the
cash flows, we obtain an EV that is lower than the base case scenario by 43%.
5
El Sewedy Cables
Scenario 2| Growth in volumes at declining margins and flat copper prices
Volumes
Price/tonne (E£)
Revenues (E£ '000)
Gross Profit/tonne (E£)
Gross Profit (E£ '000)
Gross Profit Margin (%)
EBITDA (E£ '000)
EBITDA after minority (E£ '000)
ROE%
CAPEX (E£ '000)
WC (E£ '000)
FCF (E£ '000)
Terminal Value (E£ '000)
2009e
0%
0%
2010f
6,000
52,388
314,330
6,400
38,400
12%
32,980
28,264
16%
2011f
10,000
52,388
523,884
5,500
55,000
10%
42,246
36,205
21%
2012f
10,000
52,388
523,884
4,500
45,000
9%
37,485
32,124
19%
2013f
10,000
52,388
523,884
4,500
45,000
9%
37,485
32,124
19%
2014f
10,000
52,388
523,884
4,500
45,000
9%
40,104
34,369
20%
2015f
10,000
52,388
523,884
4,500
45,000
9%
40,104
34,369
20%
(172,771)
(172,771)
(101,043)
(72,779)
(6,047)
(68,237)
(38,080)
(6,047)
15,616
41,693
(6,047)
26,077
(3,455)
30,914
(3,455)
30,914
496,998
251,779
-43%
EV (E£ '000)
Discount to the Scenario 1
Source: Beltone Financial estimates
Scenario 3: Growth in volumes at declining margins and rising copper prices
In the last scenario, we assumed a decline in gross profit per tonne, associated with a gradual increase in copper
prices. This is the most realistic scenario, given El Sewedy’s gross profit/tonne assumptions and the possibility of
increase in commodity prices.
Scenario 3| Growth in volumes at declining margins and rising copper prices
Volumes
Price/tonne (E£)
Increase in Price (%)
Revenues (E£ '000)
Gross Profit/tonne (E£)
Gross Profit (E£ '000)
Gross Profit Margin (%)
EBITDA (E£ '000)
EBITDA after min. (E£ '000)
ROE%
CAPEX (E£ '000)
WC (E£ '000)
FCF (E£ '000)
Terminal Value (E£ '000)
EV (E£ '000)
Discount to the Scenario 1
2009e
-
2010f
6,000
52,388
314,330
6,400
38,400
12%
32,980
28,264
16%
2011f
10,000
55,008
5%
550,078
5,500
55,000
10%
40,936
35,082
20%
2012f
10,000
57,758
5%
577,582
4,500
45,000
8%
35,337
30,284
18%
2013f
10,000
59,491
3%
594,909
4,500
45,000
8%
34,644
29,690
17%
2014f
10,000
60,681
2%
606,808
4,500
45,000
7%
37,202
31,882
18%
2015f
10,000
61,288
1%
612,876
4,500
45,000
7%
36,989
31,700
18%
0%
0%
(172,771)
(172,771)
(101,043)
(72,779)
(6,047)
(76,969)
(47,933)
(6,047)
8,238
32,474
(6,047)
(5,198)
18,444
(3,455)
(3,569)
24,857
(3,455)
(1,820)
26,424
424,817
187,427
-57%
Source: Beltone Financial estimates
Conclusion
This analysis does not suggest the worst case scenario for Ethiopia specifically, since El Sewedy’s cable portfolio
includes investments at varying profitability rates. Nevertheless, scenario 3 should reflect the consolidated cables
portfolio’s performance, undermining the group’s potential. The most appealing course of action would be
to divest the subsidiaries which are dragging the cables business profitability downwards. This
would, in our opinion stabilise the gross profit margin and place El Sewedy Cables on track to
better exploit the growth in electricity consumption in the region.
6
El Sewedy Cables
Transformers - Ramping up new expansions
Table 4| Transformers assumptions
Transformers Assumptions
2008a
2009e
2010f
2011f
2012f
1,618
4,788
13,000
13,000
13,000
Total Capacity (MVA)
Volumes (MVA)
Revenues (E£ '000)
1,381
3,819
8,536
10,217
12,376
242,320
385,584
735,560
835,774
921,913
37,670
62,658
136,576
158,364
173,268
16%
16%
19%
19%
19%
Gross Profit (E£ '000)
Gross Profit (%)
Source: El Sewedy Cables, Beltone Financial assumptions
The increase in transformers capacity and sales volume in 2009 and 2010 is a result of the announced
expansions in Egypt, Zambia and, most recently, Nigeria. The fundamentals of demand in each of those
countries and the relatively low level of competition should lead to a gradual increase in sales from 2H 2009
onwards. El Sewedy’s investment in Egypt is for power and dry transformers, which target a higher level in the
value chain. In other words, El Sewedy will be targeting the government agencies and utilities for the new high
MVA power transformers.
The increase in
transformers capacity
and sales volume in
2009/2010 is a result of
announced expansions
in Egypt, Zambia and,
most recently, Nigeria
Wind Energy – Strong, but delayed growth
Despite the considerable potential we foresee in wind energy, we were disappointed by the latest forecast
guidance from management, which reduced M.Torres sales volumes and profitability for 2009 onwards.
According to El Sewedy’s management, a delayed order by a Spanish developer, as a result of the financial crisis
and the poor economic outlook in Europe, were the main reasons behind the downward revision in numbers.
SWEG (the fully consolidated subsidiary) will not recognise any revenues in 2010 and the gross profit margins of
M.Torres (the 30% owned subsidiary) were dropped to 11%. The revenues generated in 2010 will be from sales
of towers from their 50%-owned subsidiary, SET. For 2011 and 2012, we reduced our price/(Mega Watt) (MW)
forecast in 2012 to account for more competition in the field. The wind energy segment will contribute 9% of the
total consolidated revenues, and 13% of the gross profit in 2011.
Despite the
considerable potential
we foresee in wind
energy, we were
disappointed by the
latest forecast guidance
from the management,
which reduced M.Torres
sales volumes and
profitability for 2009
onwards
Table 5| Wind energy segment assumptions
2009e
2010f
2011f
2012f
Sales (in MW) (Old Assumpt.)
0
84
150
178
Sales (in MW) (New Assumpt.)
0
0
66
99
Price/MW (EUR)
-
-
1,050,000
997,500
Consolidated Revenues (in E£ '000)
-
117,660
1,440,332
1,694,469
Consolidated Gross Profit (E£ '000)
-
37,197
260,790
317,405
0%
32%
18%
19%
Gross profit margin (%)
Source: El Sewedy Cables, Beltone Financial estimates
Outlook for Wind Energy in Egypt
Although Egypt has 365 MW of installed wind energy capacity, the Gulf of Suez, Gabal Al Zeit Project, is the first
wind farm to be offered to the private sector on a competitive bids approach (to be tendered based on a buildown-operate (BOO) approach). The project, which spreads over 35 km2, is planned to have a generation
capacity of 250 MW, a CAPEX of EUR400 mn and is expected to be completed by 2014. The tender for the wind
farm was announced on May 9th, 2009, and firms were invited to submit their qualification documents by July
21st, 2009. So far, 72 international companies have expressed interest. Despite the fact that we believe the
number of serious investors is much less than 72, that level of interest indicates the following:
1. The significant investment appetite for wind energy development across the globe. Given a
suitable framework for wind energy generation, which is summarised in adequate wind speed and solid
regulatory policies, wind energy projects could be very profitable investments.
7
The Gulf of Suez, Gabal
Al Zeit Project, is the
first wind farm to be
offered to the private
sector on a competitive
bids approach
El Sewedy Cables
2. The potential for wind energy generation in Egypt is exceeding the expectations of the local
authorities. In February 2008, The Supreme Council of Energy in Egypt set a target to generate 20% of the
electricity needed from renewable energy sources by 2020. This target includes a 12% contribution specifically
from wind energy, translating into 7,200 MW by 2020. To achieve the required targets for wind energy
generation, the government has stated that 66.7% of the annual generation capacity required from wind energy
(400 MW) will come from the private sector and the remaining 200 MW will be supplied by NREA (The New and
Renewable Energy Authority). So far, the 365 MW capacity of wind energy installed in Egypt has been
government-backed. The bigger project is a 360-MW wind farm in Zafarana, which has been implemented over
3 phases.
Background on El Sewedy wind energy
After the acquisition of a 30% stake in M.Torres in October 2008, El Sewedy Cables is establishing a production
plant in Egypt to produce wind tubines, towers, and at a later stage, wind blades for providing an integrated
product for wind farms. M.Torres, a Spanish company specialising in the production of gearless-technology
turbines, will be playing a role in transferring the know-how to El Sewedy’s turbine manufacturing plant in Egypt,
and will contribute to El Sewedy Cables’ investment income (full consolidation of M.Torres’ wind energy division
will occur if El Sewedy Cables exercises its option to acquire the remaining 70% by 2011). Based on M.Torres’
2010 EBITDA margin guidance of 9%, yielding EUR12.2 million, El Sewedy Cables made the acquisition at an
EV/EBITDA of around 11x (2010 estimates), which is still lower than the industry peers average of 11.8x (2010
estimates).
Table 6| Wind energy EV/EBITDA comparable multiples
Company
Country
2009
2010
Gamesa
Spain
10.06
8.55
7.23
Vestas
Denmark
10.58
8.66
6.97
Suzlon
India
11.89
11.58
8.92
Goldwind
China
18.5
15.02
12.45
Acciona
Spain
12.81
9.89
8.75
China Windpower Group
China
15.82
17.08
12.47
13.3
11.8
9.5
Average
Source: Bloomberg
2012
Nevertheless, we believe the underlying value from the M.Torres acquisition extends beyond the financial aspect.
The true value is in the development of an integrated regional production plant that serves the market demand
in the Middle East and North Africa. Following our latest discussion with the management, we learned that El
Sewedy Cables’ wind facility will start operating in March 2010. SWEG, which is 100% owned by El Sewedy
Cables will have an initial production capacity of 50 (1.65 MW) turbines to increase gradually, reaching a total of
170 turbines (for both 1.65 MW and 2.0 MW). SET, the tower production facility, is 50% owned by El Sewedy
Cables and 50% owned by (SIAG), the German partner. SET will supply 50% of its production to SIAG, based on
an off-take agreement, while the remaining 50% will be used by El Sewedy for its local production.
8
The true value is in the
development of an
integrated regional
production plant that
serves the market
demand in the Middle
East and North Africa
El Sewedy Cables
Table 7| Global installed wind power capacity (MW)
2008
Total Installed
Egypt
Region
55
365
Morocco
10
134
Iran
17
85
Tunisia
34
54
Other
14
31
130
669
China
6,300
12,210
India
1,800
9,645
Europe
8,877
65,946
Total Africa and Middle East
Latin America
95
629
8,884
27,542
27,051
120,798
North America
World Total
Source: GWEC Report 2008
Understanding the economics of wind energy
The momentum fuelling the growth of wind energy development in recent years is not attributed only to
government-backed efforts to save the environment, but, more importantly, to the profitability of wind
projects. IPP developers are finding lucrative opportunities in developing wind farms because of the
sustainability of its cash flow and the minimal working capital requirement over the course of the plant’s
operation. An unleveraged 20-year Build-Own-Operate (BOO) wind power project could deliver an IRR of
12% based on a power purchasing price of US$0.074/kwh. Nevertheless, a wind project’s profitability
is very sensitive to a number of factors that necessitate an experienced developer to reach
the target returns:
• The running costs of a wind farm, which is mostly maintenance costs, is negligible
compared to the revenues generated from the power sold, thus the free cash flow of the
project largely relies on the price at which the power is sold to the utility company. A developer must
assess the risk of default in the power purchase agreement contract from the utility company
• The initial CAPEX of procuring, erecting, and connecting the wind turbines to the grid
constitute the majority of the project’s outflow, thus a developer must minimise the outflow
from major overhauls and replacement costs by buying equipment that suits the landscape and specific
weather conditions (sand and dust, water in offshore wind farms or extreme low temperatures).
Considering the size of the wind turbine components, logistics could be a very challenging task. A
single wind blade could reach 44 meters in length and the tower could weigh up to 70 tonnes and
extend 80 meters in height. A single wind turbine could require up to 8 hauls with various
transportation modes for installation. It would add, significantly, to the initial cost, which could range
from 10% to 20%. Procuring components from local manufacturers could thus reduce the
CAPEX of a wind farm significantly
9
El Sewedy Cables
Smart meters waiting for take-off
Table 8| Meters assumptions
Meters Assumptions
2008a
2009e
2010f
2011f
2012f
Previous Sales Assumptions (units)
-
2,446,895
3,547,998
5,321,997
7,450,795
2,224,450
2,002,005
2,302,306
2,693,698
3,232,437
337
323
350
350
350
60
57
62
62
62
Revenues (in E£ '000)
749,739
647,281
805,807
942,794
1,131,353
Gross Profit (in E£ '000)
121,080
120,544
184,184
215,496
274,757
16%
19%
23%
23%
24%
-
45,310
103,604
140,072
195,562
0%
7%
13%
15%
17%
Current Sales Assumptions (units)
Average Price (E£)
Average Price (US$)
Gross Profit (%)
EBITDA (in E£ '000)
EBITDA (%)
Source: El Sewedy Cables, Beltone Financial estimates
Guidance for smart meters sales was reduced for 2009, 2010 and 2011 as a result of the delayed demand
for rollout projects in the EU, as well as the low visibility on sales outlook by management. In 2009, we
forecast sales volume to reach over 2 million meters at an average price of US$57/meter (E£323/meter),
with a gross profit margin of 19% and an EBITDA margin of 7%. The low EBITDA margin is due to high
research and development costs incurred by the business, but we forecast the EBITDA margin to rise
gradually, looking forward, as the new facility in Egypt increases its contribution to sales and minimise
the fixed cost component. Looking forward, we believe that the sales volumes will increase, on the back
of high demand (see industry outlook below). El Sewedy management has noted that it is in the
process of appointing a new CEO for the meters business, who should assume responsibility
on November 1st , 2009, implying a possible change in forecasts, based on the new plan. We
believe the meters business should contribute around 6% to the group’s revenues in 2009 and 8% to the
gross profit. The meters revenue contribution is expected to be maintained at 6% in 2012, but the gross
profit’s contribution should rise to 11% of the whole business as the segment’s profitability rises.
El Sewedy meters background
As of 2008, Iskraemco had a production capacity of over 3 million meters, and produced around 1 million
induction meters and 1.2 million electronic smart meters. This production capacity should rise gradually
to over 8 million meters by 2012. In late 2007, 68.3% of Iskreamco was acquired by El Sewedy Cable for
EUR26.3 million and, later, the remaining stake was acquired in August 2008, thus yielding a total
acquisition cost of EUR45 million for a 100% stake in the company. Based on 2008’s profitability figures,
of around EUR121.1 million, we believe that the transaction was made at a very attractive multiple. A
remaining CAPEX of around US$10 million will be paid fully by the end of 2009 to establish a meters
production plant in Egypt, which should commence production by the end of 2009. The plant in Egypt will
reduce production costs, significantly, since labour costs in Egypt are considerably lower than in Slovenia.
Smart meters in the green zone
Smart meters represent the new generation of the traditional electromechanical meters that measure
electricity consumption. Meters are the ending node in the smart grid value chain, enabling consumers
and utility companies to measure electricity consumption precisely (based on real-time data) and analyse
data related to appliance use. For consumers, smart meters will allow them to reduce their electricity bills
by controlling their appliances automatically. For utilities companies, smart meters will allow them to
control energy generation (especially from renewable sources) by feeding in real time data on
consumption patterns, which is useful for both the consumer and the environment.
Having noted this, we are looking at an industry which has been operating with on outdated technology,
and which requires prompt action to replace electromechanical meters with smart meters by 2020. The
volume of meters replacement required and the drivers of demand discussed above make us believe that
this is a significant opportunity for all the players operating in the smart metering, amongst which is El
Sewedy’s Iskraemco.
10
Guidance for smart
meters sales was
reduced for 2009, 2010
and 2011 as a result of
delayed demand for
rollout projects in the
EU, as well as low
visibility on sales
outlook by
management
El Sewedy Cables
Table 9|Identified smart metering programmes globally
Country
Number of Meters
Austria
Czech Republic
Denmark
Finland
France
Italy
Norway
Serbia
Canada
USA
Australia
India
88,000
4,400
1,184,000
351,700
30,000
Main Vendors
Echelon
Echelon
L+G and Echelon and
Gorlitz
L+G and Aidon Oy
L+G
1,500,000
L+G
8,600
L+G
30,000
8,098,000
48,063,500
NA
Itron/Elster/Sensus
Itron/L+G/GE/Sensus
20,000
IBM
500,000
NA
New Zealand
1,640,000
Saudi Arabia
120,000
NA
Trinidad and Tobago
400,000
Itron
Other
3,955,100
Total
62,038,200
Vector/Siemens
NA
Source: European Smart Metering Alliance (ESMA)
The global stock of electric meters is around 1,275 million, of which only 10% are automated (smart
meters). North America has a stock of around 175 million meters, of which around 39% is automated.
However, we believe growth in North America will be difficult due to the relatively high
penetration rate and strong competition from the dominant market player, Itron, which
The global stock of
electric meters is
around 1,275 million, of
which only 10% are
automated
acquires almost 47% market share of the electric meters market.
The EU has a stock of over 275 million meters. We believe the opportunities present in the EU are
immense, given the size of the market, its proximity to Iskraemco’s plants and government-backed
programmes over the coming few years. ERDF, a subsidiary of Electricité de France (EDF) is planning to
replace 35 million meters from 2012 to 2016. The UK is planning to rollout 49 million electricity meters in
27 million homes by 2020, whereas Spain and Portugal are planning to replace most meters with smart
meters by 2018.
What if meters take off?
Given the significant potential we foresee in the meters industry, we believe Iskraemco could outperform
the current management guidance if the anticipated CEO was successful in implementing the right
growth strategy. If we assume that the meters business ramp-up to almost full utilisation by adding
rollout contracts in their backlog, the gross profit would increase by 52.2% in 2012 from our base case
scenario used in valuation. Without further CAPEX, full utilisation of the meters division should
raise our DCF value from E£65.54 to E£77.32/share.
Table 10| Meters division assuming full utilisation
Meters Assumptions
2008a
2009e
2010f
2011f
2012f
Capacity
3,333.023
2,913,748
4,913,748
4,913,748
4,913,748
Meters Sales Volume
2,224,450
2,002,005
4,004,010
4,684,692
4,918,926
Average Price (E£)
337
323
350
350
350
Revenues (in E£ '000)
749,739
647,281
1,401,404
1,639,642
1,721,624
Gross Profit (in E£ '000)
121,080
120,544
320,321
374,775
418,109
16%
19%
23%
23%
24%
0
7%
13%
15%
17%
Gross Profit (%)
EBITDA (%)
Source: El Sewedy Cables, Beltone Financial estimates
11
Without further CAPEX,
full utilization of the
meters division should
raise our DCF value
from E£65.54 to
E£77.32/share
El Sewedy Cables
Turnkey projects seek diversification
Table 11| Turnkey projects assumptions
Turnkey Projects Assumptions
Revenues (E£ '000)
Gross Profit (E£ '000)
Gross Profit margins (%)
2008a
2009e
2010f
2011f
2012f
1,040,366
1,086,865
1,300,000
1,560,000
1,872,000
287,177
272,177
325,000
390,000
468,000
28%
25%
25%
25%
25%
Source: El Sewedy Cables, Beltone Financial estimates
Our outlook for the turnkey projects segment remains positive, in light of the increase in infrastructure
spending on power projects and the potential diversification of El Sewedy Cables to cater to more
profitable sectors. El Sewedy Cables management highlighted the fact that they are considering
penetrating power project contracting, to deliver full contracting services to governments, which we
believe is an important step that could potentially deliver higher revenues and profits to the group.
Nevertheless, we believe that the level of competition in the region from players such as Orascom
Construction Industries (OCI), will make it challenging for El Sewedy to penetrate and could potentially
dilute its current gross profit margins.
12
Our outlook on the
turnkey projects
segment remains
positive, in light of the
increase in
infrastructure spending
El Sewedy Cables
Table 12| Regional power projects under construction or in bidding phase
Name
Country
Value (in
US$ million)
Start Date
End Date
2,400MW Power Plant in Rabigh
Medina water and 1,700MW power plant
Electricity substation in Riyadh
Small scale solar power
Three substation orders
Saudi
Saudi
Saudi
Saudi
Saudi
Arabia
Arabia
Arabia
Arabia
Arabia
4,000
3,740
133
NA
100
NA
NA
2009
NA
2009
NA
NA
2011
NA
2011
Transmission lines in Jeddah
Power Plant, Jubail City
Substation near Mecca
GCC Power Grid phase one
1200MW power plant in Rabigh
Expansion of power plant in Jeddah
Saudi
Saudi
Saudi
Saudi
Saudi
Saudi
Arabia
Arabia
Arabia
Arabia
Arabia
Arabia
50
54
119
1,200
2,500
2,880
NA
2009
2009
NA
2008
2008
NA
NA
2012
NA
NA
NA
Shoaiba 1200MW power plant
Power transportation and distribution KAEC
Sharoura power plant extension
Power and desalination plant
Power station and a desalination plant (Jubail-Yanbu)
Saudi
Saudi
Saudi
Saudi
Saudi
Arabia
Arabia
Arabia
Arabia
Arabia
3,000
148
96
280
3,400
NA
NA
2008
2007
2007
NA
2010
2010
2010
2009
Oil-fired 1020MW thermal power at Shuqaiq
PP10 power plant near Riyadh
Electric station in Jizan region
1500 MW North Giza
Egyptian Saudi transmission line
Saudi Arabia
Saudi Arabia
Saudi Arabia
Egypt
Egypt
1,900
1,500
91
NA
NA
2007
2008
2009
NA
NA
2010
NA
NA
NA
NA
Nuweiba combined cycle plant 750MW
Safa coal fired plant 5000MW
Nuclear power plant
Ain Sokhna power plant
1300MW thermal power plant in Alexandria
2000MW power plant at Subiya
Egypt
Egypt
Egypt
Egypt
Egypt
Kuwait
714
NA
1,500
600
258
2,650
NA
NA
2008
2009
2009
2009
NA
NA
2020
NA
NA
2011
Power transfer Units at Kuwait City
High voltage overhead transmission line
Al Salibiah substation
Substation for KOC Facilities
High tension overhead transmission line
Kuwait
Kuwait
Kuwait
Kuwait
Kuwait
14
250
150
615
250
2009
2009
2009
2008
2009
2011
2012
2011
2011
2012
Amal power plant in Oman
Al Duqm IWPP
Four substations in Ras Laffan
Qatar power transmission system expansion
Ras Laffan C IWPP
Oman
Oman
Qatar
Qatar
Qatar
50
2,000
154
740
3,900
2009
2011
2009
2008
2008
2011
2015
2012
2010
2011
Ras Girtas power & water plant
Submarine power cable in Doha
Qatar power transmission system expansion Phase 9
Mesaieed idependent power plant
Qatar Power transmission system expansion Phase 8
Hassyan power & desalination station
Qatar
Qatar
Qatar
Qatar
Qatar
UAE
3,900
195
1,500
2,300
92
2,000
2009
2009
2009
2006
2008
2010
2011
2010
2012
2010
2010
2013
105
250
75
12
165
2007
2011
2009
2009
2007
2010
2014
2011
2011
2009
2,000
2009
2012
Saadiyat Island development - two cable circuits
Taweelah -C IWPP
Transmission tower manufacturing facilities in Ras Al Khaimah
Power transmission in Abu Dhabi
Saadiyat Island Development - Saadiyat substation
UAE
UAE
UAE
UAE
UAE
Ajman coal-fired power plant
UAE
Total
51,679
Source: Construction Weekly Projects, BMI
13
El Sewedy Cables
Financial Statements
Income Statement Summary
Income Statement
2008a
2009e
2010f
2011f
2012f
Revenues
11,446
10,311
13,358
16,807
20,785
COGS
(9,919)
(8,845)
(11,703)
(14,764)
(18,316)
1,527
1,466
1,656
2,043
2,469
(565)
(610)
(601)
(672)
(831)
Gross Profit
SG&A
Depreciation
EBITDA
EBIT
Net Financing Cost
EBT
(134)
(196)
(210)
(239)
(244)
1,096
1,052
1,264
1,610
1,882
911
936
1,022
1,332
1,592
5
(86)
(96)
(98)
(69)
916
850
925
1,234
1,524
Taxes
(19)
(33)
(56)
(99)
(152)
Net Profit b. Minority
897
817
870
1,135
1,371
Minority Interest
(68)
(22)
(35)
(45)
(55)
Net Income
828
795
864
1,090
1,316
Source: El Sewedy Cables Financials, Beltone financial estimates
Balance Sheet Summary
2008a
2009e
2010f
2011f
2012f
Cash
1,318
1,055
844
675
574
Receivables
2,639
3,023
3,111
3,914
4,556
Inventory
3,170
2,181
2,886
3,641
4,165
64
133
50
63
77
7,191
6,391
6,890
8,292
9,372
2,758
3,507
3,576
3,487
3,343
483
483
483
483
483
3,241
3,990
4,059
3,970
3,826
10,433
10,381
10,949
12,263
13,198
4,091
2,945
2,391
2,406
1,759
Payables
968
1,333
1,763
2,225
2,760
Provisions
221
179
187
195
203
25
14
18
23
29
5,305
4,471
4,359
4,848
4,751
Total Grey Area
368
428
488
548
608
Long Term Debt
755
852
784
638
486
Other LT Liabilities
197
155
160
164
170
Total LT Liabilities
952
1,008
943
802
656
Paid in Capital
1,322
1,322
1,322
1,322
1,322
Paid in Excess
581.2
581.2
581.2
581.2
581.2
0
0
0
0
0
Balance Sheet
Other Current Assets
Total Current Assets
Net Fixed Assets
Other Long Term Assets
Total Long Term Assets
Total Assets
Short Term Debt
Other Current Liabilities
Total Current Liabilities
Reserves
Treasury Stock
Retained Earnings
(2)
(2)
(2)
(2)
(2)
1,122
1,760
2,367
3,038
3,919
Adjustments
(54)
0
0
0
0
Net Worth
3,808
4,475
5,159
6,065
7,183
10,433
10,381
10,949
12,263
13,198
Total Liabilities & Equity
Source: El Sewedy Cables Financials, Beltone financial estimates
14
El Sewedy Cables
Financial Ratios
2008a
2009e
2010f
2011f
2012f
Revenue Growth (%)
22.4
-9.9
29.6
25.8
23.7
EBITDA Growth (%)
11.3
-4.0
20.2
27.3
16.9
Net Profit Growth (%)
14.4
-4.1
8.8
26.1
20.8
EBITDA Margin (%)
9.6
10.2
9.5
9.6
9.1
Net Profit Margin (%)
7.2
7.7
6.5
6.5
6.3
5.89
5.65
6.15
7.75
9.36
Key Ratios
EPS (E£)
ROA (%)
9.9
7.6
8.1
9.4
10.3
ROE (%)
24.1
19.2
17.9
19.4
19.9
Current Ratio (x)
1.36
1.43
1.58
1.71
1.97
Total Debt/Equity (x)
1.3
0.8
0.6
0.5
0.3
Net Debt/EBITDA (x)
3.2
2.6
1.8
1.5
0.9
DPS
1.00
1.00
1.00
1.00
1.00
Dividend Payout (%)
17.0
17.7
16.3
12.9
10.7
1.4
1.4
1.4
1.4
1.4
12.2
12.8
11.7
9.3
7.7
2.5
2.1
1.8
1.6
1.3
12.3
12.8
10.6
8.3
7.1
Dividend Yield (%)
P/E (x)
P/BV (x)
EV/EBITDA (x)
Source: El Sewedy Cables Financials, Beltone Financial estimates
15
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[email protected]
DUBAI
Chamel Fahmy
[email protected]
QATAR
Ahmed Mourad
[email protected]
NEW YORK
Albina Brady
[email protected]
Amr Hamdy
[email protected]
Karim Baghdady
[email protected]