Infrastructure players reported solid 1Q 2023 earnings, thanks in large part to the EGP weakening against the greenback, with rising revenues and stabilizing margins seen in the construction and infrastructure industry. The positive performance in the first quarter of the year comes despite expectations that these companies may struggle to maintain the same momentum through the end of 2023, according to analysts we spoke with. Falling volumes of new projects as the government cuts back on non-priority infrastructure spending will likely push these companies to tap international markets for FX-denominated projects, our sources suggest.

Today, we look at three major infrastructure players: Hassan Allam Holding, as well as EGX-listed Elsewedy Electric and Orascom Construction (OC). All three companies have continued to face inflationary pressures that are weighing on the macroeconomic environment, but still reported rising net income during the quarter:

  • Elsewedy Electricbooked (pdf) EGP 2.91 bn in net income after minority interest, jumping 281.8% y-o-y, with revenues rising 79.5% y-o-y to EGP 33.3 bn during the quarter. The company’s performance was buoyed by its wires and cables, and turnkey projects segments, as well as its “export-driven focus.”
  • Meanwhile, Orascom Construction’s net income attributable to shareholders almost tripled y-o-y to USD 36.1 mn in 1Q 2023 as FX gains resulting from its net asset position in Egypt offset a decline in revenues, which fell 18% y-o-y during the quarter. The company’s Middle East and Africa operations saw a 40% y-o-y decline, while US revenues rose 50% to USD 356.9 mn. OC’s backlog — a large part of which is in Egypt — dipped a marginal 1.2% to USD 5.5 bn during the quarter.
  • Hassan Allam Holdings saw a 180% y-o-y increase in newly awarded projects across different sectors in the quarter, although its new awards in Egypt’s infrastructure sector saw a “slowdown,” a company representative told Enterprise. “This increase was predominantly driven by projects in the industrial, transport, power, and healthcare sectors,” the representative told us.

Renewable energy projects played a big role in these companies’ 1Q performance, with green hydrogen projects leading that push, Prime Securities analyst Abdel Khalek Mohamed told Enterprise. Hassan Allam Utilities and UAE clean energy giant Masdar signed in November a framework agreement for a 2 GW green hydrogen plant in the Suez Canal Economic Zone. The two companies, along with Infinity, also announced a separate 10 GW wind project in Egypt, for which it signed a land allocation agreement last month. Elsewedy’s renewables segment also saw a 63% y-o-y increase in revenues.

A weaker EGP played in these companies’ favor: The EGP falling against the greenback over the past several months has actually done good things for these companies’ financials. The EGP slipped c.7% at the beginning of January to 26.49 against the greenback, marking the biggest single-day drop since last October’s devaluation. Throughout the quarter, the local currency fell c.24.9% to settle at EGP 30.96 / USD 1 at the end of March. For Elsewedy, for example, the changing FX rate resulted in EGP 1.3 bn in FX gains.

However, the country’s FX shortage is biting: Infrastructure and contracting companies are under pressure from Egypt’s ongoing FX crisis, as the government is pushing the timelines for implementing projects and rearranging its spending priorities to limit its FX spending. This will likely show its effects on the companies’ financials in the back half of the year, Al Ahly Pharos’ Radwa El Swaify told Enterprise.

Hiking prices can only go so far — and only for so long: Infrastructure companies raised their contract prices to protect their margins in 1Q 2023, while also taking advantage of stockpiled inventory that was purchased at lower costs in 4Q 2022, according to Mohamed. However, these companies won’t be able to hike their prices again unless the official FX rate rises, particularly as global commodity prices are cooling off, El Swaify suggests.

Margins weren’t affected by building material prices: Soaring prices of building materials, including cement and rebar steel, didn’t have a significant impact on companies’ margins because the costs were passed on to the end consumers, Mohamed explained to Enterprise.

This is all driving companies to look for new business outside of Egypt: Infrastructure players are likely to focus on securing projects that will be financed by international institutions, or else seek business outside Egypt, including in the Gulf, Mohamed predicts. Hassan Allam is also looking at markets such as Saudi Arabia, where the country’s Vision 2030 “is driving significant infrastructure reforms and investments,” the company representative told us.

Any renewed fall in the EGP’s value against the greenback before the end of the year would be a big help for the sector, although there’s no certainty that companies’ performance for the rest of 2023 will be as positive as the first quarter, El Swaify said. The sector is also expected to grapple with high levels of competition amid limited infrastructure spending, which will likely bite companies’ revenues and net income throughout the rest of the year, El Swaify said.

Your top infrastructure stories for the week:

  • Alstom to invest EUR 300 mn in Borg El Arab factories: French rail manufacturer Alstom plans to invest some EUR 300 mn in Egypt over the next three years to establish two factories in Borg El Arab to produce electrical systems and metro and monorail rolling stock.
  • More Chinese investments are coming to the SCZone: The SCZone and a number of Chinese companies have signed agreements to establish projects worth a combined USD 60 mn in investment.
  • Sprea Misr opens sulfuric acid factory: Egypt Kuwait Holding’s (EKH) petchem subsidiary Sprea Misr inaugurated a EGP 1.4 bn sulfuric acid production plant.
  • Concrete Plus brings in Saudi investor for tire plant: Concrete Plus has set up a JV with an unnamed Saudi investor to partner on its EUR 750 mn tire factory in the SCZone.
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