{"id":547111,"date":"2022-06-08T04:21:08","date_gmt":"2022-06-08T04:21:08","guid":{"rendered":"https:\/\/enterpriseam.com\/egypt\/hardhats\/how-have-infrastructure-players-been-impacted-by-the-headwinds-of-1q2022\/"},"modified":"2022-06-08T04:21:08","modified_gmt":"2022-06-08T04:21:08","slug":"how-have-infrastructure-players-been-impacted-by-the-headwinds-of-1q2022","status":"publish","type":"hardhat","link":"https:\/\/enterpriseam.com\/egypt\/hardhats\/how-have-infrastructure-players-been-impacted-by-the-headwinds-of-1q2022\/","title":{"rendered":"How have infrastructure players been impacted by the headwinds of 1Q2022?"},"content":{"rendered":"

<\/a> How infrastructure players performed in 1Q2022 amid rising prices + EGP<\/strong> depreciation:<\/strong> Plenty of economic headwinds have hit infrastructure firms<\/a> listed on the EGX this past quarter, with operating costs and material prices soaring from the war in Ukraine and domestic inflation<\/a>. Add to that the CBE\u2019s 300 bps rate hikes and the EGP depreciation in March<\/a>, and companies have faced mounting margin pressures. The EGP has now fallen 18% against the USD since March after slipping to EGP 18.66 last week. While some infrastructure players (including traditional contractors, as well as telecom and financial infrastructure companies) have benefited from rising prices, others\u2019 revenues were hit hard.<\/p>\n

The real impact came after the war in Ukraine began at the end of February, which means that 75% of the quarter was unscathed<\/strong>, Noaman Khalid, associate director at Arqaam Capital, tells Enterprise. \u201cThe local and global factors at play as a result of the war are not fully reflected in companies\u2019 1Q 2022 earnings,\u201d he said, adding that its impacts will be more apparent in 2Q and 3Q figures. A lot of the problems contractors have had to face \u2014 like the raw materials shortage \u2014 were also not exclusive to 1Q, but rather were inherited from late last year and exacerbated by the war, Mohamed Saad, vice president of research at Prime Securities, tells Enterprise.<\/p>\n

Contractors with European exposure suffered in 1Q: <\/strong>EGX-listed heavyweight Orascom Construction reported<\/a> a 45% fall in its net income, citing deepening losses at the Belgian Besix group, in which Orascom holds a 50% stake. The group\u2019s losses widened to USD 11.0 mn from USD 1.4 mn in 1Q 2022, as European contractors suffered the brunt of the fallout from the war, which included raw material shortages<\/a> and rising energy prices.<\/p>\n

Others were resilient \u2014 largely with the help of diversified portfolios: <\/strong>Elsewedy Electric\u2019s net income was up 9% y-o-y to EGP 760.9 mn during the quarter, according to the company\u2019s latest earnings release (pdf)<\/a>. The company\u2019s diversified portfolio \u2014 which extends beyond turnkey projects \u2014 managed to offset any margin pressures on the company, with its wires and cables segment bringing in nearly half of its revenues. OC\u2019s diversified portfolio also helped mitigate the impact of its losses (which were primarily due to Besix losses), Saad said.<\/p>\n

More pressure on working capital = more debt:<\/strong> \u201cContractors are not seeing a massive slowdown to their performance, but their working capital is inflated,\u201d EFG Hermes Associate Vice President Ali Afifi said. \u201cThis prompts companies to take on more short-term facilities and debt, and make decisions like revisiting their dividend plans, which is what Elsewedy Electric did,\u201d Afifi added. Elsewedy has not paid out any interim dividends ahead of its financials, and its debt position for the quarter rose near EGP 9.1 bn, compared to EGP 6.12 bn as of 4Q2022.<\/p>\n

And more contingency planning:<\/strong> Rising debt levels were attributed to \u201ccontingency planning,\u201d which included measures like bulk buying raw materials, making large advance payments, and coverage of rising freight costs, \u201cin an effort to curb delays in commodity deliveries and supply-chain disruptions that could negatively impact operations,\u201d Elsewedy wrote.<\/p>\n

Large contractors\u2019 earnings could be negatively impacted if public spending on infrastructure development is reduced after budget revisions<\/strong>, Khalid said. MPs have been calling for<\/a> an expansion in spending for subsidy and social safety nets, which Khalid noted could impact infrastructure allocations. Infrastructure represents the single largest recipient of public investments<\/a> in the draft FY 2022-2023 budget. We don\u2019t know yet if the government will make changes to its budget, but it has said that the figures in the draft budget are \u201ctentative\u201d and could be changed.<\/p>\n

This could mean longer implementation periods for national projects<\/strong>, Khalid explained, as one of the only ways for companies to handle investment cuts will be to extend payment term durations. This could impact earnings down the road as these projects stretch and their costs pile up, Saad said, but this was not reflected in companies\u2019 performance during the first quarter, because it\u2019s more of a long-term impact.<\/p>\n

Contractors\u2019 stock performance is a reflection of all of these pressures<\/strong>, Khalid said. Elsewedy\u2019s shares are down 27.8% YTD, while OC\u2019s shares are down 13.6%.<\/p>\n

On the bright side: \u201cA lot of evidence points to us currently hovering around the peak of the global commodities cycle<\/strong> in terms of prices, whether we\u2019re talking about oil or other commodities like cement and steel,\u201d Khalid said. This next period will be marked by a slowdown and relative stability or normalization, he added.<\/p>\n

Telecom players were impacted by the rising FX rate:<\/strong> State-owned landline monopoly Telecom Egypt performed well, but its net income fell 36% y-o-y<\/a> on the back of Vodafone Egypt\u2019s one-offs, Saad explained. Its normalized income \u2014 which excludes Vodafone Egypt\u2019s one-offs, the effect of the rising FX rate, provisions, and impairments \u2014 stayed flat y-o-y at EGP 1.7 bn. The company\u2019s weaker performance this quarter was also attributed to rising operating expenses and FX rate, Beltone said in an emailed note. Telecom\u2019s shares are down 9.7% YTD.<\/p>\n

Financial infrastructure players had it better: <\/strong>State-owned e-Finance\u2019s net income jumped 40.6% y-o-y in 1Q2022 to EGP 200.3 mn, with the company\u2019s digital operations accounting for 90% of total revenues. The government has been working on measures to advance financial inclusion through expanding fintech infrastructure \u2014 a lot of which is through e-Finance\u2019s digital infrastructure \u2014 since before the war, but this has become even more important since the war began, CI Capital equity analyst Enjy Heshmat told Enterprise. That means that if anything, the war\u2019s impacts will be a boon for the company moving forward, especially in light of the additional spending<\/a> expected from the government to cushion the war\u2019s economic impact, a large portion of which e-Finance processes, Heshmat added.<\/p>\n

Still, Fawry + e-Finance\u2019s shares have fallen this year:<\/strong> e-Finance\u2019s shares are down 21.1% YTD, but this could be as the market awaits a consecutive set of solid results before they gain confidence in the stock, Heshmat explained. e-Finance completed its blockbuster IPO<\/a> last October, and has since only reported financials for 9M2021 and 1Q2022. Fawry\u2019s share price is down nearly 70% YTD, but this is attributed to a slate of one-off events that have a short-term impact on share price but should bring about better results down the line, Heshmat explained. These include its recent EGP 800 mn capital increase and a recently-introduced employee stock ownership plan (ESOP), both of which can dilute the company's share value and can prompt some investors to exit the stock, Heshmat said. \u201cThe market is now waiting to see how these measures will translate into better performance,\u201d Heshmat said. The company has not yet reported its 1Q earnings.<\/p>\n

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