{"id":552528,"date":"2022-09-11T13:39:08","date_gmt":"2022-09-11T13:39:08","guid":{"rendered":"https:\/\/enterpriseam.com\/egypt\/inside_industry\/industrial-stocks-are-still-divorced-from-earnings-performance\/"},"modified":"2022-09-11T13:39:08","modified_gmt":"2022-09-11T13:39:08","slug":"industrial-stocks-are-still-divorced-from-earnings-performance","status":"publish","type":"inside_industry","link":"https:\/\/enterpriseam.com\/egypt\/inside_industry\/industrial-stocks-are-still-divorced-from-earnings-performance\/","title":{"rendered":"Industrial stocks are still divorced from earnings performance"},"content":{"rendered":"<p><strong>Industrial players are seeing somewhat varied stock performances<\/strong>, with most EGX-listed industrial stocks continuing on the downward trajectory that began at the outset of the year. On both a year-to-date basis and when looking at the past five months (starting from 2Q 2022), only one EGX-listed major industrial company is in the green. There are also only four stocks that have outperformed the EGX30 this year so far.<\/p>\n<p><strong>Once again, share performances and earnings are on completely different wavelengths:<\/strong> All industrial companies \u2014 with the exception of Oriental Weavers \u2014 reported strong earnings during the second quarter of the year. This was also the case <a href=\"https:\/\/enterprise.press\/industries\/industrial-players-see-disappointing-stock-performances-amid-global-uncertainty\/\">in 1Q 2022<\/a>, when the majority of companies reported stellar earnings despite underperforming the broader EGX30 as a result of the war in Ukraine and the resulting global uncertainty, which prompted investors to exit equity markets in general, but particularly impacted industrial players due to trade disruptions, material shortages, and rising prices and costs.<\/p>\n<p><strong>For the purpose of this analysis, we\u2019ll look at the performance of a handful of heavyweight EGX30 stocks<\/strong> on a YTD basis and from the beginning of 2Q 2022 until now: GB Auto, Oriental Weavers, Ezz Steel, Elsewedy Electric, and Rameda Pharma.<\/p>\n<p><strong>Almost all the companies have underperformed the EGX30<\/strong>, both on a YTD basis and when looking at the five-month period beginning in 2Q 2022, according to market data. The EGX30\u2019s YTD return is -13.3%, while its 5M return is -10.4%.<\/p>\n<ul>\n<li>GB Auto fell 22.5% YTD and 9.8% since 3 April to EGP 3.85;<\/li>\n<li>Ezz Steel fell 1.4% YTD but is up 0.8% since 3 April to EGP 14.81;<\/li>\n<li>Elsewedy Electric fell 22% YTD and 11.9% since 3 April to EGP 7.84;<\/li>\n<li>Oriental Weavers fell 18.6% YTD and 22.1% since 13 April to EGP 6.97.<\/li>\n<\/ul>\n<p><strong>The only one bucking the trend: Rameda<\/strong>, which is up 13.1% YTD and 38.7% since 3 April to EGP 2.76.<\/p>\n<p><strong>For industrial stocks, keeping an eye on where the currency is headed is key: <\/strong>\u201cGenerally speaking, industrials are very much linked to macro dynamics and particularly the currency outlook,\u201d said Ahmed Soliman, CI Capital\u2019s head of the industrials sector. Most industrial players would also benefit from a weaker EGP on the balance sheet side of the equation, he told Enterprise. Arqaam Capital Associate Director Nour El Din Sherif echoed the same opinion, saying a depreciation also results in some savings on the labor side, including \u201cselling, general, and administrative (SG&amp;A) expenses, because most of the SG&amp;A is priced in local currency.\u201d<\/p>\n<p><strong>GB Auto is also a prime example of how wider macro conditions impact stock performance:<\/strong> Supply chain disruptions and shortages in the auto market drove down the company\u2019s share price during the first several months of the year, falling as much as 53.4% on a YTD basis in July. The company\u2019s share price has begun to stage a recovery (although it remains down YTD) in recent weeks amid expectations that Hassan Abdalla\u2019s appointment as governor of the Central Bank of Egypt and a potential agreement with the IMF will ease the country\u2019s FX crunch and allow for automotive imports to resume at a more regular pace, Soliman explains.<\/p>\n<p><strong>But fundamentals play a big role, too: <\/strong>Rameda, which has been consistently reporting solid growth in its financials, shows that investors are paying attention to each company\u2019s fundamentals. While market concerns following the EGP devaluation initially impacted the company\u2019s stock, it is now picking up again, CI Capital\u2019s co-head of research Alia El Mehelmy said.<\/p>\n<p><strong>Rameda\u2019s share movements are a reflection of confidence in management\u2019s strategy:<\/strong> Besides the company\u2019s sales volumes recovering in 1H 2022 \u201cdespite the decline in covid-related demand, which had at one point comprised 15% of the company\u2019s sales,\u201d Rameda\u2019s management is pushing with a \u201cmore active acquisition strategy,\u201d El Mehelmy told Enterprise. This strategy is expected to be \u201cwelcomed\u201d by the market considering how positively it impacts growth and margins, El Mehelmy told us.<\/p>\n<p><strong>Looking at the companies\u2019 financials:<\/strong><\/p>\n<ul>\n<li><strong>GB Auto\u2019s net income <\/strong><strong><a href=\"https:\/\/enterprise.news\/egypt\/en\/news\/story\/9cd4160b-1750-4a86-a8bf-06610d02a301\">rose<\/a><\/strong><strong> 31% y-o-y in 2Q<\/strong> despite market challenges, recording EGP 490.5 mn during the April-June period. Revenues rose almost 8% y-o-y to EGP 7.83 bn.<\/li>\n<li><strong>Rameda<\/strong><strong><a href=\"https:\/\/enterprise.news\/egypt\/en\/news\/story\/4e740352-5c6a-4b63-a1b8-3480f62caa15\">reported<\/a><\/strong><strong> 65.8% y-o-y growth in net income<\/strong> to EGP 52.4 mn during 2Q 2022, and the company\u2019s topline for the quarter was up 38.0% y-o-y to EGP 368.4 mn.<\/li>\n<li><strong>Elsewedy Electric <\/strong><strong><a href=\"https:\/\/enterprise.news\/egypt\/en\/news\/story\/93b970fb-2b39-4997-8a84-719a378d4c1e\">reported<\/a><\/strong><strong> record revenues in 2Q 2022<\/strong>, rising almost 50% y-o-y to EGP 20.4 bn during the quarter, driving a 27% increase in net income to EGP 1.1 bn.<\/li>\n<li><strong>Oriental Weavers was the only company that <\/strong><strong><a href=\"https:\/\/enterprise.news\/egypt\/en\/news\/story\/4e740352-5c6a-4b63-a1b8-3480f62caa15\">reported<\/a><\/strong><strong> a decrease in net income<\/strong>, which fell 29% y-o-y to EGP 211 mn, though revenues were up 14% y-o-y, reaching EGP 3.25 bn.<\/li>\n<\/ul>\n<p><strong>Industrial players are slowly emerging as the benefactors of a weaker EGP:<\/strong> Given that the majority of their products are either priced in foreign currencies or have exposure to exports, \u201cthe industrial sector is one of the main beneficiary of the depreciation of the EGP,\u201d El Sherif told Enterprise. Even if they retain their margins and have foreign exposure on the cost side, the depreciation in local currency will result in absolute growth in profitability, he explained, adding that these companies can increase their selling prices.<\/p>\n<p><strong>The global commodity outlook is also a big factor to look at<\/strong>, because operations are directly linked to commodity prices, and therefore they have a direct impact on profitability, said Soliman. This is especially relevant for companies that import commodities, such as Elsewedy, which imports raw materials such as copper and aluminum, Sherif said. Elsewedy is enjoying <a href=\"https:\/\/capital.com\/aluminium-price-forecast\">lower aluminum and copper prices<\/a>, which are reducing working capital needs and alleviating pressure on cashflow.<\/p>\n<p><strong>But what\u2019s positive for one company can be a negative for another:<\/strong> Ezz Steel, for example, could be saving on its cost side from lower iron ore prices \u2014 a sizable portion of their costs \u2014 but its top line could be lower and its margins slimmer as they export lower volumes, Sherif explained.<\/p>\n<p><strong>The rest of the year looks a bit brighter for industrials, <\/strong>particularly for manufacturers that use local components in their production. \u201cThese companies will likely benefit from a commodity price rally, because they price their end product in USD and it goes to the export market, while most of their cost is domestic and not linked to the global prices,\u201d says Sherif. The negative overall performance of industrials during 1H 2022 was justified, due to global market conditions, says Sherif, \u201cBut I think for the second half, the outlook looks much better,\u201d he concluded.<\/p>\n<hr class=\"grey-line\">\n<p><strong>Your top industrial development stories for the week:<\/strong><\/p>\n<ul>\n<li><strong>Americana Egypt to expand food production:<\/strong> F&amp;B conglomerate Americana is planning to invest USD 26 mn in new food production lines in Egypt, Vice Chairman Ihab Hajjaj said.<\/li>\n<li><strong>The Finance Ministry has <\/strong><strong><a href=\"https:\/\/enterprise.news\/egypt\/en\/news\/story\/b01ab7ce-b452-464a-81c6-3d15a5c1e194\">laid out the criteria<\/a><\/strong><strong> for industry players<\/strong> looking to benefit from amended customs tariffs approved by the House of Representatives in June.<\/li>\n<li><strong>Pesticide imports <\/strong><strong><a href=\"https:\/\/enterprise.news\/egypt\/en\/news\/story\/c49a1f98-886d-415a-8e3c-78a1227861fc\">will be exempt<\/a><\/strong><strong> from the requirement to use letters of credit<\/strong> after the Agriculture Ministry approved categorizing pesticides as production inputs rather than final products, exempting them from the central bank\u2019s import restrictions.<\/li>\n<li><strong>FMCG player Dabur Egypt will <\/strong><strong><a href=\"https:\/\/enterprise.news\/egypt\/en\/news\/story\/c49a1f98-886d-415a-8e3c-78a1227861fc\">double its production capacity<\/a><\/strong> with a new factory in Tenth of Ramadan City. The first phase is set to start operations in March 2023.<\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>Industrial players are seeing somewhat varied stock performances, with most EGX-listed industrial stocks continuing on the downward trajectory that began at the outset of the year. On both a year-to-date basis and when looking at the past five months (starting from 2Q 2022), only one EGX-listed major industrial company is in the green. There are [&hellip;]<\/p>\n","protected":false},"featured_media":552529,"template":"","categories":[],"tags":[1133,1258,136,152,1548,633,589,241,449],"class_list":["post-552528","inside_industry","type-inside_industry","status-publish","has-post-thumbnail","hentry","tag-amoc","tag-arqaam-capital","tag-ci-capital","tag-elsewedy-electric","tag-enterprise-inside-industry","tag-enterprisepm","tag-ezz-steel","tag-gb-auto","tag-rameda-pharma","wpautop","entry"],"acf":{"mongo_id":"76d0c79a-3ea6-4f57-b69a-6e9806a6c390","is_powered_by":true,"story_type":"2","photo_url":"https:\/\/ent.news\/2022\/9\/485.jpg","photo_position":"above","related_issue":[552518],"teaser":"","voice_url":""},"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v27.1 (Yoast SEO v27.1.1) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>Industrial stocks are still divorced from earnings performance - EnterpriseAM Egypt<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/enterpriseam.com\/egypt\/inside_industry\/industrial-stocks-are-still-divorced-from-earnings-performance\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Industrial stocks are still divorced from earnings performance\" \/>\n<meta property=\"og:description\" content=\"Industrial players are seeing somewhat varied stock performances, with most EGX-listed industrial stocks continuing on the downward trajectory that began at the outset of the year. 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