Elsewedy expected to benefit from abroad

What's Up: Egypt's El Sewedy Electric business should benefit from improving demand from the construction sector across the Gulf.

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Egypt's Elsewedy Electric is expected to benefit from improving demand in Saudi Arabia and Qatar's construction sector, AlembicHC said yesterday.

"The Saudi Arabian and Qatari operations represent 19 per cent of the company's capacity and Doha Cables secured an order of more than 40,000 tonnes that should keep it busy for two years," said Hatem Alaa, an analyst at the investment bank based in Egypt.

Mr Alaa upgraded the stock to "neutral" from "underweight" and raised the target price by 5 per cent to 39.6 Egyptian pounds on valuation grounds.

Putting up US$220 billion, Saudi Arabia accounts for 36 per cent of the $628bn project pipeline across the main Middle East and North Africa region's construction markets, according to a Citi report to investors earlier this month.

Saudi Arabia also has more than $180bn of projects in development and will continue to dominate the region's construction landscape, the US bank's report said.

Elsewedy has four main business segments: wires and cables; electrical products; turnkey projects; and wind energy.

The low-margin wires and cables segment has historically been the primary revenue and value driver of the company, accounting for more than 75 per cent and 60 per cent of gross profit lines last year.

Elsewedy has pursued a geographic expansion strategy that focuses on penetrating new markets through establishing new cable plants across the Middle East.

The management's criteria for selecting new markets focused on expanding operations in poor and underdeveloped infrastructure markets characterised by a low-cost environment that could potentially serve as an export hub in neighbouring markets, Sudan and Ethiopia to Africa, Yemen and Syria to Iraq.

The strategy also included expanding in rich countries characterised by strong budget surpluses expected to offer strong potential for infrastructure spending, such as Saudi Arabia, Qatar and Algeria.

Investors must always consider the risk when it comes to return on their investments; high copper prices for cabling substantially increase working capital requirements for the company.

Although prices have softened since hitting a record high of $10,168 per tonne in February and are now about $9,000 per tonne, the price of copper is considerably higher than last year's $7,000 per tonne.