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Reports

BY  Monette Doss/
  • CIRA’s expansion plan implies increasing registered students and revenue at a 2022–29e CAGR of c13% and c25%, respectively, with some pressure on EBITDA due to rising OPEX
  • Planned annual CAPEX average EGP940m over the next five years with average debt/equity of 1.19x, on our numbers
  • We increase our 12-month target price for CIRA by c15% to EGP21.0/share, as we currently  include New Damietta university in our numbers and maintain our Overweight rating 

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BY  Noha Baraka/

  • Demand recovery was mainly interrupted by higher prices to mitigate higher input costs
  • However, margins should improve in 2H21e on low-interest costs and improved working capital, allowing for good FCF generation
  • We reduce our 12M TP for Obourland c7% to EGP9.26/share, and for Domty c20% to EGP6.73/share while maintaining our OW rating for both on share price dip. Obourland is our sector pick

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BY  Monette Doss/
  • We see tourism and government spending as the main GDP growth drivers. We expect building up inflationary pressures, and moderate EGP depreciation supported by a possible 100-150 bps rate hike in 2022
  • Current account deficit to narrow while debt repayment schedule necessitates seeking additional external funding, in our view
  • We expect the budget deficit to slightly widen to 7.5% of GDP in FY21/22e, with the banking sector financing the bulk of the deficit 

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BY Mariam Ramadan/
  • Polyethylene prices starting to come off record highs, but we expect spreads to remain elevated into 2022
  • Higher working capital needs weigh on debt, but decelerating investments and strong operating cash flows should make room for dividend payments next year, albeit at depressed yields
  • We leave our 2022–25e EBITDA estimates and target price nearly unchanged at EGP6.66/share but upgrade to Neutral on the recent share price slump

 

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BY  / 8 November 2021
  • Longer-than-expected favorable global dynamics and strong local demand support sales volume, margins and balance sheet improvement
  • New licenses add no finished steel capacity to the market, while Ezz Steel's brownfield expansions provide upside risk to our estimates
  • We raise our 2021–25e EBITDA estimates 3.82x and our TP a lower c25% to EGP15.0/share on a higher cost of capital, but reiterate Neutral on share price rally

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BY  Mariam Ramadan  /

  • New business intake has recovered from COVID-19 but associated margin compression has not, as precautionary measures are replaced by global inflationary pressures
  • Other equity investments help bridge the gap until BESIX recovers
  • We cut our 2021–25e EBITDA and EPS estimates c19% and 25% and TP c22% to USD10.0/share (EGP156/share), but reiterate OW on a still compelling valuation

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BY /

  • Sales and construction pace are picking up despite pandemic difficulties; we positively view coastal expansions and new key management figures
  • We expect collections of EGP54.5bn over 3Q21—2030 against CAPEX spending of EGP27.7bn
  • We reduce our TP c26% to EGP2.82/share and maintain our Overweight rating as we account for the settlement of Botanica; stock is trading slightly below par value at a 2021e P/NAV of 0.45x

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BY  Mariam Ramadan /

  • Cables business staging a recovery; we see volumes growing c10% in 2021, with gross profit per ton inching close to USD1,000, while turnkey project awards prove unyielding in the wake of COVID-19
  • Organic and inorganic expansions support growth, but along with higher working capital needs, could temporarily affect dividend distributions
  • We raise our 2021–24e EBITDA and net profit forecasts c30% and c19% and TP c11% to EGP10.5/share, and reiterate OW on a still compelling valuation

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BY
  • Egypt's attractive demographics and limited capacity in national educational institutions to fuel private education sector growth
  • CIRA, Egypt's largest private schools' operator, plans to increase its higher-education capacity by 3.76x over our forecast period; mostly self-financed
  • We initiate coverage with a  12-month target price of EGP18.3/share and an Overweight rating

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BY  /
  • Pent-up local demand, implemented price increases, and improved export markets should fuel Oriental Weavers' top-line growth, in our view 
  • Well-contained SG&A expenses and timely export rebate collections should more than offset higher polypropylene prices, filtering through to a 2021–24e EBITDA upward revision of c23%
  • We raise our 12M TP c32% to EGP9.45/share on higher estimates, but downgrade to Neutral from Overweight on share price rally

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BY /
  • A new price list translates to a c7% increase in FY21/22e ex-factory price
  • We expect high margins to sustain on higher revenue and cost-cutting efforts
  • We raise our TP c16% to EGP20.6/share on higher estimates and maintain our Overweight rating on further share price weakness

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BY Noha Baraka/

  • Demand proved resilient despite the COVID-19 outbreak; we look for a 2021–25e core business volume CAGR of c7%
  • A more favorable cost outlook and ongoing cost-cutting, along with lower net financing charges, should allow for margin expansion and profitability restoration, despite high SG&A expenses
  • We raise our 12M TP c3% to EGP10.9/share and maintain our OW rating on compelling valuation; recent concerns on management continue to be an overhang on the stock

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BY  Mariam Ramadan  /
  • Government finally imposes local sales quota to balance supply/demand; retail price should theoretically correct to over EGP1,200/ton, albeit gradually, benefiting all players
  • Arabian Cement should see its earnings multiply to unprecedented levels, despite the slightly lower implied utilization rate
  •  We more than double our 2021–24e EBITDA estimates and our TP to EGP15.0/share and reiterate OW on a substantial upside potential

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Featured

By /Sun

Egypt’s trade deficit widened slightly to USD11.8bn in 3Q21/22 from USD11.4bn a year earlier, with a net oil trade surplus of USD2.07bn, up from USD0.23bn a year earlier, according to the Central Bank of Egypt (CBE) data. Suez Canal and tourism receipts increased c17% y-o-y and c80% y-o-y, respectively, to USD1.71bn and USD2.38bn, respectively.  Workers' remittances increased by a muted c3% y-o-y to USD8.01bn, altogether leading to a slightly wider current account deficit of USD5.79bn (1.30% of GDP), compared to USD5.67bn (1.4% of GDP) a year earlier. Foreign direct investments (FDIs) increased 2.86x y-o-y to USD4.08bn supported by USD2.0bn received from the UAE by the end of March for the purchase of stakes in some five EGX-listed companies. Portfolio investment outflows came in at USD14.8bn (including net bond outflows of USD1.99bn), reversing inflows of USD5.82bn (including net bond inflows of USD3.84bn). The CBE recorded liability inflows of USD14.1bn, compared to net outflows of USD0.20bn a year earlier. Outflows to replenish the foreign asset position of banks came in at USD4.65bn, up from outflows of USD1.76bn a year earlier. The balance of payment’s (BoP) deficit widened to USD7.25bn, reversing a surplus of USD0.33bn a year earlier. (CBE)

Our comment: The current account deficit came in mostly in line with our estimate of USD5.21bn, with workers’ remittances coming in c8% below our estimate of USD8.74bn. Net portfolio outflows came in 2.0x higher than our estimate of USD7.0bn, and the BoP deficit came in also c2x higher than our estimate of USD3.59bn.

 

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By /

SODIC (OCDI EY): The company’s 2Q22 net income dropped c46% y-o-y to EGP65m, it said in its earnings release.

Our comment: The reported net income comes significantly lower than our estimate of EGP219m (down c46% y-o-y) despite revenue coming in line with our estimate at EGP1.54bn (up c51% y-o-y). Revenue growth was driven by a 2.1x y-o-y increase in the number of units delivered to 299 units, c11% ahead of our estimate of 270 units. The deliveries were skewed towards SODIC East which had an impact on margins as gross profit margin stood at a c28%, c4 pp lower than our estimate of c33%, and c8 pp lower than a year earlier, and yielded a gross profit miss of c10% as gross profit stood at EGP437m (higher c18% y-o-y). SG&A and other expenses increased c53% y-o-y to EGP317m, c36% ahead of our estimate of EGP233m. Management has explained that this is related to commission costs charged with the delivery of units. The company follows accrual-based accounting with regards to commissions, allowing it to expense commission charges with the handover of units, which explains the high SG&A reported during quarters with high deliveries. The high SG&A charges and, to a lower extent, the gross profit margin miss, led to a c53% miss in EBIT. SODIC reported EGP17m in net interest expense while we had expected a net interest income of EGP27m, and a higher-than-exected effective tax rate of c34%, higher than our estimate of c23%, widened the miss at the net income level to c70%. Operationally, sales for the quarter were impressive as gross contracted sales increased c54% y-o-y to EGP2.94bn, c19% ahead of our estimate. The beat was volume driven as the company unit sales increased c55% y-o-y to 445 units, c23% higher than our estimate of 361 units. The average price per unit sold was flat y-o-y and stood at EGP6.61m/unit, c4% lower than our estimate of EGP6.90m/unit. The company’s North Coast project, June, was the strongest contributor to the beat as the company launched a new phase in May and generated sales of EGP1.26bn. The company also noted strong performance from SODIC East while the quarter showed the selling of residual West Cairo inventory. The company continued to book cancellations related to its 500-feddan West Cairo project due to its temporary suspension, which yielded a cancellation rate of c10%, in line with our estimate, and unchanged y-o-y. Cash collections increased c22% y-o-y to EGP1.59bn while CAPEX spending came largely in line with our estimate at EGP661m (down c6% y-o-y). The average value per unit delivered decreased 25% y-o-y to EGP4.8m/unit, c6% lower than our estimate of EGP5.0/unit as deliveries included more SODIC East units of 125 units, higher than our estimate of 85 units, which weighed down the average price and pressured margins. SODIC’s backlog stood at EGP15.7bn, c2% higher than our estimate due to the beat in sales. The company’s net debt to equity increased to 0.13x from 0.07x in 2Q21 and 1Q22.

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By  Mayar Hathout/ Thursday, July 28, 2022

Obourland Food Industries (OLFI EY): The company’s 2Q22 consolidated net profit increased c22% y-o-y to EGP90.2m, according to its audited financial statements. (EGX)

Our comment: The reported net income comes 12.5% higher than our estimate of EGP80m. Revenue grew c37% y-o-y to EGP874m beating our estimate by c6% on higher-than-expected prices. Gross profit increased c24% y-o-y to EGP192m, leaving gross margin at c22%, c2% lower than a year earlier, and 2.7 pp higher than our estimate, mainly due to the higher-than-expected selling prices. As a result, EBIT came c25% higher than our estimate and 27% higher than a year earlier. The beat narrowed to c13%  on the bottom line level mainly due to higher-than-expected net financing expenses of EGP8.36m compared to our estimate of a net financing income of EGP0.90m and some EGP2.98m of FX losses, while we didn’t account for any. On a segmental breakdown, cheese revenue increased c40% y-o-y to EGP820m and came in c4% higher than our estimate on higher-than-expected selling prices, while volumes came 7.30% higher than a year earlier, c3% lower than our estimate of 25,600 tons. The white cheese segment gross profit margin came in c3 pp lower y-o-y and c3 pp higher than our estimate. The milk and juice segments’ revenue increased c25% y-o-y to EGP60.6m and came c47% higher than our estimate of EGP41m on higher-than-expected prices, c25% higher than a year earlier. Gross profit of milk and juice increased c32% y-o-y to EGP9.84m, beating our estimate by c58%, leaving the gross margin at 16.2%, 0.8 pp higher than a year earlier, and 1.1 pp higher than our estimate.

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By Monette Doss /  Sunday, 24 July, 2022

Cairo Investment & Real Estate Development (CIRA EY): The company’s 3Q21/22 consolidated net profit declined c28% y-o-y to EGP140m, according to its announced KPIs. (Earnings release)

Our comment: The net profit figure came in c22% below our estimate of EGP181m on higher-than-expected losses from the four newly launched K12 schools and higher-than-expected operating expenses and establishment costs incurred by Badr University in Assiut (BUA). K12 revenue increased c11% y-o-y to EGP214m, c8% below our estimate of EGP233m. K12 adjusted EBITDA margin expanded 4.59 pp y-o-y to c46%, factoring out one-off EGP7.0m in pre-opening expenses pertaining to BCCIS and SIS, higher than our all-in estimated EBITDA margin of c41%. Higher-education revenue declined c4% y-o-y to EGP306m, c4% below our estimate of EGP318m, mostly due to lower-than-expected admission revenue, which management expects to rebound next year upon the termination of the centralized admission system. Accordingly, the higher-education EBITDA margin contracted c6 pp y-o-y to c70%, and came c4 pp lower than our estimate of c74%. Currently, the stock is trading at 2022e P/E of 19.7x, compared to 12.0x for Taaleem Management Services (TALM EY).

 

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BY /

In its last meeting on 19 May, the Central Bank of Egypt's (CBE) Monetary Policy Committee (MPC) decided to increase key policy rates by 200 bps after increasing it by 100 bps in March and following the Federal Reserve Bank's (Fed) decisions to increase the interest rate by 25 bps in March and by 50 bps in May. The Fed also said that it is likely to increase interest rate by 50-75 bps in its next meeting in July. Egypt's annual headline inflation accelerated to 13.5% in May from 13.1% in the previous month, with monthly inflation increasing 1.1% m-o-m, compared to an increase of 3.3% m-o-m in April, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS). With the MPC due to meet on 23 June, we present our expectations on the likely outcome based on Egypt's current situation.

 

Our comment: The May inflation figure came in lower than our estimate of 14.0% y-o-y, and we expect it to average 14.4% over the rest of the year, however, well above the CBE's inflation target of 7% (+/-2% for 4Q22). We believe inflation is largely imported and reflects some product shortages due to less domestic manufacturing and lower importation. Egypt’s PMI came in at 47.0 in May, with the data pointing to low consumer spending, falling new order volumes at the quickest pace since 2020, and reduced business input purchases and staffing. We believe that consumer and business spending is largely subdued, with much of the liquidity directed to high-yield banking deposits. As of April 2022, local currency deposits increased to c66% of GDP from the pre-pandemic level of c49% in April 2019. However, domestic credit to the private business sector remained subdued at c20% of GDP in April 2022, slightly up from c16% in April 2019, and below its pre-revolution level of c26% in April 2010. Given the current economic dynamics, we believe that further interest rate hikes will not prove effective in combating inflation and could prove self-defeating by suppressing business activity, leading to more supply shortages. We still believe that carry trade is essential for supporting Egypt’s net international reserves (NIR) given its recent decline to USD35.5bn in May from USD40.9bn in February, the drop in foreign currency deposits not included in official reserves to USD1.04bn in May from USD9.2bn in February, and the widening net foreign liability position of the banking sector to USD12.7bn in April from USD3.29bn in February. However, an overvalued EGP, as indicated by the JP Morgan real effective exchange rate index at 108 bps, the change in outlook on the Egyptian economy to negative from stable by Moody's, the emerging markets sell-off , and subdued increase in 12M T-bills are hindering carry-trade and diluting the benefit of an interest rate hike, in our view. We note that the yield on 12M T-bills increased by only 90 bps following the 300 bps policy rate hikes, while the yield on 3M T-bills increased by 370 bps. This resulted in low coverage of the longer-term T-bill auctions, reducing the weighted average duration of issued T-bills from 22 March to 16 June to 5.5 months, from 9.8 months (from 1 January to 15 March). Given Egypt’s current 1-year USD credit default swap at 808 bps, and given the Egypt-US inflation differential, we believe interest on 12M T-bill rates should increase to the north of 16.0% to reflect the 300 bps rate hike undertaken so far, to translate to a real interest of 0.27% from -1.73% currently, before resorting to hiking rates further. That said, we expect the MPC to keep rates unchanged in its upcoming meeting.

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By / Sunday

Foreign currency deposits not included in international reserves decreased from USD9.17 in February to USD1.53bn in March and April and further to USD1.04bn in May, according to the Central Bank of Egypt's (CBE) data. Egypt's banking sector net foreign liabilities (NFL), including the CBE, widened to USD12.7bn in April from USD12.1bn in March, the data showed. Excluding the CBE, the banking sector's net foreign liability (NFL) widened to USD7.91bn in April from USD7.04bn in March. (CBE)

Our comment: Egypt has drawn on some USD30.6bn of its foreign currency resources (official reserves, non-official reserves, and net foreign liabilities of the banking sector) over the last five months, with the largest drawdown in March following the outbreak of the Russia-Ukraine war. Egypt's official and non-official reserves dropped by USD3.91bn and USD7.64bn, respectively, in March, which we believe corresponded to carry-trade outflows, the official figures for these outflows are not yet disclosed. On a different front, we believe that aid packages announced by the Gulf countries were recorded as foreign liabilities for the CBE, which saw its foreign liabilities increase to USD40.8bn in March from USD31.8bn in February, but without really leading to a boost in the country's reserve figure. We note that Egypt's external debt dues (excluding maturing Gulf deposits) are USD8.5bn during 1H22 which we believe contributed to the drawdown during the period.

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Talaat Moustafa Group Holding (TMGH EY): The company’s 1Q22 consolidated net income increased c27% y-o-y to EGP554m, according to its announced KPIs. (EGX)

Our comment: The reported net income comes c6% higher than our estimate of EGP523m and c7% higher than the Bloomberg consensus estimate of EGP520m. Revenue came c4% lower than our estimate of EGP3.15bn but rose c12% y-o-y to EGP3.02bn. The miss was mainly from the company’s recurring revenue as it came c25% lower than our estimate at EGP556m (c24% lower y-o-y), while real estate revenue came c2% ahead of our estimate at EGP2.08bn (c3% higher y-o-y), and hospitality revenue came c5% ahead of our estimate at EGP387m (2.2x higher y-o-y). Gross profit came c4% ahead of our estimate of EGP1.05bn and increased c15% y-o-y to EGP1.09bn as gross profit margin came c3 pp ahead of our estimate of c33% and increased c1 pp y-o-y to c36%. The company’s pre-sales were strong, increasing c53% y-o-y to EGP5.31bn and were in line with our estimate of EGP5.30bn. This led to a backlog of EGP65bn, c3% lower than our estimate. likely on the c2% higher-than-expected property revenue from deliveries, yet showing a solid c27% y-o-y growth. More to follow as the company’s financials become available.

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BY /

EFG Hermes Holding (HRHO EY): The company’s 1Q22 consolidated net profit increased c19% y-o-y to EGP345m, according to its audited financial statements. (Company financials)

Our comment: The net profit figure is c8% below our estimate of EGP377m. More to follow.

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By / Sun

Orascom Construction (ORAS EY, OC DU): The company’s 1Q22 consolidated net profit dropped 45% y-o-y to USD13.1m, according to its audited financial statements. The company’s board proposed a DPS of USD0.2313 for FY21 that the company will pay in 3Q22. (Company data)

Our comment: The company’s net income came c61% lower than our estimate and c55% lower than the Bloomberg consensus estimate mainly due to subdued performance from BESIX, which turned in the red, weighing down on ORAS profitability by USD11m. Net profit excluding BESIX stood at USD24.1m, c13% lower than our net income estimate excluding BESIX of USD27.3m. The company’s backlog increased c2% y-o-y to USD5.52bn, in line with our estimate of USD5.54bn (-0.3% deviation), incorporating the effect of the EGP devaluation. New awards decreased c7% y-o-y to USD618m, c13% lower than our estimate, with c53% of the new awards coming from the MEA region and c47% coming from the USA, almost in line with our awards’ composition of c52%, c45% and c3% from MEA, the USA and rest of the world, respectively. BESIX backlog increased c2% y-o-y to USD5.573bn, and came c2% higher than our estimate, while its new awards dropped c29% y-o-y to USD858m, in line with our estimate of USD857m. Revenue increased c20% y-o-y to USD980m and came c4% higher than our estimate, with revenues from Egypt and the Egyptian government increasing c25% and c24% y-o-y to USD701m and USD580m, respectively, higher than our estimates by c17% and c21%, respectively. Revenue from the USA was almost unchanged y-o-y at USD236m, yet came c18% lower than our estimate of USD288m. BESIX revenue was almost unchanged y-o-y at USD780m and came c16% lower than our estimate. Gross profit increased c11% y-o-y to USD92m and came in line with our estimate, only c1% higher. GPM decreased 0.8 pp y-o-y to 9.3% and came lower than our estimate by 0.3 pp. SG&A expenses increased c22% y-o-y to USD56m and came c7% higher than our estimate, lowering EBIT by c7% y-o-y to USD37m, c5% lower than our estimate. Accordingly, EBITDA dropped c1% y-o-y to USD50m and came c7% lower than our estimate. EBITDA margin decreased 1.1 pp y-o-y to 5.1%, 0.6 pp lower than our estimate, with MENA margin dropping 2 pp y-o-y to 6.5%, 0.6 pp lower than our estimate and the US margin was almost unchanged y-o-y at 0.8%, 2.2 pp lower than our estimate. EBIT margin dropped 1 pp y-o-y to 3.8%, 0.3 pp lower than our estimate. Income from equity accounted investees surged 3.13x y-o-y to USD5m, c12% higher than our estimate of USD4.5m. BESIX proforma contribution to income dropped significantly, weighing down on ORAS profitability with a negative contribution of USD11m in 1Q22, from a negative contribution of USD1.4m a year earlier, reversing the outstanding positive contribution of USD10.8m in the previous quarter. BESIX 1Q22 contribution comes significantly lower than our estimate of a positive contribution of USD8.6m on lower-than-expected revenue, and we await further clarification from management on the subdued performance. FX gains and losses almost netted out at the group level, and the effective tax rate came in higher y-o-y and higher-than-expected at c45% (compared to c32% a year earlier) due to deferred taxes of USD6.6m versus our estimate for the effective tax rate of c25%, lowering net income c45% y-o-y to USD13.1m, c61% below our estimate of USD33.3m. The proposed FY21 DPS comes c32% lower than our estimate of USD0.34, implying a payout ratio of c24% lower than our estimate of 40%, and offers a net-of-tax dividend yield of 5.18% on the 19 May closing price.

Our comment: The new awards figure comes a substantial c44% ahead of our estimate of USD766m, with the US beat more than offsetting the miss from Egypt. Management had hinted that 2Q21 would make up for the weak awards in the previous quarter especially in the US in data centers, with 1H21 overall now looking strong, though the mix is clearly less optimal for margins. We expect the relatively weak awards from Egypt will be made up for as the company signs the final contracts for the high-speed rail likely in 3Q21 when the financing is complete, among other projects in the transportation sector pipeline. The industrial segment in Egypt is seeing initial signs of a comeback, in our view, though still mainly government related, with this quarter’s bit likely reflecting the two EGP2.6bn textile manufacturing complexes signed last week. The backlog figure, however, suggests executions during the quarter could have come in below our expectations, which we will be able to confirm along the release of the 2Q21 financials.

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By / Mon

In a special meeting on 21 March, the Central Bank of Egypt's (CBE) Monetary Policy Committee (MPC) decided to increase key policy rates by 100 bps after keeping it unchanged for ten consecutive meetings and following the Federal Reserve Bank (Fed) decision in March to increase the interest rate by 25 bps. Egypt's annual headline inflation accelerated to13.1% from 10.5% in the previous month, with monthly inflation increasing 3.3% m-o-m, compared to an increase of 2.2% m-o-m in March, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS). With the MPC due to meet on 19 May, we present our expectations on the likely outcome based on Egypt's current situation.

 

Our comment: The April inflation figure came in higher than our estimate of 12.3% and Reuters' median consensus estimate of 11.8%, driven by a 48.8% y-o-y increase in fruit and vegetable prices, while bread and grains increased by 28.5% y-o-y, according to CBE and Central Agency for Public Mobilization and Statistics (CAPMAS) data. We believe that several factors triggered food inflation, including seasonal demand during the month of Ramadan, c18% EGP devaluation since 21 March, and increasing global prices following the Russia-Ukraine war. Even though food prices could relatively cool off in the coming month as demand neutralizes after the month of Ramadan, we expect food prices to be the main trigger for an average inflation estimate of 14.0% over the remaining of 2022e due to hampered purchasing power resulting from lower employment levels (as revealed by Egypt's April PMI at 46.9) and directing most demand to food staples. On a different front, we believe carry trade is essential at this point to support Egypt's net international reserves (NIR); however, it would be challenging for Egypt to attract it, given the massive sell-offs in emerging markets by foreign investors. We believe that carry trade remains subdued with coverage of government T-bill auctions of only c3%-4% for six and 12 months durations and coverage of c66%-78% for the shorter durations (in auctions held from 19 April until now). We note that yields on the 3M T-bills increased by 170 bps since the March interest rate hike, while 12M T-bills increased by only 49 bps. Given our May-December 2022e inflation estimate of 14.0% and a 15% tax rate on T-bills income for the US and EU investors, we believe that Egyptian 12M T-bills offer a negative real return of 239 bps. In May, the Fed increased its main policy rate by 50 bps taking its 1-year T-bill constant yield to 1.99%, from 1.34% in March. Accordingly, we perceive pressure on 12M T-bills to increase to 16.5%-17.0%, close to their 1H19 average of 17.4% when inflation averaged 12.9% and corresponding to average 1-year US Treasury yields of 2.39%. In 1H19, real yields of 180 bps in Egypt corresponded to a real yield of 58.9 bps in the USA. At 17%, real yields on Egypt’s 12M T-bills will come in at 0.45 bps while 1-year US treasuries offer a year yield of -490 bps (given Bloomberg consensus 2022 inflation estimate of 6.9% for the USA) while Turkey offers a negative real return of -37.69% (given the last 1-year T-bill rate of 22.3% and Bloomberg consensus 2022 inflation estimate of 60%). That said, we expect the MPC to increase rates by 200 bps in its upcoming meeting, bringing back Egypt's real interest rates to positive territory. On the currency front, we believe that risks are to the downside as we believe that the currency rate is more flow-driven, and as we expect higher outflows from more industrial imports (they are now exempt from the LC requirement) and given our estimated FY21/22e current account deficit of 4.0% of GDP. We note that the net foreign liability position of the Egyptian banking sector (including the CBE) widened to USD12.1bn in March from USD3.39bn in February. Excluding the CBE, the NFL of Egyptian banks narrowed to USD7.04bn in March from 11.8bn in February.

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By /

The Egyptian government has decided to raise the price of natural gas to the cement, steel, fertilizer, and petrochemical producers by USD1.25/mmbtu to USD5.75/mmbtu (or according to the pricing formula stipulated in the contracts), and to USD4.75/mmbtu for all other industrial uses effective tomorrow, according to the Official Gazette. (Official Gazette)

Our comment: This is clearly negative (and unexpected) news for the sector following previous reports of the government’s intention to fix prices for three years. Each USD1/mmbtu hike in the price of natural gas increases Ezz Steel’s (ESRS EY) production costs by USD50m per annum, which translates to around EGP1bn for the entire USD1.25/mmbtu hike. DRI economics remain favorable, however, especially in light of the recent drops in iron prices, which along with finished steel prices holding up, should support margins. The subject remains practically irrelevant to cement producers, including Arabian Cement (ARCC EY), but could deter them from seeking to switch back to operating on gas, especially in light of the expected receding of the price of thermal coal along moves by the Chinese government. The decision should not affect SIDPEC (SKPC EY), whose gas cost is tied by a formula to finished product prices, albeit possibly with a lag before back-end adjustments are made with GASCO. It remains to be seen whether this suggests a similar move could happen on the electricity tariffs front.

 

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News

BY / Wednesday, 10 August 2022

Egypt’s annual headline inflation accelerated to 13.6% y-o-y in July from 13.2% y-o-y in the previous month, according to data posted by the Central Agency for Public Mobilization and Statistics (CAPMAS). Monthly prices rose 1.3% m-o-m compared to a decline of 0.1% m-o-m in June, with food and beverage prices increasing 0.5% m-o-m compared to a decrease of 1.8% in June, the data showed.  (CAPMAS)

Our comment: The inflation figure came in higher than our estimate of 0.7% m-o-m and 13.0% y-o-y.

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BY  / Wednesday, 10 August 2022

The Saudi Egyptian Investment Company (SEIC), a unit of the Saudi Public Investment Fund (PIF), plans to buy shares in Egypt’s e-finance (EFIH EY) and Abu Qir Fertilizers (ABUK EY), according to Asharq newspaper. The PIF unit may buy The Chemical Industries Holding Company’s 5.47% and the Industrial Development Authority’s (IDA) 10.08% stakes in Abu Qir Fertilizers, it added. (Bloomberg)

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