- We perceive microfinance as a major growth driver despite responsible financing regulations, while leasing lags on delayed private investment recovery
- Strong deal pipeline and synergies with affiliated commercial banks offset lagging stock market activity, in our view
- We increase our 12-month TP for EFG Hermes by c27% to EGP20.5/share and for CI Capital by c14% to EGP6.25/share; we maintain our OW ratings on EFG Hermes and CI Capital
Egypt Financials Sector: Diversified Platforms Support Growth
Egypt Macro: Overdue Private Sector Engagement
- 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
SIDPEC (SKPC EY): Upgrade To Neutral On Share Price Drop | Neutral, TP EGP6.66
- 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
Ezz Steel (ESRS EY): It Gets Better | Neutral, TP EGP15.0
- 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
Orascom Construction (ORAS EY): Lower Margins Warrant A Lower TP, Maintain OW | Overweight,TP EGP156
- 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
Palm Hills Developments (PHDC EY): Resilient Performance | Overweight, TP EGP2.82
- 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
El Sewedy Electric (SWDY EY): Still Oversold | Overweight, TP EGP10.5
- 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
CIRA (CIRA EY): Growth Play With Solid Fundamentals | Overweight, TP EGP18.3
- 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
Oriental Weavers (ORWE EY): Downgrade to N on share price rally | Neutral, TP EGP9.45
- 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
Eastern Company (EAST EY): Price Increase Warrants A Higher Target Price | Overweight, TP EGP20.6
- 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
Juhayna Food Industries (JUFO EY): Sustained Solid Fundamentals | Overweight, TP EGP10.9
- 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
Arabian Cement (ARCC EY): A Turnaround In Fortunes Starts Now | Overweight, TP EGP15.0
- 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
Egypt Cheese Sector: Demand Recovery Interrupted
- 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
Orascom Construction (ORAS EY, OC DU): The company’s 1Q22 consolidated net profit dropped 45% y-o-y to USD13.1m
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.
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
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.
The Egyptian government has decided to raise the price of natural gas to the cement, steel, fertilizer, and petrochemical producers by USD1.25/mmbtu
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.
Orascom Development Egypt (ORHD EY): The company’s 4Q21 net income dropped c53% y-o-y to EGP88m
Orascom Development Egypt (ORHD EY): The company’s 4Q21 net income dropped c53% y-o-y to EGP88m, it said in its earnings release. Revenue increased c25% y-o-y to EGP2.15bn while gross profit (including depreciation charges) increased c33% y-o-y to EGP555m as gross profit margin expanded 1.6 pp y-o-y to c26%, it added. (Company release)
Our comment: The company reported impressive quarterly operational numbers, but profitability was hit by a provision charge of EGP300m and an exceptionally high effective tax rate of c63%. Revenue came largely in line with our estimate of EGP2.07bn, c4% higher as real estate revenue came in line with our estimate of EGP1.50bn but hospitality and town management revenue both exceeded our estimate by c12% and c30% respectively. Gross profit came c6% ahead of our estimate on a slight gross profit margin beat of 0.5 pp. SG&A expenses of EGP56m, came in c46% lower than our estimate of EGP105m, and stood at c2% of net sales whereas we had expected SG&A expenses to be c3% of net sales. Interest income (including interest on deferred revenue) came 2.1x ahead of our estimate of EGP40m. Given the full year’s profitability, management opted to take on an EGP300m provision charge, which we had not accounted for. Including other gains, the other expenses (including the provision charge) for the quarter stood at EGP285m while we had expected other income of only EGP25m. The provision charge offset the lower-than-expected SG&A expenses, higher-than-expected investment income, and share of associate gains and led to a c30% EBIT miss and a c33% EBITDA miss. Financing expenses were lower than expected, c43% lower than our estimate of EGP120m, which narrowed the pre-tax miss to c25%. The company’s tax charge was exceptional during the quarter as the effective tax rate stood at c63%, compared to our estimate of c47%, following management guidance that tax charges will be high during the quarter. The high taxes were partially related to previous exemptions given to touristic companies due to COVID-19. This led to a c48% miss in pre-minority income, and a c54% miss in net income. Excluding the provision charge and applying the corporate tax rate of 22.5% would yield a net income of EGP430m, c2.3x higher y-o-y.
Ezz Steel (ESRS EY): The company reported a 4Q21 consolidated net income of EGP1.04bn, reversing a net loss of EGP0.35bn a year earlier
Ezz Steel (ESRS EY): The company reported a 4Q21 consolidated net income of EGP1.04bn, reversing a net loss of EGP0.35bn a year earlier, and FY21 net income of EGP3.52bn, reversing a net loss of EGP3.12bn a year earlier, its audited financials showed. (EGX)
Our comment: The reported 4Q21 net income comes c43% below our estimate of EGP1.83bn, and c18% below our FY21 net income estimate of EGP4.31bn. More to follow.
GB Auto (AUTO EY): The company’s 4Q21 consolidated net profit increased c64% y-o-y to EGP473m,
By Mayar Hathout/ Sunday, February 27, 2022
GB Auto (AUTO EY): The company’s 4Q21 consolidated net profit increased c64% y-o-y to EGP473m, according to its audited financial statement. (Company release)
Our comment: The reported net profit came in c47% above our estimate of EGP323m. The Auto and Auto related business reported a net profit of EGP205m in 4Q21, 2.72x higher than a year earlier, beating our net profit estimate of EGP104m by c98%, mainly on higher-than-expected revenue and marings. Auto and Auto related business revenue increased c30% y-o-y to EGP7.16bn, c14% higher than our estimate of EGP5.74bn, while gross profit rose c29% y-o-y to EG969m, c39% higher than our estimate of EGP739m as the gross profit margin for the period stood at 13.5%, 0.1 pp lower than a year earlier, yet 0.7 pp higher than our estimate of 12.9%. Despite c17% higher-than-expected SG&A expenses of EGP591m (up c30% y-o-y), and c77% higher-than-expected provisions of EGP20m (down c41% y-o-y), EBIT came in c47% higher than our estimate at EGP406m (up c38% y-o-y), on the higher-than-expected margin. EBIT margin expanded 0.3 pp y-o-y to 5.7%, and came 0.9 pp higher than our estimate. Income tax came in c49% higher-than-expected and minority interest also came in c22% higher-than-expected. Segmental breakdowns showed that the higher-than-expected revenue coming from Egypt passenger cars (PCs), Commercial Vehicles, and other segments have more than offset lower-than-expected revenue from Egypt’s 2- and 3-wheelers and lower revenue from regional operations. Egypt’s PCs revenue increased c38% y-o-y to EGP3.82bn, c18% higher than our estimate of EGP3.25bn, mainly on c14% higher-than-expected volume of 13,516 cars (up c24%y-o-y), despite the persisting impacts of the global semiconductor shortage on passenger car supply chains. The company attributed the y-o-y increase in volumes primarily to strong demand for Hyundai, which continued to be the leading brand in the passenger car segment during 2021. While Egypt’s 2- and 3-wheelers revenue increased c8% y-o-y to EGP1.02bn, missing our estimate of EGP1.26bn by c19%, mainly on c25% lower-than-expected 3-wheeler volumes. The company has started finding adequate substitutions to the three-wheelers to support the longer-term sustainability of the LOB, and mitigate the anticipated shortfall in its performance after the latest regulatory development relating to the ban on importing key three-wheeler components. Also, the company’s regional operations came c1% lower-than our estimate at EGP807m (down c0.9% y-o-y), which we largely attribute to both lower-than-expected Iraq’s PC cars and 2-and 3-wheelers volumes. While the Iraqi passenger cars market remains weak, the company is happy with the volume, market share, channel mix, and network development of the MG brand.
Cairo for Investment and Real Estate Development (CIRA EY)'s1Q21/22 consolidated net profit
By Monette Doss / Sunday, 30 January, 2022
Cairo for Investment and Real Estate Development (CIRA EY): The company’s 1Q21/22 consolidated net profit declined c8% y-o-y to EGP100m, according to its KPIs. (Company release)
Our comment: The net profit figure came in c19% below our estimate of EGP123m on a mix of higher-than-expected operational and net financing costs. The company’s operating costs increased in 1Q21/22 due to start-up expenses including marketing and salaries related to its three newly inaugurated schools in September, and its four new faculties in Assuit University. Pre-operation costs pertaining to the four new schools were previously capitalized on the company’s balance sheet and were then transferred to the P&L after the schools became operational, according to management. The higher cost is also not reflected in realized revenues as the new schools break even in the second year of operations and turn profitable in the third year. In 1Q21/22, the company started the operations of three new schools, namely British Colombia Canadian International School (BCCIS) West, Saxony International School (SIS) West, and Futures Language School in Sohag. We believe that around EGP10m of the pre-operation costs came under other expenses, hence not fully reflected in the K–12 EBITDA, which remains to be confirmed upon the release of the full financial statements. The number of registered K–12 students increased c14% y-o-y to 30.9k, only c1% above our estimate of 30.5k reflecting in c22% y-o-y increase in schools’ revenue to EGP196m, mostly in line with our estimate of EGP192m. K–12 EBITDA increased c16% y-o-y to EGP64m, only c6% below our estimate of EGP68m, which suggests that most of the startup expenses came under other expenses. Hence, K–12 EBITDA margin came in at c33%, c2 pp below our estimate of c35%. For the higher-education segment, the company started the operations of three new faculties in the Badr University in Cairo (BUC) in 1Q21/22 while delaying the operations of some three to four new faculties in its Assiut University until February upon receiving the necessary approvals. Accordingly, the number of registered higher-education students increased c8% y-o-y to 14.0k, mostly in line with our estimate of 14.2k. The subdued increase in new registrations is due to the newly introduced university admission system by the Ministry of Higher Education, the effect of which is expected to fade over the coming semesters as universities will be given an allowance to accept a higher number of new students to compensate for forgone new registrations in the first semester of the academic year. Accordingly, higher education revenue increased c12% y-o-y to EGP234m, c4% below our estimate of EGP243m. Higher education EBITDA increased by a muted c4% y-o-y to EGP155m, c6% below our estimate of EGP165m, with an EBITDA margin of c66%,just below our estimate of c68%. The company’s net financing cost increased c54% y-o-y to EGP39m, c22% above our estimate of EGP32m, possibly due to lower-than-expected interest income on the company’s cash, which remains to be confirmed upon the release of the full financial statements.
SIDPEC (SKPC EY) 4Q21 results
SIDPEC (SKPC EY): The company reported an unaudited 4Q21 net profit of EGP177m, up c75% y-o-y and 2.36x q-o-q, according to a bourse release. (EGX)
Our comment: The reported 4Q21 results come lower-than-expected mainly due to lower-than-expected revenue, despite in-line margins. Revenue increased c30% y-o-y to EGP1.37bn but missed our estimate of EGP1.52bn by c10%, possibly on lower-than-expected volume sold. SKPC reported a gross profit of EGP340m, up 2.60x y-o-y but missed our estimate of EGP397m by c14%, translating into a gross margin of c25%, up c13 pp y-o-y and 1 pp below our estimate. As a result of the lower-than-expected revenue, net income missed our estimate of EGP228m by c22%.
On a yearly basis, the reported FY21 figures come much higher than the FY21 budgeted figures released in early 2021. The reported FY21 revenue of EGP5.13bn comes c15% higher than FY21's budgeted revenue of EGP4.47bn, and the reported FY21 net income of EGP535m comes 3.26x higher than the budgeted FY21 net earnings of EGP164m, mainly due to higher y-o-y selling prices.
We will comment further when the company publishes its full financials.
Heliopolis Housing (HELI EY): The company has approved the revenue-share agreement with Mountain View,
Heliopolis Housing (HELI EY): The company has approved the revenue-share agreement with Mountain View, it said in a statement. Mountain View will make an initial payment of EGP1.4bn, representing 50% of the total initial amount, while the remainder will be paid within 18 months, it added. The project includes a EGP80bn minimum guarantee, it added, while the project development is expected to take place over 15 years, according to the release. (Bloomberg)
Our comment: We positively perceive the disclosed project economics as they come better than our numbers for Heliopark. Our TP of EGP8.41/share includes a value of EGP3.37/share for Heliopark where we assumed the company would generate sales of EGP101bn from the plot, a gross profit margin of 45%, a collection period of 21 years, CAPEX spending over 17 years, which yielded an NPV of EGP716/share, on our numbers. The agreement with Mountain View would generate proceeds of EGP115bn for Heliopolis Housing (c14% higher than our estimate of EGP101bn), a collection period of 23-25 years, and although the company did not mention a project margin in the release, we assume the agreement would entail a high margin for Heliopolis Housing, given the nature of revenue-share deals. The EGP115bn of proceeds to Heliopolis Housing implies a revenue share of c29%, similar to its revenue-sharing agreement with SODIC (OCDI EY) for the SODIC East project, which included a similar revenue share of c30%. In terms of margins, we had derived a margin of c95% for HELI in SODIC East using an external infrastructure cost of EGP350/sqm for the total area of 2.75m sqm. For the minimum guarantee, it is worth noting that SODIC East included a minimum guarantee of only EGP5.01bn (c10% of the project revenue of EGP49.1bn) while the agreement with Mountain View includes a high minimum guarantee of EGP80bn (c20% of the EGP397bn revenue). To incorporate the new economics into our valuation for Heliopark, we factored in the sales proceeds of EGP115bn, the collection period of 25 years, used an external infrastructure cost of EGP1,615/sqm (a gross profit margin of 85%), excluded SG&A expenses (which Mountain View would incur), and discounted the net proceeds using HELI’s WACC. This yields an NPV of EGP10.9/share for HELI’s share in Heliopark, or EGP2,043/sqm of land, which is c3.2x higher than our valuation for the plot. Using the minimum guarantee proceeds of EGP80bn and assuming all else is constant, would yield a value of EGP7.58/share, or EGP1,421/sqm. Accordingly, based on our calculations, the agreement can potentially almost double our valuation for Heliopolis Housing, increasing it by c1.89x.
Aldar-ADQ consortium successful mandatory tender offer (MTO) for SODIC
Aldar-ADQ consortium successful mandatory tender offer (MTO), where they will own 85.52% of SODIC’s outstanding shares EGP20/share (a total deal value of EGP6.1bn), puts SODIC on a 2021e P/NAV of 0.31x and a P/E of 11.9x. Although, the deal valuation comes c15% lower than the IFA’s valuation of EGP23.42/share and c33% lower than our TP of EGP30/share, with both valuations not including any acquisition premiums, we believe it will still allow for a re-rating of Egyptian real estate stocks, especially the extremely oversold ones with sold fundamentals.
Currently the sector is trading on a P/NAV of 0.22x and a P/E of 9.03x (excluding SODIC), which we believe warrants a re-rating for the sector. Moreover, we expect the divestment proceeds of SODIC’s shareholders to find its way back into the sector and most likely into more established developers as fund managers adjust their portfolio positions following the execution of the deal expected to take place next week (5 working days following the MTO’s deadline of 7 December). We also believe the deal shows a resilient outlook for Egypt’s real estate sector given that the acquirer is a large regional real estate player.
We note that our 2021 picks were TMGH EY, OCDI EY, and ORHD EY which have so far realized a y-t-d return of c32%, c33%, and c19%, respectively. For 2022e, we believe TMGH EY still has a solid chance to be a sector outperformer as we incorporate Noor into our numbers. ORHD has also delivered exceptional 9M21 results and with a rebound in hospitality operations in sight, we expect the company’s fundamentals to continue to be attractive going forward. We also see a trading opportunity in HELI EY as the company is close to finalize a revenue-sharing deal on its 1,695-feddan project, Heliopark, which coupled with its other revenue-sharing project with SODIC, SODIC East, would improve its earnings visibility. We also advise to keep a close eye on EMFD due to its strong fundamentals, the exceptionally low trading 2021e P/E of 3.3x and given the strong numbers it reported in 9M21.
In terms of operational KPI’s, it is worth highlighting that the sector witnessed a c38% y-o-y growth in 3Q21 pre-sales. The highest growth was reported by TMGH EY and stood at c96% y-o-y, followed by PHDC EY at c93%, ORHD at c50% and EMFD EY at c24%, however, SODIC EY reported a c23% y-o-y drop in sales and MNHD EY reported a c58% y-o-y drop. Leverage has also been healthy in the sector with PHD reporting the highest net debt-to-equity of 0.54x as of 3Q21, followed by ORHD at 0.48x, MNHD EY at 0.27x, and OCDI EY at 0.01x. On the other hand, TMGH and EMFD, reported a net cash position (including treasuries) of EGP3.43bn, and EGP10.8bn, respectively.
Juhayna Food Industries (JUFO EY)’s 9M21 net profit increased c28% y-o-y
Juhayna Food Industries (JUFO EY): The company’s 9M21 consolidated net profit increased c28% y-o-y to EGP490m, according to its announced 1Q21, 2Q21, and 3Q21 KPIs. (EGX)
Our comment: The reported 9M21 net income came in c5% higher than our estimate of EGP467m mainly on improved working capital management. The company published its 1Q21, 2Q21, and 3Q21 KPIs all at once, and hence we are commenting on the 9M21 KPIs. The company’s 9M21 revenue came in line with our forecast of EGP6.5bn, up c16% than a year earlier. Newly launched products during 1Q21 and 2Q21 have contributed to the increased revenue. The company’s gross profit came c5% lower than our estimate of EGP2.02bn and increased c7% y-o-y, mainly due to a 1.7 pp lower-than-expect gross profit margin of 29.5%, 2.6 pp lower than a year earlier. On the EBIT level, the company more efficiently used its working capital and improved its cash conversion cycle by reducing its inventory, leading to lower debt and interest expense. Hence, pre-tax income increased c16% y-o-y to EGP629m; however, it came c6% below our estimate of EGP666m mainly due to the lower-than-expected operating margins. A lower-than-expected and lower y-o-y effective tax rate of c22%, widened the y-o-y growth in net profit to 27.6% and led net income to come in c5% higher than our net income estimate.
Egypt’s 3Q21/22 came in at 5.4% leading to a 9M21/22 growth of 7.8%
/ Thursday, 26 May 2022
Egypt’s 3Q21/22 came in at 5.4% leading to a 9M21/22 growth of 7.8%, according to the minister of planning. The government expects FY21/22 growth of 6.2%, she added. Growth during the past period was largely due to strong economic activity in the restaurant and hotel industry, followed by the telecommunication sector, and the Suez Canal, she added. In related news, the International Monetary Fund (IMF) has begun technical talks with Egyptian officials that are aimed at maintaining high growth rates, according to the Director of the Middle East and Central Asia Department at the fund. Egypt will need to focus on increasing its export capacity, he also said. (Cabinet statement, Al Shorouk)
Egypt will introduce mega-projects over the coming months to attract foreign direct investments including mega data centers
/ Thursday, 26 May 2022
Egypt will introduce mega-projects over the coming months to attract foreign direct investments including mega data centers, oil transport networks, gas liquefaction plants, and telecommunication towers, together with new investment incentive packages, according to a cabinet statement. (Cabinet statement)