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- Private sector pickup materializing on monetary easing, moderate inflation, and stable EGP
- We are positive on the Egyptian economy, which fared better-than-expected in light of COVID-19, on IMF and government supports
- We are bullish on real estate, financials, and select industrial and consumer names, filtering through to 9 high-conviction picks
Navigating Egypt: Shifting to higher-beta stocks
CI Capital (CICH EY): Capitalizing On NBFS Impressive Growth | Overweight, TP EGP5.47
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- We expect monetary easing and private sector pickup to support leasing and investment banking operations, while financial inclusion should benefit microfinance loan growth
- CI Capital is currently a target of acquisition by Banque Misr. We expect synergies from this deal to have positive spillover effects on the company’s different operations
- We increase our 12M TP for CI Capital by c19% to EGP5.47/share on lower COE and maintain our OW rating. Offer price implies a limited premium of c13% to market price and is c14% below our TP
Alexandria Mineral Oils Company (AMOC EY): When The Going Gets Tough | Underweight, TP EGP2.84
- Global economic slowdown, IMO 2020 regulations, and tough competition in the lubricants market take a toll on AMOC’s operating margin
- We expect the heightened blending feed cost to continue weighing on operating margins too, taking EBITDA margin to an average of 3.2% over our forecast horizon, reversing a loss of -8.7% last year but still significantly below its preceding 5-year average of 6.6%
- We initiate coverage with a TP of EGP2.84/share and an UW rating on uncompelling valuation and lackluster story
GB Auto (AUTO EY): 3Q20: Pofitability Should Be Back On Track | Overweight, TP EGP5.13
- Auto and auto related operations are gaining traction on improved market dynamics and GB Auto presence; auto business to revert to profits this year, on our numbers
- We forecast GB Capital to continue delivering solid earnings growth and impressive NIMs, filtering through to a 4-year bottom line CAGR of c11%
- We slightly cut our 12M TP c3% to EGP5.13/share on lower GB Capital valuation, but maintain our OW rating on compelling valuation
GB Auto (AUTO EY): 3Q20: Pofitability Should Be Back On Track | Overweight, TP EGP5.13
- Auto and auto related operations are gaining traction on improved market dynamics and GB Auto presence; auto business to revert to profits this year, on our numbers
- We forecast GB Capital to continue delivering solid earnings growth and impressive NIMs, filtering through to a 4-year bottom line CAGR of c11%
- We slightly cut our 12M TP c3% to EGP5.13/share on lower GB Capital valuation, but maintain our OW rating on compelling valuation
Navigating Egypt: Good Stories With Limited Downside Risk
- Macro indicators across the board have improved, with private investment yet to show its potential and drive the economy
- Given the reversal of the bulk of 2016–17 rate hikes and some c11% EGP appreciation in 2019, we are bullish on consumer, financials, and select real-estate names
- With most of Egyptian equities currently oversold, we focus on compelling stories with limited downside risk, filtering through to 10 high-conviction picks
Egypt Financials Sector: Outperform On Sturdy NBFS Growth
- Private sector rebound witnessed in 1Q20 relapsed due to low visibility on the future development of the pandemic in our view, while we expect interest rate stability over the rest of 2020
- Despite our 2020e earnings downward revision, NBFS are showing high resilience with companies under our coverage seeking profitable investments and synergies with commercial banks
- We decrease our 12-month TP for EFG Hermes by c10% to EGP21.1/share and for CI Capital by c23% to EGP4.59/share on downward earnings’ revision, while maintain Overweight for both. EFG Hermes is our top pick on regional exposure and higher potential return
Oriental Weavers (ORWE EY): Decent FCF Yield | Overweight, TP EGP7.15
- A lower EGP/USD rate and delayed local demand recovery limit the benefits of an improved export market outlook, weighing down on Oriental Weavers’ top line
- Despite higher working capital needs and CAPEX bill, the stock offers a 2021–24e FCF yield of c15%, on average
- We cut our TP c23% to EGP7.15/share on our lower estimates, but maintain Overweight on share price weakness
Orascom Construction (ORAS EY, OC DU): Valuation Still Compelling | Overweight, TP EGP175
- OC reasonably weathers the storm aided by a strong backlog and balance sheet, but new order intake ex-Egypt likely to be impacted
- COVID-19 additional costs still in place, but a good project mix and earlier revenue underbookings should give margins a breather and, along with BESIX’s recovery, support earnings
- We lower our 2020–24e EBITDA estimates c5% and our TP c10% to EGP175/share, but reiterate OW on compelling valuation
Arabian Cement (ARCC EY): No Alternative For Government Intervention | Overweight, TP EGP5.50
- Capacity shutdowns outpaced by demand destruction; prices unlikely to find a bottom without direct government intervention, which is now in the cards
- Lower coal/petcoke/electricity prices, a stronger EGP and lower SG&A expenses offset weak selling prices, giving a breather to ACC’s operating margins, but earnings remain in the red until the end of the year, on our estimates
- We cut our 2020–23e EBITDA estimates c11% and TP c21% to EGP5.50/share, and maintain OW on a still compelling valuation
Egypt Financials Sector: Well Shielded
- Despite our downward GDP revision, Egypt provides attractive risk-adjusted return for carry-trade, while the banking sector is strong enough to weather a business slowdown in 2020, in our view
- CAPEX lending now delayed to 2021, however CIB, ADIB-Egypt and CAE are expected to maintain decent profitability, despite 2020e EPS downward revision, in our view
- We remain Overweight on CIB and ADIB-Egypt, and upgrade our rating for CAE to Overweight from Neutral, despite lower valuations for the 3 banks. CIB is our sector pick
SIDPEC (SKPC EY): Raise TP On A Higher Feedstock Price Cut | Overweight, TP EGP9.00
- SIDPEC manages to land the more optimistic USD1/mmbtu feedstock price cut, which more than offsets significant top line pressure
- We raise our 2020–24e EBITDA and EPS estimates c10% and c27%, but cut our rating to Neutral following the recent share price rally
Madinet Nasr Housing (MNHD EY): Further Challenged | Overweight, TP EGP7.05
- Sector conditions continuing to be difficult have pushed MNHD to resort to one-off sales and cash sale discounts to overcome liquidity shortage
- This has also impacted deliveries which are expected to pick up in 2021e. We forecast revenue to grow at 3-year CAGR of c21% and pre-sales to grow modestly at c3%
- We maintain our OW rating on MNHD, while lower our TP c44% to EGP7.05/share; implying a 2020e TP/NAV of 0.35x, while it is trading at half of that
Egypt’s net international reserves (NIR) remained almost flat m-o-m in January at USD40.1bn
Egypt’s net international reserves (NIR) remained almost flat m-o-m in January at USD40.1bn, inching up by USD38m, according to the Central Bank of Egypt's (CBE) data. Deposits not included in the official reserves slightly decreased to USD5.59bn in January from USD5.83bn in the previous month, the data showed. (CBE)
Our comment: We believe the flat NIR figures could be attributed to low foreign inflows into Egyptian treasuries during January, which was also reflected in the upward interest rate pressures witnessed in treasury auctions since the beginning of 2021. We believe Egyptian treasuries are currently facing higher competition from Turkey, which increased the interest rate on its 15-month treasuries to 15.97% in January from an implied rate of 10.66% previously. Given Bloomberg's 2021e inflation estimates for Turkey at 12.2%, we estimate its treasuries currently offering a real return of 3.8%, close to Egypt’s real return of 4.2% (based on 12-month T-bill rate of 13.3%, 15% tax rate for European and American investors and our 2021e inflation forecast of 7.2%), with the 2 countries having similar 5-year USD CDS.
SODIC (OCDI EY): The company’s FY20 gross contracted sales rose c2% y-o-y
SODIC (OCDI EY): The company’s FY20 gross contracted sales rose c2% y-o-y to EGP7.4bn, representing 1,361 units sold, with residential sales growing c19% y-o-y to EGP7.2bn and non-residential sales accounting for c3% of SODIC’s gross contracted sales in FY20 versus c17% in FY19, it announced in a release. Sales performance for the year exceeded management’s guidance after excluding Malaaz, as it had guided for EGP8.4bn in gross contracted sales including EGP1bn from Malaaz, and the launch of the project has been postponed to 2021, it added. West Cairo contributed c61% of the yearly gross sales figures vs. c39% by East Cairo and cancellations accounted for c14% of our FY20 gross contracted sales, and were negatively affected by client’s initial response to the outbreak of COVID-19, in addition to the cancellation of a bulk transaction in 3Q20. Excluding the effect of the bulk transaction, the cancellation rate for the year would stand at c10% of gross contracted sales, and it recorded cancellations of c7% of 4Q20 gross contracted sales. The company delivered 1,162 units in FY20, it also said. (Company release)
Our comment: This implies a c13% y-o-y drop in 4Q20 gross contracted sales to EGP3.30bn, divided into EGP3.24bn in residential sales and EGP60m in retail sales, a c17% drop in net contracted sales to EGP3.06bn, a c22% y-o-y drop in number of units sold to 616 units, and an c11% y-o-y drop in number of units delivered to 376 units. Having said that, we perceive the company reporting such y-o-y drops in operational figures as understandable given the impact of COVID-19 on its operations since March, and we positively perceive the impressive q-o-q growth in operational figures. Gross contracted sales grew c49% q-o-q, net contracted sales grew c77% q-o-q, number of units sold grew c57% q-o-q, while number of units delivered dropped c29% q-o-q. We attribute this impressive q-o-q growth in quarterly sales to a recovery in real estate investment demand following the 400 bps policy rate cuts that took place in 2020 (following a 450 bps rate cuts in 2019) rendering investment in real estate more appealing, despite suboptimal real demand, the company’s attractive product offering especially in West Cairo mainly in Vye and The Estates projects, and more y-o-y relaxed payment terms to make units more affordable to buyers. This helped the company to report almost flat growth in operational figures in FY20, despite COVID-19.
Bahrain’s Bank ABC entered into an accord with BLOM Bank to acquire its Egyptian unit for USD428m
Bahrain’s Bank ABC entered into an accord with BLOM Bank to acquire its Egyptian unit for USD428m (the equivalent of EGP6.70bn), according to an ABC Bank release. The acquisition is expected to complete in 2Q21, according to a regulatory filing. The deal took place at a P/B of around 1.4x, and a sale and purchase agreement (SPA) is expected to be signed within hours, according to sources familiar with the matter. HSBC Bank Middle East acted as the sole financial advisor to Bank ABC and BLOM Bank Lebanon was advised by CI Capital Holding for Financial Investments (CICH EY). (Bloomberg, Hapi Journal)
Our comment: The mentioned deal implied 2020e P/B is in line with our calculated multiple of 1.39x and we roughly estimate the bank’s ROE at c19% for 2020e. This compares to 2020e trading multiples of 1.60x for Commercial International Bank (COMI EY), 1.08x for Crédit Agricole Egypt (CIEB EY) and 0.58x for Abu Dhabi Islamic Bank Egypt (ADIB EY).
Egypt’s annual headline inflation accelerated to 5.7% in November from 4.5% in the previous month
Egypt’s annual headline inflation accelerated to 5.7% in November from 4.5% in the previous month, according to data posted by the Central Agency for Public Mobilization and Statistics (CAPMAS). Monthly prices increased 0.8%, compared to an increase of 1.8% m-o-m in October, with food and beverage prices increasing 2.7% m-o-m compared to an increase of 0.1% m-o-m in October, the data showed. (CAPMAS, CBE)
Our comment: The inflation figures came in higher than our expected 0.5% m-o-m and 5.3% y-o-y driven by accelerating food prices due to a negative supply shock of vegetables.
Egypt’s NIR remained flat m-o-m at USD39.22 by the end of November
Egypt’s net international reserves (NIR) remained flat m-o-m at USD39.22bn by the end of November, according to data from the Central Bank of Egypt (CBE). Deposits not included in NIR declined slightly to USD4.65bn in November from USD4.93bn in the previous month, the data showed. (CBE)
Our comment: Egypt’s NIR and deposits not included in NIR did not reflect foreign portfolio inflows into Egyptian treasuries of USD2bn during November, which we believe could be reflected in supporting the net foreign asset position of the banking sector. The net foreign assets position of the banking sector (excluding the CBE) increased to USD2.91bn in October from USD2.06bn in the previous month.
Egypt’s M2 October domestic liquidity
By Monette Doss / Sunday, 6 December, 2020
Egypt’s M2 domestic liquidity growth accelerated to 19.4% y-o-y in October, from 18.6% y-o-y in the previous month, according to CBE data. (CBE)
Our comment: The money supply figures indicate early signs of improved consumer confidence as well as moderate acceleration in business activity where loans to households and the private business sector increased by 1.57% m-o-m and 1.00% m-o-m, respectively. On the other hand, the public economic authorities continued to be the main growth drivers, with credit extended to them increasing by 7.67% m-o-m in October.
Eastern Company (EAST EY): 1Q20/21 results review
By Noha Baraka/ Monday, November 16, 2020
Eastern Company (EAST EY): The company’s 1Q20/21 net profit grew c10% y-o-y to EGP1.16bn, its audited financial statements showed. (EGX)
Our comment: This comes largely in line with our estimate of EGP1.16bn, only 0.5% higher. Total revenue grew c7% y-o-y to EGP3.95bn, broadly in line with our estimate of EGP3.60bn. Local cigarette revenue grew c7% y-o-y to EGP3.24bn, missing our estimate of EGP3.30bn by c2%, mainly on c4% lower-than-expected volume sold of 16.3bn sticks (up c3% y-o-y due to higher volume produced), despite some c3% higher-than-expected ex-factory price of EGP3.99/pack (up c4% y-o-y), which we largely attribute to improved sales mix. As for under-license revenue, it grew c5% y-o-y to EGP605m, c5% ahead of our estimate of EGP575m, mainly on a c12% higher-than-expected effective toll fee of EGP116 per 1,000 stick (a c10% y-o-y increase), despite volumes coming in c6% lower than our estimate at 5.23bn sticks (a drop of c5% y-o-y). Total gross profit grew c8% y-o-y to EGP1.61bn, missing our estimate of EGP1.66bn by only c3%, mainly as some c8% higher-than-expected raw material costs of EGP1.72bn (up c7% y-o-y), have more than offset the c9% lower-than-expected salaries of EGP448m (up c7% y-o-y). Gross profit margin during the quarter stood at 40.7%, 0.7 pp higher than a year earlier, but 1.2 pp lower than our estimate. Some c4% lower-than-expected SG&A expenses (up c9% y-o-y), along with c22% higher-than-expected net financing income (up c49% y-o-y), in addition to the fact that the company did not book any provision expense during 1Q20/21, against our expectations of EGP58m, all together, have more than offset the EGP41m booked in FX losses, filtering through to an in line bottom line figure.
Orascom Development Egypt (ORHD EY) debt refinancing agreement
Orascom Development Egypt (ORHD EY) | Commercial International Bank (COMI EY) | Banque du Caire (BQDC EY) | EFG Hermes Holding (HRHO EY): The company signed a USD265m 7-year loan agreement to refinance and upsize its outstanding debt with a 2.5-year grace period, it announced. ODE intends to use the proceeds as follows: (1) up to USD215m to refinance outstanding debt balances to relieve itself from upcoming debt commitments, and (2) an additional tranche of USD50m (in EGP), will be available for drawdown over 2 years for future growth opportunities at the discretion of the group, including any planned CAPEX for rollout of new rooms and renovation of hotels in the group’s destinations, it added. Commercial International Bank (CIB), Banque Misr, Banque du Caire, and HSBC are acting as mandated lead arrangers, EFG Hermes Holding acted as sole financial advisor, lead manager, global coordinator and bookrunner for the transaction, and CIB is acting as the facility agent of the transaction. (Company release)
Our comment: We positively perceive the announcement due to its large size of USD265m, the equivalent of EGP4.16bn, higher than ODE’s current debt balance of EGP3.48bn. According to the agreement, the company will use USD215m (EGP3.38bn) to repay existing debt, which covers all of outstanding debt and gives it room for additional debt with a 2.5-year grace period during tough times for the company due to its hospitality exposure in light of COVID-19. In addition to the grace period, the new debt will allow ODE to increase its EGP denominated debt and possibly allow for some interest savings. The remaining USD50m (EGP785m) will be used at the company’s discretion and will be utilized based on the recovery in the tourism sector and hospitality operations. As of 3Q20, ODE had a net debt balance of EGP1.65bn, and a net debt to equity ratio of 0.48x, and it is worth noting that the bulk of its debt is related to the hospitality segment and not to the real estate segment.
Heliopolis Housing (HELI EY) 1Q20/21 results review
Heliopolis Housing (HELI EY): The company reported a 1Q20/21 net loss of EGP41.2m, reversing a net income of EGP29.4m a year earlier, its audited financials showed. Revenue dropped c85% y-o-y to EGP38.3m, gross profit dropped c83% y-o-y to EGP32.5m, and gross profit margin increased c7 pp y-o-y to c84%, it added. (EGX)
Our comment: As expected, the company’s weak 1Q20/21 figures were largely due to no land sales during the quarter, leading revenue to come c76% below our estimate of EGP155m. The miss was attributable to negligible land and unit sales in addition to weaker-than-expected SODIC East revenue which came in at EGP23m only, c72% lower than our estimate of EGP82m. Gross profit margin came c9 pp higher than our estimate of c75% due to the high contribution of SODIC East collections to total revenue, which carries a high margin and narrowed the gross profit miss slightly to c73%. SG&A expenses of EGP35m were in line with our estimate of EGP34m, but the low revenue led to an EBIT loss of EGP3m compared to our estimate of EGP82m. Net financing expenses of EGP53m were largely in line with our estimate of EGP59m, while leasing expenses of EGP30m, were c16% lower than our estimate of EGP36m. The company reported a one-off asset sale for the quarter of EGP32.5m for a leased real estate asset, which boosted other revenue and narrowed pre-tax and net income losses to EGP42m, c3.3x higher than our estimated loss of EGP13m, as it didn’t report any tax expenses, in line with our estimate. It is worth noting that the company had lowered its targeted FY20/21 net income by c54% to EGP562m.
Egypt’s banking sector’s net foreign assets (NFA), including the CBE, inched up c8% m-o-m to USD17.2bn in December
Egypt’s banking sector’s net foreign assets (NFA), including the CBE, inched up c8% m-o-m to USD17.2bn in December, according to CBE data. Excluding the CBE, the banking sector’s net foreign assets increased to USD3.74bn in December from USD3.29bn in the previous month, the data showed. (CBE)
Our comment: According to official announcements, Egyptian treasuries attracted some USD3.0bn in foreign inflows in December that we believe were reflected in the increase in the banking sector’s NFA by USD1.29bn, deposits not included in the official reserves increased by USD1.18bn to USD5.83bn, and net international reserves (NIR) by USD0.84bn to USD40.1bn by the end of December.
Egypt’s prime minister ordered the formation of a committee comprising the ministers of justice, finance, local development and representatives of a number of entities to facilitate real estate registration procedures
/ Thursday, 25 February 2021
Egypt’s prime minister ordered the formation of a committee comprising the ministers of justice, finance, local development and representatives of a number of entities to facilitate real estate registration procedures, according to the prime minister. (Al Borsa)
Our comment: The registration fees are EGP500/unit for units with an area up to 100 sqm, EGP1,000/unit for units with an area of up to 200 sqm, EGP1,500/unit for units with an area up to 300 sqm, and EGP2,000/unit for units with an area exceeding 300 sqm. For land, the registration fees range from EGP500 for land plots with an area of up to 5 feddans to EGP2,000 for land plots with an area exceeding 10 feddans. Based on this, we see that the registration value is immaterial relative to the unit value. However, in light of the fact that the Egyptian government instructed its public utilities bodies not to extend any utilities for new homes that are not registered, while the utilities extended to old unregistered homes will remain as is, we see that this could slow a bit secondary market transactions as not all units are registered, or have the needed legal status to be registered, especially in case the buyer of the units wants to have the utilities contracts in his name. There is a legal workaround in this case, however it could take longer to finalize secondary market transactions, if the unit is not registered.
Egypt’s Ministry of Finance denied imposing a new tax on real estate transactions
/ Thusday, 25 February 2021
Egypt’s Ministry of Finance denied imposing a new tax on real estate transactions highlighting that the real estate transaction tax of 2.5% of a unit value has been in place since 1996, according to the minister. The real estate transaction tax is paid by the seller of the unit and not the buyer, he added. Rural residential units are exempt from this tax, as well as in-kind real estate transactions used in the capital increase of companies, on the condition that the owner of the units doesn’t sell his shares in the company for 5 years, he also said. (Ministry of Finance, Mubasher)
HC Research NBFS Corporate Access Event
/ MONDAY, 15 APRIL 2019
