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), 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): 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.
EFG-Hermes Holding (HRHO EY): The company has finalized the acquisition of a 51% stake in Arab Investment Bank (aiBank), it said in a statement. The deal will give EFG Hermes control of aiBank, with The Sovereign Fund of Egypt’s (TSFE) Financial Services and Fintech Subfund (fully owned by TSFE) acquiring a 25% stake. The deal makes EFG Hermes a universal bank with an investment bank, a commercial bank, and a non-bank financial institutions platform, it added, while the acquisition will mark EFG Hermes’ entry into the Egyptian commercial banking sector, according to the statement. The acquisition will help build a business model that can withstand the cyclicality of capital markets and increase synergies creation potential across the platform. The terms of the deal were not disclosed. (Bloomberg, company release)
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.
The Egyptian government decided to terminate the protective tariff on aluminium, steel billet and rebar imports effective today, according to the Ministry of Industry and Trade. (Mubasher)
Our comment: Even though the tariffs were already on the lowest tranche of a sliding schedule that was to end in April 2022, this comes as a surprise (and rather counterintuitive) move as it affects the marketability of the new licenses and backward integration efforts (besides the natural gas price hike). In our view, the maximum theoretical selling price in the local market is set by the rebar import parity price, which now stands some USD125–130/ton lower. We expect a smaller USD60–65/ton drop in Ezz Steel’s selling price over the short term since it was pricing at a discount to import parity (not fully utilizing the safeguard measures) before the decision, but we still view this as negative for the company (direct hit to margin). More importantly, we were expecting a continuation of a 6–7% protective tariff beyond April 2022 (on par with HRC and history), which we think is now less likely as the government shifts focus to lower construction costs, posing further downside risk to our numbers long term. Assuming no reinstatement of the protective tariff when things settle globally, our 2022-2025 local rebar selling prices would stand USD45/ton lower, on average, which would cut our EBITDA forecasts over the same period by an average c36%, all else constant. As for the rolling mills, we believe the decision is mostly neutral, as they would see their costs also drop by USD60–65/ton, leaving their margins almost unchanged. That said, we expect a limited impact on Ezz Steel’s market share (vs. rerollers and/or rebar importers) and hence our sales volume forecasts, which we believe are rather mostly capped by working capital and/or operational bottlenecks and are safe from competition, especially in light of its full production running on the specialty B500 steel. The latter offers a noteworthy c8–10% savings in reinforced concrete applications and has already gained significant traction among mega projects.
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.
Eastern Company (EAST EY): The company’s 4Q20/21 net profit dropped c41% y-o-y to EGP391m, its earnings release showed. In related news, the company’s board proposed a DPS of EGP1.50 for FY20/21. The company’s board also approved the selling of some 1.65m treasury shares from 17 October till 29 November, it said in a release to the EGX. (Company release. EGX)
Our comment: The net profit figure comes c69% below our estimate of EGP1.27bn, despite in-line operations, on one-off provisions for disputed taxes and early retirement obligations worth over EGP1bn (divided evenly). Total revenue grew c25% y-o-y to EGP3.88bn, which is in line with our estimate, as higher-than-expected under-license revenue offset the slight miss in local cigarettes revenue, reversing the trend seen in the mix over the past couple of quarters. Local cigarette revenue grew c32% y-o-y to EGP3.10bn, missing our estimate by c1% mainly on lower volumes sold. Under-license revenue grew c4% y-o-y to EGP611m, beating our estimate of EGP523m by c17%, on c31% higher-than-expected volumes shipped of 6.2bn sticks (c4% higher y-o-y), leaving however the effective toll fee per 1,000 sticks in line with last year at EGP99, which is c11% lower than our estimate. Gross profit grew c43% y-o-y to EGP1.63bn, slightly above our estimate of EGP1.60bn, leaving margins at 42.1%, 5.3 pp higher than a year earlier, and 0.5 pp above our estimate. SG&A expenses grew c19% y-o-y to EGP272m, c15% higher than our estimate, representing 7.0% of sales, which is 0.3 pp lower than a year earlier, but 0.9 pp higher than our estimate, leaving EBIT in line with our estimate at EGP1.36bn (c49% higher y-o-y), implying an EBIT margin of 35% (5.6 pp higher y-o-y). Nevertheless, the said provisions more than offset higher-than-expected net financing income, resulting in the bottom line miss, which was not helped by a higher effective tax rate. The proposed DPS of EGP1.50 comes c21% below our estimate of EGP1.90, but still offers a decent dividend yield (net-of-tax) of 11.5% on Thursday’s closing price of EGP12.37/share.
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Egypt’s balance of payments (BOP) recorded a surplus of USD1.9bn in FY20/21, reversing a deficit of USD8.6bn a year earlier as the capital and financial account realized a net inflow of USD23.4bn, up from USD5.37bn a year earlier, while the current account deficit widened to USD18.4bn from USD11.2bn a year earlier, impacted by the effect of COVID-19 on the tourism sector, according to a press release by the Central Bank of Egypt (CBE). Tourism revenue dropped c51% y-o-y to USD4.86bn. Portfolio investment recorded a net inflow of USD18.7bn, reversing an outflow of USD7.3bn a year earlier, while foreign direct investments (FDI) dropped to USD5.2bn from USD7.5bn a year earlier. (CBE)
Our comment: The current account deficit widened to USD5.1bn in 4Q20/21 from USD3.8bn last year, mostly in line with our estimate of USD5.5bn. Tourism receipts increased 5.9x y-o-y to USD1.8bn in 4Q20/21, in line with our estimate of USD1.9bn.
By Monette Doss/ Sunday, October 10, 2021
Egypt’s annual headline inflation accelerated to 6.6% in September from 5.7% in the previous month, according to data posted by the Central Agency for Public Mobilization and Statistics (CAPMAS). Monthly prices increased 1.1% m-o-m compared to an increase of 0.1% in August, with food and beverage prices increasing 3.5% m-o-m compared to a no monthly increase in August, the data showed. (CAPMAS)
Our comment: September inflation came in higher than our estimate of 0.8% m-o-m and 6.3% y-o-y.
By Monette Doss / Sunday, 3 October, 2021
The indicative price for e-finance’s initial public offering (IPO) will range from EGP12.50–13.98/share with the final price to be announced on or around 9 October following the book building process, the company announced in a release. Public subscription will start on 6 October and end on 13 October and the stock will begin trading on or around 18 October, it added. The offering will consist of a sell-down of 80m secondary shares and a capital increase of 178m primary shares, together representing 14.5% of the group’s share capital, and will involve a placement to certain institutional investors in Egypt and elsewhere and a retail offering to retail investors in Egypt. The proceeds of the capital increase will be utilized to fund the group’s future operational expansion plans, the statement added. (Company release)
Our comment: e-finance’s IPO indicative price range implies a 2021e PER range of 44x-49x, lower than 74x for Fawry for Banking Technology and Electronic Payments (FWRY EY).
Egypt’s annual headline inflation accelerated to 5.7% in August from 5.4% in the previous month, according to data posted by the Central Agency for Public Mobilization and Statistics (CAPMAS). Monthly prices increased 0.1% m-o-m compared to an increase of 0.9% m-o-m in July, with food and beverage prices showing no monthly increase compared to a rise of 0.5% m-o-m in July, the data showed. (CAPMAS)
Our comment: August inflation came in better than our estimate of 0.8% m-o-m and 6.4% y-o-y.
The Egyptian government is planning to raise the monthly minimum wage for government employees by 12.5% to EGP2,700 in FY22/23, from EGP2,400 currently, and implement salary raises worth EGP8bn of 7% of the basic salary to employees subject to the Civil Service Act, and 13% of basic salary to employees not subject to it, according to the presidential spokesperson. (Al Borsa, Mubasher)
The Egyptian government is planning to raise the monthly minimum wage for government employees by 12.5% to EGP2,700 in FY22/23, from EGP2,400 currently, and implement salary raises worth EGP8bn of 7% of the basic salary to employees subject to the Civil Service Act, and 13% of basic salary to employees not subject to the law, according to the presidential spokesperson. (Al Borsa, Mubasher)