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Reports

BY  Monette Doss  /
  • Egypt’s external position vulnerability renders further EGP devaluation accompanied by interest rate hikes necessary, in our view
  • We expect further working capital loan growth, moderate deposit increases, maintained NIMs and pressured asset quality over the rest of 2022e
  • We lower our TP for CIB by c5%, and for CAE by c9% but increase it for ADIB-Egypt by c36%; and maintain an OW rating for all three banks. CIB is our top pick 

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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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Featured

By / Sunday

Orascom Construction (ORAS EY, OC DU): The company’s 3Q22 consolidated net income decreased c16% y-o-y to USD23.9m, according to its audited financials. (Company data)

Our comment: The reported net income comes c24% higher than our estimate of USD19.3m, mainly on c22% higher-than-expected revenue. The company’s backlog decreased c5% y-o-y to USD5.73bn, accounting for the full effect of the EGP devaluation. New awards dropped c30% y-o-y to USD677m, comprised of USD473m new awards in MEA, predominantly in Egypt, in local currency in water infrastructure, BOO warehouse, and real estate development projects, and a small percentage in Saudi Arabia (which constitute a potential for larger projects) and USD204m of new awards in the USA in core data center and commercial projects. BESIX backlog decreased c5% y-o-y to USD5.37bn, and came c9% higher than our estimate, on c77% higher-than-expected new awards of USD1.3bn, c12% lower y-o-y. The breakdown of Besix backlog revealed lower exposure to Europe, UAE, and Africa versus higher exposure to the  USA and other MENA countries. Revenue increased c33% y-o-y to USD1.14bn and came c22% higher than our estimate on higher-than-expected executions, with revenue from Egypt rising c18% y-o-y to USD0.69bn (exceeding our estimate by c21%), while revenue from the USA surged c48% y-o-y to USD0.40bn (exceeding our estimate by c34). BESIX revenue rose c4% y-o-y to USD793m and came c10% lower than our estimate. Gross profit rose c21% y-o-y to USD95m and exceeded our estimate by c26%, and gross profit margin dropped c0.8 pp y-o-y to 8.3%, c0.3 pp higher than our estimate of 8.03%. SG&A expenses rose c11% y-o-y to USD51m and came c9% above our estimate. EBITDA surged c25% y-o-y to USD57.2m, exceeding our estimate by c38% on c0.6 pp higher-than-expected EBITDA margin of 5.0%, c0.3 pp lower y-o-y. MENA margin decreased c0.4 pp y-o-y to 6.4%, 0.3 pp higher than our estimate, and the US margin increased 0.3 pp y-o-y to 2.5% and came c1.2 pp higher than our estimate on a good rebound in US margin. EBIT increased c36% y-o-y to USD46m, and came c57% above our estimate, while EBIT margin remained flat y-o-y at 4.0%, c1 pp above our estimate. BESIX reversed course with OC recording a minor loss of USD0.2m from BESIX versus a positive figure of USD6.5m a year earlier, missing our estimate of USD2.7m, which was partially offset by c62% higher-than-expected income from equity accounted investees ex-Besix at USD4.7, c34% higher y-o-y. Net interest expense surged 2.4x y-o-y to USD9.7m, and came c40% above our estimate on lower-than-expected interest income and c12% higher-than-expected interest expense. Net profit dropped c16% y-o-y to USD23.9m and came c24% higher than our estimate, mainly due to the higher-than-expected revenue.

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BY /

Commercial International Bank (COMI EY): The bank's 3Q22 consolidated net profit increased c16% y-o-y to EGP4.42bn, according to its audited financial statements. (Bank data)

Our comment: The bank reported a good set of results, with its net profit exceeding our estimate of EGP3.73bn by c18%, mainly on c15% lower-than-expected interest expense. Moreover, its balance sheet showed healthy growth, with net loans meeting exactly our estimates while deposits exceeding our estimates. Gross loans increased c21% y-t-d to EGP199bn in 3Q22, c1% above our estimate of EGP197bn, with a real growth of c15% y-t-d (net of EGP devaluation) driven mainly by c28% y-t-d increase in EGP loans. Net loans grew c22% y-t-d to EGP178bn as of September FY22. CIB's holding of financial investments increased c23% y-t-d to EGP264bn as of September FY22, 2.9% relatively above our estimates. Customer deposits rose c23% y-t-d and c16% q-o-q to EGP499bn, exceeding our estimate of EGP442bn by c13%. In real terms, customer deposits increased by only c17% (net of EGP devaluation). Foreign currency deposits increased by c6% y-t-d and c1% q-o-q to USD6.4bn in 3Q22. Net interest income increased c25% y-o-y to EGP8.1bn, c14% above our estimate of EGP7.12bn, mainly due to a c15% lower-than-expected interest expense of EGP6.54bn, which increased c26% y-o-y. The average yield on earning assets came in at 10.7% in 3Q22, 1.00 pp below our estimate of 11.7%, while the average cost of funds dropped 0.05 pp y-o-y to 5.02% in 3Q22, 1.10 pp below our estimate of 6.12%. Accordingly, the bank's net interest margin (NIM) increased 0.31 pp y-o-y to 6.24%, mostly in line with our estimate of 6.14%. Non-interest income declined c24% y-o-y to EGP398m, yet came c7% above our estimate of EGP370m. Provision expenses declined c26% y-o-y to EGP224m, c19% below our estimate of EGP276m. NPLs declined to 4.59% in 3Q22 from 5.70% a year earlier, with a coverage ratio of c216%, compared to 206% in 3Q21 and 209% in 2Q22.

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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 / Wednesday

The Egyptian cabinet increased the natural gas price for cement producers to USD12.0/mmbtu from USD5.75/mmbtu previously and based the natural gas price for the ethane and propane fuel mix used by petrochemical producers on the following formula: 20% of the Independent Commodity Intelligence Services (ICIS) polyethylene price divided by 50, while setting a minimum for the final price of USD4.5/mmbtu, according to the Official Gazette. The Egyptian General Petroleum Corporation (EGPC) will revise the pricing formula for the petrochemical producers who use the ethane and propane fuel mix every month. The decision also maintained the natural gas price for other petrochemical producers at USD5.75/mmbtu. The decision became effective on 9 October. (Official Gazette, Hapi Journal)
Our comment: The USD6.25/mmbtu increase in natural gas price for cement producers will make the use of natural gas by cement producers cost-inefficient compared to the current prices of other fuel inputs like coal, petcoke, and alternative fuels. Accordingly, we believe the decision will deter cement producers from using natural gas as fuel, holding all else constant. Having said that, the feasibility of using natural gas may be reconsidered in case of a worsening in the shortage of hard currency and/or unexpected negative disruption to the global supply and prices of coal and petcoke, and/or any potential lowering of imports by the government. As for Arabian Cement (ARCC EY), the company is bound by an agreement to source 300,000 tons/per annum of petcoke from the Egyptian Refining Company (ERC), which covers 60–70% of its fuel needs, depending on the production level. ARCC is currently using c18% of alternative fuels in its fuel mix, which leaves it an estimated c22% of the fuel mix that it can efficiently allocate among other sources. For ARCC, we do not expect a significant change in the company’s cash cost estimates following this decision, as it has already secured its coal needs for FY22. However, other cement producers who use c10–15% natural gas in their fuel mix, estimated at 10 factories out of 22 factories, will witness an increase in their cash cost/ton if they continue using natural gas post this decision. As for the natural gas price used in the ethane and propane fuel mix, the new pricing formula is based on polyethylene prices posted in the Independent Commodity Intelligence Services (ICIS), a source and benchmark for price information and insight across key commodities markets worldwide. As per the new formula, the cost of feedstock (ethane/propane mix) supplied by GASCO based on an agreement with it and used by petrochemical companies, namely SIDPEC (SKPC EY) and its 20%-owned subsidiary ETHYDCO, will be mainly linked to end-product polyethylene (PE) prices for East Med FOB, in addition to a premium covering the extraction cost of the ethane/propane from natural gas. We expect the new pricing formula to be more cost-efficient, realizing a cost saving for SKPC at the current PE prevailing prices relative to the cost the company is currently incurring for its feedstock. According to our calculations, and depending on the premium added by GASCO, the minimum of USD4.5/mmbtu set by the formula poses a downside risk to the company’s current profitability margins at low PE price levels, which we do not expect to materialize for the short to medium-term, given the elevated forward prices of oil and naphta, exhibiting a flatter price normalization trend, implying sustained PE price levels, in our view.

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By / Sunday

The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) has decided to keep the benchmark overnight deposit and lending rates unchanged at 11.25% and 12.25%, respectively, in its meeting on Thursday, it announced in a press release. The CBE has also maintained the rate of its main operation and the discount rate at 11.75%. The CBE also decided to increase the required reserve ratio to 18% from 14%. This works as a catalyst, complementing the tightening stance that the CBE is maintaining, by calibrating liquidity conditions, it added. On the global front, forecasts for global economic activity have dampened due to spillover effects from the conflict between Russia and Ukraine. Furthermore, global financial conditions are expected to tighten further as major central banks continue to raise policy rates and reduce asset purchase programs with the aim of containing increased inflationary pressures in their respective countries. In contrast, global commodity prices, such as international prices of oil, have slightly declined, as a result of weakening demand due to global recession expectations. Domestically, economic activity has grown by a preliminary figure of 3.2% in 2Q22, implying that FY21/22 registered a growth rate of 6.6%, compared to 3.3% a year earlier. The latest available data for the 9M21/22 shows that GDP growth was mainly driven by the private sector, particularly non-petroleum manufacturing, tourism, and trade. Meanwhile, public sector activity was supported by natural gas extractions, Suez Canal, and the general government. Moreover, select leading indicators continue to register positive growth rates in 3Q22. However, economic activity is expected to grow at a slower rate than previously projected, given the uncertainty and negative spillovers from the global scene. In the labor market, both employment and the labor force figures increased by similar magnitudes, therefore, the unemployment rate remained stable at 7.2% in 2Q22. Annual headline urban inflation increased to 14.6% in August from 13.6% in July. Similarly, annual core inflation - which excludes volatile food and regulated items - increased to 16.7% in August from 15.6% in July. The increase in annual inflation since the beginning of 2022 is emanating predominately from supply-side issues, particularly international commodity prices. Despite rising annual figures, the recorded monthly rates are lower than the recent highs witnessed during March and April. Therefore, the MPC concurs that the current key CBE rates coupled with the increased required reserve ratio are consistent with achieving price stability over the medium term. Noting that the previous tightening of policy rates by 300 bps is still transmitting through the economy, the MPC will continue to assess the impact on inflation expectations and other macroeconomic developments over the medium term. The elevated annual headline inflation rate will continue to be temporarily tolerated above the CBE’s pre-announced target of7% (+/- 2%) on average in 4Q22. The CBE remains committed to achieving low and stable levels of inflation over the medium term, which is a requisite condition for sustainable economic growth. (CBE)

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Ezz Steel (ESRS EY): The company’s 2Q22 consolidated net income more than doubled 2.3x y-o-y to EGP1.84bn, according to its audited financials. (Company data)

Our comment: The reported net income came c17% higher than our estimate of EGP1.57bn on higher-than-expected realized selling prices and margins and lower-than-expected other expenses. Long production increased c17% y-o-y to 852,000 tons, beating our estimate by c3%. Flat production decreased c20% y-o-y to 437,000 due to the increase in long steel production, falling below our estimate by c3%. Total production slightly rose c1% y-o-y to 1.29m tons, c1% higher-than-our estimate. Total sales volume dropped c12% y-o-y to 1.18m tons and came c13% below our estimate as the company didn’t sell all of its production, unlike our assumption. Revenue surged c17% y-o-y to 19.9bn on higher selling prices, missing our estimate by c7% on lower-than-expected sales volume partially offset by relatively higher-than-expected realized selling prices. Total manufacturing cost increased c19% y-o-y to EGP16.5bn, and came in line with our estimate with a deviation of only 1%, mainly on c15% y-o-y higher raw materials costs and c1.4x y-o-y higher manufacturing overhead expenses, which came 1% higher than our estimate. Total COGS increased only c6% y-o-y to EGP14.2bn due to some EGP2.3bn change in inventory finished products, which we didn’t account for in our numbers. EBITDA remarkably surged c50% y-o-y to EGP4.97bn and came in c12% higher than our estimate. EBITDA margin surged c5.5 pp y-o-y to 25.0%, c4.3 pp above our estimate due to higher-than-expected selling prices and lower-than-expected COGS. EBITDA (USD/ton) expanded c44% y-o-y to USD240, exceeding our estimate by c28% on the higher-than-expected EBITDA margin. Net financing costs decreased c9% y-o-y to EGP787m and came c12% higher than our estimate on lower-than-expected interest income and higher-than-expected interest expenses. The beat widened on the net income level to c17% on lower-than-expected other expenses.

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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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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 / Tuesday, 29 November 2022

Egypt recorded a 1Q22/23 GDP growth of 4.4% and expects to record a GDP growth of 5% in FY22/23, according to the cabinet and the presidential spokesman. (Bloomberg)

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BY  /Tuesday, 29 November 2022

The governor of the Central Bank of Egypt (CBE) met yesterday with the heads of local banks to discuss the FX shortage and how to increase FX supply in the market, according to unidentified sources familiar with the matter. The ideas mentioned in the meeting include: (1) obliging tourist establishments to deposit their hard currency receipts at local banks in return for financing incentives, (2) issuing USD saving instruments to Egyptian living abroad, and (3) showing more flexibility in accepting foreign currency deposits from banks’ clients. (Asharq Business)

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