Egypt's annual headline inflation decelerated to 35.8% y-o-y in October from 38.0% y-o-y in the previous month, according to data posted by the Central Agency for Public Mobilization and Statistics (CAPMAS). Monthly prices rose 1.0% m-o-m compared to an increase of 2.0% m-o-m in September, the data showed. (CAPMAS)
Our Comment: October inflation comes better than our estimate of 2.6% m-o-m and 38.0% y-o-y. The inflation deceleration partially reflects the government's initiative to reduce the prices of basic commodities in the local market for six months, in our view.
In its 21 September meeting, the Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) decided to maintain the benchmark overnight deposit and lending at 19.25% and 20.25%, respectively, after it increased it by 300 bps y-t-d and 800 bps in 2022. Egypt's annual headline inflation accelerated to a record of 38.0% in September from 37.4% y-o-y in August, according to the Central Agency for Public Mobilization and Statistics (CAPMAS) data. Monthly prices rose 2.0% m-o-m in September compared to a 1.59% m-o-m increase in the previous month. On the global front, the US Federal Reserve raised interest rates in July by 25 bps to a range of 5.25-5.50%, a total of 100 bps y-t-d and 425 bps in 2022, with most expectations likely to maintain rates in its meeting next week, according to Bloomberg. Based on Egypt's current economic situation, we present below our expectations for the likely outcome of the 2 November MPC meeting.
Our comment: We expect Egypt's inflation to continue rising by 2.6% m-o-m and 38.0% y-o-y in October, similar to September's figure, reflecting supply shortages of essential commodities and products mainly caused by the curbing of importation, exporting some crops and lack of USD availability and the seasonality effect of the partial start of schools and universities' academic year. Moreover, Moody's and S&P downgraded the Egyptian government's long-term foreign and local currency issuer ratings with a Stable outlook. Besides the reasons mentioned by the rating agencies for the rating downgrade mostly related to Egypt's worsening debt affordability, other concerning factors include (1) the surge in Egypt's 1-year CDS to 2,013 bps from 1,230 in mid-September, (2) the widening of the gap between the parallel and official FX rates to as much as c50% and c30% between the Real Exchange Rate (RER) and Real Effective Exchange Rate (REER) models, based on our calculations, (3) the increase of the inflation differential between the US and Egypt to 34.4% in 4Q23 from 33.8% in 3Q23, and (4) the increase of the 12M yield on US treasuries to 5.42% currently from 4.67% in January 2023 while Egypt offers a negative real yield of 4.0% currently on its 12M T-bills, based on the latest 12M T-bills auction offering a nominal yield of 26.4% compares to a positive real yield of c2.7% on US treasuries. For Egypt's real yield calculation, we used a 15% tax rate for US, UK, and Europe investors) and an average inflation rate of 26.4% for for FY24. We also estimate that the 12M T-bills required return is c28%. On a more positive note, Egypt's overall balance of payment (BoP) recorded a surplus of USD601m in 4Q22/23 and USD882m as well in FY22/23. Net international reserves (NIR) increased by 5.34% y-o-y and 0.12% m-o-m to USD35.0bn in September, and deposits not included in the official reserves increased by c6.4% m-o-m and 3.82x y-o-y to USD5.05bn in September. Egypt's banking sector's net foreign liabilities (NFL) narrowed by USD585bn m-o-m for the second consecutive month to USD25.7bn in August due to a USD995m m-o-m decline in the CBE's foreign liabilities, according to CBE data. Excluding the CBE, the banking sector's NFL widened by USD220m m-o-m to USD16.4bn due to a larger drop in banks' foreign assets (excluding the CBE) by USD868m m-o-m versus a decline of USD648m m-o-m in banks' foreign liabilities. Based on Egypt's economic situation, and although the inflation spike is supply-driven rather than demand-driven, we forecast a total 200 bps policy rate hike before year-end, including 100 bps for the 2 November meeting as we believe that the rate hike may help defend the currency against dollarization and purchases of gold by Egyptian citizens, despite that we would still be in negative real yield territory until inflation normalize again.
Egypt's banking sector's net foreign liabilities (NFL) narrowed by USD378m in August to USD25.9bn, according to data from the Central Bank of Egypt (CBE). Excluding the CBE, the banking sector's NFL widened by USD353m to USD16.5bn, the data showed. (CBE)
Our comment: The improvement in Egypt's overall NFL in August was mainly due to a USD730m m-o-m narrowing in the CBE's NFL to USD9.39bn. In August, banks' foreign assets, excluding the CBE, dropped 5.51% m-o-m to USD13.1bn, which was the main reason behind the widening of their NFL, despite the decline in their foreign liabilities by 1.37% m-o-m to EGP29.6bn. As for the CBE, its foreign assets increased 0.24% m-o-m to USD33.9bn, and its foreign liabilities dropped by 1.48% m-o-m to USD43.3bn, which narrowed its NFL by 7.21% m-o-m to USD9.39bn in August.
Madinet Masr (MASR EY): The company has not received information that the Saudi Public Investment Fund (PIF) is seeking to acquire it at a price of EGP4.30–4.60/share, according to a release on the EGX. (EGX)
Our comment: If confirmed, we believe the proposed acquisition price is generous, offering a c8%–15% premium to our TP of EGP4.00/share and a c42%–52% premium over Thursday's closing price.
Ezz Steel (ESRS EY) | Al Ezz Dekheila Steel (IRAX EY): TSFE received the first valuation of Al Ezz AlDekheila Steel of EGP1,060/share in preparation for a partial sale of the government’s stake in it to Ezz Steel, according to unidentified sources familiar with the matter. The government owns a 14% direct stake in Al Ezz Dekheila Steel through the National Investment Bank (NIB) and the National Bank of Egypt (NBE), while Ezz Steel owns 64% of it, the sources added. TSFE did not comment on the news. (Asharq Business)
Our comment: The government did not yet officially announce a partial divestment of its stake in EZDK, however, according to the State Ownership Policy Document, the steel industry falls within the sectors in which the state is planning to fix or reduce its economic presence. The news aligns with ESRS’s continuous restructuring efforts to optimize its operational process and financial performance. The estimated fair value at EGP1,060/share represents a c29% premium to EZDK’s Thursday closing price of EGP821/share and a c25% discount to the Bloomberg consensus valuation of EGP1,413/share. ESRS has long been eying EZDK for its relatively higher profitability and technical performance since it is the most significant player in the local market and a major steel exporter. In the case of ESRS expressing interest in increasing its stake in EZDK and such a deal goes through, ESRS would be entitled to a higher share of EZDK’s dividend distributions, and report lower minority interest on its income statement.
B Investments (BINV EY) | Orascom Financial Holding (OFH EY): B Investments seeks to complete the acquisition of up to 90% of Orascom Financial Holding shares during 3Q23, and negotiations are underway with several companies to appoint an independent financial advisor (IFA), but they have not yet settled on any, according to its investor relations. (Al Borsa)
Egypt's annual headline inflation accelerated to 32.7% y-o-y in May from 30.6% y-o-y in the previous month, according to data posted by the Central Agency for Public Mobilization and Statistics (CAPMAS). Monthly prices rose 2.7% m-o-m compared to an increase of 1.7% m-o-m in April, the data showed. (CAPMAS)
Our comment: May’s inflation came in higher than our estimate of 1.0% m-o-m and 30.5% y-o-y, following the recent increase in diesel prices, changes in the ration cards system, the continuity of lower food supplies due to the Russian-Ukrainian war, and higher demand due to increased arrivals of Sudanese citizens to Egypt due to recent political turmoil in Sudan.
Orascom Construction (ORAS EY, OC DU): The company's 1Q23 consolidated net income increased 2.76x y-o-y to USD36.1m y-o-y, according to its audited financials. (Company data)
Our comment: The company's net income comes 2.15x higher than our estimate of USD17m, on USD28.4m in net FX gains as part of its net finance cost, and lower effective tax rate. The company's backlog decreased c1% y-o-y to USD5.46bn, and came c9% above our estimate. New awards increased c29% y-o-y to USD858m, comprised of USD458m new awards in MEA in renewable energy, infrastructure, commercial, marine, and transportation sectors, and included the new 500 MW BOO wind farm in Egypt, additional work for highway and road development, and new scope for a premium private sector real estate developer, and USD401m of new awards in the USA mainly in the data center and commercial sectors. BESIX backlog increased c11% y-o-y to USD6.17bn and came c9% higher than our estimate, on c31% higher-than-expected new awards of USD1.12bn, c31% higher y-o-y. The breakdown of Besix backlog revealed y-o-y slightly lower exposure to North America, UAE, and Europe versus a y-o-y higher exposure to other MENA countries and Africa. Revenue decreased c18% y-o-y to USD805m and came c4% lower than our estimate, with revenue from Egypt falling c42% y-o-y to USD409m (lower than our estimate by c9%), while revenue from the USA surged c50% y-o-y to USD357m (exceeding our estimate by c8%). BESIX revenue surged c11% y-o-y to USD837m and came c4% higher than our estimate. Gross profit dropped c24% y-o-y to USD69m, and exceeded our estimate by c8%, and gross profit margin contracted c0.7 pp y-o-y to 8.6% and came c0.9 pp higher than our estimate of 7.7%. SG&A expenses decreased c25% y-o-y to USD42m and came c11% above our estimate. EBITDA dropped c30% y-o-y to USD35.4m, missing our estimate by c9% on c0.2 pp lower-than-expected EBITDA margin of 4.4%, c0.7 pp lower y-o-y. MENA margin decreased slightly c0.1 pp y-o-y to 6.4%, c0.2 pp below our estimate, and the US margin improved c1.1 pp y-o-y to 1.9% and came c0.2 pp above than our estimate. EBIT decreased c28% y-o-y to USD27m, and came c4% below our estimate, while EBIT margin dropped c0.5 pp y-o-y to 3.4%, and came in line with our estimate. BESIX contribution to bottom-line profitability was almost neutral, with a minor negative contribution of USD0.1m (lower than our estimate of a positive contribution of USD0.7m), versus a negative contribution of USD11m a year earlier. Income from equity accounted investees, ex-Besix, decreased c44% y-o-y to USD2.8m, missing our estimate of USD3.2m by c13%. Net interest expense increased 2.17x y-o-y to USD7.8m, c5% above our estimate. The company booked USD28.4 in net FX gains on net interest cost, which we did not account for in our numbers. Net profit hiked 2.76x y-o-y to USD36.1m, and exceeded our estimate by 2.15x, mainly due to the FX gains and a lower-than-expected effective tax rate of 20.2% versus our estimate of 22.5% which was partially offset by a higher-than-expected minority interest. The company divested its full stake in the construction chemicals subsidiary for EGP1.8bn in May, and its shareholders at its 31 May AGM approved a 6.52m share buyback, representing 5.58% of its total shares, from Melinda French Gates, for USD3.0/share, which it plans to terminate in 3–12 months.
Orascom Development Egypt (ORHD EY): The company's 1Q23 consolidated net income dropped c31% y-o-y to EGP292m, it said in its earnings release. (Company release)
Our comment: The company delivered impressive 1Q23 operating numbers, mainly due to selling price increases, that were hit by an EGP478m FX loss. Revenue grew c53% y-o-y to EGP2.95bn (c8% lower than our estimate of EGP3.22bn). Growth was from all revenue segments as real estate revenue grew c44% y-o-y to EGP2.01bn (c14% lower than our estimate), hospitality revenue grew c2.2x y-o-y to EGP573m (c13% higher than our estimate), and town management revenue grew c33% y-o-y to EGP366m (c2% lower than our estimate). Gross profit grew c64% y-o-y to EGP1.04bn (c2% lower than our estimate) as gross profit margin reached c35%, up 2 pp y-o-y (c2 pp higher than our estimate). SG&A expenses increased c68% y-o-y to EGP59m (c8% higher than our estimate) and investment income grew c73% y-o-y to EGP130m (c33% ahead of our estimate). The 478m FX losses were reported before the EBIT and reduced EBIT y-o-y growth to only c2% y-o-y (c47% lower than our estimate). Excluding the FX losses, EBIT would have come only c5% lower than our estimate. Financing expenses increased c2.8x y-o-y to EGP210m (c87% ahead of our estimate) and led to a pre-tax income decline of c24% y-o-y to EGP388m (c62% lower than our estimate). Taxes were negligible as the FX loss offered some tax benefits, which led to an effective tax rate of only 1% (compared to our estimate of 22.5%), resulting in a pre-minority income of EGP384m, down c17% y-o-y (c52% lower than our estimate and c8% higher than our estimate excluding the impact of the FX loss). Minority charges led to a net income of EGP292m, c31% lower y-o-y (c59% lower than our estimate and c8% above our estimate, excluding the impact of the FX loss). Operationally, the company’s sales were solid. Net sales grew c36% y-o-y to EGP2.75bn (c1% above our estimate) on the back of higher prices as volumes were flat. The company’s average unit price increased c33% y-o-y and c25% q-o-q to EGP10.1/unit (c15% higher than our estimate). In total, the company sold 272 units, c2% higher y-o-y (c12% lower than our estimate). Prices increased c68% y-o-y in Gouna to EGP129,966/sqm, c61% y-o-y in O West to EGP56,069/sqm, and c24% y-o-y in Makadi to EGP41,188/sqm. In Gouna, the company delivered 66 units, out of a targeted 462 units. The company’s hospitality revenue benefited mainly from the increase in room rates which increased c93% y-o-y in Gouna in EGP terms and in occupancy rates to a lesser extent. Occupancy rates in Gouna stood at an average of c69%, up from c61% in 1Q22. Hospitality margins also widened, with EBITDA margin for the segment reaching c61% from c34% a year earlier.
Our comment: The March inflation comes lower than our estimate of 3.75% m-o-m, and 34.0% y-o-y possibly due to a relative drop in poultry prices after the government increased poultry supply recently.
By Mariam El Saadany/ Monday, April 4, 2023
Ezz Steel (ESRS EY): The company’s 4Q22 consolidated net income decreased c47% y-o-y to EGP570m, according to its audited financials. (Company data)
Our comment: The reported net income comes c11% above our estimate of EGP515m on lower-than-expected net finance cost, higher-than-expected net other income, and lower-than-expected effective tax rate due to a deferred tax income. Total steel production increased c4% y-o-y to 1.26m tons and came c1% below our estimate. Long steel production increased c6% y-o-y to 0.78m tons, while flat production increased c1% y-o-y to 0.48m tons, with both coming in line with our estimates. Total sales volume remained almost flat y-o-y at 1.3m tons, c4% below our estimate. Local rebar sales fell c9% y-o-y to 0.74m tons, constituting a market share of c39% of total local market rebar consumption of 1.9m tons. On the other hand, long export sales more-than-doubled c2.2x y-o-y to 56,000 tons, including rebar export sales, as a gradual orientation by the company to increase exports to secure the needed FX to import raw materials and consumables. Local HRC sales hiked c92% y-o-y to 0.34m tons, while its export sales decreased c45% y-o-y to 0.13m tons to satisfy local demand, following the decrease in imports due to the EGP devaluation, the limited FX availability, and to optimize profitability by benefiting from higher local HRC prices. It is worth mentioning that the second melt shop of EFS should start operations in April 2023, which would enable the company to increase exports without jeopardizing its local market share. Revenue increased c24% y-o-y to EGP23.3bn on higher y-o-y prices in EGP terms and came c2% below our estimate on the c4% lower-than-expected sales volume. COGS increased c27% y-o-y to EGP18.9bn on higher production costs in EGP terms, despite lower raw materials costs in USD terms, and came c1% below our estimate. Gross profit margin dropped c1.7 pp y-o-y to 18.8% and came c0.9 pp below our estimate. EBITDA increased c16% y-o-y to EGP4.14bn and came c6% below our estimate. SG&A slightly fell c2% y-o-y to EGP614m and came c7% below our estimate. EBITDA (USD/ton) dropped c35% y-o-y to USD138, reflecting the EGP devaluation, and came c2% below our estimate. EBITDA margin contracted c1.3 pp y-o-y to 17.7% and came c0.7 pp below our estimate. Net financing costs decreased c12% y-o-y to EGP661m and were c31% below our estimate on c77% higher-than-expected interest income (cash and cash equivalents balance increased to EGP13.2bn in 4Q22 from EGP6.8bn in 3Q22). Interest expense increased c9% y-o-y to EGP866m and came c19% below our estimate. The company booked EGP3.47bn in FX losses and EGP994m of losses related to financing fixed assets, which were capitalized in accordance with the accounting standards, of which the company accounted for EGP2.04bn in 4Q22. ESRS recorded EGP38m in net other income, reversing a net other expense of EGP72m a year earlier, while we expected a net other expense of EGP117m, which filtered through a c17% higher-than-expected NPBT of EGP1.08bn, down c54% y-o-y. A deferred tax income lowered the effective tax rate below our expectation, resulting in a c11% higher-than-expected net income of EGP570m, down c47% y-o-y.
Our comment: The reported pre-minority income comes c16% lower than our estimate of EGP315m despite revenue beating our estimate by c34%. Revenue grew c48% y-o-y to EGP5.96bn. Gross profit grew c50% y-o-y to EGP1.90bn, c35% ahead of our estimate, as the reported gross profit margin was in line with our estimate of c32%. More to follow as the company’s financials become available. The proposed DPS of EGP0.19 is higher than our estimate of EGP0.17 and yields a net-of-tax yield of 1.82% based on Thursday’s trading price.
By Heba Monir / Sunday, 26 March, 2023
In its 2 February 2023 meeting, the Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) decided to keep the benchmark overnight deposit and lending rates unchanged at 16.25% and 17.25%, respectively after it hiked policy rates by 800 bps in 2022 and by 500 bps in 4Q22 alone. Egypt's annual headline inflation accelerated to 31.9% y-o-y in February from 25.8% y-o-y in the previous month, according to the Central Agency for Public Mobilization and Statistics (CAPMAS) data. Monthly prices rose 6.5% m-o-m in February 2023 compared to an increase of 4.7% m-o-m in the previous month, mainly due to increasing food and beverage prices by 14.4% m-o-m compared to an increase of 10.1% m-o-m in January. On the global front, the US Federal Reserve raised interest rates on Wednesday by 25 bps, bringing its total rate hikes y-t-d to 50 bps after it increased interest rates by 425 bps in 2022.
Our comment: We expect the MPC to continue tightening policy rates by around 200 bps in its 30 March meeting to tame increasing inflation rates, which we expect to continue rising, peaking at 35.9% by July, on our numbers, before it decelerates to 30.3% by December. We anticipate that March and the coming months' inflation figures will reflect; (1) the early March c7-11% increase in octane gasoline prices and the c20% increase in heavy fuel oil (mazut) prices for all industries except food and electricity generating sectors; (2) the expected increase in household electricity effective 1 July; (3) the recent liberalization of the prices of essential food commodities like rice; (4) the shortage in local poultry supply due to problems related with animal feed prices and availability, affected by the Russia-Ukraine war, and (5) the continuing EGP devaluation which reached c20% y-t-d. As a result of the USD shortage, Egypt’s banking sector net foreign liabilities (NFL), including the Central Bank of Egypt (CBE), widened to USD21.6bn in January 2023 from USD20.0bn in December 2022. Excluding the CBE, the banking sector's NFL widened to USD13.0bn from USD11.7bn in December 2022. In light of the inflationary pressures, the USD shortage, and Egypt’s need to keep the carry trade attractive, we calculate a required 12M T-bills rate of 25.18%, which considers soaring Egypt’s 1-Year CDS to 1,419 from 670 at the beginning of February. Foreign holdings in Egyptian T-bills increased by USD2.4bn from December 2022 to USD10.4bn by the end of January 2023. The latest 12M T-bills auction recorded an average yield of 19.19% (accounting for a 15% tax rate for US and European investors), which offers a real yield of negative 2.31%, given our inflation expectation of 21.5% in March 2024, solidifying our view of a needed increase in policy rates. We estimate the real yield to turn to a positive1.33% based on our calculated required after-tax 12M T-bill rate and expected inflation of 20.1% for April 2024.
On a more positive note, deposits not included in the official reserves increased for the third consecutive month, increasing in February by c19% m-o-m to USD2.61bn, yet it still remains below its level of USD9.18bn a year earlier, and net international reserves (NIR) inched up for the sixth consecutive month by 0.4% m-o-m to USD34.3bn in February, while dropping 16.2% y-o-y.
Egypt was not offered help with its debt by the US and Israel in return for taking in Palestinians fleeing Gaza, Egypt’s foreign minister said. (Bloomberg)
The value of goods awaiting release at Egyptian ports dropped by USD800m in October to USD3.9bn from USD4.7bn in September, according to unidentified government sources familiar with the matter. These goods do not include petroleum products worth USD1.7–1.9bn that remained unchanged m-o-m, the sources added. The release of goods prioritizes necessities such as food, medicines, production inputs, fuel, and petroleum products, the sources also said. (Al Borsa)