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HC Comments on the IMF’s approval of a 12-month Stand-by Arrangement (SBA) for Egypt

A 12-month Stand-by Arrangement (SBA) for Egypt was approved by the executive board of the International Monetary Fund (IMF), with access equivalent to SDR3.76bn (about USD5.2bn or c185% of quota) to address balance of payments financing needs arising from the COVID-19, it announced in a press release. The approval of the SBA for Egypt enables the immediate disbursement of about USD2bn, and the remainder will be phased over 2 reviews, it added. The new arrangement aims to help Egypt cope with challenges posed by the COVID-19 pandemic by providing Fund resources to meet Egypt’s balance of payments needs and to finance the budget deficit. The Fund-supported program would also help the authorities preserve the achievements made over the past 4 years, support health and social spending to protect vulnerable groups, and advance a set of key structural reforms to put Egypt on a strong footing for sustained recovery with higher and more inclusive growth and job creation over the medium term. (IMF)

HC’s Comment

The USD5.2bn SBA will bring Egypt’s total recently secured external financing to USD13.0bn, including the USD2.8bn Rapid Financing Instrument (RFI) from IMF and the USD5.0bn proceeds from the recent Eurobond issuance, which will help in closing the Egyptian banking sector net foreign liability position and support the balance of payment (BOP).”

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Interest rates to remain unchanged by the CBE, according to HC’s expectations

  • In its latest report about their expectations on the likely outcome of the MPC meeting scheduled on 25 June and based on Egypt’s current situation, HC Securities & Investment expects the CBE to maintain interest rates unchanged. 

Chief economist, and head of macro and financials at HC, Monette Doss said: “We believe that release of inflationary pressures is mainly driven by lower private consumption due to rising unemployment and significantly less social gatherings following the Coronavirus outbreak. Current price levels also reflect lower demand compared to relatively higher consumption levels during the month of Ramadan. Going forward, we remain cautious as recent EGP devaluation of c3%in addition to possible supply disruptions resulting from lower international trade could lead to some price increases. Hence, we expect inflation to average 8.4% over the remaining of 2020, well within the CBE target of 9% (+/- 3%) for 4Q20. We accordingly, expect the CBE to maintain interest rates unchanged in its upcoming meeting.”

“Applying Egypt’s current 1-year foreign currency credit default swap (CDS) at 330 bps, USA 12m T-bill rate at 0.18%, and Egypt-USA inflation differential into our model shows that Egypt’s current T-bill rates are fairly priced, in our view. We, hence, expect to see some foreign inflows into the Egyptian treasury market going forward, as the global panic arising from the Coronavirus resides. In this regard, there are unofficial announcements that Egyptian treasuries has attracted some USD300m-USD400m in foreign investments over the past week. We believe that this could be seen in the high coverage of treasury auctions during this period compared to the prior period.” Monette Doss added

It is worth mentioning that, in its last meeting on 14 May, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to keep rates unchanged for the second time after undertaking a 300bps rate cut on 16 March in an unscheduled meeting.  Egypt’s annual headline inflation decelerated to 4.7% in May from 5.9% y-o-y in the previous month, with monthly inflation showing no increase compared to an increase of 1.3% in April, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS).

Automation Is Changing Job Markets Across the Globe

The way business is done has been changed forever. Many factors have led to an increased reliance on automated technology within the job market. For many years, enterprise-level organizations, startups, and international operations have all pushed for more and more automation.

Currently and in wake of Covid-19 outbreak, the world has no choice but to adapt. Automation has become essential to help make up for the thousands of individuals not capable of performing their duties from home. As the job market catches up, many of the tasks that unskilled workers used to perform will be taken over by sophisticated automation protocols.

  • Automated Technology to Follow

One technology you should pay attention to is called Robotic Process Automation. This form of AI machine learning is how computers are beginning to do what humans can do. Virtually any repetitive task you perform on a computer can be managed by RPA. Whether that’s updating account information, verifying or declining applications, and even customer outreach.

All it takes is a knowledgeable programmer to instruct the program on what to do. Then, what previously took one employee all day to finish can be done in 1 hour with a 0% error rate. That’s greater efficiency and a greater quality all wrapped up into one program.

  • How Is Automation Impacting the World?

The job market is being changed sector by sector. Different industries are responding differently to the push for automation. Some sectors will thrive in the new landscape and others will die. Take a look at the following sectors below to see how automation is impacting them specifically. When you’re ready, reach out to HC to see how we can help you gain a foothold in the changing marketplace.

  • Education

The education sector has always been at the forefront of the technological revolution. Recently, a greater push towards automation has created some interesting investment opportunities. Intelligent Tutoring Systems (ITSs) are gaining in popularity and offer an incredible opportunity to invest in an emerging technology set to take over the education sector.

The automated instruction of classes has been a hot topic for many years. It hasn’t been until recently that the technology has really taken off. As the education sector scrambles to evaluate various solutions, the market is wide open.

  • Training

In the same way that Intelligent Tutoring Systems (ITSs) are becoming more popular in the education sector, automated training platforms are showing promise in the corporate world. As enterprise organizations concentrate on building digital workforce and technology to facilitate that remote workforce, automated training protocols will become necessary.

Systems designed to train vast numbers of digital workers will be needed in the coming shift. This opens the floodgates for technology firms with the capacity to develop automated systems for corporations to use.

  • Technology Infrastructure

Investing in technological infrastructure is similar to buying real estate. Businesses and citizens will always need a reliable digital network to pretty much do anything. Investing in technological infrastructure puts you at the forefront of development in a region. As we shift towards a greater reliance on digital processes, the world will need larger servers, stronger networks, and greater resources.

The future belongs to those that control the flow of information. This is your chance to become a stakeholder in the digital realm. When you control the technology, you control the user.

  • New Economic Growth

Establishing new economic sectors will help absorb the rate of rising joblessness while bringing a sizable return on investment. In the current climate, new economic sectors can be established in the IT industry, remote workforce sector, on-demand services industry, and many others.

Any industry that operates with a reliance on the internet would be a quality investment to consider. Establishing new economic sectors can be done by leveraging a team of expert investment bankers that keep their fingers on the beating pulse of the industry.

  • Global Investment Opportunity

It’s about more than creating investment opportunities in Egypt and around the Middle East. The current climate calls for a global investment opportunity, unlike anything you’ve ever seen. It’s time to awaken the sleeping giant within the room. Here are some sectors you can make an impact on by investing With HC.

  • Emerging Markets

  • Energy

  • IT

  • And a few others…

Don’t forget that HC is here to help point you in the right direction. When it comes to making a sound, and correct choice, you want to rely on the best. Our team of investment bankers will lead you down the path of least resistance. Experience the impact of smart investing by contacting our team today.

HC maintains the Overweight rating of Orascom Development Egypt (ORHD)

In a recent report, HC Brokerage issued an update note about Orascom Development – Egypt (ORHD) in light of the coronavirus outbreak stating that they maintain their Overweight rating on the steep drop in share price

  • In light of the coronavirus outbreak, the stock takes a hit due to its tourism sector exposure, despite impressive real estate operations 

  • We cut hospitality occupancy rates to a 2020e–2021e average of c62% in Gouna, c36% in Taba Heights and c26% in Fayoum, and we account for a gradual recovery in 2H20e

  • We reduce our TP by c33% and maintain our Overweight rating of Orascom Development on the steep drop in share price

Mariam Elsaadany, real estate analyst at HC Brokerage commented that: “Tourism exposure takes a toll on Orascom Development ’s operations and share performance: The company’s tourism exposure (c32% of 2019 revenues and c30% of 2019 EBITDA) has led to a steep decline in its share price (down c50% y-t-d vs only c26% for the EGX30) as investors perceive it to be amongst the most badly hit by the coronavirus and the restrictive measures taken to combat it. Across our coverage, ORHD is the company with the highest tourism exposure, which warrants a significant downward revision in 2020e earnings, in our view. Accordingly, we expect 2020e hospitality revenues and town management to drop by c56% y-o-y and c68% y-o-y, respectively. Despite the government’s announcement of the reopening of hotels and resorts on 15 May for domestic tourism, we are still conservative in our assumptions for 2020e, as hotels will only be permitted to operate at a maximum capacity of 25% for the remaining months of 2Q20 and at only at 50% by July, which justifies the downward revision in our 2020 estimates. For the real estate segment, we expect the sector to suffer further from weak presales due to the coronavirus outbreak, however we believe the risk of a steep increase in cancellations is low. We expect demand for the second homes segment to suffer the most, in our view, which affects the real estate operations of ORHD’s destinations, Gouna, Makadi and Fayoum. We perceive O West as a successful project as it captured EGP5.31bn in sales since its launch and up to 1Q20, however, we believe the company’s execution capacity on such a large scale project will be tested in 2020e. We believe O West can capture a decent market share because of the developer’s strong name and superior West Cairo location. Despite our general positive outlook for O West, we expect ORHD’s total real estate sales to drop c33% y-o-y in 2020e on the back of lower volumes. It is worth noting that construction work for O West had already begun in January 2020 and the measures taken to combat the coronavirus so far do not pose a risk to delay deliveries, which are set to begin in 2023e, according to management.”

“ We cut recurring income stream on the expected decline in tourist arrivals due to the coronavirus outbreak: We reduce hospitality occupancy rates, room revenue and margins across the company’s destinations portfolio. Our estimates for 2020e-2021e occupancy rates average c62% in Gouna (c82% in 2019), c36% in Taba Heights (c48% in 2019) and c27% in Fayoum (c29% in 2019) as we account for a gradual recovery in occupancy rates, following a steep drop in 1H20e, on the back of the government’s decision to promote local tourism. This reduces our total hospitality revenues by c56% y-o-y in 2020e, and increase it by c63% y-o-y in 2021e, mainly on base effect. We maintain room rates, in line with 1Q20 KPIs reported by management, while apply lower margins as we expect hospitality EBITDA margin to drop 8 pp y-o-y in 2020e to c25% and increase by 2 pp y-o-y in 2021e to c27%. It is worth noting that the company is optimistic that local tourism will partially replace foreign tourism starting 3Q20, according to management’s best case scenario, which would be an upside to our numbers. For real estate operations, we forecast a slowdown in 2020e sales with some EGP4.66bn in contracted sales, c33% lower y-o-y while we expect total 2020e–2026e contracted sales of EGP58.3.4bn, mostly attributable to O West. Our forecasts point to total collections of EGP84.0bn over 2020e–2034e (adjusted for ORHD’s share of O West collections) against CAPEX of EGP47.6bn (including NUCA’s in-kind stake of O West). We expect total 2020e–2023e revenues of EGP29.2bn against costs of EGP21.3bn, implying an average gross profit margin of c27%. We forecast the company’s 2020e net debt-to-equity (including land liabilities) to drop to 1.89x (liabilities mostly related to O West) from 2.38x in 2019. We expect the company’s cost efficiency efforts to reflect positively on its SG&A expenses, additionally, a drop in LIBOR rates and local interest rates should reduce financing expenses.” El Saadany added

The real estate analyst concluded her update on  Orascom Development stating that “We reduce our TP by c33% despite accounting for O West in our valuation and maintain our OW rating: We reduce our target price mainly on the back of lower hospitality and town management estimates. This comes despite including O West in our numbers since the project was launched in 2019, and lower risk free rates on the back of the Central Bank of Egypt’s (CBE) decision to cut interest rate by 300 bps in March. Despite this, our WACC increased to an average of 14.3% from 14.0% previously, as the drop in interest rates was offset by a sharp increase in the stock beta to 1.38 from 0.87 previously, which also partly explains the c33% downward revision of our TP. Of our TP of EGP9.44/share, DCF contributes c43% (from c46% previously) and our land valuation contributes c57% (from c54% previously). Our DCF component includes EGP3.50/share from launched real estate projects (EGP3.72/share previously), EGP2.64/share from hospitality operations (EGP4.19/share previously), EGP0.47/share from town management operations (EGP1.12/share previously), while a net debt position of EGP1.89/share and minority interest of EGP0.60/share shave off a total of EGP2.50/share, which yielded a total DCF value of EGP4.12/share. Our TP of EGP9.44/share puts the company at a P/NAV of 0.61x, and implies a potential return of c175% over the 19 May closing price of EGP3.44/share. We therefore maintain our Overweight rating. We estimate the stock is trading at a 2020e P/NAV of 0.22x, slightly higher than the peer average of 0.20x. On our numbers, the market is assigning a negative value of EGP26/sqm to the company’s undeveloped land compared to our valuation of EGP264/sqm, which represents a c68% discount to market prices.”