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HC is positive on the Egyptian economy… Shifting to higher-beta stocks

  • HC Securities and Investment Research Department released its latest report about Egypt’s macro economy. They assured that they are positive on the Egyptian economy, which fared better-than-expected in light of COVID-19, on IMF and government supports.

  • 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

HC’s research team explained: “Our 2021e macro assumptions entail moderate inflation, stable EGP, and further 100 bps policy rate cuts: Despite COVID-19 concerns, we are bullish on the Egyptian economy in 2021 following a total 400 bps policy rate cuts in 2020, our expected 100 bps rate cut in 2021, inflation moderating to an average c7%, and EGP stability, in our view. Starting July 2020, the Egyptian government eased COVID-19 restrictive measures, highlighting its unwillingness to impose any curfews or lockdowns during a second pandemic wave. Despite this, the health system remained under control, which has helped Egypt to record positive GDP growth of 3.6% in FY19/20, while the IMF estimated all MENA countries to record negative GDP growth in 2020.  While the FY19/20 GDP growth was supported by a 5.4% growth in final consumption (public 7.2% vs. 5.2% private), we expect an FY20/21e GDP growth of 2.8%, supported by 6.2% growth in total investments (public 7.0% vs. 5.6% private). We expect slashed tourism receipts to result in a wider current account deficit of c4% of GDP in FY20/21e from c3% in FY19/20 despite Egypt recording an oil trade balance surplus in FY20/21e, and worker remittances increasing c10% y-o-y in FY20/21e, on our estimates. That said, Egypt’s carry trade remains appealing, offering a 12M positive real interest rate of 4.1%, on our calculations. We hence see robust portfolio inflows, which–together with Eurobond issuances and the IMF loans –should finance Egypt’s debt repayment and help the BOP reverse to a surplus of USD1.70bn in FY20/21e, from a deficit of USD8.59bn in FY19/20, in our view.”

HC’s analysts concluded: “Against this macro backdrop, we stick to 9 high-conviction picks in real estate, financials, and select industrial and consumer names, based on which we present our proposed equity investment portfolio with the highest risk-adjusted return: Considering our macro view, we prefer sectors benefiting from a low-interest-rate environment, pent-up demand, stable EGP, private consumption recovery and a pickup in private investment. These criteria lead us to pick stocks in real estate, financials, and select industrial and consumer names. Last year we preferred stocks with limited downside risk. However, going into 2021e and in light of our economic view, we currently recommend shifting to higher beta stocks and stick to 9 high-conviction picks. Our picks are Orascom Construction in the industrial sector, Eastern Company, and GB Auto in the consumer sector, Commercial International Bank, Abu Dhabi Islamic Bank Egypt and EFG Hermes Holding in the financial industry, and TMG Holding, SODIC and Orascom Development Egypt in the real estate sector.”

HC Increases its 12M TP for CI Capital by c19% to EGP5.47/share

HC Increases its 12M TP for CI Capital by c19% to EGP5.47/share, The firm Capitalizes on NBFS impressive growth

  • HC Brokerage recently updated the market on CI Capital and their NBFS impressive growth. HC stated that it increases its 12M TP for CI Capital by c19% to EGP5.47/share on lower COE and maintain the OW rating.

  • 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.

Monette Doss, head of macro and financials commented: “We expect 2020e25e consolidated net profit CAGR of c20% on NBFS growth and improved stock market activity from last year’s troughs: Monetary easing, including 400 bps policy rate cuts in 2020, reflected positively on Corplease’s operations with its net leasing portfolio growing by c56% y-o-y in 9M20, exceeding our earlier estimate by c19%. However, the company’s net interest margin (NIM) declined to 4.6% in 9M20 from 5.5% in 2019. Going forward, we expect the company’s net leasing portfolio to grow at a 2020e–25e CAGR of c24%, maintaining an average leverage of 6.1x, as it tends to securitize c45% of its new annual bookings and expect its NIM to average 4.4%. We raise our provisions estimates over our forecast period to account for higher-than-expected net leasing portfolio growth, and accordingly downward revise our leasing 2021e–24e net earnings estimates by c8%. The company’s microfinance arm, Reefy, managed to outpace the c20% y-o-y sector growth in 9M20, growing its loan book c35% y-o-y to EGP849m and increasing its market share to 4.8%, from 4.2% in 2019, based on our calculations. As we move forward, we expect the government’s financial inclusion efforts to reflect positively on microfinance loan growth, and hence estimate Reefy’s loans to grow at a 2020e–25e CAGR of c26%, outpacing sector growth of c17% over the same period, while we expect NIM to gradually decline to c31% by 2025e from c41% in 2020e. We mostly maintain our previous 2021e–24e net earnings estimates for Reefy. The impact of COVID-19 on emerging stock markets in 2020, worsened by the EGX30 underperforming other markets and dropping c22% y-o-y, has negatively reflected on CI Capital’s investment banking operations with net revenue declining by c27% y-o-y in 9M20. Accordingly, we downward revise our IB 2021e–24e net earnings estimates by c33%, however, we expect it to grow at a 2020e–25e CAGR of c36%, coming from a low base.”

“The IPO of CI Capital’s 16.5%-owned education arm, Taaleem Management Services, to possibly occur in 1Q21:  We positively perceive the company’s direct investment in the education sector through its 16.5%-owned Taaleem Management Services as the sector enjoys high growth potential. On Thursday, the company announced that it submitted its registration application to Egypt’s Financial Regulatory Authority (FRA) to list its shares on the Egyptian Exchange (EGX) through an initial public offering (IPO). The offering consists of a secondary sale of shares by Sphinx Obelisk of up to 358m ordinary shares on the EGX, representing up to 49% of its share capital post completion of the offering. Taaleem owns and operates Nahda University in Beni Suef with two campuses in the governorate, and a total capacity of just over 11,000 students and more than 6,270 enrolled students for the academic year 2020/2021. The university consists of 8 faculties and is planning to add three more faculties over the next three years, subject to obtaining regulatory approvals, which will increase its student capacity by c27%. Additionally, Taaleem entered into a joint venture with Palm Hills Developments (PHDC EY) to set up a higher education university in West Cairo, pending regulatory approvals, with a potential capacity of 9,160 students controlled and managed by Taaleem. CI Capital influences the decisions of Taaleem’s board of directors. We value Taaleem at an equity value of EGP4.42bn, implying EGP728m for CI Capital’s share.” Monette Doss added.

“Seeking expansion in NBFS, Banque Misr submits an MTO for up to 90% of CI Capital at EGP4.70/share: Banque Misr has submitted a mandatory tender offer (MTO), approved by Egypt’s Financial Regulatory Authority (FRA), to acquire up to a 90% stake in CI Capital at EGP4.70/share, seeking a minimum stake of 51% of the total company’s shares, while reserving its right to execute a lower number of shares, if it chooses to, according to the MTO circular published on Friday. The offer will run from today and until the end of the 11 March trading session. Banque Misr intends to keep the minimum regulatory free float requirement of 10% of its shares to maintain its listing on the EGX. Currently, the bank owns a 24.7% stake in CI Capital, while the acquisition will increase its exposure to the highly profitable NBFS sector, in our view. We believe the transaction could result in significant synergies between the two entities, including providing cheaper funding to CI Capital’s NBFS operations and benefiting investment banking operations.” Monette Doss continued.

HC’s head of macro and financials concluded: “We increase our 12M TP for CI Capital by c19% to EGP5.47/share, largely on lower COE, and maintain our Overweight rating: We value the company using a Sum-of-the-part (SOTP) methodology, and use an excess return model for its core operations, valuing its consumer finance and mortgage greenfield investments at equity book value. We value its financial investment in Palm Hills Developments at a market value of EGP141m and use a DCF methodology to value Taaleem applying a beta of 1.00. We decrease our cost of equity to an average of 16.7% from 17.5% previously, on a lower-than-previously expected risk-free rate. Individually, we value CI Capital’s Corplease at EGP2.42/share (c17% higher than our previous estimate), putting the business at a 2021e P/E multiple of 7.3x. For microfinance, we value Reefy at EGP1.15/share (c28% higher than our previous estimate), putting the business at a 2021e P/E multiple of 8.70x. We value the investment bank at EGP0.91/share (c1% lower than our previous estimate). We add the equity book value of its mortgage and consumer finance greenfield investments and its financial investment in Palm Hills Developments of EGP0.26/share. We value Taaleem at EGP0.73/share (c3% higher than our previous estimate), putting the business at 2021e EV/EBITDA of 11.1x, 2.11x its acquisition value. The NBFS platform makes up c65% of the stock’s total equity value, the investment bank c17%, Taaleem c13%, with equity investments accounting for the remaining c5%. These sum up to a 12-month target price of EGP5.47/share, implying a potential return of c20% on the 11 February closing price of EGP4.54/share. We, therefore, maintain our Overweight rating on CI Capital. Our 12-month TP of EGP5.47/share puts the stock at a 2021e P/E multiple of 9.77x and a P/B multiple of 1.51x, while it is trading at 2021e P/E and P/B multiples of 8.12x and 1.26x, respectively.”

HC Brokerage stepped in 2021 with a new branch in Alexandria

  • HC Brokerage stepped in 2021 with a new branch in Alexandria. Hassan Choucri: “Our expansion plan aims at providing services to retail in light of the high potential for investment growth in the stock market.”

HC Brokerage launched its new branch in Alexandria, to provide various services in the fields of securities trading, and online trading to the potential investors of this active governorate and the surrounding areas, after obtaining the necessary licenses from the Financial Regulatory Authority, to reach eight branches across the two capitals, Delta and Upper Egypt.

The opening of the new branch comes within the framework of the company’s commitment to being present in uncovered areas who do not have access to investment services and financial advisories throughout the country. HC targets promising areas in terms of investment opportunities and appetite. The past period, particularly during the coronavirus outbreak, proved that these expansions led to great successes across Upper Egypt and the Delta region.

Hassan Choucri, Managing Director of HC Brokerage, said that the opening of the Alexandria branch is a continuation of the company’s efforts to expand in the governorates of Egypt, especially the Delta region. The Egyptian stock market witnessed a significant number of retail investors who acquired a significant share of trading volumes. Due to this current market trend, in addition to the company’s positive outlook for 2021 performance, the decision to offer much needed retail financial services proved feasible in the presence of latent opportunities for investment growth.

He added: “The company plans to add other governorates to the bundle of branches of HC Brokerage in the Delta and Upper Egypt, we are encouraged by the expected improvement in the Egyptian economy’s performance in 2021 and thus the performance of the capital market, despite the crisis of the coronavirus outbreak. We are also encouraged by the pay-off of our efforts.” HC tripled its market share in the retail sector from 0.5% at the end of 2015 to reach 1.5% at the end of 2020, and the company has also jumped from the 55th rank by retail trading volume to the 19th over the same period.”

Choucri stressed that the Egyptian capital market is expected to receive greater interest from foreign investors in 2021, whether in Egyptian treasuries – as their real returns are attractive compared to other markets – or in stocks. With regards to stocks, the pricing declines witnessed in the Egyptian capital market remained greater than other markets. Moreover, it is expected that the Egyptian economy will be the only economy in the region that will record growth, according to the estimation of many international entities, including the World Bank.