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CIRA: Favorable growth dynamics

  • CIRA 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  for CIRA with average debt/equity of 1.19x, on our numbers

CIRA’s expansion plan should reflect in the number of registered students growing at a 202229e CAGR of c13%, on our numbers: The company’s Badr University in Assuit (BUA) should start operations next September with six to seven science-focused faculties including physical therapy, nursing, dentistry, and biotechnology. The company plans to add two new faculties annually to reach 16 faculties by 2028e with a total capacity of 24,000 students. The company plans to start the operations of its Cairo Saxony University for Applied Sciences and Technologies (CSU) in 2024e with some four cohorts and add two annually to reach a total of 16 faculties by 2030e, with a total capacity of 32,000 students. CSU will be established under a joint venture between CIRA and Al Ahly Capital, named Al Ahly CIRA for Educational Services, in which CIRA owns 51%. CIRA will own 60% of CSU and Al Ahly Capital 40%. The company also expects to start the operations of its New Damietta university in 2025e with some four faculties and will add two annually to reach 16 faculties by 2031e with a total capacity of 24,000 students. The New Damietta university will be established under a joint venture between CIRA and El Sewedy Capital Holding, named Cairo Egypt for Education (CEE), where CIRA will own 60% of the university and El Sewedy Capital will own 40%. The company plans to increase its higher-education capacity from 25,000 students in Badr University in Cairo (BUC) in 2022 to 105,000 students in all of its universities by 2031e. We, accordingly, incorporate all universities’ expansions and account for the recent change in the university admission system by the Ministry of Higher Education. In the academic year 2020/21, the Egyptian secondary examination system was renovated, leading to a 20 pp decline in average students’ grades. The minimum grades for acceptance into private universities were not adjusted proportionally, leading to a lower number of students’ eligibility for enrollment and hence less utilization of the available seats. As a corrective action, the Supreme Council of Private Universities (SCPU) recently decided to revert to the pre-2020/2021 direct enrollment system, allowing students to apply to universities through their websites. The SCPU has also agreed to adjust the minimum grading for all faculties after the release of secondary-school grades. For K–12. The company currently owns 27 schools, 16 under the Futures brand, serving lower-middle-income families. Two schools under the British Columbia Canadian International School (BCCIS) and one under Saxony International School (SIS) are geared towards the higher-income segment, with the rest of the schools in between. In November 2021, CIRA signed a partnership with The Sovereign Fund of Egypt (TSFE) to provide high-quality, affordable education to all segments and governorates in Egypt. The partnership involves launching two new schools in the Cosmic Village with an investment cost of EGP350m, and plans to start the operations of the first one in 2024e. The company plans to add one new school annually over our 2023–29e forecast period to reach 36 schools with a total capacity of 49,000 students. The Egyptian government’s public-private partnership (PPP) program provides an upside risk to our numbers as the government is offering some 57 schools, of which the company is bidding for 12 schools. The program is under a build, own, operate, and transfer (BOOT) scheme, where the government will offer the land, while the winning company will build and operate the schools for 30 years, after which the ownership will be transferred to the government and the company will be awarded a management contract. The average annual tuition fees for these schools will approximately be EGP18,000/year, fitting well with CIRA’s Future schools brand average annual tuition fees of around EGP14,000–15,000 per student. CIRA’s management believes the program will give them access to highly scarce land in Egypt’s Delta region.

We expect revenue to grow at a 2022-29e CAGR of c25% with an average EBITDA margin of c47%: We largely maintain our K–12 revenue estimates over our forecast period but downward revise our 2022e revenue estimates by c9% as the Futures brand continues to be the main contributor to K–12 tuition revenue (c61%) as opposed to our earlier assumption of a more pronounced shift towards the high-end brands. For higher-education, we downward revise our 2022–25e revenue estimates by c9% due to a one-year delay in opening BUA in addition to lower-than-expected student registration in BUC as a result of the applied registration process, which took place in the 2020/2021 academic year. Over 2028–31e, we raise our higher-education revenue estimates by c8% to capture revenue from the New Damietta university. Based on our numbers, the K–12 and higher-education expansions imply revenue growing at a 2022–29e CAGR of c25%. We expect rising costs to reflect in K–12 OPEX 8-year CAGR of c14%, with an average EBITDA margin of c28%, down from our earlier estimate of c32%. For higher-education, we expect OPEX to increase at 2022–29e CAGR of c33%, reflecting the launch of BUA in 2023e, CSU in 2024e, and New Damietta university in 2025e. We note that universities will break-even in the third year of operations and start making profits in the fourth year. We accordingly expect the higher-education EBITDA margin to decline from c67% in 2021 to an average of c58% over our forecast period, largely unchanged from our previous estimate of c59%.

CIRA secured all the land for its planned expansions and is working on securing diverse funding sources for its CAPEX plan: The company has already secured a 40-acre land plot in Badr City for its CSU for EGP873m, paid 15% as a down payment, and the rest payable over ten years ending 2031. It also purchased a 58-acre land plot for its New Damietta university for EGP1.06bn, paid a 15% down payment, and the rest payable over ten years ending 2031. The company expects no more land additions over our forecast period. According to management guidance, we raise our 2022–26e CAPEX estimates c31% to EGP4.55bn from EGP3.46bn previously to reflect New Damietta university, which was not fully captured in our earlier estimates, rising prices of construction material and the March 2022 EGP depreciation. The company plans to allocate its 2022–26e CAPEX spending of EGP4.55bn as follows: (1) EGP1.07bn for K–12 schools, (2) EGP1.18bn for BUA, (3) EGP990m for CSU, and (4) EGP1.25bn to New Damietta University. We expect the planned CAPEX to reflect in higher debt (including land liabilities)-to-equity ratio from 1.24x in 2021 to an average of 2.11x in 2022–23e and gradually decline to 0.77x in 2026e. Recently, the company obtained an EGP348m loan from Al Ahli United Bank (AUB) at a floating rate of 1%+ corridor rate, better than its previous loan from AUB at 2.5% markup. The new AUB loan has a 2-year grace period with principal payments starting 2024. The company also secured an EGP260m loan from Qatar National Bank Al Ahli (QNBA EY) at a floating rate of 1%+ corridor rate, better than its previous loan from QNB at a 1.5% markup, including a 2-year grace period with principal payments starting in 2024e. To diversify the funding sources, the company’s board called the EGM to convene to look into starting a 3-year EGP2.0bn securitization program against future cash flows, with the first issuance expected to amount to EGP800m. On our calculations, we account for the company’s future funding needs as bank loans with an interest rate of 1% above the corridor rate, similar to recent terms of bank debt secured by the company.

HC: we expect the CBE to keep interest rates unchanged

  • HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled June 23rd and based on Egypt’s current situation, they expect the CBE to keep interest rates unchanged  

Head of macro and financials at HC, Monette Doss commented: “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.

It is worth mentioning that, 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).