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Securities & Investment

Category: HC News

HC: Oriental Weavers capitalizes on a weaker EGP

Posted on by Marwa Nakhla

Oriental Weavers

Capitalizing on a weaker EGP

  • We expect the EGP devaluation to boost ORWE’s local and export sales, helping it to grow its total revenue at a 2024–29e CAGR of c11%

  • Despite current Red Sea disruptions, we expect ORWE to experience a strong 2024 mainly on higher selling prices and export rebates

In a recent report, HC Brokerage presented their evaluation of Oriental weavers forecasting a strong 2024 mainly on higher selling prices and export rebates.

Pakinam El-Etriby, Consumers Analyst at HC commented that: “ ORWE navigated well supply chain disruption caused by the Russia-Ukraine War, in our view: In 2021, the company performed exceptionally well, operating at full capacity and achieving a gross margin of c16% mainly due to pent-up demand following the COVID-19 outbreak and 2020 lockdowns. However, following the outbreak of the Russia-Ukraine War in February 2022, its associated supply chain disruptions led ORWE’s international clients to stock up as a precautionary measure, leading its exports to notably decline by mid-2022, also impacted by the inflationary environment in the US and Europe. This trend continued into 2023; however, towards the end of 2023, exports began to recover gradually, reaching 17.5m sqm in 4Q23 (up c15% y-o-y). In the local market, demand started to recover by the end of 2022 to 12.9m sqm by 4Q22 (up by c21% y-o-y) as traders stocked up to hedge against further price increases following the March 2022 and October 2022 EGP devaluations. Despite the high inflation, local demand remained relatively stable throughout 2023, dropping by only c3% y-o-y to 43.1m sqm. As for polypropylene prices, ORWE’s main raw material making up c26% of its FY23 total COGS, its price fell by c10% y-o-y to USD1,361/ton in 2022 and c22% y-o-y to USD1,062/ton in 2023, despite a c34% y-o-y higher oil prices averaging USD99.1/bbl in 2022, yet it dropped c18% y-o-y to USD81.8/bbl in 2023. We attribute the decline in polypropylene prices in 2022 despite higher oil prices to weak demand and excess supply in the polypropylene grade used in carpet manufacturing, causing the commodity to decouple from oil prices in 2022.”

“We forecast ORWE’s revenue to grow at a 2025–29e revenue CAGR of c11% on higher average selling prices: “ We forecast ORWE’s revenues to grow at a CAGR of c11% over our 2025–29e forecast period, with volumes growing at a CAGR of c5% and average selling prices at a CAGR of c6%. In 2024, we expect ORWE’s local revenue to increase by c28% y-o-y to EGP8.23bn, propelled by c42% y-o-y increase in average local selling prices to EGP212/sqm, following the 6 March EGP floatation, despite a c10% y-o-y drop in volumes to 38.8m sqm. Furthermore, we expect exports to increase c41% y-o-y to EGP15.9bn, representing c66% of ORWE’s total sales, mainly on a c35% y-o-y surge in average exports selling prices to EGP217/sqm, capitalizing on the weaker EGP, and a c5% y-o-y rise in volumes to 73.0m sqm. During 1H24, we foresee a c5% y-o-y decline in export volumes to 32.5m sqm impacted by tensions in the Red Sea and a c15% y-o-y recovery in 2H24 to 40.6m sqm. Accordingly, we estimate a c36% y-o-y increase in total revenue to EGP24.1bn in 2024, primarily driven by a c37% y-o-y increase in average selling price to EGP215/sqm, despite a c1% y-o-y drop in total volumes to 112m sqm. ORWE targets increasing its exports to the US and Saudi markets to c70% of its total production in 2024 from c65% a year earlier, as it targets increasing its 2024 exports to the US market to c36% of total sales from c30% and to c40% within three years. Also, ORWE targets exporting c10% of its total production in 2024 to Saudi Arabia.” El-Etriby added.

We expect ORWE’s gross profit margin to average c14% over our 2025-29e forecast period: “ In 2024, we expect ORWE’s gross profit margin (GPM) to expand to c15% from c14% in 2023, on the higher selling prices, with the 37.4% y-o-y increase in selling price/sqm, exceeding the 36.6% y-o-y increase in average cost/sqm, on our numbers. Our 2024 COGS assumptions imply that c54% of total COGS are USD-denominated, including polypropylene. We assume it will increase by c5% y-o-y to USD1,110/ton in 2024, and also increase by an average of c2% over our 2025–29e forecast period. However, starting in 2025, we estimate GPM to start normalizing and reach 13.6% by FY29e, driven by steady selling price increases averaging only c6% versus an average cost increase of c7% over the forecast period, as given the nature of the industry, falling under consumer discretionary, we believe that demand for the company’s products is sensitive to price increases. We forecast EBIT margin to expand by 1.11 pp y-o-y to 13.8% in 2024, mainly driven by export rebates doubling y-o-y to EGP800m. Over 2025-29e, we expect export rebates to grow at a CAGR of c8%, reaching EGP916m by the end of our forecast period, in line with the Egyptian government’s efforts to offer immediate payments to exporters under its new export rebate program. We expect EBIT margin to average c12% over our forecast period and reach c11% by FY29e. Subsequently, we expect net profit margin (NPM) to increase by c1 pp y-o-y to c11% in 2024 and average c10% over 2025–29e.” Pakinam El-Etriby concluded.

About HC Brokerage

HC Brokerage is an affiliate of HC Securities & Investment– a full-fledged investment bank providing investment banking, asset management, securities brokerage, research, and custody services. HC Brokerage is an Egyptian registered company and member of Egypt’s Financial Regulatory Authority (FRA), and its registered address is 34 Gezirat Al-Arab St., Mohandessin, Giza, Egypt, Dokki 12311

For further information, please contact:

Research@hc-si.com

HC: Heliopolis Housing, Accelerated monetization underway

Posted on by Marwa Nakhla

Heliopolis Housing

Accelerated monetization underway

  • Lucrative Heliopark sale valuation generates sizeable proceeds and sets a land valuation benchmark for HELI’s remaining land bank

  • HELI’s focus shifts to more revenue-sharing deals as the suboptimal execution pace weighs on its profitability

HC Brokerage issued their update about Egypt’s real estate sector shedding the light on Heliopolis Housing’s performance and foresee Solid profitability over the short-medium term.

Mariam Elsaadany, real estate analyst at HC Brokerage commented that: “ Heliopark sale kick starts land monetization efforts: Following years of sitting on an idle land bank, Heliopolis Housing’s (HELI) management has approved the sale of the 7.12m sqm of Heliopark land plot (representing c31% of its land bank then) to the National Organization for Social Insurance (NOSI) in October 2023 for a total value of EGP15bn (net proceeds of EGP13bn), implying a price of EGP2,107/sqm and the lump-sum transaction was executed in 4Q23. We believe the Heliopark deal valuation reflects positively on the valuation of HELI’s remaining land bank in New Heliopolis City. In November 2023, the company signed the final contract for a revenue-sharing project with Mg Developments to develop 77.19 feddans (0.32m sqm) in districts 10 and 11 of its New Heliopolis City land plot and its share of the project’s revenue is EGP3.39bn, representing 32.1% of the project’s total revenue. In January 2024, it signed a bigger deal with Middle East for Investment and Touristic Development to develop around 865 feddans (3.63m sqm) in New Heliopolis City, where HELI’s share of revenue is c28% of the semi-finished units, and c3% of the finishing value, with expected proceeds of EGP39.7bn and a minimum guarantee of EGP23bn and the size of the deal is subject to increase to 1,070 feddans. Also, in March 2024, HELI received from Mountain View an offer to develop a 517-feddan plot (2.17m sqm) in New Heliopolis City, and another offer from Madinet Nasr Housing (MASR EY) to develop three land plots in New Heliopolis City with a total area of 580 feddans under revenue-sharing terms.  The sale of Heliopark in addition to the revenue-sharing deals, leaves the company with 12.4m sqm of undeveloped land in New Heliopolis City, down from a total land bank of 22.2m sqm previously. The monetization update comes after years of efforts by the Ministry of Public Business Sector (MPBS) to extract value from the company’s assets. Going forward, we expect HELI to focus on more revenue-sharing deals to create a steady income, and the development of New Heliopolis City, after securing funding for infrastructure spending from the Heliopark sales proceeds with a cost of around EGP4bn, based on our understanding.”

“ Solid profitability over the short-medium term: Our revenue estimates for the company mainly come from its revenue-share agreement with SODIC (OCDI EY), followed by the EGP1.30bn worth of its finished units’ inventory. HELI has been consistently holding on to inventory over the past nine quarters, which hampered its profitability. The company recently announced its plan to sell 460 residential units in New Heliopolis City worth EGP1.30bn, which should reflect positively on its FY24 revenue and net income. Revenue from SODIC East will have the largest contribution to total recurring revenue, with a total contribution of c56% over FY24—26e followed by a c44% contribution from unit sales. We estimate revenue of EGP1.65bn from SODIC East, over FY24—26e. HELI has already booked EGP1.26bn from the project, c25% of the EGP5.01bn minimum guarantee. It is worth noting that SODIC East revenue is recorded at virtually no cost, allowing the company to report high margins. We estimate revenue of EGP1.30bn from 460 units to be offered in 2024, at an average margin of c40%. We will include future revenue from the revenue-sharing deals in our forecast when launched. Our blended gross profit margin estimate for 4Q23—FY26e is c79% as our total costs estimate is EGP3.40bn over the same period. The company’s existing receivables stand at EGP1.27bn, which we account for in our collection schedule over 4Q23—FY33e, in addition to the EGP1.30bn of future unit sales. We expect the company to reduce its debt over the coming period as it utilizes the Heliopark proceeds. We expect the net debt position of EGP1.45bn to reverse into a net cash position of EGP3.28bn in 4Q23, and we gradually lower the debt balance to EGP543m in FY25 from EGP1.74bn as of 3Q23. The proceeds strengthen HELI’s balance sheet significantly, despite our estimate of a sizeable FY23 DPS of EGP2.30, implying a net-of-tax yield of c18%, based on the March 10 closing price of EGP12.6/share.” Mariam Elsaadany concluded.

About HC Brokerage

HC Brokerage is an affiliate of HC Securities & Investment– a full-fledged investment bank providing investment banking, asset management, securities brokerage, research, and custody services. HC Brokerage is an Egyptian registered company and member of Egypt’s Financial Regulatory Authority (FRA), and its registered address is 34 Gezirat Al-Arab St., Mohandessin, Giza, Egypt, Dokki 12311

HC: SIDPEC, Solid performance persisting

Posted on by Marwa Nakhla

SIDPEC

Solid performance persisting  

  • Uncertain global factors at play shape export polyethylene prices

  • SIDPEC is benefiting from its comparative cost advantage. Strategic new projects and the acquisition of ETHYDCO potentially add value

HC Brokerage had recently issued an update note about Egypt’s industrial sector, through shedding the light on SIDPEC (SKPC EY). They focused on the company’s strategic new projects and their effect.

Nesrine Mamdouh, Industrials Analyst at HC commented that: “ Global supply/demand imbalances and uncertainty on geopolitical tensions and feedstock prices fluctuate global PE margins: The International Monetary Fund (IMF) estimates global GDP growth at 3.1% in 2024, which we anticipate to weigh down on petrochemical demand, picking up gradually starting 2025, as global GDP growth recovers. Additionally, the increase in PE global capacities, particularly in China and the USA, could pressure prices if global demand does not recover tandemly, leading producers to reduce their utilization rates. However, the geopolitical tensions in Gaza, Ukraine, and the Panama Canal restrictions disrupted supply chains and increased freight and insurance costs, posing upward pressure on global PE export prices. Regarding the feedstock prices of naphtha and ethane crackers, although oil and naphtha futures contracts are in backwardation, suggesting lower future feedstock prices, the uncertainty surrounding the geopolitical tensions makes futures prices prone to upward revisions. In the USA, one of the lowest-cost PE producers and exporters, future natural gas and ethane contracts suggest higher prices over the coming years, implying a decrease in the oil-to-gas ratio and a conversion in the comparative cost advantage of ethane over naphtha crackers, leading to more price conversion of exports from these regions to Europe. Accordingly, factoring in these developments, we expect global polyethylene (PE) prices to reverse the trend and increase in 2024 after normalizing in 2023 from their 2022 peaks. Despite these higher costs being passed through, to a large extent, to the final prices so far, we believe if geopolitical tensions persist, the current supply/demand imbalances will eventually curb the responsiveness of prices to increased costs, pressuring PE’s global margins.”

“ SIDPEC’s strong industry position and comparative cost advantage support its operations and profitability: The company is well positioned due to its decent local market share, allowing it to charge a local price premium over export prices, particularly when FX bottlenecks hampered Egypt’s PE imports. Furthermore, SIDPEC capitalized on its net positive FX exposure and its predominant EGP-denominated cost structure by importing grades of polymers (polypropylene, LDPE, and PVC, PE100) and selling them at a premium in the local market through its commercial unit.  Moreover, implementing the feedstock formula in 4Q22, which tied it to an indexed PE price, helped SIDPEC hedge its margins against adverse convergent movements in feedstock and final prices, leading to consistent earnings. In our forecast, we assumed a gradual narrowing in the local price premium parallel to the gradual resolution of Egypt’s FX shortage and the resumption of PE imports.  We anticipate the feedstock pricing formula to remain in place. We expect SIDPEC’s revenue to grow at a c7.6% CAGR over our FY24–28e forecast period, mainly driven by higher prices in EGP terms due to the EGP devaluation, despite normalized blended PE prices in USD. We expect COGS to grow at a CAGR of c7.9%, factoring in higher production costs, translating into an average EBITDA margin of c24% over our forecast period. We forecast net profit to grow at a CAGR of c10.7% over our forecast period. ” Mamdouh added.

“ Synergies from new projects and the acquisition of ETHYDO, represent an upside risk to our numbers: In our view, SIDPEC’s full acquisition of its 20%-owned subsidiary ETHYDCO through a share swap entails operational and cost synergies. In July 2023, the independent financial advisor (IFA) valued ETHYDCO at USD1.09bn or USD78.3/share (divided over 13.9m shares), using an FX rate of EGP30.9/USD, which yielded a value of EGP33.5bn. The IFA valued SIDPEC at EGP23.1bn or EGP30.6/share (divided over 756m shares), suggesting a swap ratio of 1.45:1, according to which SIDPEC would issue 877m shares in favor of ETHYDCO shareholders as part of a capital increase in return for acquiring the remaining 80% of ETHYDCO. The IFA valuation was based on the two companies’ FY22 financial statements. However, the deal was pending the acquisition of a 30% stake in ETHYDCO by Alpha Onyx Limited, affiliated with ADQ Holding, which delayed the transaction, without clear visibility on its implementation time, especially considering the FX uncertainty. However, we believe the resumption of talks will require a revaluation of the swap ratio to factor in recent developments and the two companies’ FY23 financial positions. Meanwhile, SIDPEC is contemplating the implementation of various projects. It has allocated an investment budget of USD57m in 2024, including contributing a 7.5% stake in the Egyptian Bioethanol Company (EBIOL), and USD5m in Egyptian Gas Cylinder (INCO) to export bioethanol and gas cylinders. Moreover, the company is currently bidding to establish a power station for EBIOL, which would enhance its FX proceeds. In addition, it secured technology to establish a combined heat and power unit to generate electricity, leading to partial electricity savings. Furthermore, SIDPEC signed a memorandum of understanding (MoU) to establish a methane production unit, using its available resources of CO2, Hydrogen, and land. The production of methane internally would serve as a fuel for boilers and reduce the cost of sourcing it externally. Also, it plans to establish a permanent facility to import ethane from the US by 2026, in partnership with ETHYDCO, GASCO, and a specialized private company for a total of 600,000 tons/year of ethane, where its share will be around 144,000 tons/year. The ample feedstock will allow SIDEPC to expand its production, estimated to cost an additional USD100-USD150/ton of ethane, equivalent to an extra USD2.3–3.4/MMBtu, according to our calculations.” Nesrine Mamdouh concluded.

 

About HC Brokerage

HC Brokerage is an affiliate of HC Securities & Investment– a full-fledged investment bank providing investment banking, asset management, securities brokerage, research, and custody services. HC Brokerage is an Egyptian registered company and member of Egypt’s Financial Regulatory Authority (FRA), and its registered address is 34 Gezirat Al-Arab St., Mohandessin, Giza, Egypt, Dokki 12311

HC expects the MPC to maintain the policy rates on its first meeting in 2024

Posted on by Marwa Nakhla

  • HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled February 1st. Based on Egypt’s current situation, they expect the CBE to keep the policy rates unchanged.

Financials analyst and economist at HC, Heba Monir commented: “We expect the MPC to maintain the overnight deposit and lending rates on its 1 February meeting in the lack of an FX rate movement; however, if an EGP devaluation takes place, we don’t rule out a policy rate hike. We anticipate an adjustment in the FX rate after concluding the IMF’s delayed first and second reviews and reaching an agreement with the IMF on doubling, if not more, the value of the USD3.00bn Extended Fund Facility (EFF). Regarding inflation, we forecast January’s annual headline inflation to increase by 6.7% m-o-m and 36.3% y-o-y to factor in higher metro ticket prices, telecom prices, household electricity prices, and also due to increased money supply resulting from the maturity of high-yielding certificates of deposits (CDs) in January, which the government tried to absorb by issuing one-year CDs by Banque Misr and the National Bank of Egypt (NBE) at an interest rate of 23.5% paid monthly and 27.0% paid annually. Also, the Commercial International Bank Egypt – CIB (COMI EY) issued competitive high-yielding three-year CDs at interest rates ranging from 20-22%. Pressures on the currency are increasing, with Egypt’s 1-year CDS increasing to 960 bps from 886 bps on 21 December, gold price skyrocketing by c17% y-t-d, and market participants pushing for higher yields on treasuries. The 12M T-bills rate increased to a 52-week high of 27.7% last Thursday from 27.4% on 21 December, implying a current negative real interest rate of 9.0%. Despite the negative real interest rate on treasuries, we don’t expect attracting carry trade to be at the forefront of the MPC priorities for the time being due to the FX uncertainty, the rating downgrades by Moody’s, S&P, and Fitch, and Egypt’s removal from JP Morgan’s Global Bond Index-Emerging Markets (GBI-EM) series, effective 31 January due to significant FX conversion concerns reported by investors, making Egyptian treasuries less attractive to foreign investors for the time being. On a more positive note, the banking sector’s net foreign liabilities (NFL) narrowed by USD170m m-o-m in November to USD27.0bn and, excluding the CBE, by USD47.2m m-o-m to USD15.8bn, net international reserves (NIR) increased by around USD47m m-o-m to USD35.219bn in December from USD35.173bn a month earlier, and deposits not included in official reserves also increased c3.2% m-o-m in December to USD6.38bn, according to CBE data.”

It is worth mentioning that, in December meeting, the Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) maintained the benchmark overnight deposit and lending at 19.25% and 20.25%, respectively, after maintaining it for three consecutive meetings and increasing it by 300 bps in 2023 and 800 bps in 2022. Egypt’s annual headline inflation decelerated to 33.7% in December from 34.6% y-o-y in November, according to the Central Agency for Public Mobilization and Statistics (CAPMAS) data. Monthly prices rose 1.4% m-o-m in December compared to a 1.3% m-o-m increase in the previous month. On the global front, the US Federal Reserve raised interest rates in July 2023 by 25 bps to a range of 5.25-5.50%, a total of 100 bps in 2023 and 425 bps in 2022, with most expectations likely to maintain rates in its meeting in 30-31 January.

 

HC: Egypt macro, FX shortage weighs on economic growth

Posted on by Marwa Nakhla

Egypt macro

FX shortage weighs on economic growth

  • Low FX liquidity is fueling soaring inflation and affecting GDP growth, in our view. We expect an FX adjustment when Egypt improves its FX supply

  • We see the current account deficit turning into a surplus with a moderate expansion in external debt over FY23/24e, impacted by recent rating downgrades by Moody’s, S&P, and Fitch

  • We expect the budget deficit to widen to 7.1% of GDP in FY23/24e on higher interest expense and social benefits 

HC shared their outlook recently about Egypt’s macro economy in 2024 addressing the main GDP growth drivers and expectations on the EGP, Inflation rates and the state general budget.

Economist and financial analyst at HC, Heba Monir commented: “ FX shortage and monetary tightening constraining GDP growth, in our view: Egypt’s real GDP growth decelerated to 3.8% in FY22/23, and we expect it to increase to 4.0% in FY23/24e, slightly lower than the government’s target of 4.1%, yet higher than the IMF’s October 2023 estimate of 3.7%. However, lower-than-expected tourism revenue by c15% y-o-y due to the Israeli-Hamas war could lower our GDP growth estimate for FY23/24e to 3.3% and narrow the overall balance of payments (BoP) surplus by c50%. Our estimates reflect an EGP devaluation of c37% y-o-y in FY22/23 and of c19% y-o-y in FY23/24e, based on our real effective exchange rate (REER) model, compared to a c6% y-o-y EGP devaluation in FY21/22. The EGP devaluation, mainly triggered by foreign portfolio outflows following the outbreak of the Russian-Ukrainian war, fueled inflationary pressures and negatively affected corporate borrowing and private consumption. We expect GDP growth in FY22/23e to be driven by higher private consumption (+5.9% y-o-y), higher FDIs (+28.4% y-o-y), and a narrowing trade deficit, while in FY23/24e, besides the improved trade deficit, we expect a rebound in public investments (+47.8% y-o-y) to drive GDP growth, despite lower government consumption (-2.90% y-o-y).”

Monir continued: “ We expect inflationary pressure to persist in FY23/24e, reflecting the EGP devaluation: We expect inflation to accelerate to an average 33.2% y-o-y in FY23/24e, from 24.1% in FY22/23 and 8.48% y-o-y in FY21/22 as we expect inflationary pressures to persist following Russia’s withdrawal from the Black Sea Grain Initiative, supply shortages, weakening EGP, higher oil prices, and the impact of El Niño on commodities’ prices. We expect inflation to decline gradually on base effect to 26.1% by June 2024. To control inflation and anchor inflation expectations, the Central Bank of Egypt (CBE) increased policy rates by 1,100 bps since FY21/22, and we expect it to leave rates unchanged at its 21 December meeting since inflation is supply-driven. In 2024e, we expect an improvement in the government’s partial asset sale program, tourism, Suez Canal, and Egypt’s worker remittances to possibly trigger the start of monetary easing, which would lead to a higher GDP growth in FY24/25e, on our numbers. The Egyptian government recently secured USD2.63bn from selling public stakes in companies in July and September and is on track to sell public stakes and assets worth more than USD2bn by the end of June 2024.”

“The BOP reversed into a surplus of USD882m in FY22/23, which we project to narrow to USD529m in FY23/24e on lower borrowing by banks: Egypt’s balance of payments (BOP) recorded an overall surplus of USD882m in FY22/23, reversing a deficit of USD10.5bn a year earlier, mainly due to a significant narrowing in the current account deficit on lower imports and improved tourism and Suez Canal revenues. For the same reasons, we expect the BOP to record an overall surplus of USD529m in FY23/24e. We anticipate the current account deficit to turn into a surplus of USD1.31bn in FY23/24e (c0.4% of GDP), from a deficit of USD4.71bn in FY22/23, versus the IMF’s deficit estimate of USD8.63bn (2.41% of GDP), on a lower trade deficit, in our view. Regarding Egypt’s external debt, which reached USD165bn by the end of June 2023, we estimate that the government repaid around USD33.9bn in FY22/23 and rolled over some USD24.0bn (mostly GCC deposits), representing c41% of its total dues for FY22/23 with a scheduled repayment of USD24.7bn in FY23/24e. We forecast a moderate increase in FY23/24e’s external debt, constrained by debt capacity and the recent rating downgrades by Moody’s, S&P, and Fitch, leading Egypt to resort to Asian markets to issue Panda and Samurai bonds with a value of around USD979m and considering tapping the Indian market. We forecast the financial account surplus to narrow by c13% y-o-y to USD7.82bn in FY23/24e with a net inflow in Egypt’s portfolio investment of USD0.18bn versus an outflow of USD3.77bn in FY22/23. The banking sector’s net foreign liabilities (NFL), including the CBE, widened c36% y-o-y to USD27.1bn as of June 2023. We estimate it to narrow by c6% y-o-y to USD25.5bn by June 2024, on an improvement in foreign currency inflows, including proceeds from the government’s partial asset sale program and improving FDIs in the services sector, especially in real estate, finance, and information technology. Following the delay in the IMF program review of March and September, related to the USD3.0bn Extended Fund Facility (EFF) Egypt secured in December 2022, Egypt’s 1-year CDS fluctuated over the 11M23, reaching 1,122 bps currently from 499 bps in January, after it resumed its partial asset sale program. In our view, Egypt’s commitment to the IMF’s reforms, most importantly leveling the playing field with the private sector, is essential to attract FDIs again and restore FX liquidity.” Monir added.

Heba Monir concluded: “ We estimate the budget deficit to widen to 7.1% of GDP in FY23/24e mainly on higher interest expense: Egypt’s budget deficit reached 6.1% of GDP in FY22/23, similar to FY21/22’s level, while we estimate it to widen to 7.1% of GDP in FY23/24e, reflecting a cash deficit of EGP810bn, c5% lower than the government estimate of EGP849bn. Our FY23/24e budget estimates assume c54% y-o-y higher total revenues of EGP2.13trn, in line with the government’s estimate (-1%), on a c25% y-o-y higher tax revenue and a 2.87x y-o-y hike in non-tax revenue. We expect expenditures to increase c44% y-o-y to EGP2.94trn, c2% lower than the government’s estimate. We forecast interest expense to increase by c29% y-o-y to EGP757bn in FY22/23e and by c55% y-o-y to EGP1.17trn in FY23/24e, representing c37% and c40% of total expenditures in FY22/23e and FY23/24e, respectively, higher than its 5-year historical average of c36%, mainly due to the 1,100 bps increase in key policy rates since the start of 2022.”

 

 

HC believes the MPC is to increase the policy rates by 1% in its coming meeting

Posted on by Marwa Nakhla

  • HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled November 2nd. Based on Egypt’s current situation, they expect the CBE to increase the policy rates.

 Financials analyst and economist at HC, Heba Monir commented: “ 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.”

It is worth mentioning that, 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.

About HC Securities & Investment

HC Securities & Investment is a leading investment bank in Egypt and the MENA region. Since its inception in 1996, HC has utilized its relationship-driven insights, local and regional market knowledge, and industry-specific expertise and strong execution capabilities to provide its clients with a wide range of services in investment banking, asset management, securities brokerage, research, custody and online trading  through its offices in Egypt and the UAE (DIFC). HC Investment Banking has an outstanding track record of advising leading corporates in Egypt and the MENA region on M&A, capital market, and financing transactions in excess of USD6.6bn. HC Asset Management now manages 7 mutual funds for commercial banks and portfolios for institutions and sovereign wealth funds with assets under management in excess of EGP7bn. HC Brokerage is ranked among the top brokers in Egypt and provides a wide array of services, including research and online trading to institutional and retail clients.

 

HC: Edita Food Industries, Resilient Performance

Posted on by Marwa Nakhla

  • Attractive product offerings and efficient pricing and working capital management strategies help Edita navigate challenging conditions

  • We forecast EBITDA and EPS to grow at a 2024–28e CAGR of c18% and c21%, respectively, driven by volume and price increases

In a recent report, HC Brokerage presented their evaluation of Edita Food Industries forecasting their revenue to grow.

Pakinam El-Etriby, Consumers Analyst at HC commented that: “Edita diligently navigating a double whammy: The COVID-19 pandemic outbreak and lockdowns in 2020 impacted energy, commodity supply, and prices. When economies started to open up in 2021, the limited supply caused production bottlenecks, further fueling inflation. The Russian-Ukrainian war in February 2022 exacerbated the situation, resulting in additional disruptions in global supply chains. The impact was especially notable for commodities like wheat, primarily sourced from Ukraine and Russia. By March 2022, crude oil and wheat prices reached their highest levels in three years (from 2020 to the present), standing at USD128/bbl for oil (up from an average of USD70.9/bbl in 2021 and USD89.7/bbl for the first two months of 2022) and around USD524/tons for wheat (up from an average of USD258/tons in 2021 and USD290/tons for the first two months of 2022). Furthermore, the three consecutive EGP devaluations in March 2022, October 2022, and January 2023, by a total of around 50%, further increased raw material prices for Egyptian food producers, which eventually influenced consumer spending patterns. As a result, companies hiked prices to navigate this challenging economic environment, with Edita standing out by preserving its margins while not negatively impacting the demand for its products. From 2021 through 1H23, it managed to increase its volumes by an average of c22% y-o-y per quarter and expand its market share, as smaller producers found it difficult to withstand the challenging operating environment, with some even exiting the market, allowing Edita to increase its market share. In 2022, EFID increased its revenue and net profit by c46% and 2x y-o-y, respectively, and the momentum continued into 1H23 with a c80% y-o-y growth in revenue and a c2x y-o-y hike in net profit. We expect EFID to continue passing the bulk of cost increases onto consumers, directly and indirectly, to protect its margins against higher raw material costs.”

“We forecast revenue to grow at a 2024–28e CAGR of c14% on higher volumes and prices: During 1H23, total volume increased c31% y-o-y to 1,994m packs, and blended price increased c37% y-o-y to EGP2.83/pack, leading to the c80% y-o-y revenue growth to EGP5.64bn. We expect a similar performance in 2H23, as the company capitalizes on its attractive product offerings, serving as a meal replacement, and its active pricing strategy. Therefore, we expect 2023e revenue to increase by c64% y-o-y to EGP12.6bn. Furthermore, we forecast revenue to grow at a CAGR of c14% over our 2024–28e forecast period, with volumes growing at a CAGR of c10% and average selling prices growing at a CAGR of c4%. We expect the cake and bakery segments to continue contributing more than c80% to Edita’s total revenue over our forecast period.” El-Etriby added.

“We forecast EBITDA and EPS to grow at a 2024–28e CAGR of c18% and c21%, respectively, helped by stable margins and efficient working capital management: In 2023, we expect GPM to contract by c2 pp y-o-y to c32%, impacted by higher commodity prices and a weaker EGP, with average cost/pack standing at EGP2.06/pack (up c44% y-o-y), surpassing the c40% annual increase in average selling prices of EGP3.03/pack during the year, based on our numbers. However, starting in 2024, despite the further expected EGP devaluation, we estimate GPM to gradually recover over our 2024–28e forecast period and reach 34.9% by 2028e, as we expect Edita to pass on cost increases to consumers and successfully migrate them toward higher-priced SKUs. We expect the EBITDA margin in 2023 to marginally decline to 19.0% y-o-y from 19.8% in 2022, supported by the high operating leverage and economies of scale, with SG&A and distribution costs representing c15% of total sales versus 17% in 2022, respectively. We expect Edita’s EBITDA margin to average c22% over our 2024–28e forecast period. Accordingly, we forecast EBITDA and EPS to grow at 2024–28e CAGR of c18% and c21%, respectively. Edita has always maintained an efficient working capital strategy characterized by a negative cash conversion cycle (CCC). However, during the past two years, receivable and inventory days on hand (DOH) relatively surged due to global supply chain disruptions and the EGP depreciation, with the CCC averaging c23 days and we expect it to decline to c10 days by 2028e.” Pakinam El-Etriby concluded.

About HC Brokerage

HC Brokerage is an affiliate of HC Securities & Investment– a full-fledged investment bank providing investment banking, asset management, securities brokerage, research, and custody services. HC Brokerage is an Egyptian registered company and member of Egypt’s Financial Regulatory Authority (FRA), and its registered address is 34 Gezirat Al-Arab St., Mohandessin, Giza, Egypt, Dokki 12311

For further information, please contact:

Research@hc-si.com

 

HC: Orascom Construction, Robust business model

Posted on by Marwa Nakhla

  • Imminent inflection point in the GCC to support MENA operations

  • ORAS capitalizes on its U.S. presence, hedges setbacks, and further diversifies its exposure through BESIX

  • In a recent report, HC Brokerage issued an update note about Egypt’s construction sector, through shedding the light on Orascom Construction focusing on the the company’s exposure rebalancing.

Nesrine Mamdouh, Industrials Analyst at HC commented that: “Despite a challenging operating environment in Egypt, projects in the pipeline still offer moderate potential: In 2022, The Russian-Ukrainian war caused commodity market turmoil, supply chain disruptions, soaring global inflation, and hence rate hikes by major international central banks, pressuring the EGP and stressing Egypt’s state budget. As a result, the Egyptian government rationalized public spending, and despite delaying the implementation of new projects with a USD component (estimated at USD8bn), it allocated EGP587bn for investments (USD18.8bn) in the FY23/24 state budget. It also endorsed legislative and regulatory amendments to reduce its footprint in various economic sectors and encouraged private sector participation, including amendments to the executive regulations of the PPP Act for infrastructure projects to facilitate public-private partnerships in key projects. The budget also marks EGP600bn for private investments, representing c33% of total investments of EGP1.8trn and c50% by FY25/26, which is achievable if domestic macroeconomic visibility and investor sentiment improve, in our view. Regarding ORAS’s main business areas, we expect the transportation sector’s share of total investments to retreat after the completion of its ten-year (2014–2024) development plan with total investments of EGP1.7trn. We also see growth potential in the logistics, manufacturing (with expected investments of USD3.3bn in FY23/24), electric regional interconnectivity, and renewable energy sectors. Renewables include green hydrogen projects, which are attracting remarkable investments to Egypt, and water desalination projects with investments of USD3.1–3.3bn for the first phase of Egypt’s water desalination program, targeting a capacity of 3.35m cbm/day by 2025.”

“Rebalancing exposure in MENA in a quest for potential opportunities:  We expect ORAS’s share of Egypt’s investments to soften to an average of c3.1% in 2023–2027e (a proxy for its awards from Egypt), from 3.7% in 2018–2022, as the government plans to scale down USD-intensive projects and as ORAS targets quality projects, entailing a foreign financing component. Having said that, we expect a c20% y-o-y decrease in Egypt awards to USD1.6bn in 2024e, while a faster-than-expected resumed USD spending on planned projects, and private sector participation would represent an upside risk to our numbers. However, the 2023e healthy backlog from Egypt, estimated at USD3.9bn, representing c69% of its total backlog, should secure decent sustained revenue over 2024 until the economy overcomes its bottlenecks and FX shortage. Also, the government’s compensations to negatively affected contractors by the EGP devaluation, should support its revenue from Egypt. As for MENA, we see ORAS capitalizing on its flexible and diversified business model to increase its exposure to the GCC through vigorous investment plans and mega projects aiming at diversifying their hydrocarbon-based economies. The GCC’s total underway and planned projects are estimated at USD2.6trn, of which c54% are in the KSA, c21% in the UAE, and are led by the construction sector at c56% of total investment projects, according to the GCC 2023 planned projects by MEED. As for KSA, which dominates the lion’s share of investments, we expect its awards to average c35% of investments over our forecast period, a growth of c2.2x, from an average of c16% in 2018–2022. Despite fierce competition, we see ORAS, relying on its expertise, actively bidding and consorting with national and international companies for various water projects, including desalination, transmission, strategic reservoir, and wastewater treatment projects.” Mamdouh added.

“Sustained business in the US and diversification benefit from Besix: The US Infrastructure Investment and Jobs Act (IIJA) signed in 2021 authorized USD1.2trn for transportation and infrastructure spending, of which USD550bn were allocated to new investments over five years in the nation’s bridges, airports (the Bipartisan Infrastructure Law provides USD15bn in airport infrastructure funding), waterways, and public transit among others. However, the Fed Reserve’s restrictive policy to curb inflation by raising rates by 525 bps since March 2022 to date to a range of 5.25–5.50%, created tighter credit conditions, gradually weighing down on growth. While supply chain bottlenecks are largely resolved, and inflation is gradually improving, it is still relatively high, at 3.7% as of August. Whereas in July 2023, the US total construction spending (SAAR) increased by c5.5% y-o-y to USD1.97trn, driven by a c17% y-o-y growth in total non-residential spending and a c71% y-o-y growth in notable private manufacturing spending. ORAS maintains its exposure to the US data center business, the recession-proof student housing, and the light industrial and commercial sectors, while increasing it to the advanced manufacturing and aviation infrastructure works. We foresee ORAS focusing on non-interest-rate sensitive and sophisticated projects where it possesses a comparative advantage, which should sustain its EBITDA margins at an average of c2.2%, on our numbers. As for Besix, despite a gloomy outlook for the European construction sector in 2023, the Eurostat Construction Production Index increased y-o-y as of June 2023 for Belgium, Netherlands, and Luxemburg, with a slight decrease for France, Besix’s main business markets in Europe. We foresee investments in these economies to maintain an average share of c33% of total Euro area fixed capital formation over 2023–2024e. Also, the infrastructure and renewable projects public tenders should sustain Besix’s business in concessions and assets. Moreover, the company’s expertise in marine, high-rise innovative buildings, its exposure to the Middle East, along with the phasing out of lower-quality projects should improve its net profit margin at an estimated average of c1.1%, suggesting a decent contribution to ORAS’s bottom line, further enhanced by the magnitude of any potential appreciation of the EUR/USD exchange rate.” Nesrine Mamdouh concluded.

 About HC Brokerage

HC Brokerage is an affiliate of HC Securities & Investment– a full-fledged investment bank providing investment banking, asset management, securities brokerage, research, and custody services. HC Brokerage is an Egyptian registered company and member of Egypt’s Financial Regulatory Authority (FRA), and its registered address is 34 Gezirat Al-Arab St., Mohandessin, Giza, Egypt, Dokki 12311

 

HC believes the MPC is to keep the policy rates unchanged

Posted on by Marwa Nakhla

  • HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled September 21st. Based on Egypt’s current situation, they expect the CBE to keep the policy rates unchanged.

Financials analyst and economist at HC, Heba Monir commented: “ We anticipate Egypt’s inflation to continue rising by 1.8% m-o-m and accelerate to 37.8% y-o-y in September, reflecting supply shortages of basic commodities and products mainly caused by the curbing of importation and lack of USD availability and the seasonality effect of the partial start of schools and universities’ academic year. Egypt’s overall balance of payment (BoP) recorded a deficit of USD317m in 3Q22/23, despite recording surpluses during the previous two quarters, mainly due to a c17% q-o-q drop in exports. Moreover, Egypt’s 1-year CDS soared c60% y-t-d and c31% m-o-m to 1,217 bps in mid-September 2023. On a more positive note, net international reserves (NIR) increased by 4.39% y-o-y and 0.14% m-o-m to USD34.9bn in August, and deposits not included in the official reserves increased by c1.6% m-o-m and 5.35x y-o-y to USD4.74bn in August. Egypt’s banking sector’s net foreign liabilities (NFL) narrowed by USD822m m-o-m to USD26.3bn in July, according to CBE data. Excluding the CBE, the banking sector’s NFL narrowed by USD965m m-o-m to USD16.1bn, due to an increase in banks’ foreign assets (excluding the CBE) by c8% m-o-m versus no change in banks’ foreign liabilities. Based on Egypt’s economic situation, we believe that the MPC is likely to maintain interest rates at its 21 September meeting to fully absorb the effect of the last 100 bps increase, especially that the inflation is supply-driven and not demand-driven. Additionally, the latest 12-month T-bills recorded an average yield of 25.541%, up 663 bps y-t-d and 83 bps m-o-m, partially reflecting the 3 August 100 bps rate hike, the spike in Egypt’s CDS and to maintain the attractiveness of Egypt’s carry trade, which also suggests that the MPC may hold interest rates at its upcoming meeting.”

It is worth mentioning that, in its 3 August meeting, the Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) decided to raise the benchmark overnight deposit and lending rates by 100 bps to 19.25% and 20.25%, respectively, with 300 bps total rate hike y-t-d and 800 bps in 2022. Egypt’s annual headline inflation accelerated for the third consecutive month to a record of 37.4% in August from its previous record of 36.4% y-o-y in July, according to the Central Agency for Public Mobilization and Statistics (CAPMAS) data. Monthly prices rose 1.59% m-o-m in August compared to 1.86%m-o-m 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 an expectation to maintain rates in its meeting next week, according to Reuters poll.

Orascom Development Egypt: Gouna masterplan amendments add value

Posted on by Marwa Nakhla

  • Amendments to the Gouna masterplan waive environmental fees, unlock value, and increase ODE’s hospitality exposure

  • ODE enjoys solid profitability in 2023e as the 3Q23 land sale should offset potential FX losses

In a recent report, HC Brokerage issued an update note about Egypt’s real-estate sector, through shedding the light on Orascom Development Egypt where they expect ODE to offset potential FX losses.

Mariam Elsaadany, real estate analyst at HC Brokerage commented: “Gouna masterplan amendments should pave the way for significant value unlocking: In February 2023, Orascom Development Egypt (ODE) signed a new masterplan agreement with the Egyptian authorities, including the following terms: (1) approval of a new master plan for the remaining land bank in El Gouna and 1,000 hotel rooms at the company’s discretion, (2) granting ODE the right to connect its lagoon system to the sea via two new water canals to improve water quality in existing and future projects, (3) reducing the shoreline setback for the remaining land bank from 200 meters to 105 meters, which allows ODE to make commercial use of the most prime land of the destination, and (4) amending the transfer fee payable by ODE on real estate sales for the remaining land bank, which is fixed for ten years and will be paid in advance over 15 years, and (5) granting environmental permits for 24 projects in Gouna and exonerating ODE from all charges and settlement of all disputes with the Environment Protection Agency (EPA). The amendments remove the overhang on the stock and allow significant value extraction from its 16.6m sqm, which we had previously valued at an NPV of only EGP209/sqm, compared to EGP402/sqm currently. Moreover, ODE’s recurring income business benefitted from a strong touristic season, contributing c32% to 1Q23 revenue, up from c28% in 1Q22, and c29% to EBITDA, up from c20% in 1Q22. Nonetheless, ODE’s USD and EUR debt balance, representing c73% of total debt, exposes it to significant FX losses during EGP devaluations, despite recording higher hospitality revenue in EGP terms helped by the EGP devaluation. Accordingly, we expect more one-off transactions, including land sales and non-core asset sales, to offset possible FX losses and margin compression from the real estate business, such as the company’s sale of an EGP390m high-margin land plot in Gouna in 3Q23.”

 

Mariam concluded: “We expect accelerated collections on shorter payment plans in first-home projects and expect reduced risk of margin erosion due to core and shell offerings: We assume substantial increases in ODE’s real estate selling prices, hospitality average room rates (ARRs), and rental prices to preserve its profitability amid inflationary pressures. Annual urban headline inflation averaged 31.6% in 1H23 compared to a c59% increase in residential selling price increase and a c86% increase in hospitality ARR over the same period, demonstrating the company’s efforts to preserve its margins. Margin compression for ODE is limited during the coming two years, in our view, due to (1) the company’s strategy to raise selling prices and (2) expected one-off sales going forward, and (3) more core and shell offerings allow it to avoid margin erosion on finishing materials. For the real estate business, we expect a drop in sales volumes over 2023—2024e, in line with management’s strategy to hold onto inventory, where it opts to reduce the number of units launched to the market during uncertain times and offers them when the profitability outlook is higher. Our total receivables estimates over our forecast period stand at EGP151bn, including the company’s share of O West receivables. Our CAPEX estimate is EGP90.2bn for the forecast period, which implies an average margin of c40% for the company’s residential business. Over our forecast period, we increased hospitality occupancy rates to range from c70%–80% in Gouna and increased ARRs at an average of c10% annually. We did not include in our estimates any of the 1,000 planned hotel rooms in Gouna, and it is worth noting that the company is not obliged to build these rooms and can abandon the plan if it chooses to. Our hospitality estimate yields a c28% 4-year CAGR in hospitality revenue, and we expect the company’s hospitality margin to average c30% over our 2H23–2027e forecast period. We expect ODE’s 2023e net debt-to-equity to drop to 0.46x from 1.10x in 2022 as its cash balance grows on the back of strong collections. It is worth noting that the company has reduced payment plans in O West, which we believe affirms strong demand.  We also highlight the increase in the company’s interest expense, especially on the EUR and USD debt, given that c73% of its debt is in these currencies.”