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HC expects the CBE to keep interest rates unchanged in the upcoming MPC meeting

  • HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled September 16th 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: “Egypt’s inflation remains closer to the lower end of the CBE target range of 7% (+/-2%) for 4Q22, and we expect it to average 5.6% in 4Q21. We believe that the Federal Reserve’s recent announcement of unlikely interest rate hikes in the near future partly relieved the pressure on Egypt’s treasury yields by renewing the interest in emerging markets carry trade. Accordingly, Egyptian treasury bill yields declined by an average of 40 bps since mid-August, reflecting higher foreign portfolio inflows during August. Foreign holding of Egyptian treasuries increased to USD33.0bn in August from USD29.0bn in May, according to S&P Global Ratings. We also believe that a rebound in foreign currency receipts from tourism following the resumption of Russian flights to Egypt’s Red Sea resorts released some interest rate pressure on the EGP. Going forward, we believe that the interest rate action of other emerging markets will determine the pace of future declines in Egypt’s treasury yields. Currently, Turkey offers c19% on its 1-year treasuries (hence a real yield of 5.45% given zero taxes and Bloomberg 2022 inflation estimate of 13.4%) compared to Egypt’s real yield of 3.0% (given our 2022e inflation forecast of c8% and 15% taxes for European and US investors). Also. according to CBE data, the corporate borrowing rate is currently at around 9.4%, while the risk-free after-tax rate is around 10.4%. Therefore, we believe that any interest rate cuts at the moment could lead to a wider gap between the corporate and the risk-free rates, with the corporate rate being on the lower end. We accordingly expect the MPC to keep rates unchanged in its upcoming meeting.

It is worth mentioning that, in its last meeting on 5 August, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to keep rates unchanged for the sixth consecutive time. Egypt’s annual headline inflation came in at 5.7% in August, with monthly inflation increasing 0.1% m-o-m compared to an increase of 0.9% m-o-m in July, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS).

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About HC Securities:

HC Securities & Investment (HC) 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, online trading and private equity 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 USD6.2bn. HC Asset Management, winner of the 2018 MENA Fund Manager Awards, now manages 9 mutual funds for commercial banks and portfolios for institutions and sovereign wealth funds with assets under management in excess of EGP6.8bn. 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 Brokerage cooperates with Contact Factoring to launch the First Margin Lending Factoring Program with EGP 400 mln

  • HC Brokerage signed a cooperation agreement with Contact Factoring for launching the first margin lending factoring program, aimed at financing HC retail clients interested in Margin Trading, with a total value of EGP400mm. This program will contribute in growing the trading volume in the Egyptian stock market and allows easier access to financing for retail and institutional clients.

This HC Contact cooperation comes in line with the decisions of the Financial Regulatory Authority to allow factoring companies to provide quick loans for the retail clients of brokerage companies who offer margin trading. This cooperation conveys Contact’s confidence in HC as one of the biggest brokerage companies in Egypt, based on the trading volume and array of services that HC provide to a large base of clients, both institutions and retail.

Hassan Choucri, Managing Director of HC Brokerage, affirmed that this agreement allows great opportunities for a multitude of stock market investors across all segments, by facilitating the needed financing through the first margin lending factoring program. He noted that HC concluded this deal based on its extended expertise in the stock market, as well as its strong relations with its clients and NBFS companies.

He added that “Brokerage companies mainly depended on their own resources to serve margin traders. Given the current interest in encouraging small retail investors to trade and spread the culture of stock market investments, such agreements offer great opportunities for injecting new money, where clients can trade with larger sums, which in turn increases the market liquidity and creates a better investment environment.”

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About HC Brokerage

  • HC Brokerage has rapidly developed into one of the top brokerage firms in Egypt. HC Brokerage provides its services to a wide client base of corporate institutions and High Net-Worth Individuals. Since 1999 HC Brokerage has developed a growing client base that has benefited from a multitude of services and a trusted team that aims for the utmost benefit and client satisfaction.
  • HC Brokerage is a subsidiary of HC Securities & Investment, one of the most distinguished investment banks in Egypt and the Middle East which was established in 1996 and has fully operational offices in Egypt and the middle east.
  • HC Brokerage provides its clients with a wide- array of services, including: Brokerage for securities listed on the Egyptian Exchange and Brokerage for Global Depository Receipts (GDRs) issued by Egyptian companies and listed on the London Stock Exchange. In addition, Brokerage for Sovereign and Corporate bonds, Intermediation for transactions involving unlisted securities in the Egyptian over-the-counter (OTC) market and listing of companies on the Egyptian Exchange. HC Brokerage also provides Online-trading services, bonds and foreign securities trading.

HC’s strategy in 2021 and 2022

In an interview with Reuters, Hussein Choucri, Founder, Chairman and managing Director of HC Securities and Investment shared his views on the Egyptian economy and HC’s strategy for 2021/2022.

  • HC’s strategy: Choucri confirms that there is no intention to sell the company

  • HC is about to close two acquisitions worth a total value of EGP5bn.

  • HC’s strategy for 2022 includes working on acquisitions with EGP4bn

  • HC Brokerage aims at launching two new branches besides its eight branches.

  • In 2021, HC sealed two deals as it acted as a co-advisor for MAC Beverages Ltd and its affiliates on the sale of a 52.7% stake in Coca-Cola Egypt for $427mm.

  • HC acted as co-advisor to Saudi food giant Almarai on the acquisition of 100% shares in Bakemart UAE and Bahrain in a deal worth USD25.5bn

  • Recently, HC Brokerage signed a cooperation agreement with Contact Factoring for launching the first margin lending factoring program, aimed at financing HC retail clients interested in Margin Trading, with a total value of EGP400mm.

  • HC’s assets under management reach EGP6.8bn.

HC Securities & Investment

HC Securities & Investment (HC) is a leading investment bank in Egypt and the MENA region. Since its inception in 1996, HC has leveraged its relationship-driven insights, local and regional market knowledge, 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, online trading and private equity 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 USD 5.9bn. HC Asset Management, now manages 9 onshore mutual funds for commercial banks and portfolios for institutions and sovereign wealth funds with assets under management in excess of EGP 7bn. 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 acted as co-advisor to MAC Beverages Ltd and its affiliates (“MBL”) on the sale of their 52.7% stake in Coca Cola Bottling Company of Egypt

  • HC Securities & Investments (“HC”) acted as co-advisor to MAC Beverages Ltd and its affiliates (“MBL”) on the sale of their 52.7% stake in Coca Cola Bottling Company of Egypt (“CCBCE”), as a part of Coca Cola HBC Holdings B.V (“CCH Holdings”) acquisition of 94.7% of total CCBCE’s shares for an agreed total combined purchase price of US$ [427] million, subject to certain adjustments.

The parties of Coca Cola transaction have entered into definitive agreements. The transaction is expected to closing in late Q4 2021, subject to satisfaction of various conditions, including the receipt of certain lenders consents under CCBCE’s existing loan facilities and certain regulatory and other conditions.

Mohamed Aburawi, Head of Investment Banking at HC commented: “We are pleased to support MBL on this landmark transaction. HC has developed a long term relationship with MBL for more than a decade advising MBL on a number of high profile transactions in the F&B and packaging sectors. This transaction testifies of Egypt’s attractiveness as a promising investment destination offering great business opportunities appealing to prominent international strategic investors”

End –

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 leveraged its relationship-driven insights, local and regional market knowledge, 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, online trading and private equity 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 USD 5.9bn. HC Asset Management, now manages 9 onshore mutual funds for commercial banks and portfolios for institutions and sovereign wealth funds with assets under management in excess of EGP 7bn. 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: A turnaround in fortunes starts now in Arabian Cement

  • In its latest report, HC Brokerage shed the light on the cement industry in Egypt, specifically on Arabian Cement Company (ACC) where they reiterated OW on a substantial upside potential

  • Government finally imposes local sales quota to balance supply/demand; retail price should theoretically correct to over EGP1,200/ton, albeit gradually, benefiting all players
  • Arabian Cement should see its earnings multiply to unprecedented levels, despite the slightly lower implied utilization rate
  •  We more than double our 2021–24e EBITDA estimates and our TP to EGP15.0/share and reiterate OW on a substantial upside potential

Mariam Ramadan, Head of Industrials at HC commented that: “The introduction of quotas shakes up market shares but should significantly improve pricing environment for all: Under the formula proposed, each cement maker would cut production capacity by a base amount of 10.69%, an additional 2.81% per production line, besides an asset age factor, effective 15 July. We estimate this could shave off around 24m tpa (or c32%) of clinker capacity off the map, leaving effective capacity at 50m tpa, in line with pre-COVID-19 consumption levels, leaving all players potentially utilizing their full rebased capacity/quota allocated. While the imposed quota will result in a redistribution of sales volume, with gains for some and losses for others, the consequent higher price should comfortably translate into improved earnings for all. We estimate a theoretical ex-factory price floor of EGP1,000–1,200/ton based on the marginal cost producer’s all-in breakeven point, which is broadly in line with management’s expectation. Nevertheless, we only assume a gradual closing of the gap between actual prices and the marginal cost of production, as the market psychologically adjusts to the considerable hike and as inventories run down. We also factor in the normalization of coal/petcoke prices and freight rates, all translating to a terminal realized price of EGP1,000/ton for local sales. That said, however, a long-term equilibrium price should, besides fully covering fixed and variable costs, allow for debt servicing, recouping years of accumulated losses, and generate a positive return to shareholders, which should provide further upside.

Export market dynamics little changed despite the excess volume: On our calculations, all players who netted production cuts (and therefore face an increase in excess volumes) are already exporters. Assuming no significant change in their cost efficiency (and hence ability to export) following the cuts suggests an increase in volumes that need offloading in export markets, where margins are already very slim. We expect Arabian Cement’s export contribution margin to remain positive at the new utilization rate and anticipate it will retain its competitive edge in export markets as it remains among the most cost-efficient players with an extensive and diversified market reach (spanning from Sub-Saharan Africa to the US). We assume little change in the company’s export volumes (market share aside) but now factor in clinker exports as well (at slightly higher margins versus cement). This leaves the company’s cement utilization rate at 80%, down from its average historical mid-80%s (pre-line one’s outage last year), and its clinker capacity utilization nearly unchanged, with total exports making up c10% of sales.” Added Mariam Ramadan

Many key considerations remain unresolved, constituting both upside and downside risks: On the downside, the government has only specified a one-year validity initially, but we assume an extension until natural supply/demand balance is achieved, with the cuts to merely oscillate with potential demand step-ups until then. Also, naturally, allowing imports would defy the logic of the intervention. Still, there has been no word on an import ban, while importing could now become lucrative (judging by prices in Turkey and the GCC). On the upside, divisibility remains key, with some producers potentially opting to idle their less efficient line (s) as the threshold of operating all profitably is higher than implied by their allocated quota. If this does not change the marginal cost producer’s breakeven point, it could translate to a higher effective supply cut and higher prices. Additionally, the kickoff of reconstruction in Libya and Iraq provides real upside to our export assumptions (prices and volumes), the signs of which already started to show.” Mariam Ramadan continued

Back to 2015 market dynamics; reiterate OW on compelling valuation: Our new assumptions see EBITDA multiplying to an all-time high of EGP1.26bn next year from EGP183m in FY20, with our 2021–24e estimates standing some c140% higher, on average, than our previous forecasts. This implies an EV/ton of USD78, still substantially below the replacement cost of at least USD130/ton, and a target price of EGP15.0/share. This level is comfortably below its all-time high of EGP18.0/share before the announcement of the new 12m tpa Wataniya plant and the new cement licenses; dynamics that were very similar to where this development takes us. Between then and now, however, the EGP devaluation also took place while the USD-based cost curve shifted downward on the exit of a couple of players and conversions to coal and petcoke. Ultimately, Arabian Cement’s cost advantage versus the marginal producer (and hence selling price potential) widened significantly, resulting in higher future operating cash margins, while its debt and other liabilities shrank and its cost of capital decreased. Therefore, we see the said share price rerating as only reasonable. Our new target price puts the company at FY22e EV/EBITDA of 4.9x (trading at 2.0x) and P/E of 7.6x (trading at 2.7x) and implies a potential return of 182% on the 6 July closing price of EGP5.32/share. Therefore, we reiterate our Overweight rating.” Mariam Ramadan concluded

Egypt cheese sector: Demand recovery interrupted

  • In a recent report, HC Brokerage presented their analysis of Egypt’s cheese sector and a valuation of the two players Obourland and Domty, where HC maintained Overweight rating for both on share price dip.

  • Demand recovery was mainly interrupted by higher prices to mitigate higher input costs
  • However, margins should improve in 2H21e on low-interest costs and improved working capital, allowing for good FCF generation
  • We reduce our 12M TP for Obourland c7% to EGP9.26/share, and for Domty c20% to EGP6.73/share while maintaining our OW rating for both on share price dip. Obourland is our sector pick

Noha Baraka, the Head of Consumers at HC commented on Egypt cheese sector:We see Obourland offering the best exposure to the Egyptian cheese sector: In the aftermath of soaring global commodity prices and the prolonging of the COVID-19 situation, we see inflation rising, pressuring consumer’s disposable income, and weighing down on private consumption. We see private consumption growth dropping to an average of 6.15% in 2H20/21e from an average of 9.91% in 1H20/21. The elevated global commodity prices have left companies with no choice but to raise their retail prices to restore margins, which could impede the volume growth of certain players, in our view. Companies fared differently within the cheese market depending on their pricing strategies, and the varying degrees of their exposure to the crisis. Given that Domty started the year with a more aggressive pricing strategy than Obourland, and the situation worsened with the phasing out of agents, we accordingly expect its cheese volumes to drop c8% y-o-y in 2021e. As for Obourland, we forecast volumes to remain essentially unchanged y-o-y in 2021e, supported by its active procurement strategy allowing it to adopt gradual price increases and maintaining its presence in underserved areas characterized by lower competition.”

“Despite an unfavorable cost outlook, we still see the possibility of margin expansion for both companies toward 2H21e:  The COVID-19 outbreak disrupted the global commodities markets in 2021. The average winning contract price of skimmed milk powder from New Zealand rose c15% y-t-d and c25% y-o-y, with future contracts suggesting that prices will continue rising for the rest of the year, implying an increase of c3% h-o-h in 2H21e and c25% y-o-y higher. Also, palm oil prices increased c57% y-t-d due to labor shortages in major producing countries following the COVID-19 outbreak, with future contracts suggest that palm oil prices are expected to drop c7% h-o-h in 2H21e but still increase c44% y-o-y. Starting with Obourland, we see that its real strength lies in running a solid business model, safeguarding it during the recent hike in commodity prices. Obourland adopts successful cost management initiatives, an active procurement strategy, raised efficiencies, and is dependent mainly on wholesalers, all together are paying off and allowing the company to maintain high margins for the rest of the year, in our view. As for Domty, we expect the relative easing of the commodity wave cycle, the completion of the phasing out of agents, improved cost management, and increased contribution from the higher-margin bakery segment to bode well for its margins in 2H21e. Nevertheless, we see that cost overruns stemming from high marketing expenses for both companies related to new launches and improved distribution channels accelerate SG&A spending and lead to some return dilution. The cost overrun should leave our Obourland terminal EBITDA margin at 15.9%, 1.3 pp lower than in 2020, and Domty at 9.0%, 1.4 pp lower than 2020. However, we are not concerned, as both companies should enjoy a healthy cash conversion cycle (CCC) due to their increased reliance on wholesalers’ distribution channels, which should translate to good FCF generation, not fully priced in by the market. As a result, Obourland offers an average FCF yield of c14% and Domty c12% over our forecast period.” Baraka added.

“Maintain Overweight for both; we favor Obourland: We differentiate between stocks based on their demand recovery, pricing strategy, balance sheet strength, and the healthiness of their cash flow cycle. For dairy names, we have lowered our valuations on lower-than-expected demand recovery in the cheese segment and rising costs with unmatched price increases, despite a lower cost of capital. As a result, we reduce our 12-month target price for Obourland c7% to EGP9.26/share and maintain an Overweight rating. Obourland offers a compelling valuation, despite its outperforming the market by c21% since the beginning of the year. For Domty, we reduce our 12-month target price c20% to EGP6.73/share and maintain our Overweight rating, with the stock underperforming the market by c12% over the same period. Historically, Obourland has proved its resilience given its defensive nature, fairly weathering stock market shocks, and outperforming during stock market recovery times. With both companies having solid fundamentals and compelling valuations, we favour Obourland, especially when the stock market lacks triggers.” Baraka Concluded.

  • trading.

HC: Possible higher inflows into Egyptian sovereigns following the inclusion in the FTSE and the JP Morgan GBI-EM

  • HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled June 17th 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 figures came in slightly better than our estimates of 5.0% y-o-y and 0.8% m-o-m. Over the rest of 2021, we expect monthly inflation to average 0.8% m-o-m and 6.8% y-o-y accounting for rising international commodity prices and a possible pick-up in tourism and consumer spending following the successful rollout of the COVID-19 vaccine. We, therefore, expect 2021 inflation to remain within the CBE’s target range of 7% (+/-2%) for 4Q22. Given sluggish tourism receipts, currently, Egypt relies on foreign portfolio inflows into sovereign debt as a main source for foreign currency which poses interest rate pressures on sovereigns. This is evident in T-bill rates declining by only 129bps since January 2020 despite the CBE undertaking a 400 bps rate cut during that period which resulted in a decoupling between corridor rates and sovereign yields. Currently, banks earn an after-tax rate of 10.6% on 12M treasuries and around 10.8% on lending to the private sector (according to the CBE’s subsidized loan initiatives to different sectors at 8% while compensating participating banks for the difference between mid-corridor rate + 2%). We believe that at this point a rate cut could result in further deviation of sovereign and corridor rates with the risk-free rate being on the lower side. We note that over the last 3 months foreign portfolio inflows into Egyptian treasuries have been largely stagnant with announcements for foreign holdings in May being at USD28-29bn, the same figure that was announced for February. We also note that net foreign assets for the banking sector (excluding the CBE) came in at USD3.52bn which we believe is a vulnerable level given that Egyptian banks are the main cushion against a currency sell-off. We accordingly, expect the MPC to maintain rates unchanged in its upcoming meeting. We believe that a 100 bps rate cut is possible in 2H21 following the resumption in tourism and a possible pick-up in international trade. Also, possible higher inflows into Egyptian sovereigns following the inclusion in the FTSE Frontier Emerging Markets Government Bond Index Series and the JP Morgan GBI-EM Global Diversified Index could allow room for the MPC to undertake a rate cut.  That said, we believe that Egyptian treasuries provide attractive real yield of 4.0% on our calculations (13.3% on 12M T-bills, 15% tax rate for European and American investors and our inflation estimate of 7.3%) compared to a real yield of 3.1% for Turkey (18.7% on 1-year treasuries, zero tax rate and Bloomberg inflation estimate of 15.6%).

It is worth mentioning that, in its last meeting on 28 April, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to keep rates unchanged for the fourth consecutive time after undertaking cuts of 50 bps twice in its October and November 2020 meetings. Egypt’s annual headline inflation accelerated to 4.8% in May, with monthly inflation increasing 0.7% m-o-m compared to an increase of 0.9% in April, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS).

Heliopolis Housing’s five-year strategy supports a kick-starting monetization

HC Brokerage issued their update about Egypt’s real estate sector shedding the light on Heliopolis Housing’s performance and upgrading the rating to Overweight

  • The five-year strategy and the successful sale of a 270-feddan land plot are the new management’s first steps; we await more such efforts to turn around the company

  • A new revenue-share agreement with a private developer in the 7.1m sqm Heliopark plot could provide some EGP100bn in revenue stream over 15 years; according to management

  • We reduce our target price c24% to EGP8.41/share but upgrade our rating to Overweight from Neutral on the share price dip

Mariam Elsaadany, real estate analyst at HC Brokerage commented that: We expect an operational turnaround following several weak quarters: Heliopolis Housing has reported net losses from 4Q19/20 to 2Q20/21 due to a slowdown in the Egyptian real estate market, impacting its unit sales. In October 2020, management outlined a 2020–25e strategy that addressed its plans for its 18.0m sqm of undeveloped land following the resignation of its previous board and management team. The strategy outlines the company’s land plots to develop independently and other plots it intends to develop under revenue-sharing terms in its two projects New Heliopolis City and Heliopark. Since this announcement, the company successfully sold a 270-feddan plot for EGP2.57bn (an average price of EGP2,263/sqm given the prime nature of the plot). The company has not yet agreed on a payment method with the buyer; however, payment over installments would increase the value to EGP4.00bn. For Heliopark, the company’s prime 7.12m sqm land plot, management seeks to assign an international company to design a new general master plan for the project during 2021. Management is also open for negotiations with major real estate developers to develop 1,000–1,200 feddans of the project under a revenue-sharing scheme and is planning to develop 200 feddans of the project on its own. Some ten real estate developers have bought the bidding terms for Heliopark, including SODIC (OCDI EY, Overweight, TP EGP30.0), Majid Al Futtaim (MAF), Mountain View, Madinet Nasr Housing (MNHD EY, Overweight, TP EGP7.05), Al Marasem Development, and Tiba Real Estate. The company is working on finalizing a deal in 3Q21. We expect Heliopolis Housing’s 5-year strategy to impact its financials and operations substantially, especially after it signs a revenue-sharing agreement for Heliopark, securing some EGP100bn in steady revenue stream over the coming 15 years, according to management.”

“Heliopark revenue-sharing agreement should be favorable to HELI: Although the company did not receive any bids yet for Heliopark, it has clarified that the terms could be advantageous to HELI and include a minimum cash guarantee. We do not include such a deal in our target price; however, using SODIC East’s NPV/sqm of EGP1,219/sqm for the entire 7.11m sqm of Heliopark yields a total valuation of EGP9.48bn or EGP7.10/share. This value implies a c2.1x premium to our valuation of EGP3.37/share for the plot using its current master plan as part of our land valuation. Additionally, the company plans to sell all of its finished inventory during 2021, which should reflect positively on its FY20/21 and FY21/22 financials as the 270-feddan land sale should boost FY20/21 profitability. As for financing, the company plans to borrow some EGP681m of bank debt to finance the necessary infrastructure in New Heliopolis City, after it borrowed a total of EGP2.77bn from FY17/18 to 2Q20/21 to finance infrastructure spending. Also, the company will implement a capital increase in 2022 as part of its five-year strategy. With a net debt-to-equity of 2.54x as of 2Q20/21, a capital increase should improve the company’s balance sheet. Management has guided the capital increase would be worth around EGP1.00bn, which would decrease net debt-to-equity to 0.40x, on our calculations. The increased future profitability should sustain the company’s dividend distribution policy, in our view, as the company will undertake the bulk of its infrastructure spending during 2021.” Mariam El Saadany added

The real estate analyst at HC concluded her update on HELI stating that: “We decrease our target price by c24% to EGP8.41/share but upgrade our recommendation to Overweight from Neutral: We reduce our target price for Heliopolis Housing by c24% to EGP8.41/share. We exclude future land sales from our forecasts in line with the company’s new strategy, which does not account for future land sales beyond the 270 feddans in New Heliopolis. Our target price implies a potential return of c83% on the 10 May 2021 closing price of EGP4.59/share; therefore, we upgrade our recommendation to Overweight from Neutral on the sharp share price decline. The sale of the 270-feddan plot decreases the company’s net debt balance to EGP175m from EGP1.34bn previously. In our previous target price, we had included EGP2.44/share of land sale proceeds for a total of 290 feddans worth of land sales which contributed c22% of our previous target price. Of our new target price, land valuation contributes c94% of the value with only c6% from our DCF, which is still higher than the negative DCF contribution to our previous target price due to the improved liquidity position. We do not account for new revenue-sharing agreements in our valuation as the company did not announce such deals yet. Our land valuation for the Heliopark plot implies total sales proceeds of EGP100bn. Still, a revenue-share deal with a reputable developer will serve as an upside to our numbers and will reflect positively on investor confidence, in our view. We use a DCF‐based sum-of-the-parts (SOTP) valuation model for the company with a 5-year average moving WACC of 17.32%. Our target price includes (1) EGP6.42/share for the company’s 18.0m sqm undeveloped land bank, (2) EGP2.59/share for its undeveloped residential and commercial phases of SODIC East, (3) EGP0.56/share for the units the company sells independently, and (4) EGP0.04/share for leased assets. We deduct a 4Q20/21e net debt position of EGP175m, which reduces our target price by a negligible EGP0.13/share, and the repurchase of the 0.71m sqm in New Heliopolis City reduces our target price by another EGP1.06/share (using an average repurchase price of EGP2,000 per sqm). Our target price of EGP8.41/share puts the company on an FY21/22e P/NAV of 0.22x, with the stock currently trading at an FY21/22e P/NAV of 0.12x, a c53% discount to peers’ trading average of 0.25x, which is no longer justified given (1) a new management team, (2) the sale of the 270-feddan plot for a lucrative value of EGP2.66bn, (3) the company expecting to finalize a revenue-share deal in 1Q21/22. We estimate the market is valuing the company’s proportionate land bank at EGP306/sqm, a c48% discount to our implied value of EGP590/sqm, which is significantly higher than the c12% discount in our previous valuation.”

HC Brokerage and Avior Capital Markets hold their first Virtual Conference

The Avior-HC Egypt Virtual Conference starts today and runs until 20 May, offering some 30 financial institutions from the US, Canada, Europe, South Africa, the UAE, and Egypt insights on compelling investment opportunities within the Egyptian equities market. Investors will e-meet representatives of some 26 listed companies on the Egyptian Exchange (EGX) through group meetings and 138 one-on-one meetings.

The conference will also host two sessions with government officials as speakers, including Central Bank of Egypt Deputy Governor Rami Abulnaga and the CEO of the Sovereign Fund of Egypt (SFE), Ayman Soliman.

Investors will also get a glimpse of how global equities, the EGX30, Egypt CDS, Egyptian treasuries, global commodities, currencies, and other asset classes are expected to perform over the year through a Technical analysis (TA) session with Mohamed El Saiid. Mohamed is the Executive Director and Head of the TA department at HC Brokerage and the former President of the International Federation of Technical Analysts (IFTA).

Hussein Choucri, Founder, Chairman, and Managing Director of HC Securities & Investment, said: This is an important part of our services in which we update and attract foreign institutional investors and inform them about recent developments taking place in the Egyptian economy and the capital market.

Peter Koutromanos, CEO of Avior, said: The conference illustrates Avior’s accelerating internalization and its strategy to link global investors to the Investment opportunities available in large emerging markets such as EGypt.  We are delighted to work with our partner HC Securities in delivering this initiative.

For Further details on Avior Capital Markets, please visit: https://avior.co.za/

For Further details on HC Brokerage, please visit: https://www.hc-si.com/

About Avior Capital Markets

Avior Capital Markets (Pty) Ltd is an independent, globally recognized capital markets research and trading firm providing in-depth and insightful research in a broad range of equities, and fixed income, and derivatives in South Africa and Sub-Sahara Africa. Avior Capital Markets US LLC is a FINRA registered broker-dealer (CRD # 172595) formed for that purpose in the State of Delaware with its principal office at 733 Third Avenue, New York, New York 10017.

HC: Edita Food Industries, undemanding valuation

  • In a recent report, HC Brokerage presented their analysis of the food & beverage sector in Egypt where they shed the light on Edita Food Industries’ performance and maintained their OW rating on compelling valuation.

  • Consumption recovery is behind us; however, the 14% VAT imposition may drag volumes; we estimate a 2020–25e volume and revenue CAGR of c10% and c14%, respectively
  • Improved sales mix, along with indirect price increases, should mitigate higher costs, translating to a 2020–25e EPS CAGR of c18%
  • We reduce our 12M target price c18% to EGP12.0/share on lower estimates but maintain our OW rating on compelling valuation

Noha Baraka, the Head of Consumers at HC commented that: “Inevitable volume recovery, in our view, yet the potential imposition of a 14% VAT remains a risk: We see a good year ahead for the snack-food market, with inevitable private consumption recovery, in our view, backed by easing inflationary pressures, stable FX rates, and a low-interest-rate environment. If it were not for the possible imposition of a 14% value-added tax (VAT) (instead of 5% currently) on snack food goods, including bakery, we would have been more optimistic about a surge in demand. This surge would have been backed by the Egyptian government’s eased COVID-19 precautionary measures allowing more on-the-go consumption of snacks, not to mention the change in consumer behaviour, tilting more towards products offering more value for money, despite higher price points. However, we opt to be conservative in our volume estimates for the time being as we believe direct price increases following the VAT imposition could initially cause a demand shock, especially in light of tamed inflation rates. Accordingly, we expect total volume to rise c9% y-o-y in 2021e to 104,800 tons, almost unchanged compared to our previous estimate. Longer-term, we expect inflation to average c9% and private consumption to increase and normalize at 5% from an estimated 1.0% only in FY20/21, further supporting our assertion of an acceleration in the pace of volume recovery. Accordingly, we look for a 2022e–25e total volume CAGR of c11%, on average. We expect the croissants and wafer segments to stand out the most given new product launches, not to mention the inauguration of the biscuit segment and potentially rolling out of new SKUs, and the materialization of the company’s Moroccan JV to all help accelerate demand recovery.”

“We expect high margins to sustain over our forecast period, despite an unfavourable cost outlook: Despite the significant surge in most of the input costs, rising almost c18% y-t-d (except for sugar and cocoa, which remained essentially unchanged y-t-d, yet still increased c31% y-o-y), and higher cost base to support new ventures, we believe a more robust EGP/USD rate and higher volumes should primarily mitigate this. Therefore, we expect the 2021e EBITDA margin to expand 1.4 pp y-o-y to 17.1%. Going into 2022e we expect margins to continue expanding mainly on: (1) Edita’s continued efforts to re-engineer its portfolio and introduce to the market new offerings at higher price points, 2) venturing into new segments, 3) and ramping up of utilization rates. Thus, our numbers point to a terminal EBITDA margin of 17.6% by 2025e.  We are optimistic about the company’s management initiatives over the past year to increase its debt level in EGP terms, which we expect would expedite Edita’s earnings recovery and enhance returns. We forecast 2020–25e EPS to increase at a CAGR of c18%, on average, which leaves our ROE at 27.3% by 2025e from 17.2% in 2020, further solidifying our view of improving profitability.” Baraka added.

“ We reduce our 12-month target price by c18% and maintain an Overweight rating on further share price dip: We reduce our 12-month target price by c18% to EGP12.0/share on our new lower estimates across the board. Our new target price implies a 2022e P/E multiple of 19.1x and EV/EBITDA multiple of 9.5x, offering a potential return of c58% over the 22 April closing price of EGP7.75/share. Therefore, we maintain our Overweight rating. In our view, the current valuation is highly compelling, with the stock trading at a 2022e P/E multiple of 12.3x, which is a c49% discount to its peers’ implied multiple of 24.2x. The stock is also trading at a 2022e EV/EBITDA multiple of 6.1x, a c61% discount to its peers implied multiple of 15.5x. We believe the market is overstating VAT-associated risks and over penalizing the stock, which is unjustified in our view in light of its good operational recovery. We see Edita as too cheap to ignore in a sector characterized with high trading multiples nature, suggesting potential share price correction from current levels.” Baraka Concluded.