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Egypt financials: Diversified platforms support growth

  • We perceive microfinance as a major growth driver despite responsible financing regulations, while leasing lags on delayed private investment recovery

  • Strong deal pipeline and synergies with affiliated commercial banks offset lagging stock market activity, in our view

  • We increase our 12-month TP for EFG Hermes by c27% to EGP20.5/share and for CI Capital by c14% to EGP6.25/share; we maintain our OW ratings on EFG Hermes and CI Capital

We expect solid microfinance 2022–26e performance, while accounting for responsible financing regulations enforcement: Egypt’s microfinance loans increased c40% y-o-y in 2021 to EGP27.1bn, with the number of beneficiaries increasing c10% y-o-y to 3.49m individuals taking the penetration rate to 7.7%, on our calculations, from 7.1% a year earlier. The average ticket per beneficiary increased c27% y-o-y in 2021 to EGP7,748. Going forward, we expect microfinance loans to grow at a 2022–26e CAGR of c17%, well below its 2018–21 CAGR of c32%, supported by higher financial inclusion and rising inflation. We expect inflation to average 9.0% over 2022–23e, up from 5.2% in 2021, weakening the household’s purchasing power and increasing the demand for microfinance loans. On a different front, Egypt’s Financial Regulatory Authority (FRA) and the Central Bank of Egypt (CBE) recently introduced the Responsible Financing Law, which requires microfinance firms to report a sustainable rate for pricing their products. The sustainable rate formula sums up administrative expenses, loan write-off rate, the cost of external funds, the tax expense, and the required return by the microfinance company, all as a percentage of the average outstanding loan portfolio and divided by 1 minus loan write-off rate. The companies have six months to comply with the law, which became effective on 8 February. According to the law, charges and fees paid by beneficiaries should not exceed 5% of the loan’s value for micro borrowers and 1.5% for small and medium borrowers. We expect the new regulations to lead to a reshuffling in recording revenue items between interest earned, fees, and commissions. On our numbers, the all-in earned rate on EFG Hermes’ Tanmeyah’s average loan portfolios should decline from 48.5% in 2021 to 38.0% in 2026e, and for CI Capital’s Reefy should decline from 47.2% in 2021 to 38.6% in 2026e. We expect both firms to grow their loan books at a 2022–26e CAGR of c21%, increasing Tanmeyah’s market share from c14% in 2021, on our numbers, to c16% in 2026e and increasing Reefy’s market share from c6% in 2021 to c7% in 2026e. Tanmeyah’s 2021 net profit increased 2.16x y-o-y to EGP493m, c71% higher than our initial estimate of EGP288m, due to higher-than-expected fee income and lower-than-expected provisioning charges. As provisioning normalizes over our forecast period, we expect a 2022–26e net profit CAGR of c17%, implying an upward revision of c75%, on average, over our forecast period. Reefy’s 2021 net profit increased c60% y-o-y to EGP200m, c21% above our initial estimate of EGP166m on higher-than-expected loan growth. Going forward, we expect a 2022–26e net profit CAGR of c22%, implying an upward revision of c21% on average over our forecast period.

Subdued private sector participation weighs on leasing growth, and higher competition leads to lower NIMs: Even though private investments increased c41% y-o-y in 1H21 to EGP103bn, constituting c25% of total investments, it remains significantly below its pre-floatation FY14/15–FY15/16 levels where it constituted an average of 57% of total investments. In USD terms, private investments declined at a CAGR of c15% over FY15/16–FY20/21 to USD12.7bn. In 2021, the total value of leasing contracts increased c36% y-o-y to EGP79.8bn following the increase in private investments helped by lower interest rates; however, they remain subdued, in our view. Moreover, higher competition and the low-interest-rate environment led to a decline in NIMs from an average of 5.0% in 2020 to 3.5% in 2021 for companies under our coverage. Going forward, we expect leasing contracts to increase at a CAGR of c25% over our forecast period following our expected rebound in private investments. We also expect upward pressure on interest rates to support NIMs growth. EFG Leasing’s net leased portfolio increased c14% y-o-y in 2021 to EGP5.46bn, mostly in line with our initial estimate of EGP5.51bn. NIMs came in at 3.0% in 2021, on our calculations, lower than our initial estimate of 4.6%. Net profit increased c83% y-o-y to EGP101m, c44% above our earlier estimate of EGP70.3m, on lower-than-expected provisioning. We expect EFG Leasing to grow its net leased portfolio at a CAGR of c23% over our forecast period, with an average NIM of 3.4%, leading to a net profit CAGR of c20%, implying an average upward bottom line revision of c20%. CI Capital’s Corplease net leased portfolio remained unchanged y-o-y in 2021 at EGP8.44bn, after adjusting for securitizations in both years, c23% below our estimate of EGP10.9bn. NIMs came in at 4.0% in 2021, on our calculations, lower than our initial estimate of 5.0%. Despite muted portfolio growth and declining NIMs, Corplease’s net profit increased c5% y-o-y to EGP434m, c15% above our earlier estimate of EGP378m, due to some EGP35.6m in provision reversals compared to our expected provision expenses of EGP73m. We expect the company to grow its net leased portfolio at a CAGR of c26% over our forecast period, with an average NIM of 3.8%, leading to a net profit CAGR of c19%, hence, implying an average downward bottom line revision of c8%.

Strong market positioning coupled with a healthy advisory pipeline and existing synergies drive IB growth, in our view: Egypt’s stock market turnover increased c31% y-o-y in 2021 to EGP665bn (excluding deals), representing c87% of market capitalization from c72%, a year earlier. The turnover was mainly led by retail trades, which increased c43% y-o-y to represent c74% of total turnover, while institutional trades increased by only c4% y-o-y to constitute c26% of total turnover. With EFG Hermes’ and CI Capital’s focus on institutional trading, the two firms saw their market shares decrease to c17% in 2021 for EFG Hermes from c21% a year earlier, and to c6% for CI Capital from c8% a year earlier, on our calculation. EFG Hermes’ exposure to rebounding regional and frontier markets, and a strong Egypt market positioning reflected in increasing its brokerage revenue by c34% y-o-y in 2021 to EGP1.34bn, backed by its Egypt and regional operations, but missing our earlier estimate of EGP1.54bn by c13%. CI Capital’s brokerage revenue increased c9% y-o-y in 2021 to EGP212m, missing our earlier estimate of EGP253m by c16%. EFG Hermes’ asset management revenue increased c28% y-o-y to EGP528m, backed by local and regional operations, c55% above our initial estimate of EGP341m. CI Capital’s asset management revenue increased c66% y-o-y to EGP54.8m, however, came c13% below our estimate of EGP63m. Both firms enjoyed a strong advisory pipeline leading to a 2.08x y-o-y increase in EFG Hermes advisory fees to EGP494m, c78% above our earlier estimate of EGP278m. For CI Capital, advisory and merchant banking fees increased 10.1x y-o-y to EGP268m (of which we estimate some EGP150m as gain on the sale of Taaleem Management Services (TALM EY) shares). We expect EFG Hermes’ IB net profit to increase at a 2022–26e CAGR of c24%, implying an average upward revision of c30%, and CI Capital’s IB net profit to increase at 2022–26e CAGR of c29%, implying an average downward revision of c23%. Overall we like EFG Hermes’ exposure to regional markets and the resulting USD exposure. We believe that possible synergies with Banque Misr in terms of increasing AUMs and rapidly growing advisory business to represent an upside to our numbers for CI Capital.

EFG Hermes is developing into a universal bank with the acquisition of a 51% stake in AIB, while CI Capital acquired a c16% stake in Cleopatra Hospitals: EFG Hermes completed the acquisition of a 51.0% stake in Arab Investment Bank (AIB) at EGP2.55bn through a capital increase, which implies a 2022e P/B of 0.92x, on our numbers. Concurrently, the Sovereign Fund of Egypt (TSFE) also acquired a 25.0% stake in the bank through a capital increase. After the acquisition, the bank’s paid-in capital increased to EGP5.0bn reaching the CBE’s minimum capital requirement and achieving adequate capitalization to allow loan book expansion. The bank’s loan-to-deposit ratio reached c29% as of December 2021. We expect the bank to grow its loan book at a 2022–26e CAGR of c25% taking its L/D to c49% by 2026. We expect an average 2022–26e NIMs of 4.3%, up from an estimate of 3.1% in 2021 and we expect its ROE to increase from an estimate of 9.24% in 2021 to 16.3% by 2026e. We believe the acquisition will help the firm increase its ROE, cross-sell its different corporate and retail products and smooth its earnings volatility. We note that in February First Abu Dhabi Bank (FAB UH) submitted a non-binding offer to Egypt’s Financial Regulatory Authority (FRA) to acquire a minimum 51% stake in EFG Hermes Holding at an indicative all-cash offer price of EGP19.0/share implying a total company value of EGP18.5bn, c7% below our TP of EGP20.5/share. FAB later withdrew the offer due to global market uncertainty and volatile economic conditions. The initial offer had put the firm on a 2022e P/B and a P/E of 1.22x (adjusted for cash) and 15.7x, respectively, on our numbers. On a different front, CI Capital acquired a stake in Cleopatra Hospitals (CLHO EY) through its merchant banking operations, capitalizing on the growth potential of the healthcare sector. CI Capital and Banque Misr own MCI Capital Healthcare Partners with a 60:40 ownership split. MCI Capital acquired 26.8% stake in Cleopatra Hospitals at EGP2.09bn, implying a 2022e P/E of 15.4x. On our calculations, the company took EGP1.6bn in debt to finance the acquisition.

We increase our 12-month TP for EFG Hermes by c27% to EGP20.5/share and for CI Capital by c14% to EGP6.25/share on a mix of rolling valuations for one year, accounting for equity investments, and earnings revision. We maintain our Overweight recommendations on both stocks: We value both companies using a Sum-Of-The-Part (SOTP) valuation methodology using an excess return model for their core operations and adding excess cash and financial investments. For CI Capital, we value Taaleem using a DCF methodology. For both firms we use a cost of equity applying our forecast for 12-month T-bill yields leading to an average cost of equity of 16.9%. For EFG Hermes investment bank, our base assumption for the cost of equity is a weighted average of Egypt and the MENA region based on geographical revenue contribution leading to an average cost of equity of 12.6%. Individually, we value EFG Leasing at EGP1.08/share (c46% higher than our previous estimate) and CI Capital’s Corplease at EGP2.49/ share (c3% higher than our previous estimate) putting the businesses at a 2022e P/E multiple of 9.13x and 7.63x, respectively. For the microfinance, we value EFG’s Tanmeyah at EGP4.58/share (c66% higher than our previous estimate) and CI Capital’s Reefy at EGP1.56/share (c36% higher than our previous estimate), putting the businesses at a 2022e P/E multiples of 7.63x and 7.93x, respectively. For the investment banks, we value EFG Hermes at EGP7.69/share (c49% higher than our previous estimate) and CI Capital at EGP0.85/share (c6% below our previous estimate). For EFG Hermes, we then add the company’s excess cash position, and investment property valued at around EGP4.0bn, or EGP4.19/share (c42% lower than our previous estimate due to cash deployed to the acquisition of AIB). We value the company’s stake in AIB at EGP2.84bn, or EGP2.92/EFG Hermes share, implying a 2022e P/B multiple of 1.06x. For CI Capital, we value Taaleem at EGP0.74/CI Capital share (almost unchanged from our previous estimate) putting the business at 2022e EV/EBITDA of 12.6x. We value CI Capital’s 16% stake in Cleopatra Hospitals using the average 1Q22 market price of EGP4.79/share deducting the debt portion that we estimate at EGP960m, yielding a value of EGP0.27/share. For EFG Hermes, the NBFS platform makes up c28% of the stock’s total value, the investment bank c38%, with cash and AIB stake accounting for the remaining c35%. This sum up to a 12-month target price of EGP20.5/share, which yields a potential return of c36% on the 18 April closing price of EGP15.0/share. We therefore maintain our Overweight rating on EFG Hermes Holding. For CI Capital, the NBFS platform makes up c65% of the stock’s total equity value, the investment bank c14%, with Taaleem and equity investments accounting for the remaining c22%. This sums up to a 12-month target price of EGP6.25/share, which yields a potential return of c75% on the 18 April closing price of EGP3.58/share. We therefore maintain our Overweight rating on CI Capital. For EFG Hermes, our 12-month TP of EGP20.5/share puts the stock at a 2022e P/E multiple of 12.8x and a P/B multiple of 1.33x, while it is trading at 2022e P/E and P/B of 12.4x and 0.88x, respectively. For CI Capital, our 12-month TP of EGP6.25/share puts the stock at a 2022e P/E multiple of 9.79x and a P/B multiple of 1.65x, while it is trading at 2022e P/E and P/B multiples of 5.60x and 0.94x, respectively.

Our take on the CBE’s interest rate decision, EGP movement and newly introduced CDs

The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) has decided in a special meeting today to raise the key policy rates by 100 bps, it announced in a release. The Egyptian pound devalued to EGP18.22/USD, according to Bloomberg. Banque Misr and the National Bank of Egypt offered one-year certificates of deposits (CDs) at an interest rate of 18%, according to banking sector data. (CBE, Bloomberg, Banking sector data)

HC’s comment: Overall, we are positive on the CBEs today’s decisions, including the 100 bps increase in policy rates, the EGP devaluation by more than c10%, and public banks offering one-year CDs at an interest rate of 18%,  as they are a better reflection of the economic fundamentals and hence remove distortions that negatively affect economic activity. Although the decisions could negatively impact consumer demand in the short term, they will potentially contain inflation, stop dollarization, attract foreign portfolio investments, enhance foreign currency supply with a positive spillover effect on economic activity, compared to a standstill that could occur due to foreign currency shortages. We see the stock market reacting positively to the move; however, the 18% CDs could, to an extent, compete with investment in the Egyptian stock market; but, we still expect the stock market to rebound from current levels as it was heavily oversold. We expect a rate increase of 150 bps throughout 2022 but we now believe that it could occur faster than we previously expected. The high-yielding CDs will serve different purposes, such as partially containing inflationary pressures, supporting households’ disposable incomes in light of the EGP devaluation, and stopping dollarization. We also believe that the combination of EGP devaluation along with higher interest rates will result in a rebound in Egypt’s carry trade and help finance Egypt’s external funding needs. We believe that carry trade could rebound at a yield of 14.2%-14.5% for 12M T-bills, implying a real return of around c1% on our calculations. This will make Egypt more competitive in the carry trade market compared to Turkey, with its Bloomberg 2022e inflation estimate at c44% and its recent 1-year note offering a yield of c22%. The EGP devaluation to a rate of EGP18.22/USD, exceeded our estimate of EGP16.70/USD by 8.34%. Over the coming months, we believe that the exchange rate will be flow-driven and could show some appreciation depending on the rebound in carry trade.

HC expects the CBE to increase interest rates by 0.5-0.75 bps

  • HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled March 24th and based on Egypt’s current situation, they expect the CBE to increase interest rates by 0.5-0.75 bps

Head of macro and financials at HC, Monette Doss commented: “We raise our 2022e inflation estimate to 11.5% from 7.2% previously on increasing international prices of wheat and oil and our expectation of less importation of consumer goods that could lead to some supply shortages. Our calculations are based on Bloomberg 2022 consensus wheat price estimate of USD1,086/bushel, c53% higher than its 2021 average price of USD712/bushel and consensus Brent price estimate of USD91.7/barrel, c55/% above its 2021 average of USD59/barrel. We also expect new regulations requiring letters of credit (LCs) for most imported goods to ultimately result in less importation of consumer goods, possibly leading to some supply shortages and imposing some inflationary pressures. On a different front, our calculations suggest that carry-trade currently requires a 12M T-bill rate of 14.8% (162 bps higher than the latest auction) based on; (1) Egypt’s current 1-year USD credit default swap of 560 bps, (2) Bloomberg 2022 consensus estimate for the Federal Reserve rate at 1.55%, and (3) Egypt-USA 2022 inflation differential of 544 bps (given our Egypt 2022e inflation estimate of 11.5% and Bloomberg USA 2022 inflation estimate of 6.1%). We believe that carry trade is key at the moment to support Egypt’s net international reserves (NIR), more so with the banking sector’s net foreign liability (NFL) position widening to USD11.5bn in January and possibly worsening further as net foreign portfolio outflows reached USD2.3bn since the beginning of the Russia-Ukraine war. That said, we expect the MPC to increase interest rates by 0.5-0.75 bps in its upcoming meeting.

It is worth mentioning that, in its last meeting on 3 February, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to keep rates unchanged for the tenth consecutive time. Egypt’s annual headline inflation came in at 8.8% in February, with monthly inflation increasing 1.6% m-o-m, compared to an increase of 0.9% m-o-m in January, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS).

HC: About Egypt macro, overdue private sector engagement

  • In its latest report, HC shared their outlook about Egypt’s macro economy in 2022 addressing the main GDP growth drivers and expectations on the EGP and interest rates.

  • We see tourism and government spending as the main GDP growth drivers. We expect building up inflationary pressures, and moderate EGP depreciation supported by a possible 100-150 bps rate hike in 2022
  • Current account deficit to narrow while debt repayment schedule necessitates seeking additional external funding, in our view
  • We expect the budget deficit to slightly widen to 7.5% of GDP in FY21/22e, with the banking sector financing the bulk of the deficit 

Head of macro and financials at HC, Monette Doss commented: “We see tourism and government spending as the main GDP growth drivers in FY21/22e, which we estimate at 5.4%. We expect building up inflationary pressures to lead to moderate EGP depreciation and a possible 100-150 bps rate hike in 2022: According to official announcements, tourism receipts recovered to pre-COVID-19 levels during 2021 implying a 5.50x y-o-y growth in 1H21/22 to USD9.83bn. We accordingly believe that tourism was the major contributor to 1Q21/22 GDP growth of 9.80% y-o-y due to favorable base effect. On another front, government investments increased c14% y-o-y in FY20/21 to EGP560bn to constitute c74% of total investments, up from c62% a year earlier. Private investments showed broad-based recovery in 4Q20/21, growing by 14.0x y-o-y to EGP66.3bn, just below its pre-COVID-19 level of EGP68.4bn in 4Q18/19. We believe that government megaprojects mostly backed private investments in 4Q20/21. Going forward, we expect the government to remain focused on developing Egypt’s physical and human capital, with the Egyptian Village development project being at its core focus currently. To acquire the necessary funding from different international organizations, we expect the government to also focus on Environmental, Social, and Governance (ESG) projects while seeking further private sector engagement, as evidenced by The Sovereign Fund of Egypt’s (TSFE) investment mandate. As such, we expect more investments with higher private sector participation in water desalination, agritech, fintech, and green manufacturing. Our estimates filter through to a GDP growth of 5.4% in FY21/22e, up from 3.3% a year earlier. In 2022e, we expect inflation to increase 2 pp y-o-y to 7.2%, reflecting high global inflation, global supply bottlenecks, rising gasoline prices and the possibility of further reduction of local food subsidies. Applying a real effective exchange rate model, we expect the EGP to show an average annual depreciation of c3% over the next two years. Despite inflation being in line with the Central Bank of Egypt’s (CBE) target range and Egypt offering high real interest rates, we expect the CBE to hike policy rates by 100-150 bps in 2022 to support the EGP considering Egypt’s high foreign funding needs.”

“Current account deficit to narrow while debt repayment schedule necessitates seeking additional external funding in 2H21/22e, in our view: Egypt’s trade deficit increased from 10.0% of GDP in FY19/20 to 10.4% in FY20/21, as non-oil imports outpaced exports growth. On our calculations, we expect Egypt’s trade deficit to slightly increase to 10.5% of GDP in FY21/22e and to narrow to 10.0% in the following year as we account for higher prices of raw material imports, higher imports of intermediate and investment goods on higher expected economic activity. We expect Egypt’s tourism receipts to increase 2.19x y-o-y in FY21/22 and worker remittances to maintain momentum on growing Gulf economies. Hence, we expect Egypt’s current account deficit to narrow from 4.6% of GDP in FY20/21 to 3.6% in FY21/22e and 2.8% in FY22/23. In FY21/22e, Egypt is due to repay some short-term external debt of USD13.8bn, long-term external debt of USD15.7bn, and maturing deposits to gulf countries of USD11.3bn that we expect to be rolled over. We believe that the banking sector, mainly public banks, financed the bulk of Egypt’s short-term external debt repayment during 1H21/22 worth USD7.92bn in addition to funding foreign portfolio outflows from government T-bills of USD3.40bn during October and November. This resulted in the banking sector (excluding the CBE) reversing from a net foreign asset (NFA) position of USD1.73bn in June to a net foreign liability (NFL) position of USD10.0bn in December. We believe that by December 2021, the government had already secured USD10.0bn of the external funding necessary for FY21/22e. To satisfy its obligations while maintaining net international reserves (NIR) stable in 2H21/22e, we expect the government to seek additional external funding worth USD15.5bn. On our calculations, the government’s external debt should reach c26% of GDP in FY21/22e and c24% in FY22/23e. At these levels, public debt held by non-residents would exceed the IMF’s lower early-warning threshold of 15%; however, it remains below its upper early warning benchmark of 45%. Also, our estimates for external funding needs for FY21/22e and FY22/23e represent c7% of GDP and c4%, respectively. Accordingly, we expect Egypt’s external financing requirements to be just above the IMF’s lower early warning threshold of 5% of GDP in FY21/22e and drop below it in FY22/23e.” Added Doss

“We expect the budget deficit to slightly widen to 7.5% of GDP in FY21/22e, with the banking sector financing the bulk of the deficit: We expect government revenue to increase c10% y-o-y capped by slow business activity. On the other hand, we expect government spending to increase c11% y-o-y to EGP1.75trn in FY21/22e, assuming a stable effective interest on total domestic debt at c12%. Hence, we expect the debt service cost to increase c11% y-o-y in FY21/22e to EGP644bn (c37% of total government spending) and c10% y-o-y in FY22/23e to EGP701bn (c36% of total government spending). Recent official announcements suggested that the government will contain its subsidy bill through a few possible approaches. In this regard, the government increased the selling price of subsidized edible oil by c19% in October 2021, increased the price of subsidized sugar by c24% in December 2021, announced in December 2021 that newly married men will not be entitled to family ration cards, and has put a ceiling in October 2021 on the quantities of subsidized allowance per beneficiary. We expect these measures to offset the increase in rising commodity prices partially. Accordingly, we estimate an increase in subsidies and social benefits of c6% annually over the next two years to EGP281bn in FY21/22e and EGP300bn in FY22/23e. On our numbers, the government’s budget deficit should slightly widen from 7.4% of GDP in FY20/21 to 7.5% in FY21/22e and decline to 6.4% of GDP in the year after. We believe that Egypt’s banking sector can finance up to c51% of the government budget deficit over the next two years without experiencing a significant tightening in interbank liquidity. We expect the government’s net domestic debt to decline from c82% of GDP in FY20/21e to c80% in FY21/22e and c77% in FY22/23e.” Monette Doss concluded

HC expects the CBE to keep interest rates unchanged

  • HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled February 3rd 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 largely contained towards the lower end of the CBE target range of 7% (+/-2%) for 4Q22. We, however, expect inflation to average 7.0% in 1Q22, as we expect a pick up in food and gasoline prices reflecting global inflationary pressures. We continue to believe that carry trade is essential for supporting Egypt’s net international reserves (NIR). More so as demonstrated by the net foreign liability (NFL) position of the Egyptian banking sector (excluding the CBE), which increased to USD7.12bn in November from USD USD4.8bn in the previous month. Accordingly, we perceive continued pressure to maintain the current levels of Egyptian treasuries interest rate. Currently, Egyptian treasuries offer a real return of c4% (given 12M T-bill rate of 13.2%, taxes for US and EU investors of 15%, and our 2022e inflation forecast of 7.2%). Even though the US Federal Reserve might start increasing interest rates in March, US 2-year notes are expected to offer a negative real return of -2.2% given Bloomberg consensus estimates of 2022 2-year notes rate of 1.4% and average US inflation of 3.6% over 2022-23. Currently, Turkey offers a real return of 3.8% on our calculations (based on its 2-year note rate of 22.6%, zero taxes on Turkish treasuries, and Bloomberg inflation consensus estimates of 18.8% on average over 2022-23). We note that Egypt’s credit default swap (CDS) is currently at 550 bps, just above Turkey’s CDS of 527 bps. Accordingly, we believe that Egypt’s carry trade remains attractive at the current levels, and with inflation remaining within the CBE’s target range, we expect the CBE to maintain rates unchanged in its upcoming meeting.

It is worth mentioning that, in its last meeting on 16 December, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to keep rates unchanged for the ninth consecutive time. Egypt’s annual headline inflation came in at 5.9% in December, with monthly inflation decreasing 0.1% m-o-m, reversing an increase of 0.1% in November, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS).

The Global Green Economy in 2022

Egypt & Africa now have a new responsibility for the Green Economy in 2022. Looming climate change and international negotiations over the global problem have sparked a “Green Transition” in Africa & Egypt. The United Nations IPCC, an intergovernmental panel on climate change, has recently updated its reports to state that globally, we must reach a net-zero CO2 emissions level by 2050 to begin reversing the impacts of global warming. For this reason, the green economy has seen a new surge of funding and interest in Q1 of 2022. Contact an HC Securities & Investment experts to discuss how the Green Economy of 2022 can impact your portfolio.

  • The IPCC Net Zero Emissions Goal Stimulates Innovation & Green Investment

A Task Force established by the IPCC has concluded that immediate action must be taken. That mandate has kickstarted a transition towards a new wave of green innovation. Anytime innovation is involved, lenders aren’t too far behind. Financial activities surrounding profitable green initiatives are on the rise. Emerging nations in Africa are now at the top of the list for securing funding and technology from large financial institutions. This renewed investment into the green transition has sparked interest from many banks and investment firms from around the globe. 2022 is sure to see a great deal of financial activity in the green sector from emerging nations.

  • The Growing Market For GSS Bonds

Green, social and sustainable bonds are a new trend across the globe. Many nations have issued them and the market is growing. A total of 16 nations currently issue GSS bonds, however only 1 exists in africa. Nigeria is shaping up to be a central location for investment firms, banks and private investors looking to support state-run green initiatives. As 2022 brings a transition into a net zero emissions plan, GSS bonds could provide a new source of financing for Egypt and countries in Africa.

  •  The New Assault On Fossil Fuel Subsidies

Fossil fuel subsidies have been known to promote excessive energy consumption. When energy prices are low thanks to government subsidies, both private and public organizations over consume. Fossil fuel subsidies are necessary in some places, however when they are used inefficiently it can cause some serious problems. 2022 has already shown a trend of correcting old, out of touch fossil fuel policies. Consequently, removing energy subsidies frees up additional capital to fund the green transition. We can expect this year to bring the removal of more fuel subsidies in Africa and Egypt and major investment in new green initiatives.

  • A Rapid Green Transition Is Coming

One thing is for certain, a transition is on the horizon. Egypt and Africa along with the rest of the world is on a rapid transition to a net-zero emissions point. To get there, we are seeing huge investment and initiatives from intergovernmental organizations around the globe. Smart investors and savvy entrepreneurs can potentially take advantage of this green transition to earn great returns. As Egypt and Africa become larger players on the international stage, all eyes are watching. Heading into 2022, the GDP of Africa & Egypt is on the rise. Similarly, the amount of investment being diverted into green projects is on the same trajectory. But can we reach net-zero emissions by 2050? Only time will tell.

HC expects the CBE to keep interest rates unchanged

  • HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled December 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 largely contained towards the lower end of the CBE target range of 7% (+/-2%) for 4Q22, and we expect it to average 5.8% in 4Q21. We also believe that cooling-off international oil prices reduce inflationary pressures going forward. However, given our perceived pressure on Egypt’s balance of payment (BoP), we believe carry trade remains essential for supporting Egypt’s net international reserves (NIR). This is also demonstrated by the net foreign liability position of the Egyptian banking sector (excluding the CBE), which increased to USD4.8bn in October from USD3.9bn in the previous month. Accordingly, we perceive continued interest rate pressures on Egyptian treasuries. Going into 2022, we expect yields to cool off to correct for the current mismatch of risk-free rates being higher than corporate borrowing rates. While, at the moment, we expect any interest rate cut by the CBE to lead to further decoupling between the risk-free rate and the corporate borrowing rate. In the global context, according to Bloomberg estimates, interest rates in the USA and the Eurozone are expected to normalize over 2022 from current accommodative levels, with the US two-year note expected to increase to 0.9% from 0.3% in 2021. With Bloomberg average 2022-23e inflation estimates of 2.9% for the US, the real return would be -2.0%. This Is significantly lower than Egypt’s real return of 3.3% given a 12M T-bill yield of 13.3%, our 2022e inflation forecast of 8.0%, and a 15% tax rate for US and EU investors. Turkey’s real yields are also less attractive than Egypt’s at 0.9%, given the one-year note interest rate of 14.2%, Bloomberg 2022 inflation forecast for Turkey of 13.3%, and zero taxes. That said, we believe that it is unlikely for the CBE to increase policy rates. We accordingly expect the MPC to keep rates unchanged in its upcoming meeting.

It is worth mentioning that, in its last meeting on 28 October, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to keep rates unchanged for the eighth consecutive time. Egypt’s annual headline inflation came in at 5.6% in November, with monthly inflation increasing 0.1% m-o-m compared to an increase of 1.5% m-o-m in October, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS).

-Ends-

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 8 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: we expect the CBE to keep interest rates unchanged

HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled October 28th 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 within the CBE target range of 7% (+/-2%) for 4Q22, and we expect it to average 5.9% in 4Q21. We, however, believe that rising international prices of oil and other commodities impose significant inflationary pressures domestically, especially in light of recent official announcements of the government’s intention to reduce its subsidy bill. Globally, monetary tightening is coming on the scene, with Federal Reserve officials indicating they could start tapering stimulus spending before year-end. At the same time, the Bank of England Governor recently announced that the Central Bank should act to counter rising inflation. We believe that the prospects of global monetary tightening reflected in some mild interest rate pressures on Egyptian 12-months T-bill yields, which increased by 13bps since the beginning of October. We also note that Egyptian banks’ net foreign liability position widened to USD4.44bn in August from USD1.63bn in July. This should also impose upward interest rate pressures on Egyptian treasuries, in our opinion. Currently. However, Egyptian 12-months T-bills continue to offer attractive real return of c3% (given our 2022e inflation forecast of c8% and 15% taxes for European and US investors). This is compared to c4% offered by Turkey (based on the recent 9-months T-bill rate of 18.25%, zero taxes, and Bloomberg 1-year inflation estimate of c14). That said, we expect the MPC to keep rates unchanged in its upcoming meeting.

It is worth mentioning that, in its last meeting on 16 September, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to keep rates unchanged for the seventh consecutive time. Egypt’s annual headline inflation came in at 6.6% in September, with monthly inflation increasing 1.1% m-o-m compared to an increase of 0.1% m-o-m in August, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS). With the MPC due to meet on 28 October, we present our expectations on the likely outcome based on Egypt’s current situation.

HC: Orascom Construction’s lower margins warrant a lower TP, we maintain OW

  • In a recent report, HC Brokerage issued an update note about Egypt’s construction sector, through shedding the light on Orascom Construction. HC reiterates OW on a still compelling valuation.

  • New business intake has recovered from COVID-19 but associated margin compression has not, as precautionary measures are replaced by global inflationary pressures
  • Other equity investments help bridge the gap until BESIX recovers
  • We cut our 2021–25e EBITDA and EPS estimates c19% and 25% and TP c22% to USD10.0/share (EGP156/share), but reiterate OW on a still compelling valuation

Mariam Ramadan, Head of Industrials at HC commented that: Business intake in Orascom Construction continues to be strong, but margin pressure is likely to stay longer:We are still positive on new business prospects, with the company’s project awards on track to exceed pre-COVID levels this year. In Egypt, the government continues investing heavily in megaprojects, with the new year’s budget hitting the EGP trillion mark for the first time in core sectors, including transportation, logistics, and renewable energy-based desalination. The private sector is also forecast to make a decent comeback, most notably in manufacturing, where we already see a handful of big, previously stalled industrial and petrochemical complexes start to resurface. Lately, the US market has witnessed numerous contractors face delays or cancellations on labor shortages, supply chain disruptions, and higher project costs. Still, contractors remain positive on the awaited USD1trn infrastructure package. However, with many currently forecasting the heightened commodity and energy prices and supply chain issues to persist into 2022, we opt to lower our US EBITDA margin estimates an average 0.4 pp, in line with the current level. We also reduce our MENA margin forecasts 1.6 pp, closer to the last reported figures, with which management seems content, and especially given that the building materials division performance is currently at a peak (together with the concessions represented c22% of net profit at an EBITDA margin of c24% in 1H21), in our view. It is worth noting that management had indicated potential double-digit margins for some complex mega infrastructure projects in its backlog that could provide a windfall upon completion, offering upside risk to our estimates. Other positives that have yet to reflect in our numbers include business in MENA ex-Egypt, where several memoranda of understanding (MOUs) and preliminary contracts were signed in Libya, mainly in the roads space, among other countries.”

 

“BESIX’s subdued earnings continue, but other investments hold up: BESIX has lagged our expectations and management guidance of returning to profitability last year, as it engages in further cleanups, structural adjustments and faces delays in its real estate business. While the unit’s EBITDA margin has crawled back nearly to its historical levels, its net debt (again mostly related to the real estate business) has continued to expand, weighing down on its earnings contribution. Management is confident about a positive result for the whole year, but we opt to have it breaking even this year and factor in no dividend payout next year. On the other hand, other equity-accounted investees, mostly IPPs and concessions, have started to contribute more significantly to earnings. Management sees many opportunities in the pipeline over the next few months, which often not only provide a recurring income stream but also come with a construction component.” Mariam Ramadan added.

“Maintain OW on compelling valuation: We lower our 2021–25e EBITDA and EPS estimates an average c19% and c25% respectively, leaving our TP c22% lower at USD10.0/share, or EGP156/share on the current EGP/USD rate. Our new target price puts the company on a 2022e P/E multiple of 9.9x (trading at 4.6x) and EV/EBITDA multiple of 3.5x (trading at 1.8x), implying a potential return c116% on the 18 October closing price of EGP72.6/share. Therefore, we maintain our Overweight rating. In our view, valuation remains compelling, with the share price dropping c14% YTD, underperforming the market by c18 pp.” Mariam Ramadan concluded. 

HC: Palm Hills Development… Resilient performance

  • HC Brokerage issued their update about Egypt’s real estate sector shedding the light on Palm Hills Development performance and maintaining the Overweight rating.

  • Sales and construction pace are picking up despite pandemic difficulties; we positively view coastal expansions and new key management figures
  • We expect collections of EGP54.5bn over 3Q21—2030 against CAPEX spending of EGP27.7bn
  • We reduce our TP c26% to EGP2.82/share and maintain our Overweight rating as we account for the settlement of Botanica; stock is trading slightly below par value at a 2021e P/NAV of 0.45x

Mariam Elsaadany, real estate analyst at HC Brokerage commented that: “ Healthy sales growth and project expansion: We continue to see solid sales figures as the sector gradually recovers from the pandemic’s impact. In the future, we expect the real estate sector’s performance to pick up from current levels aided by the Central Bank of Egypt’s (CBE) new EGP50bn middle-income mortgage finance initiative at a declining 8% interest rate. The price ceiling of units in the initiative has been revised upward to EGP2.50/unit, and it can now finance units not registered at notary offices provided that the beneficiary can provide alternative collateral to the mortgage lender, as per the most recent amendments to the initiative. We see that PHD could benefit from the amendments to the initiative given its sizeable ready-to-move inventory. Developers have been reporting impressive pre-sales figures with Talaat Moustafa Group Holding (TMGH EY), Emaar Misr (EMFD EY), and SODIC (OCDI EY), all exceeding our FY20 pre-sales forecasts by c9%, c29% and c2%, respectively and by 4.1x, c27%, and 2.1x in 1H21. Palm Hills Developments (PHD) has been no exception, reporting healthy pre-sales numbers, aided by project expansion. In FY20, it slightly exceeded the EGP12.0bn pre-sales revised target and gave FY21 a big boost with a strong 1H21, with the company currently expecting pre-sales to increase c17% y-o-y in FY21 EGP15.0bn. Construction pace has also gained momentum with EGP2.50bn expected in CAPEX in 2021, c67% higher y-o-y as it plans to deliver 1,450 units and any excess going to its ready-to-move inventory with a value of around EGP3.2bn as of 2Q21.  We also positively perceive PHD’s recent agreement with Taaleem Management Services (TALM EY Equity) to establish a university in Badya and the expected 3Q21 delivery of residential units in the project. Given the recent change in management entailing the hiring of two co-CEOs and managing directors in May, we would not be surprised by strategic changes taking place in the company towards the end of the year, in our view. According to its chairman, decisions related to the company’s securitization program, the sale of Botanica land, and available financing options are open to reassessment by the new management team. In terms of expansions, new projects will likely be in coastal cities as management has noticed a pickup in demand in second homes since the pandemic and seeks to capitalize on it. PHD is currently working on finalizing a 0.57m sqm North Coast revenue-share project with Hassan Allam, having already launched Hacienda West, which will add more North Coast inventory. On a less positive note, some c58% of PHD’s FY2021—26e sellable inventory is in Badya, which increases the company’s concentration risk, in our view. Also, in our opinion, Badya faces competition from Orascom Development Egypt’s (ORHD EY, Overweight, TP EGP8.21/share) O West project in terms of location and pricing.”

“ We expect collections of EGP54.5bn over 3Q212030e against CAPEX spending of EGP27.7bn; reflecting positively on PHD’s balance sheet: Our EGP49.6bn of expected real-estate revenue recognized over 3Q21–31e includes EGP15.9bn of existing backlog, as we continue to account for only the launched phases of Badya in our forecasts, given that the project is only c5% sold. Our numbers point to an average future gross profit margin of c48% with total costs of EGP26.1bn. We expect new net contracted sales of EGP43.0bn over 3Q21–24e, which is reduced to EGP31.4bn when adjusted to PHD’s stakes in revenue-sharing projects, Badya, Palm Hills New Cairo (PHNC), Hacienda West, and Capital Gardens. We expect PHD to sell some 9,793 units over the same period, with PHNC accounting for c22%, Palm Hills Alexandria c20% and Capital Gardens c18%, and the remaining sales of the launched areas in Badya to account for c13%. Our numbers point to CAPEX spending of EGP27.7bn over 3Q21–2030e and collections of EGP54.5bn extending to 2030e. For deliveries, we expect the company to deliver 16,398 units over 3Q21–2028e. PHD is targeting EGP2.5bn worth of securitization transactions in 2021, of which it already closed an EGP1.20bn transaction in June. We estimate the company’s net debt/equity to drop to 0.37x by 2021e and to 0.25x by 2022e as its balance sheet improves due to good collections, better cash flow management, and especially in light of the low-interest-rate environment, in our view. The management is targeting to close 2021 with cash flow from operations of EGP2.00bn while we are estimating EGP1.49bn. It also targets a net debt figure of EGP1.50bn or less, while we estimate its net debt (excluding land liabilities) to reach EGP1.36bn by the end of 2021 (excluding the recently secured facility of EGP2.50bn for PHNC).” Mariam El Saadany added

The real estate analyst at HC concluded her update on PHD stating that: “We reduce our SOTP TP for PHD by c26% to EGP2.82/share and maintain our Overweight rating: Our sum-of-the-parts (SOTP) target price is lower as our model now captures the settlement on Botanica, our assumption of selling the plot as raw land over 5 years and using an average selling price of EGP2,000/sqm. This follows shareholder approval to return 50% of Botanica land (2.96m sqm) to the government and holding on to the remaining area, in addition to 1.47m sqm under registration. We only include the registered areas of 2.69m sqm as the sale of the plot yield a value of EGP1.09/share, on our estimates. We continue to include only launched areas of the Badya project in our numbers and add Hacienda West to our forecasts given its recent launch. We exclude the company’s 205-feddan West Cairo revenue-share project as PHD’s revenue-share has been revised downward to 20% from 40%. We value PHD’s real estate and hospitality businesses using a DCF methodology, which we lowered by c31% to EGP1.82/share, despite adding the company’s Ain Sokhna project, Laguna Bay, and Hacienda West in our numbers, mainly due to the extension in the collection period. The sale of Botanica and excluding PHD’s 5m sqm land bank in Saudi Arabia (we remove on lack of visibility) reduces our land valuation by c33% to EGP1.69/share. We use a 5-year moving WACC of 16.2% with a 5-year average pre-tax T-bill rate of 11.7% and a beta of 1.199. PHD’s net debt represents a negative EGP0.70/share as of 2Q21. This sums up to a target price of EGP2.82/share (down by c26% from our previous target price of EGP3.79/share adjusted to the recent capital reduction). This puts the company on a 2021e P/NAV of 0.67x (NAVPS of EGP4.22) and implies a c47% potential return over the 5 October closing price of EGP1.92/share. Therefore, we maintain our Overweight rating. In our view, the market continues to undervalue PHD’s land bank, especially after the Botanica settlement, pricing it at EGP770/sqm, which is a c53% discount to the market-implied land value of EGP1,643/sqm, on our calculations. The company trades at a 2021e P/NAV of 0.45x, and 0.42x for 2022e, and a PER of 6.82x for 2021e and 6.34x for 2022e. PHD has also announced a five-year dividend policy (which we are not accounting for in our numbers), and also announced a share buyback program as it bought 2.47% of the company as treasury shares of which it terminated 36.3m shares in June.”