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Securities & Investment

Category: HC News

HC expects the CBE to maintain the interest rates, Egypt’s credit outlook improvement is one of the reasons

Posted on by Marwa Nakhla

  • In light of Egypt’s macro economy developments and the global conditions, HC Securities & Investment expects the CBE to maintain the interest rates in its upcoming meeting scheduled July 18th, 2024, Egypt’s credit outlook improvement is one of the reasons

Financials analyst and economist at HC, Heba Monir commented: “We expect the MPC to maintain the overnight deposit and lending rates at its upcoming meeting despite (1) the y-o-y deceleration in headline inflation for four consecutive months, despite m-o-m increases, on favorable base effect, (2) improved FX liquidity post the Ras El Hekma investment deal, which helped increasing net international reserves (NIR) by c33% y-o-y and c0.6% m-o-m to USD46.4bn in June and reversing the net foreign liabilities (NFL) position of the banking sector of USD29.0bn in January into a net foreign assets position (NFA) of USD14.3bn in May, (3) the improvement in Egypt’s one-year CDS to 303 bps currently from 857 bps on 1 January, and (4) the recent improvement in Egypt’s credit outlook by Moody’s to Positive from Negative and to Positive from Stable by Fitch and S&P. However, our interest rate model estimated the required interest rate by investors on the 12-month T-bills at 36.1%, corresponding with the maximum yields requested by banks and reflected in the high bid-to-cover ratios currently witnessed, which implies a real positive interest rate of 7.9% versus a current minor negative real interest rate of 0.6% (after deducting a 15% tax rate for European and US investors and based on our 12M average inflation rate forecast of 22.8%) over the latest 12M T-bill rate. Since the 6 March EGP floatation, the 12M T-bill rate rebounded to 26.1% currently from its lowest level of 25.7% in early April, yet it remains lower than its peak at 32.3% in early March. Therefore, given the current negative real interest rate on treasuries and the possibility of higher inflation following the imminent revision of household electricity and fuel prices in 3Q24, we anticipate the MPC will keep interest rates unchanged.”  

It is worth mentioning that, in its 23 May meeting, the Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) maintained the benchmark overnight deposit and lending rates unchanged at 27.25% and 28.25%, respectively, after it hiked them by 600 bps in March, bringing total rate hikes to 1,900 bps since it started its tightening policy, including 300 bps in 2022, 800 bps in 2023 and 800 bps in 2024. Egypt’s annual headline inflation decelerated to 27.5% in June from 28.1% y-o-y in May, according to the Central Agency for Public Mobilization and Statistics (CAPMAS) data. Monthly prices rose 1.6% m-o-m, compared to a decrease of 0.7% m-o-m in the previous month. On the global front, the US Federal Reserve maintained the target range for the federal funds rate at 5.25-5.50% after it hiked rates by 100 bps in 2023 and 425 bps in 2022, with a total of 525 bps since it started its tightening policy, while the European Central Bank (ECB) ECB lowered the key ECB interest rates by 25 bps after nine months of holding rates steady on an improved inflation outlook. Based on Egypt’s current economic situation, we present below our expectations for the possible outcome of the 18 July MPC meeting.

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 expects outstanding bank’s profitability in 2024 for CIB

Posted on by Marwa Nakhla

Commercial International Bank (CIB)

  • Egypt’s favorable economic structural reforms entail monetary and fiscal tightening, enabling private sector growth and currency liberalization, making the Egyptian banking sector a key beneficiary of these reforms
  • We expect outstanding profitability for COMI in 2024 as a result of the expected NIM expansion, while CAPEX loan growth would be delayed to 2025, in our view

  • HC Brokerage resumes coverage on Commercial International Bank expecting outstanding bank’s profitability in 2024 as a result of the expected NIM expansion.

Economist and financial analyst at HC, Heba Monir commented: “The Ras El Hekma investment deal improved Egypt’s external position and outlook: The Egyptian economy restored confidence after concluding the Ras El Hekma USD35bn investment deal with the UAE in February 2024. The disbursement of the first and second cash tranches worth USD24bn, helped narrow the banking sector’s net foreign liabilities (NFLs) significantly by c85% y-o-y to USD3.64bn in April, from USD29bn in January 2024. On 6 March, the Central Bank of Egypt (CBE) hiked policy rates by 600 bps, raising them by 800 bps y-t-d and 1,900 bps since it started tightening rates in March 2022, and allowed market forces to determine the exchange rate, leading to an EGP devaluation of c35% y-t-d to EGP47.7/USD currently. Following this, and given the impact of the Gaza war on tourism and Suez Canal receipts, the International Monetary Fund (IMF) and the Egyptian authorities reached a staff-level agreement on a set of comprehensive policies and reforms needed for the Extended Fund Facility (EFF) arrangement, increasing it significantly to USD8.0bn from the previously approved USD3.0bn in December 2022, leading to the disbursement of USD820m in April and another USD820m to be disbursed in June. The European Union (EU) also pledged a EUR7.4bn (USD8.06bn) aid package for Egypt to be disbursed through 2027. All this reflected positively on Egypt’s economic and banking sector credit ratings; S&P Global Ratings and Fitch Ratings upgraded Egypt’s economic outlook to Positive from Stable and Moody’s to Positive from Negative. Despite these positive developments, we do not expect CAPEX lending growth before 2025, given the prohibitive high borrowing cost and our expectation of delayed monetary easing to late 2024 or early 2025. Yet, we expect banks to benefit in 2024 from the higher treasury yields and high deposit auction rates, leading to unusually high net interest margins (NIMs).”

“We expect solid banking sector profitability in 2024 due to high treasury yields and real growth in loans: We forecast the banking sector’s loans to grow by c31% y-o-y to EGP7.25trn in 2024, mainly driven by EGP loans to finance working capital needs and inflated by the EGP devaluation. Given the high-interest rate environment, we do not expect CAPEX lending to materialize before 1H25. In January 2024, the state-owned National Bank of Egypt (NBE) and Banque Misr introduced a one-year certificate of deposits (CDs) at a 27.0% interest rate paid annually. Following the 6 March EGP devaluation, they introduced in March a three-year declining interest rate CDs paying interest annually of 30.0% in the first year, 25.0% in the second year, and 20.0% in the third year. In January 2024, some private banks like Commercial International Bank (COMI) followed suit and issued three-year CDs at a monthly 20–22% interest rate while setting a minimum value per CD of EGP0.1–5.0m. Therefore, we estimate market deposits to increase by c27% y-o-y to EGP13.7trn in 2024. Regarding profitability, we expect local currency NIMs to continue expanding, given the high treasury yields and high interest rates. We see room for higher treasury yields by 100–200 bps if inflation accelerates, which would represent an upside risk to our numbers. Regarding asset quality, we forecast that large to medium-cap banks will report good asset quality, as most of them increased their provisions charges during 4Q23. Meanwhile, we could see higher NPLs for small-cap banks. As for the capital adequacy ratio (CAR), most banks’ CARs are above the CBE’s minimum requirement, and if they happen to be impacted by the EGP devaluation, we expect them to recover, helped by their solid profitability.” Heba Monir added.

HC’s economist concluded: “We forecast COMI’s net income to grow at a 5-year CAGR of c24% while maintaining its leading market share: We forecast COMI’s net income to grow at a 5-year CAGR of c24% from 2023–28e, with a c70% y-o-y growth in 2024e to EGP50.4bn on higher interest rates, the EGP devaluation, and a favorable deposit mix, as its current account savings accounts (CASA) represent c55% of its total deposits. We estimate its NIM to increase to 9.57% in 2024e from 7.75% in 2023e, with an ROE of 49.8%, up from 37.5% in the previous year. We forecast COMI to maintain its attractive deposit market share, which we estimate at 6.4% in 2024e, growing its deposits by c23% y-o-y to EGP835bn in 2024e, on our numbers, and we estimate its loan market share at 4.9% in 2024e, growing its loan portfolio by c29% y-o-y to EGP303bn in 2024e to finance corporates’ higher working capital needs, inflated by the c35% EGP devaluation. We expect COMI to report an adequate asset quality, with NPLs of 4.65% of gross loans, higher than the 3.59% it reported in 2023, due to more volatile business conditions and the precautionary measures required by the expected credit loss (ECL) model of IFRS 9. We forecast the bank to record a lower coverage ratio of 276% in 2024e from 305% in 2023 due to its good provisioning and the sound credit profile of its corporate clients. We estimate its net loan-to-deposit (L/D) ratio to increase to 36.3% in 2024e from 34.8% a year earlier. We estimate the bank’s financial investments holdings to surge by c39% y-o-y to EGP378bn, representing c45% of customer deposits in 2024e from c40% in 2023 due to the attractive treasury yields. We expect COMI’s CAR to increase to 30.3% in 2024e from 26.2% in 2023.”

 

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 Brokerage awarded best Forecaster of Egypt’s Fiscal Balance – 2024 by Focus Economics

Posted on by Marwa Nakhla

For the second year, HC Brokerage awarded an Egypt Best Forecaster in one of Focus Economics’ macro forecasts categories

  • HC Brokerage’s Research Team has been awarded for its exceptional performance for the second consecutive year from the prestigious Focus Economics, winning the Best Forecaster of Egypt’s Fiscal Balance in the 2024 FocusEconomics Analyst Forecast Awards.

This remarkable achievement is a testament to the team’s proactive efforts in building robust relationships with a diverse range of experts and sources, enabling them to gain valuable insights into economic trends and events, improving the accuracy of their forecasts, and earning them well-deserved recognition in the industry.

FocusEconomics is a leading provider of economic analysis and forecasts for 198 countries in Africa, Asia, Europe, the Middle East, and the Americas, as well as for 30+ key commodities. Each month, FocusEconomics surveys over 1,500 economic experts from national and international banks, top financial institutions, and economic research companies to obtain their projections for the main economic indicators and elaborate the Consensus Forecast, which is the average of all individual forecasts. FocusEconomics has established a solid reputation among the most renowned financial institutions, multinational companies, consulting firms and government agencies as a reliable source for timely and accurate business intelligence.

Hassan Choucri, Managing Director of HC Brokerage, expressed his pride in this achievement for the second year in a row, he added: “HC continues to grow its capacities in providing accurate forecasts and analysis related to the Egyptian economy indicators in general, especially in light of the economic and geopolitical developments the world is witnessing today. We are always keen to maintain our position as a leading provider of financial research services in the Egyptian market through a wide range of solutions.”

In 2023, HC Brokerage research team won the prestigious “The Best Overall Forecaster for Egypt in the 2023 Focus Economics Analyst Forecasts Awards”. The Research team also secured the top spot in inflation forecasts and ranked third in exchange rate and fiscal balance forecasts.

It is worth noting that HC Brokerage is an affiliate of HC Securities & Investment– the full-fledged investment bank has consistently maintained its position as a dynamic participant in the region. The company’s primary objective is to support its partners, clients, and staff in achieving their goals by providing exceptional financial services in various markets across the region.

 

 

HC Brokerage and Avior Capital Markets fourth Egypt Virtual Conference

Posted on by Marwa Nakhla

  • Over 4 days 27-30 May, HC Brokerage and Avior Capital Markets hold their fourth Egypt Virtual Conference – “Avior – HC EGYPT VIRTUAL CONFERENCE May 2024”

27 May 2024

The Avior-HC Egypt Virtual Conference starts on 27 May and will run until 30 May, offering financial institutions from the US, Canada, Europe, South Africa, and Egypt insights on compelling investment opportunities within Egypt’s leading listed companies across multiple sectors. Investors will e-meet representatives of some 25 listed companies on the Egyptian Exchange (EGX) through group and one-on-one meetings.

The Deputy Governor of the Central Bank of Egypt (CBE), Mr. Rami Abulnaga, is the keynote speaker of the opening session of the conference.

Hassan Choucri, Managing Director of HC Brokerage, said: Our fourth initiative, in cooperation with Avior, comes within our relentless endeavor to promote investment opportunities in Egypt, especially in light of the current global economic conditions.

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, fixed income, and derivatives in South Africa and Sub-Saharan 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 630 Fifth Avenue, 45 Rockefeller Plaza, New York, 10111.

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 visit

www.hc-si.com

HC expects the CBE to maintain the overnight deposit and lending rates

Posted on by Marwa Nakhla

  • Based on Egypt’s macro economy developments, HC Securities & Investment expects the CBE is to most likely keep the policy rates unchanged in its upcoming meeting scheduled May 23rd, 2024

Financials analyst and economist at HC, Heba Monir commented: “ We expect the MPC to maintain the overnight deposit and lending rates at its upcoming meeting given (1) the y-o-y deceleration in headline inflation for two consecutive months, despite m-o-m increases, (2) improved FX liquidity post the Ras El Hekma investment deal after receiving around USD25bn from the UAE and the IMF, which helped increasing net international reserves (NIR) by c19% y-o-y and c1.7% m-o-m to USD41.1bn in April and narrowing the net foreign liabilities (NFL) of the banking sector significantly by c81% m-o-m and c83% y-o-y to USD4.18bn in March, (3) the improvement in Egypt’s one-year CDS to 287 bps from 857 bps on 1 January, and (4) the recent improvement in Egypt’s credit outlook by Moody’s to Positive from Negative and to Positive from Stable by Fitch and S&P.

Egypt’s latest 12M T-bill rates retreated to 25.98%, implying an estimated negative real yield of c6.8%, down from its peak of 32.30% in mid-March. The decline in T-bills rates reflects a rebound in foreign holdings in treasuries by around USD11-12bn until 8 April (according to banking sector sources), following the CBE’s decision to allow market supply and demand forces to determine the FX rate, the Ras El Hekma investment deal, and resumed IMF program.

It is worth mentioning that, the Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) hiked the benchmark overnight deposit and lending rates by 600 bps on 6 March in a special meeting to 27.25% and 28.25%, respectively, bringing total rate hikes to 1,900 bps since it started its tightening policy, including 300 bps in 2022, 800 bps in 2023 and 800 bps in 2024. Egypt’s annual headline inflation decelerated to 32.5% in April from 33.3% y-o-y in March, according to the Central Agency for Public Mobilization and Statistics (CAPMAS) data. Monthly prices rose 1.1% m-o-m in April, compared to an increase of 1.0% m-o-m in the previous month. On the global front, the US Federal Reserve maintained interest rates at its current range of 5.25-5.50% after it hiked rates by 100 bps in 2023 and 425 bps in 2022, with a total of 525 bps since it started its tightening policy. Based on Egypt’s current economic situation, we present below our expectations for the possible outcome of the 23 May MPC meeting.”

 

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: 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.”