Category: HC News

The Central Bank of Egypt (CBE) has decided to terminate the repatriation mechanism at the end of the 4 December business day for any fresh foreign currency portfolio investments wishing to enter the local treasuries or stock markets, the CBE announced in a release. Going forward, fresh foreign portfolio investments will be channeled through the interbank market and the decision will not apply to balances held inside the mechanism before the cut-off date, it added. (CBE)

HC’s comment: Foreign holding of Egyptian T-bills declined to USD11.8bn in October 2018 from USD21.5bn in March, a total outflow of USD9.7bn. Around USD8bn of the outflows were covered by commercial banks shifting them to a net foreign liability position of USD3.9bn as of September and the remaining USD1.7bn were covered from the repatriation fund which declined to USD7.8bn as of the end of October from USD9.7bn in March. HC expects the direction of foreign currency portfolio investments through the interbank systems to result in an FX rate reflecting supply and demand forces, supporting a floating currency mechanism. HC however, expects commercial banks to show limited ability to support the EGP at current rates due to holding a net foreign liability position, as HC earlier illustrated in thier Egypt macro note dated November 7, 2018. Therefore HC expects to see EGP devaluation of 5%-10% throughout 2019. That said, as the currency settles at market equilibrium rates HC would expect to see foreign inflows into the Egyptian T-bill market giving banks room to replenish the position of their foreign assets. Accounting for the potential devaluation, HC expects inflation to average 16%-17% over 2019, hence they do not expect interest rate hikes throughout 2019, as was also illustrated in their November macro report. Currently, international price of Brent declined to USD58.87/barrel, which should offset the potential EGP devaluation’s effect on the Egyptian government’s budget. On HC’s numbers, average FY18/19e Brent price of USD76.6/barrel translates to a budget deficit of 8.4% of GDP.

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Egypt’s Cabinet approved a new draft law modifying income tax on treasuries, which separates income earned on treasuries from corporates’ and banks’ other income sources, according to the Ministry of Finance sources. According to the draft law, income earned on government treasuries will be recorded net of a 20% tax and then will be added to the entity’s taxable income after deducting other treasuries related costs. The total net income will then be subjected to the 22.5% income tax rate. The amendment is expected to result in some EGP10bn in tax revenue to the government. (Al Borsa).

HC’s comment: Currently, banks are taxed at the highest of 22.5% of pre-tax income or 20% of treasury income. Egypt’s Ministry of Finance did not provide further clarification on the actual application of the new tax law. According to HC’s understanding, however, it appears the new law stipulates that banks will be entitled to 80% of treasury returns (net of 20% tax), which will enter the bank’s revenue stream and will later be subjected to 22.5% corporate income tax after deducting operating expenses, implying double taxation. If HC’s understanding is correct, this would imply a lower net profit for banks and possibly lower valuations. For banks under coverage, Abu Dhabi Islamic Bank – Egypt (ADIB EY) and Commercial International Bank (COMI EY) have the highest exposure to government treasuries, constituting c46% and c45% as of 3Q18, respectively, of total deposits, while Crédit Agricole Egypt (CIEB EY) has the lowest exposure to treasuries, constituting c36% of its total deposit base. HC awaits confirmation from domestic banks on their understanding of the new law before adjusting their numbers.

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HC Securities & Investment announced today that it acted as the sole financial advisor to Middle East Glass Manufacturing Co. (MEG) (MEGM.CA) and the Samaha family on the sale of 74% of the share capital of Medco Plast for Packing and Packaging Systems S.A.E (Medco Plast) to Indorama Ventures Public Company Limited (IVL), one of the world’s leading producers in the intermediate petrochemicals industry, for a value of EGP 843 Million. Additionally, HC Brokerage acted as the sole transaction broker for the buyer and the sellers.

“This is our fifth M&A transaction with MEG, where we have worked hand-in-hand over the years to ensure they meet their long-term objectives,” Mahmoud Selim, Head of Investment Banking at HC Securities & Investment, commented on the transaction.

HC Securities & Investment has previously advised MEG on several transactions, including the acquisition of 60% of Medco Plast in 2010, the acquisition of Wadi Glass in 2014, the private placement of 36% of MEG share capital to Gulf Capital, one of the leading private equity firms in the MENA region in 2014, and the acquisition of Misr Glass Manufacturing Company in 2016.

Medco Plast is the largest manufacturer of recyclable PET preforms, injection molded products, and closures to all the multinational soft drink and water manufacturers operating in Egypt, with a 25% market share. Medco Plast currently has 11 state-of-the-art production lines with a combined annual production capacity of 70,000 metric tons of PET preforms.
“Indorama is a global player that adds to the development of the packaging sector in Egypt, and transactions such as this provide confidence in the Egyptian economy and hopefully contribute to attracting more foreign investments to Egypt,” Selim added.

HC expects the MPC to keep interest rates unchanged at its upcoming meeting.
October monthly inflation came in significantly higher than HC’s expectation of it normalizing to c0.8%, mainly on supply shocks witnessed in the fruit and vegetable market leading to price hikes. Currently, inflation has exceeded the upper limit of the CBE’s targeted rate of 13% (+/-3%). HC accordingly raises its inflation forecast for October-December to 17.1% from 15.9%, previously, however, HC still believes the CBE will not undertake a rate increase due to a slow business activity, as indicated by the Egypt PMI index of 48.6, which has resulted in excess interbank liquidity currently (25% of deposits as of August 2018 compared to 21% in June 2017). Hence, HC believes attracting additional liquidity to the banking sector is not on the table at the moment. Higher corridor rates could also have a negative effect on consumer demand, already at low levels growing by an estimate of 1.5% in FY17/18e, below the normal population growth rate of 2.5%. Moreover, the CBE deputy governor said earlier this month that the CBE will begin to flexibly target inflation.

At its last meeting on 27 September 2018, the Central bank of Egypt’s (CBE) Monetary Policy Committee (MPC) kept its policy rates unchanged for the fourth time after 2 consecutive 100 bps cuts in both February and March, signaling the start of an easing cycle. Egypt’s annual urban consumer inflation accelerated to 17.7% in October from 16% in the previous month with monthly inflation accelerating to 2.6% from 2.5% in September, according to data published by the CBE. Egypt’s annual core inflation accelerated to 8.85% y-o-y in October from 8.55% y-o-y in September, with the monthly core CPI increasing 0.98% m-o-m, central bank data showed.

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– In its latest report, HC stated that “August monthly inflation came in higher than our expectation of it normalizing to c1%, mainly on higher fruit and vegetable price increases, reflecting the second round effects of the energy price hikes, but they are still within the targeted CBE rate of 13% (+/-3%). We expect the annual inflation rate to average 14.8% over September–December.”

Monette Doss, Equity Analyst|Macro and Banking Sector, expected high interest rates offered by other emerging markets to reflect on higher corridor rates since attracting domestic liquidity is not the main target at the moment. “In this regard, we note that local currency deposits grew 8.8% y-t-d to EGP2.3trn in July despite the maturity of the 18-month 20% certificates of deposit (CDs) that started to take place last May.” added Monette.

“Banque Misr and National Bank of Egypt (NBE) announced in early September that a total of EGP176bn of the 20% CDs have matured since May. However, based on July figures, it seems these deposits have not exited the banking sector, which makes higher rates aiming at attracting domestic liquidity unnecessary for the time being.” as per the report.
Monette concluded, “Contrary to our previous belief that the CBE would resume monetary policy easing in 4Q18, we now expect it to keep rates unchanged this last quarter, mainly due to the global high interest rate environment. That said, we expect the MPC to keep interest rates unchanged at its upcoming meeting.”

It is worth mentioning that, at its last meeting on 16 August 2018, the Central bank of Egypt’s (CBE) Monetary Policy Committee (MPC) kept its policy rates unchanged for the third time after 2 consecutive 100 bps cuts in both February and March, signaling the start of an easing cycle. Egypt’s annual urban consumer inflation accelerated to 14.2% in August from 13.5% in the previous month with monthly urban inflation decelerating to 1.8% from 2.4% in July, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS). Egypt’s annual core inflation edged up to 8.83% y-o-y in August from 8.54% in July, with the monthly core CPI remaining the same at 0.58% compared to the previous month, central bank data showed.

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– Egypt’s annual urban consumer inflation accelerated to 14.2% in August from 13.5% in the previous month, with monthly prices decelerating to 1.8% from 2.4% in July, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS).

Annual core inflation edged up to 8.83% y-o-y in August from 8.54% in July, with the monthly core CPI remaining the same at 0.58% compared to the previous month, central bank data showed. (Reuters, CBE)

HC’s comment: The monthly headline inflation figure is largely in line with HC’s expectation of 1.5%. In August, price increases of regulated items decelerated from hikes witnessed over the last 2 months following the energy subsidy cuts, but still showed the highest yearly increase. Fruit and vegetable prices increased, however, showing the highest monthly rise, reflecting the second-round effects of higher energy prices.

Core inflation, which excludes the prices of regulated items as well as fruits and vegetables, remained moderate at 8.83% y-o-y and 0.58% m-o-m. In their opinion, the high price increases of fruits and vegetables combined with moderate core inflation reflect conservative consumer spending that is more inclined toward necessities with relatively lower demand for unnecessary goods. HC expects core inflation to average 9.5% in September and October as the back-to-school season could impose higher demand for other goods and services.

HC expects the government to undertake more energy subsidy cuts in January, which in their opinion will likely renew inflationary pressures. In this regard, they expect inflation to average 18.2%–20.5% over 2H18/19, above the CBE target of 13% (+/-3%).

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– HC Securities & Investment has successfully acted as the exclusive financial advisor to Minapharm Pharmaceuticals and Chemical Industries S.A.E. (MIPH.CA) (www.minapharm.com) on the acquisition of an additional 15.76% of the share capital of its subsidiary Minapharm ProBioGen S.A.E., a company specialized in the R&D and manufacturing of biopharmaceuticals, in a transaction valued at EGP 95 Million. HC Brokerage acted as the broker for both the buyer and the seller.

Post the transaction, Minapharm Pharmaceuticals’ shareholding in Minapharm ProBioGen has increased to 75.01% from 59.25%.

• Egypt’s annual urban inflation decelerated to 13.5% in July from 14.4% in the previous month, while monthly prices increased 2.4% compared with a 3.5% increase in June, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS). (Bloomberg, Reuters).

HC’s comment: The monthly inflation figure came higher than HC’s expectations of 1.5% on high food and beverage inflation of 2.1% m-o-m, contributing to 1.15% of the total monthly inflation figure, according to the published breakdown of total inflation, which highly mimicked urban inflation figures.

The second major contributor to the monthly inflation figure was housing and utilities, with prices rising 5.2% m-o-m following a 14.6% increase in the prices of electricity, natural gas, and other fuels products, contributing to 0.56% of the total monthly inflation figure. This was in addition to alcoholic beverages and cigarette prices rising 7.2% m-o-m after cigarette prices increased 7.6% m-o-m to contribute 0.34% of total monthly inflation.

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• Fitch Ratings has affirmed Egypt’s long-term foreign-currency and local-currency issuer default ratings (IDRs) at ‘B’ with a positive outlook, it said in a statement.

The ratings agency forecasts Egypt’s GDP growth at 5.5% in FY18/19 and FY19/20 and sees average inflation to drop to 11.6% in 2019, down from 13% in 2018. Fitch estimates general government debt-to-GDP to fall below 93.6% in FY17/18 from 103% in FY16/17, with further fiscal consolidation to reduce the figure to c88% in FY18/19 and c75% in FY22/23.

HC’s comment: fitch has revised the outlook on Egypt to positive from stable last January on improving macroeconomic stability from a fragile state. Affirming this outlook is a confirmation to the improving macroeconomic fundamentals, which should reflect positively on investor’s perception of Egypt’s risk profile, and should reflect in lower demanded yields on Egypt’s debt instruments.

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• Egypt’s passenger car sales rose c70% y-o-y to 11,593 cars in June compared to a c55% y-o-y increase to 10,994 cars in the previous month, according to a report by the Automotive Marketing Information Council (AMIC). Bus sales also rose c15% y-o-y to 1,314 buses, according to the report. (AMIC).

HC’s comment: Local passenger car (PC) sales grew c63% y-o-y to 32,981 cars in 2Q18, coming in c24% above HC’s estimate of 26,652 cars, with completely built-up (CBU) vehicle sales c64% above HC’s estimate, while completely knocked-down (CKD) vehicle sales were c10% lower than our forecast. Initial numbers from the AMIC report show Hyundai sales grew c98% y-o-y to 8,418 cars, c52% above HC’s estimate of 5,539 cars. This implies a market share of 25.5% for the quarter, which is 4.7 pp higher than HC’s estimate and 4.6 pp higher than a year earlier. Geely sales came in c85% lower than HC’s estimate (a c87% y-o-y drop) to stand at 78 cars, while Chery sales came in c16% lower than forecasted (c1% y-o-y drop) to stand at 1,226 cars in 2Q18. Mazda sales dropped c11% y-o-y to 214 cars, beating HC’s estimate by c18%. GB Auto’s (AUTO EY) total market share in 2Q18 stood at 30.1%, which is 1.3 pp above HC’s estimate, but 1.2 pp lower than a year earlier.