Category: HC News

HC Brokerage issued their update about Egypt’s real estate sector shedding the light on six main players’ performance following the most recent market dynamics.

• While sector investment demand benefited from inflation and EGP devaluation fears, currently, it is hurt by lower affordability, cost overruns, and challenging financing

• We expect further market consolidation following sector conditions and the EGP devaluation; revaluation of assets is currently underway for the acquisition targets

Mariam Elsaadany, real estate analyst at HC Brokerage commented that: “ Soaring inflation is pressuring affordability and leading to cost overruns; in our view: A high inflation environment, causing negative real interest rates, has historically served the Egyptian real estate sector well, as investors usually view it as a safe haven. However, the current macro environment is challenging to the industry, in our view. Cost-inflationary pressures, caused by soaring inflation rates, which averaged 13.8% in 2022, led to cost overruns and pushed developers to resort to receivables securitization more than bank debt, which pressured their operating margins. We expect this to continue into 2023e as we expect inflation to average 21.5%. The Central Bank of Egypt (CBE) raised the key policy rates by 800 bps in 2022, and the EGP devalued by c37% in 2022 and by c18% y-t-d. To fend off dollarization and keep inflation in check, Egyptian public banks issued high-yielding certificates of deposits (CDs), offering an interest rate of as much as 25.0%, and private banks followed suit. In our view, the high-yielding CDs compete with investment in the real estate sector, adversely impacting its pre-sales which only grew by c8% in 9M22 in terms of value, while volume dropped c5% y-o-y for the six developers we track, as opposed to growing by c59% in 2021, which was volume and value-driven. Developers could not extend payment plans further, as previous years’ extended payment plans had already stretched their cash flows, raising concerns about affordability. In 2023e, we expect pre-sales growth to be price-driven.”

Elsaadany added: “Tourism recovery and EGP devaluation lead us to prefer developers with hospitality exposure; while we keep an eye on M&A targets: Given the currency outlook and a recovering tourism sector, as evidenced by higher occupancy rates, we like companies with significant hospitality operations, namely Orascom Development Egypt (ORHD EY) and Talaat Moustafa Group Holding (TMGH EY). Also, in light of a high-interest rate environment, we like developers who have been active in deleveraging their balance sheets and building on their ready-to-move inventory, putting themselves at a cost advantage, like Palm Hills Developments (PHDC EY). The three stocks also enjoy solid fundamentals and decent market liquidity. We believe three of the six companies under our coverage are subject to M&A speculation and/or currently the subject of a potential deal with ORHD’s sale of its subsidiary, Orascom Real Estate (ORE) to SODIC, under study. Also, in our view, MNHD and HELI are the two other developers we believe are most likely to be the subject of a potential acquisition due to their attractive land bank. As a result, the stock prices of ORHD, MNHD, and HELI rallied c20%, c43%, and c18%, respectively, during 2022, implying a value of EGP615/sqm of land for HELI and EGP1,227/sqm for MNHD at the current market prices. Given the outlook on the EGP, we maintain a favorable view on acquisition targets during 2023e despite them offering lower potential returns based on our valuations. The valuations for the deals/potential deals seen by the market ranged from EGP878/sqm—1,192/sqm of undeveloped land. The most recent offer by SODIC to acquire Orascom Real Estate (ORE), a subsidiary of Orascom Development Egypt (ORHD EY), implied a price of EGP878/sqm, or USD45/sqm. In our view, future potential deals should see a significant increase on an EGP basis.”

“The sector challenges are reflected in stock prices which are currently oversold with an average 2023e P/NAV and P/E ratios of 0.34x and 6.08x (excluding HELI), respectively, suggesting that the overselling is excessive, in our view. PHDC and TMGH stocks have not rallied as much as other real estate names despite both companies delivering good results, PHDC initiating a share buyback program, and both stocks paying dividends. PHDC is trading at a 2023e P/NAV of 0.29x, and TMGH is trading at 0.32x, lower than the sector’s average. PHDC offers the highest potential return of c83% and TMGH c57%, while the market assigns a negative value to TMGH’s land bank. Therefore, we maintain our Overweight recommendations for the two stocks.

In our view, an economic pickup, monetary easing, and the development of the mortgage market for the upper-middle segment would be the sector’s key triggers.”, Mariam Elsaadany concluded.

 

• HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled February 2^nd. 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 keep the policy rates unchanged to allow the market to absorb the 300 bps hike of the 22 December 2022 meeting. Also, the CBE declared that foreign investments in the Egyptian market exceeded USD925m in the week following the EGP/USD movement on 11 January 2023, mentioning that carry trade is becoming more attractive to foreign investors. We expect the headline urban inflation to accelerate and reach 23.5% in July 2023 before it retreats to 18.2% in December 2023, averaging 21.5% throughout 2023. We expect the EGP 1-Year T-bills to average around 20.6% in 2023 (accounting for a 15% tax rate for US and European investors), taking into the calculation a 200 bps rise in the corridor that we expect to materialize over the rest of the year. This considers fluctuations in Egypt’s CDS 1-Year, which currently records 504.7, down from its peak at 1,774 on 27 July 2022, yet still high compared to its record low of 181 on 17 September 2021. The EGP depreciated by c17% over the past month, registering EGP29.9/USD, due to the accumulated pressures on Egypt’s balance of payment (BoP) and high foreign debt obligations, although there was a slight improvement in (1) Net International Reserves (NIR) inching up 1.4% m-o-m for the first time since December 2020 versus a 16.9% y-o-y decline to USD34.0bn in December 2022, (2) the banking sector’s net foreign liability (NFL) position, excluding the CBE, narrowing by 16.7% m-o-m to USD13.7bn in November 2022 for the first time since July 2022 while widening by 93% y-o-y. The latest 12M T-bills auction yield of 18.57% (accounting for a 15% tax rate for US and European investors) offers a real yield of positive 0.57%, given our inflation expectation of 18.0% in January 2024, solidifying our view of a needed increase in policy rates until the end of the year.”

It is worth mentioning that, in its 22 December 2022 meeting, The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) decided to raise the benchmark overnight deposit and lending rates by 300 bps to 16.25% and 17.25%, respectively. This decision accelerated its tightening pace by 500 bps in 4Q22, raising policy rates by 800 bps during 2022. Meanwhile, headline urban inflation surged to 21.3% in December 2022, with an average of 13.8% during 2022. On the global market, the US Federal Reserve raised interest rates by 425 bps versus an average inflation rate of 6.5% during 2022.

 

HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled December 22^nd. Based on Egypt’s current situation, they expect the CBE to hike policy rates by 200 bps for inflation-targeting purposes and to make carry trade attractive in the following meeting

Financials analyst and economist at HC, Heba Monir commented: “We expect the MPC to hike policy rates by 200 bps for inflation-targeting purposes and to make carry trade attractive. Inflation accelerated in November, rising 2.3% m-o-m and 18.7% y-o-y, and exceeded our estimate of 16.5%. This acceleration in inflation, coupled with the current shortage in foreign currency inflows, led us to expect an annual inflation rate of 19.1% in December. The EGP depreciated by c7.0% since 27 October 2022 and 36.2% y-t-d due to the accumulated pressures on Egypt’s balance of payment (BoP) and high foreign debt obligations as (1) external debt to GDP is expected to increase to 38.8% in FY22/23 from 37.7% in FY21/22, according to official estimates, (2) net International reserves (NIR) retreated by c18% y-o-y in November to USD33.5bn, with a 67.7% y-o-y increase in gold versus 22.3% y-o-y decline in foreign currencies, (3) August remittances declining c8% m-o-m to USD2.2bn, (4) the banking sector’s net foreign liability position, excluding the CBE, widening to USD16.4bn in October from USD5.0bn a year earlier, (5) the drop in foreign currency deposits, not included in the official reserves, to USD1.67bn in November from USD11.5bn a year earlier, and (6) Egypt’s external debt repayment schedule showing repayment of dues of USD20.2bn over FY22/23. The 12-month after-tax T-bills average yield reached 15.99% (accounting for a 15% tax rate for US and European investors) in the most recent auction with a bid-to-cover ratio of 3.20x, indicating higher required yields. Egypt’s 12-month T-bills currently offer a real yield of negative 0.1%; factoring in the 200 bps increase will make carry trade more attractive.”

It is worth mentioning that, in a special meeting on 27 October, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to raise policy rates by 200 bps and moved to a durably flexible exchange rate regime, leaving the forces of supply and demand to determine the value of the EGP against other foreign currencies, which led to a c14% EGP depreciation. Accordingly, this brought the cumulative interest rate hikes in 2022 to 500 bps, concurrent with the Federal Reserve Bank’s (Fed) cumulative interest rate increases of 375 bps y-t-d.

The CBE’s 200 bps policy rate hike aligns with our previously announced expectations of a 200 bps interest rate increase before year-end, which should help contain inflation, which reached 15.0% in September, and makes carry-trade more attractive. Assuming that the rate hike will be reflected in the treasuries market, we estimate that the 12-month T-bills will offer a positive real interest rate of 2.36% (up from 0.66% before the rate hike) compared to a negative real yield in the US. Our calculations consider the latest after-tax 12-month T-bills auction, a 15% tax rate on treasuries imposed on US and European investors, and our estimate of a yearly inflation rate average of 14.62% over the coming 12 months. As for the CBE’s decisions on the FX system in Egypt, allowing banks to use FX derivatives and gradually canceling import trading through LCs, we believe it will make the USD more available in the market and help restore business activity in Egypt. This morning the EGP devaluated by c13.7% to EGP22.84/USD against the USD, which implies a REER level of 91.82, suggesting the EGP is undervalued by c8% at current levels, based on our calculations.

As for the impact of the decisions on the banking sector, today’s announced high-yielding CDs by state-owned the National Bank of Egypt (NBE) will increase competition for private sector banks. However, we don’t expect it to be material considering the recently offered CDs by some private banks at higher rates and the higher yields on their treasuries investments, which will safeguard and improve their profitability.

As for the stock market, although higher interest rates are not generally positive for investment in the stock market, however, we believe that the stock market will react positively to the decisions due to very depressed market valuations that were reflecting the stagnation of business activity in Egypt.

As for the USD9bn of external aid that Egypt secured from the IMF and multilateral institutions, we believe it would fully cover Egypt’s 2H22 total debt repayment and part of that of 1H23. Most importantly, the agreements constitute a vote of confidence in Egypt’s structural reform program and guarantee that it continues on the right economic reform path. Egypt’s structural reform program will include policies to unleash private sector growth, including reducing the state footprint, adopting a more robust competition framework, enhancing transparency, and ensuring improved trade facilitation, which in our view, could unleash Egypt’s economic growth potential, that was held back for several years.

• HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled September 22^nd. Based on Egypt’s current situation, they expect the CBE to gradually raise the overnight deposit and lending rates by 100 bps in the coming meeting and then raise it by another 100 bps in the following meeting

Financials analyst and economist at HC, Heba Monir commented: “The annual August inflation is the highest recorded since May 2019, as the pricing of imported commodities at a higher exchange rate and supply bottlenecks negatively impacted it. At these levels, the annual inflation rate is well above the CBE’s pre-announced target of 7% (+/-2% for 4Q22), and we estimate it to average 14.3% until year-end. Furthermore, a few days ago, the Egyptian government decided to amend the natural gas pricing formula for nitrogen fertilizers producers, which should translate into higher crop prices and inflation rates. Regarding Egypt’s external position, we believe that pressure is accumulating given (1) our FY21/22e current account deficit estimate of 4.8% of GDP, up from 4.6% a year earlier, (2) July remittances declining c15% m-o-m  and y-o-y to USD2.38bn, (3) the banking sector’s (excluding the CBE) net foreign liability position reaching USD10.1bn in July, (4) the drop in foreign currency deposits, not included in the official reserves, to USD0.89bn in August from USD11.7bn in December, dropping 0.35% m-o-m and c92% y-t-d, (4) net international reserves settling at USD33.1bn in August representing 4.71 months of imports coverage, and (5) Egypt’s external debt repayment schedule showing dues (excluding GCC deposits) of USD12.1bn over FY22/23. Against this backdrop, we believe a 200 bps rate hike is necessary to absorb the current pressures. For the time being, we believe the MPC Committee will prefer to gradually raise the overnight deposit and lending rates by 100 bps in the coming meeting and then raise it by another 100 bps in the following meeting. Currently, Egypt offers a real yield on 12-month T-bills of 208 bps (given the current 12-month T-bills rate, our 12-month inflation estimate of 12.25%, and a 15% tax rate for European and US investors) compared to a real return on the US 1-year notes of negative 245 bps (given 1-year notes yield of 3.83%, Bloomberg average 12M inflation estimate of 6.28%, and assuming no taxes). Based on our assumptions and calculations, Egyptian 12-month T-bills need to increase in 2022 to 17.3% from 16.9% currently to remain attractive. ”

It is worth mentioning that, in the previous two consecutive meetings in June and August, the MPC decided to keep policy rates unchanged after it increased them by 300 bps y-t-d, including 200 bps in May and 100 bps in March, concurrent with the Federal Reserve’s cumulative interest rate hikes of 225 bps y-t-d. Egypt’s annual headline inflation accelerated to 14.6% in August from 13.6% in the previous month, with monthly inflation increasing 0.9% in August compared to an increase of 1.3% m-o-m in July.

 

• Egypt’s external position vulnerability renders further EGP devaluation accompanied by interest rate hikes necessary, in our view about Egypt Financials
  

• For Egypt Financials, we expect further working capital loan growth, moderate deposit increases, maintained NIMs and pressured asset quality over the rest of 2022e

For Egypt Financials, we expect loans to be mostly geared towards working capital financing and deposits to increase moderately on higher competition from public banks: We expect CAPEX lending to be delayed beyond 2022 while tight corporate liquidity to be the main driver for increasing working capital loans in 2022. Accordingly, we expect average 2022e loan growth of c17% y-o-y for banks under our coverage, largely similar to the 2021 average growth of c16% y-o-y. On the liability side, we expect deposits to increase at a 2022e average of c10% y-o-y down from c19% y-o-y in 2021 due to higher competition from high-interest deposits issued by public banks, which we expect to be reintroduced soon in an attempt to combat dollarization. We expect Crédit Agricole Egypt (CAE) to maintain its conservative balance sheet growth, increasing its deposits by c6% in 2022e compared to c12% for Commercial International Bank (CIB) and c11% for Abu Dhabi Islamic Bank-Egypt (ADIB). We expect banks to mostly take advantage of rising treasury yields which we expect to increase to c18% from c16% currently, however, face some pressure due to our expected increase in the cost of funding. Should our view on interest rates materialize, we expect banks’ NIMs to remain intact, averaging 5.7% in 2022 for banks under our coverage, slightly up from 5.4% in 2021. Accordingly, we expect CAE to face less pressure from increasing funding costs, leading to a 2022e NIM estimate of 6.2% compared to 5.8% for CIB and 5.2% for ADIB Egypt. For ADIB Egypt, we note that the bank relied on high-interest fixed deposits in the past to increase its market share, which led to lower NIMs than peers. In a rising interest rate environment, we expect banks with short or negative asset-liability duration gaps to show the highest bounce in their NIMs as their assets reprice quicker than their liabilities. As such, we expect ADIB-Egypt’s NIMs to increase by 50 bps y-o-y to 5.2% in 2022e, backed by its negative asset-liability duration gap of ten months as of December 2021. We expect CAE’s 2022e NIMs to increase by 40 bps y-o-y to 6.2% (backed by its asset-liability duration gap close to zero). However, we expect CIB’s NIMs to remain at 5.8% in 2022e, the same as last year, backed by its positive asset-liability duration gap of ten months. For CIB and CAE, we largely maintain our 2022–26e earnings estimates as our higher NIMs estimates are largely offset by higher provisioning estimates. For ADIB-Egypt, we raise our 2022–26e earnings estimates by c32%. This reflects our higher growth assumptions following the full completion of its capital increase to EGP5.0bn, which management expects to take place after it finalized an EGP2bn capital increase.

We believe the challenging business environment imposes a threat to the banks’ asset quality; however, we expect it to be contained due to adequate capital buffers: We expect an average 2022e non-performing loan (NPL) ratio of 4.2% for banks under our coverage, up from 3.8% a year earlier, reflecting challenging economic conditions. Accordingly, we expect 2022e provision expenses for the three banks to average c12% of net operating income, up from c10% in 2021e, with an average 2022e coverage ratio of c145%, down from c161% in 2021. We believe banks under our coverage are adequately capitalized, with a capital adequacy ratio (CAR) of 22.7% for CAE (as of March 2022), 13.8% for ADIB-Egypt and 28.8% for CIB (as of June 2022). In our numbers, we account for ADIB-Egypt’s second capital increase planned to take place by the end of 2022 or the beginning of 2023, increasing its paid-in capital to EGP5.0bn after successfully implementing the first phase of the rights issue in August, doubling its paid-in capital to EGP4.0bn. For CIB, the bank’s management is unlikely to distribute a special dividend hence maintaining its high capitalization. Given our 2022–26e balance sheet growth estimates, we expect a CAR average of c17% for CAE, c16% for ADIB-Egypt, and c20% for CIB.

• Is The Supply Chain Crisis Impacting Capital Markets

 

Banks and investors are monitoring current supply chain imbalances closely. Capital markets are definitely impacted when the global supply chain experiences turbulence. Therefore, Capital Market suppliers like banks and investors in the Middle East and Egypt are paying close attention to how certain circumstances are impacting the global supply chain and capital markets.

 

As the world comes out of a global pandemic, we are entering into a Russia/Ukraine war that further compounds what was already a supply chain crisis. The doubling of these two worldwide occurrences has created a supply chain imbalance that hasn’t been previously observed. HC Securities & Investments is taking this moment to carefully navigate Capital Markets with our investors and clients’ best interests in mind. In this article, we will discuss exactly what is causing the supply chain crisis. As well as how Capital Markets are being impacted by it.

 

• Global Factors & Geopolitical Issues Impacting The Supply Chain Crisis & Capital Markets

Just when COVID restrictions have begun to clear up, geopolitical conflicts like the Russia/Ukraine war offer new limitations and have caused some serious supply chain crises. Here are a few reasons why.

 

• Port Congestion As China Increases Output

Chinese ports have been working in overdrive to first take in as many returning empty shipping containers as possible. As Chinese manufacturers ramp up production to meet increased consumer demand, the shortage of containers and surplus of goods has created massive congestion that is impacting Middle Eastern & Egyptian supply chains. Because the global supply chain and capital markets are inextricably linked, we are seeing a residual knock-on effect from port congestion that stimulates market volatility.

 

• Spillover Impacts Global Ports Already Congested From Covid Restrictions

The Russia/Ukraine war has been raging with no sign of surrender from either side. Grain & fuel shortages around the globe are only one of the spillover effects the Middle East & Egypt are facing. Additionally, global ports where cargo has traditionally been shipped are facing extreme congestion as they try to compensate for other ports that have been closed or shut down due to the Russia/Ukraine conflict. This congestion only further bolsters supply chain imbalances that skyrocket consumer demand, and consequently inflation.

 

• Russian Airspace Restrictions Delays Air Freight Transportation

Air transportation, especially along the Asia-Europe route has been severely altered. While air freight from China to the Middle East can avoid Russian and Ukrainian air space. The overall limitations and additional restrictions have created an environment where air freight liners are forced to prioritize certain, more important goods over others, causing shortages of goods in some areas.

 

• Global Shortage of Truck Drivers Still Looms

Manufacturers, ports, and logistics firms were already being pushed to the edge throughout covid. This new Russia/Ukraine conflict has added an extra layer of pressure that has caused many truck drivers and port machine operators to simply quit. A global shortage of truck drivers everywhere has to be factored into the cost of goods now.

 

• Congested Overland Rail Freight From China

Ports and rails are being pushed to the limit to keep up with consumer demand. This push to deliver has even congested overland rail freight routes coming out of China. Everyone destined for Northern European regions now have to avoid Russian rails and ship through Asia. The overall burden placed on rail operators is enormous.

 

• Banks & Investors See Correlation Between Supply Chain Issues & Inflation

As many of the global factors and geopolitical issues listed above stimulate supply chain issues, inflation seems to tag along as an undesirable consequence. Foundational supply & demand principles dictate as consumer demand increases, manufacturers produce increased inventory to meet the demand. This in turn stimulates rises in costs, and inflation as customers are willing to pay increased costs for the products they demand.

 

Investors in the Middle East and Egypt understand this all too well and have taken a position within inflation-resistant markets. Firms like HC Securities & Investments is helping investors manage supply chain imbalances and inflation by shifting investor portfolios to more stable investments. Research shows that industries like healthcare and information technology have been somewhat resistant to the supply chain crisis and offer better stability for banks and investors.

 

 

 

• HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled August 18^th and based on Egypt’s current situation, they expect the CBE to hike policy rates by 200 bps.

Head of macro and financials at HC, Monette Doss commented: “ The July inflation figure came in higher than our estimate of 13.0% y-o-y, and we expect it to average 14.2% over the rest of the year, well above the CBE’s inflation target of 7% (+/-2% for 4Q22). Looking at Egypt’s external accounts, we believe that pressure is accumulating on the country’s balance of payment (BoP), including (1) our FY21/22e current account deficit estimate of 4.8% of GDP, up from 4.6% a year earlier, (2) April remittances declining c7% m-o-m to USD3.1bn, (3) the banking sector’s (excluding the CBE) net foreign liability position widening to USD11.5bn in June, (4) the drop in foreign currency deposits, not included in the official reserves, to USD0.89bn in July from USD11.2bn in December, (4) net international reserves settling at USD33.1bn representing 4.71 months of imports coverage, and (5) Egypt’s external debt repayment schedule showing dues (excluding GCC deposits) of USD12.1bn over FY22/23. Against this backdrop, we believe a 200 bps interest rate hike coupled with c9% currency devaluation to EGP21.2/USD is necessary to support the currency and combat dollarization. As such, we also perceive the possibility of reintroducing high-interest rate deposits by state-owned banks to boost remittances, especially with rising GCC income levels. Assuming full currency floatation and applying Egypt’s current 1-year USD sovereign credit default swap (north of 1,400 bps) together with Egypt-US inflation differential, we believe that 12M T-bill yields could increase to 18.3%, from 16.4% currently. At this rate, Egypt’s 12M T-bills will be offering a real yield of 288 bps (given our 12M inflation estimate of 12.7% and a 15% tax rate for European and US investors) compared to a real return on the US 2-year notes of negative 265 bps (given 1-year notes yield of 3.10%, Bloomberg average 12M inflation estimate of 5.75% and assuming no taxes). That said, we expect the MPC to hike policy rates by 200 bps in its upcoming meeting.”

It is worth mentioning that, in its last meeting on 23 June, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to keep key policy rates unchanged after increasing it by 300 bps y-t-d, including 200 bps in May and 100 bps in March, concurrent with the Federal Reserve Bank’s (Fed) cumulative interest rate cuts of 225 bps y-t-d. Egypt’s annual headline inflation accelerated to 13.6% in July from 13.2% in the previous month, with monthly inflation increasing 1.3% m-o-m, compared to a decline of 0.1% m-o-m in June, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS).

• CIRA expansion plan implies increasing registered students and revenue at a 2022–29e CAGR of c13% and c25%, respectively, with some pressure on EBITDA due to rising OPEX

• Planned annual CAPEX average EGP940m over the next five years  for CIRA with average debt/equity of 1.19x, on our numbers

CIRA’s expansion plan should reflect in the number of registered students growing at a 2022–29e CAGR of c13%, on our numbers: The company’s Badr University in Assuit (BUA) should start operations next September with six to seven science-focused faculties including physical therapy, nursing, dentistry, and biotechnology. The company plans to add two new faculties annually to reach 16 faculties by 2028e with a total capacity of 24,000 students. The company plans to start the operations of its Cairo Saxony University for Applied Sciences and Technologies (CSU) in 2024e with some four cohorts and add two annually to reach a total of 16 faculties by 2030e, with a total capacity of 32,000 students. CSU will be established under a joint venture between CIRA and Al Ahly Capital, named Al Ahly CIRA for Educational Services, in which CIRA owns 51%. CIRA will own 60% of CSU and Al Ahly Capital 40%. The company also expects to start the operations of its New Damietta university in 2025e with some four faculties and will add two annually to reach 16 faculties by 2031e with a total capacity of 24,000 students. The New Damietta university will be established under a joint venture between CIRA and El Sewedy Capital Holding, named Cairo Egypt for Education (CEE), where CIRA will own 60% of the university and El Sewedy Capital will own 40%. The company plans to increase its higher-education capacity from 25,000 students in Badr University in Cairo (BUC) in 2022 to 105,000 students in all of its universities by 2031e. We, accordingly, incorporate all universities’ expansions and account for the recent change in the university admission system by the Ministry of Higher Education. In the academic year 2020/21, the Egyptian secondary examination system was renovated, leading to a 20 pp decline in average students’ grades. The minimum grades for acceptance into private universities were not adjusted proportionally, leading to a lower number of students’ eligibility for enrollment and hence less utilization of the available seats. As a corrective action, the Supreme Council of Private Universities (SCPU) recently decided to revert to the pre-2020/2021 direct enrollment system, allowing students to apply to universities through their websites. The SCPU has also agreed to adjust the minimum grading for all faculties after the release of secondary-school grades. For K–12. The company currently owns 27 schools, 16 under the Futures brand, serving lower-middle-income families. Two schools under the British Columbia Canadian International School (BCCIS) and one under Saxony International School (SIS) are geared towards the higher-income segment, with the rest of the schools in between. In November 2021, CIRA signed a partnership with The Sovereign Fund of Egypt (TSFE) to provide high-quality, affordable education to all segments and governorates in Egypt. The partnership involves launching two new schools in the Cosmic Village with an investment cost of EGP350m, and plans to start the operations of the first one in 2024e. The company plans to add one new school annually over our 2023–29e forecast period to reach 36 schools with a total capacity of 49,000 students. The Egyptian government’s public-private partnership (PPP) program provides an upside risk to our numbers as the government is offering some 57 schools, of which the company is bidding for 12 schools. The program is under a build, own, operate, and transfer (BOOT) scheme, where the government will offer the land, while the winning company will build and operate the schools for 30 years, after which the ownership will be transferred to the government and the company will be awarded a management contract. The average annual tuition fees for these schools will approximately be EGP18,000/year, fitting well with CIRA’s Future schools brand average annual tuition fees of around EGP14,000–15,000 per student. CIRA’s management believes the program will give them access to highly scarce land in Egypt’s Delta region.

We expect revenue to grow at a 2022–-29e CAGR of c25% with an average EBITDA margin of c47%: We largely maintain our K–12 revenue estimates over our forecast period but downward revise our 2022e revenue estimates by c9% as the Futures brand continues to be the main contributor to K–12 tuition revenue (c61%) as opposed to our earlier assumption of a more pronounced shift towards the high-end brands. For higher-education, we downward revise our 2022–25e revenue estimates by c9% due to a one-year delay in opening BUA in addition to lower-than-expected student registration in BUC as a result of the applied registration process, which took place in the 2020/2021 academic year. Over 2028–31e, we raise our higher-education revenue estimates by c8% to capture revenue from the New Damietta university. Based on our numbers, the K–12 and higher-education expansions imply revenue growing at a 2022–29e CAGR of c25%. We expect rising costs to reflect in K–12 OPEX 8-year CAGR of c14%, with an average EBITDA margin of c28%, down from our earlier estimate of c32%. For higher-education, we expect OPEX to increase at 2022–29e CAGR of c33%, reflecting the launch of BUA in 2023e, CSU in 2024e, and New Damietta university in 2025e. We note that universities will break-even in the third year of operations and start making profits in the fourth year. We accordingly expect the higher-education EBITDA margin to decline from c67% in 2021 to an average of c58% over our forecast period, largely unchanged from our previous estimate of c59%.

CIRA secured all the land for its planned expansions and is working on securing diverse funding sources for its CAPEX plan: The company has already secured a 40-acre land plot in Badr City for its CSU for EGP873m, paid 15% as a down payment, and the rest payable over ten years ending 2031. It also purchased a 58-acre land plot for its New Damietta university for EGP1.06bn, paid a 15% down payment, and the rest payable over ten years ending 2031. The company expects no more land additions over our forecast period. According to management guidance, we raise our 2022–26e CAPEX estimates c31% to EGP4.55bn from EGP3.46bn previously to reflect New Damietta university, which was not fully captured in our earlier estimates, rising prices of construction material and the March 2022 EGP depreciation. The company plans to allocate its 2022–26e CAPEX spending of EGP4.55bn as follows: (1) EGP1.07bn for K–12 schools, (2) EGP1.18bn for BUA, (3) EGP990m for CSU, and (4) EGP1.25bn to New Damietta University. We expect the planned CAPEX to reflect in higher debt (including land liabilities)-to-equity ratio from 1.24x in 2021 to an average of 2.11x in 2022–23e and gradually decline to 0.77x in 2026e. Recently, the company obtained an EGP348m loan from Al Ahli United Bank (AUB) at a floating rate of 1%+ corridor rate, better than its previous loan from AUB at 2.5% markup. The new AUB loan has a 2-year grace period with principal payments starting 2024. The company also secured an EGP260m loan from Qatar National Bank Al Ahli (QNBA EY) at a floating rate of 1%+ corridor rate, better than its previous loan from QNB at a 1.5% markup, including a 2-year grace period with principal payments starting in 2024e. To diversify the funding sources, the company’s board called the EGM to convene to look into starting a 3-year EGP2.0bn securitization program against future cash flows, with the first issuance expected to amount to EGP800m. On our calculations, we account for the company’s future funding needs as bank loans with an interest rate of 1% above the corridor rate, similar to recent terms of bank debt secured by the company.

• HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled June 23^rd and based on Egypt’s current situation, they expect the CBE to keep interest rates unchanged  

Head of macro and financials at HC, Monette Doss commented: “The May inflation figure came in lower than our estimate of 14.0% y-o-y, and we expect it to average 14.4% over the rest of the year, however, well above the CBE’s inflation target of 7% (+/-2% for 4Q22). We believe inflation is largely imported and reflects some product shortages due to less domestic manufacturing and lower importation. Egypt’s PMI came in at 47.0 in May, with the data pointing to low consumer spending, falling new order volumes at the quickest pace since 2020, and reduced business input purchases and staffing. We believe that consumer and business spending is largely subdued, with much of the liquidity directed to high-yield banking deposits. As of April 2022, local currency deposits increased to c66% of GDP from the pre-pandemic level of c49% in April 2019. However, domestic credit to the private business sector remained subdued at c20% of GDP in April 2022, slightly up from c16% in April 2019, and below its pre-revolution level of c26% in April 2010. Given the current economic dynamics, we believe that further interest rate hikes will not prove effective in combating inflation and could prove self-defeating by suppressing business activity, leading to more supply shortages. We still believe that carry trade is essential for supporting Egypt’s net international reserves (NIR) given its recent decline to USD35.5bn in May from USD40.9bn in February, the drop in foreign currency deposits not included in official reserves to USD1.04bn in May from USD9.2bn in February, and the widening net foreign liability position of the banking sector to USD12.7bn in April from USD3.29bn in February. However, an overvalued EGP, as indicated by the JP Morgan real effective exchange rate index at 108 bps, the change in outlook on the Egyptian economy to negative from stable by Moody’s, the emerging markets sell-off , and subdued increase in 12M T-bills are hindering carry-trade and diluting the benefit of an interest rate hike, in our view. We note that the yield on 12M T-bills increased by only 90 bps following the 300 bps policy rate hikes, while the yield on 3M T-bills increased by 370 bps. This resulted in low coverage of the longer-term T-bill auctions, reducing the weighted average duration of issued T-bills from 22 March to 16 June to 5.5 months, from 9.8 months (from 1 January to 15 March). Given Egypt’s current 1-year USD credit default swap at 808 bps, and given the Egypt-US inflation differential, we believe interest on 12M T-bill rates should increase to the north of 16.0% to reflect the 300 bps rate hike undertaken so far, to translate to a real interest of 0.27% from -1.73% currently, before resorting to hiking rates further. That said, we expect the MPC to keep rates unchanged in its upcoming meeting.”

It is worth mentioning that, in its last meeting on 19 May, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to increase key policy rates by 200 bps after increasing it by 100 bps in March and following the Federal Reserve Bank’s (Fed) decisions to increase the interest rate by 25 bps in March and by 50 bps in May. The Fed also said that it is likely to increase interest rate by 50-75 bps in its next meeting in July. Egypt’s annual headline inflation accelerated to 13.5% in May from 13.1% in the previous month, with monthly inflation increasing 1.1% m-o-m, compared to an increase of 3.3% m-o-m in April, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS).