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Category: HC News

Inflation levels remain subdued and HC expects the CBE to keep interest rates unchanged

Posted on by Marwa Nakhla

  • In its latest report about their expectations on the likely outcome of the MPC meeting scheduled on 24 September and based on Egypt’s current situation and the inflation levels, HC expects the CBE to keep interest rates unchanged. 

Head of macro and financials at HC, Monette Doss commented: “Inflation levels remain subdued coming in well below the CBE target of 9% (+/- 3%) for 4Q20 and also less than our earlier expectation of 4.2% y-o-y for August, on declining food prices in addition to low consumer spending on other non-food items, in our view. We now expect inflation to average c5% in 4Q20 down from our earlier estimate of c6%. Real interest rates in Egypt reached a high of 4.7% and 7.0% on short-term deposits and loans, respectively, significantly above their 12-year average of -3.3% and 0.8%. We, however, believe that the high real interest rate environment is justified by relatively low liquidity in the banking sector as well as the net foreign liability position held by banks currently. The CBE open market operations, as an indicator for interbank liquidity, declined to c10% of total local currency deposits in August well below its 12-year average (excluding 2011-2013) of c21%. On another front, the banking sector has been holding a net foreign liability position since the massive foreign portfolios outflows that took place in March, however, partially narrowing to USD1.8bn in July. We accordingly expect interest rates, including the 1-year 15% CDs offered by public banks, to remain at elevated levels in order to preserve the banking sector liquidity. A larger scale rebound of foreign portfolio inflows would enhance interbank liquidity and result in cooling off T-bill yields from current levels, in our view. That said, we expect the MPC to keep interest rates unchanged in its upcoming meeting.”

It is worth mentioning that, in its last meeting on 13 August, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to keep rates unchanged for the fourth time after undertaking a 300bps rate cut on 16 March in an unscheduled meeting.  Egypt’s annual headline inflation decelerated to 3.4% in August from 4.2% in the previous month, with monthly inflation declining 0.2% m-o-m compared to an increase of 0.4% m-o-m in July, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS).

HC: Madinet Nasr Housing is further challenged. However, we maintain our OW rating

Posted on by Marwa Nakhla

HC Brokerage issued their update about Egypt’s real estate sector assuring that sector conditions continuing to be difficult due to Coronavirus outbreak and they maintain the OW rating on Madinet Nasr Housing.

  • Sector conditions continuing to be difficult have pushed Madinet Nasr Housing to resort to one-off sales and cash sale discounts to overcome liquidity shortage

  • This has also impacted deliveries which are expected to pick up in 2021e. We forecast revenue to grow at 3-year CAGR of c21% and pre-sales to grow modestly at c3%

  • We maintain our OW rating on Madinet Nasr Housing, while lower our TP c44% to EGP7.05/share; implying a 2020e TP/NAV of 0.35x, while it is trading at half of that

Mariam Elsaadany, real estate analyst at HC Brokerage commented that: “Coronavirus worsens already difficult sector conditions impacting deliveries and pre-sales: Weak affordability has impacted the real estate sector pre-sales in 2019 leading to a muted c7% y-o-y growth, while the coronavirus has further worsened pre-sales and deliveries. Madinet Nasr Housing was no exception especially that it was facing fierce East Cairo competition, in addition to delivery delays. Despite its relatively strong balance sheet (net debt to equity stood at 0.39x in 2Q20), we believe the company has been facing some liquidity shortfall, triggered by the infrastructure spending needs mainly in Sarai, as well as the relaxed payment plans it introduced to the market during the launch of Sarai in late 2016. To resolve this, the company opted to: (1) offer more of its inventory on cash basis after slashing unit prices by up to c50% on some EGP500m worth of inventory, prioritizing cash flows over profitability, (2) resorting to bank debt by signing a EGP2.19bn syndicated loan with a consortium of banks (although management expects to only withdraw some EGP1.40–EGP1.50bn of the facility in 2020), (3) engaging in one-off commercial land plot sales, and (4) launching some EGP1bn of Sarai Mansions, selling residential land to individuals, which offers a different product to the company’s portfolio. It is worth mentioning that the company has delayed its delivery time for new sales currently to 4 years from 3 years previously to accommodate the delays in delivery. The company has been steadily growing its backlog, which grew at a 3-year CAGR of c28%, standing at EGP8.53bn in 2Q20 with 2020 expected to be a strong year for its deliveries as it had targeted to handover some 2,500 units, implying 14.1x y-o-y growth. With the economic implications of the coronavirus affecting all sectors indiscriminately, we believe the company may not be able to meet this target, further affecting the pace of its execution cycle.”

“We expect total pre-sales of EGP14.6bn over 2020–22e implying a 3-year CAGR of c3%: We expect collections of EGP21.8bn over 2020–30e and CAPEX of EGP9.22bn over 2020–25e. Our estimates take into account the launched phases of Taj City (including Tag Sultan, T-Zone, Shalya, Lake Park Studios, and Cobalt) and Sarai (including Taval, Croons Condos, S2, Cavana Lakes, while we exclude future sales from MNHD’s 36% stake in its JV with Palm Hills Developments (PHDC EY, Overweight, TP EGP3.75) Capital Gardens and only accounting for the project’s existing backlog). We expect the company’s backlog to be maintained at current levels as it delivers S1 in Sarai that it launched in 4Q16. Our collection period across the company’s project portfolio is also extended to capture the company’s relaxed payment plans approach in sales as the 7-year and 8-year plan are currently the most prevalent. We exclude the company’s Nasr Gardens from our forecasts and value the project’s inventory at book value. Despite our expectation for delays in deliveries, we expect 2020–25e revenue of EGP19.7bn, with an average gross profit of EGP10.1bn, implying a margin of c51% as the company delivers its backlog. We expect the company’s cash offers to have little impact on its receivables portfolio average collection period and margins, as units sold on cash basis were only around EGP500m, c5% of its receivables portfolio’s balance.” Mariam El Saadany added

The real estate analyst at HC concluded her update on MNHD stating that: “We lower our TP c44% to EGP7.05/share but maintain our OW rating: We use a DCF valuation to value MNHD’s launched real estate phases in its 2 projects, Taj City and Sarai and value the company’s undeveloped land bank by accounting for the present value of the potential cash flows from developing this land in the future, using the master plan for each plot. We exclude future sales from Capital Gardens from our valuation due to lack of visibility on future launches and on the slow sales pace, while only account for the project’s existing backlog. Our 5-year average moving WACC stands at 16.6%. Of our TP, c27% is from DCF and c73% is from land valuation, with the DCF value of launched real estate project at EGP2.90/share, undeveloped land value at EGP5.14/share, while a net debt position of EGP1.42bn shaves off a total of EGP0.99/share and yields a DCF value of EGP7.05/share. Our TP puts the company at a P/NAV of 0.35x, and implies a potential return of c107% over the 25 August closing price of EGP3.41/share, leading us to maintain our Overweight rating. We estimate the stock is trading at a 2020e P/NAV of 0.17x, lower than the peer average of 0.28x. On our numbers, the market is assigning a value of EGP406/sqm to the company’s undeveloped land compared to our valuation of EGP1,395/sqm (c33% lower than our previous value of EGP2,076/sqm), and representing a c71% discount to market prices.”

 

HC: Ex-factory price hike is key for rerating Eastern Company

Posted on by Marwa Nakhla

In its recent report, HC Brokerage presented their updated evaluation of Eastern Company assuring that: “Ex-factory price hike is key for rerating Eastern Company and maintaining our Overweight rating”.

  • Despite resilient product nature, further pricing power limitation lowers our FY20/21–FY23/24e top line estimates by c11%, on average

  • High margins are unlikely to be sustained without outright price increases, in our view

  • We cut our TP c27% to EGP16.2/share on lower estimates, but maintain our Overweight rating on further share price weakness

Noha Baraka, the Head of Consumers at HC commented that: “Limited pricing power, along with a lower USD denominated toll fee, suggest an c11% downward revision to our FY20/21–FY23/24e top line estimates: We are becoming more skeptical about Eastern Company’s margin expansion given its limited pricing power over its products. This was clearly evident following last February’s sales tax hike which was not accompanied with any price benefits for the company. While the new tax brackets mean the cigarettes price could go up by as much as EGP7.50/pack without being subject to a higher lump‐sum tax, we opt to exclude any direct price increases based on the company’s recent pricing strategy. We only account for sales-mix improvement and conservatively assume an annual c1% increase in blended local ex-factory price over our forecast period. This translates to a c13% downward revision to our FY20/21e–FY23/24e blended local ex-factory price estimates. Also, we expect the 2021e renewal of the company’s toll manufacturing agreement with Philip Morris International (PMI), and British American Tobacco (BAT) to kick in at a lower FX rate in light of the EGP appreciation compared to the time of the contract. Our estimates point out to an average rate of EGP16.8/USD down from EGP18.0/USD previously. While several industries got hit during the pandemic, we still assume demand for cigarettes to continue to be fairly resilient thanks to the product’s nature, as the lock-up period, and the working from home environment during the pandemic could cause a further spike in demand. However, we still estimate Eastern Company’s top line growth to be largely muted, growing at a 5-year CAGR c6% over our forecast period, however c11% lower than our previous estimates. We see higher blended ex-factory price as a key catalyst for rerating.”

“High margins are unlikely to be sustained over our forecast period: Over the past couple of quarters, Eastern Company’s gross profit margins have proved quite resilient despite the lack of price increases, mainly on the retailers’ margin cut along with a stronger EGP/USD rate. Despite the limited likelihood of price increases during the next year, and its cost-cutting initiative not kicking in yet, along with the EGP1.5/kg newly imposed development fee on raw tobacco, we still expect high margins to be largely sustained in FY20/21 given that the company is carrying 15 months of inventory procured at a lower EGP/USD rate. We expect Eastern Company’s gross profit margin to stand at 39.4% in FY20/21e, only 0.6 pp lower than our expected FY19/20e estimate and some 2.4 pp lower than our previous estimate. Post FY20/21e, we see margins to contract by some 3.6 pp over our forecast period to 35.8% in FY23/24e. Our SG&A expenses are now c10% lower over our forecast period, but still representing c6% of sales, in line with what management is guiding. This filters through to a c22% downward revision to our FY21/22–FY23/24e EBITDA estimates, leaving our terminal margin at 34.3%. Our new estimates filter through to a c24% downward revision to our EPS estimates on c2% lower net interest income, assuming the company maintains its current raw tobacco inventory level, with any potential interest rate cuts by the Central Bank of Egypt posing a downside risk to our numbers.” Added Noha Baraka.

Noha Baraka concluded that: “Maintain Overweight on share price weakness: In light of our lower estimates, we cut our TP c27% to EGP16.2/share. Our new target price puts the company at a FY20/21e P/E multiple of 8.1x (trading at 6.8x) and EV/EBITDA multiple of 4.5x (trading at 3.6x), and implies a potential return of c28% over the 26 August closing price of EGP12.6/share. We therefore maintain our Overweight rating for the stock. In our view, valuation is compelling, with the stock underperforming the market by c7% since the coronavirus outbreak. Also, dividend yields are becoming more attractive on recent share price drop and we also expect a higher DPO ratio starting FY19/20e on limited CAPEX needs and improved profitability compared to its historical level. In our numbers, we expect the FY19/20e and FY20/21e DPS to stand at EGP1.25/share, implying a dividend yield, net of tax, of 9.4%, and, which is 2.5 pp higher than its 2-year historical average of 6.9%. Based on our FY20/21e DPS estimate and average dividend yield, we arrive to a valuation of EGP17.2/share, which is only c6% higher than our DCF-based valuation, and c36% higher than the current market price, further solidifying our Overweight rating.”

 

HC maintains Overweight for Arabian Cement on a still compelling valuation

Posted on by Marwa Nakhla

No alternative for government intervention, HC maintains Overweight for Arabian Cement on a still compelling valuation

In its latest report, HC Brokerage shed the light on the cement industry in Egypt, specifically on Arabian Cement Company (ACC) asserting that: “prices unlikely to find a bottom without direct government intervention, which is now in the cards”

  • Capacity shutdowns outpaced by demand destruction; prices unlikely to find a bottom without direct government intervention, which is now in the cards

  • Lower coal/petcoke/electricity prices, a stronger EGP and lower SG&A expenses offset weak selling prices, giving a breather to Arabian Cement Company’s operating margins, but earnings remain in the red until the end of the year, on our estimates

  • We cut our 2020–23e EBITDA estimates c11% and TP c21% to EGP5.50/share, and maintain Overweight for Arabian Cement on a still compelling valuation

Mariam Ramadan, Head of Industrials at HC commented that: “Demand recovery to take longer than current players can sustain, all else constant: A series of setbacks (from the hit to export markets, to the crackdown on informal housing, to the coronavirus situation, to halting building permits in capitals) has left the industry in dire shape, with 2020 likely marking the fourth year of consecutive decline in sales. The bad news is that we have not bottomed out yet. Prices are still falling today when it is supposedly the good season, before 4Q comes with severe price competition and end-of-year discounts to achieve sales targets and clear inventory. Prospects of a pent-up demand materializing post the lift of the construction ban have been downplayed by sector players, and mega projects, whose contribution had helped keep sales afloat, have peaked. Long-term estimates have also become significantly worse as purchasing power suffers, private investments falter and government investments shift further away from cement-intensive structures. On the supply side, permanent exits have been slow to happen, but at least 10 players have idled production lines, and that was still insufficient to balance the market. Adjusting for idled capacity, utilization rates are effectively c20 pp tighter at least, suggesting prices (1) are far from reasonable, and (2) can no longer be rectified by demand recovery alone, no matter how fast that comes by. Sector economics have reached a level where prices need to rise enough to do away with the current operating losses, bring back idle production lines (we calculate some 25m tpa of “dormant” capacity), generate enough cash to recoup losses incurred over the past years, and pay down debts/shareholder loans.

“Small government support won’t cut it; direct intervention is the only way out: Government efforts have so far been fixated on fuel prices (which are no longer relevant), and the more generic interest rate cuts, electricity price cuts, or market-specific export support incentives. However, the government is now said to be in talks, more seriously than usual, over local sales quotas to try and match supply and demand forces, which in our view will be accompanied by a price floor. At the last reported annual utilization rate of 65%, we calculate a minimum price of EGP820/ton ex-factory, excluding VAT. This is based on the highest production cash cost among current players, not counting for SG&A, interest or depreciation. While Arabian Cement’s volumes would be affected by this arrangement, given its market share is significantly above capacity share (operating at 88% in 1H20, compared to sector average of 57%), such price floor would still be a game changer for the company, taking it back to pre-devaluation profitability, and does not take away its edge as the most cost efficient player (EGP25/ton lower than the second best) and having the biggest export share (unaffected by the quota). The assumption here is that the government will push only as high as to prevent exits (in order to preserve foreign investor sentiment and assuage investors who had yet to recoup capital outlays ahead of the establishment of the new Beni Suef plant, avert layoffs, credit defaults, etc.) and low enough not to entice public dissent. We do not account for this in our numbers, until we have more clarity, likely in September.” Mariam Ramadan added.

“Cut EBITDA estimates c11% but maintain Overweight on compelling valuation: Our new estimates filter through to a downward revision of c11% to each of our 2020–23e EBITDA and 2021–23e EPS forecasts, which leaves our TP c21% lower at EGP5.50/share, implying a c57% potential return on the 12 August closing price of EGP3.51/share. We therefore maintain our Overweight rating for Arabian Cement. With the share price holding its ground over the past year against bad EGX performance, paying out a dividend, and recording losses for the first time in its history, it seems the market is finally starting to see past the current point in the cycle and into long-term value, which remains strong, in our view, despite the worsened short-term fundamentals.” Mariam Ramadan concluded.

HC finds the IMF external account estimates for FY20/21 conservative

Posted on by Marwa Nakhla

HC: “We believe the IMF external account estimates for FY20/21 are more on the conservative side as they reflect c73% y-o-y decline in tourism receipts to USD2.7bn as well as foreign portfolio inflows of USD3.5bn.”

The International Monetary Fund (IMF) expects Egypt’s external funding gap FY20/21 will widen by about a third to USD12.2bn, compared with USD9.2bn a year earlier, as the disruptions caused by the coronavirus pandemic cut into its main sources of foreign currency, it said in its Egypt 12-month Stand-By Arrangement (SBA) report. It anticipates Egypt will cover its funding needs through several sources including the IMF expected to provide USD3.2bn under the SBA and other international financial institutions expected to provide USD2.5bn, in addition to Eurobond sales of USD6.5bn. The IMF said the financing gap has grown on “expectation of weaker FX inflows driven by lower remittances, portfolio flows, and FDI” with the global economic recovery weaker than previously expected. (Bloomberg)

HC’s comment:

“We find the IMF external account estimates for FY20/21 more on the conservative side as they reflect c73% y-o-y decline in tourism receipts to USD2.7bn as well as foreign portfolio inflows of USD3.5bn. Given that direct outbound flights from Eastern Europe and Britain to Egypt’s Red Sea resorts are resuming soon, we believe that FY20/21 tourism receipts could exceed the IMF estimates. Likewise, there is circulating news that foreign portfolio inflows into Egyptian treasuries during the first 2 weeks of July amounted to USD3bn, a trend that we expect to continue during the year given the attractive Egyptian T-bills yields coupled with a stable currency. However, as mentioned in the report, the global economic scene remains uncertain which explains the IMF resorting to conservative assumptions, in our view. The IMF praises Egypt’s commitment to the economic reform that started in 2016 which it believes helped the country acquire the trust of different funding institutions and hence expects the government to successfully secure its funding needs in the international market.”

This content is just for general information.

Despite subdued inflation rates, HC expects the CBE to keep interest rates unchanged

Posted on by Marwa Nakhla

Despite subdued inflation rates, HC expects the CBE to keep interest rates unchanged

  • In its latest report about their expectations on the likely outcome of the MPC meeting scheduled on 13 August and based on Egypt’s current situation, HC Securities & Investment expects the CBE to maintain rates unchanged despite subdued inflation rates. 

Head of macro and financials at HC, Monette Doss commented: “Inflation levels remains subdued coming in well below the CBE target of 9% (+/- 3%) for 4Q20 and also less than expected 4.6% y-o-y for July, which we attribute to low consumer demand arising from increasing unemployment and plunging consumer confidence. This together with a delay in expected tourism recovery prompt us to downward revise our 2H20e average inflation expectation to c6% y-o-y from c8% y-o-y, previously. In our new estimates, we remain cautious accounting for possible supply shocks. We hence, expect monthly inflation to average 0.8% m-o-m in 2H20e up from an average of 0.4% in 1H20. As of June, real interest rate on deposits and loans came in at 3.4% and 5.6%, respectively, significantly higher than their 12-year average of -3.5% and 0.7%. The high real interest rate environment, however, is justified by the low interbank liquidity, global economic uncertainty and the domestic funding gap, in our view. We take the CBE open market operations as a proxy for interbank liquidity. The figure came in at EGP420bn in June representing 13% of total banking sector local-currency deposits, below its 2008-2020 average of 22% (excluding 2011-2014 which witnessed post-revolution liquidity dry-up).”

“Moreover, following the outbreak of COVID-19 in Egypt in March, foreign portfolio outflows from Egyptian treasuries amounted to USD17bn increasing Egypt’s FY19/20e domestic funding gap to USD21bn, representing c6% of GDP, and taking Egypt’s foreign debt to an estimate of USD125bn in June from USD109bn last year. Using the Sharpe ratio for yields on Egyptian treasuries as well as other emerging markets, we believe that at current levels Egypt provides the highest risk-adjusted return coupled with low currency volatility, second only to Argentina whose currency display significantly high volatility. We believe this permits the government to remain on current interest rate levels, despite the increase in funding gap. We believe that this is behind the recent rebound in foreign portfolio inflows into Egyptian treasuries said to amount to USD3bn during the first 2 weeks of July, according to unnamed banking sources. That said and despite subdued inflation rates, we expect the MPC to maintain rates unchanged in its upcoming meeting maintaining the attractiveness of treasury yields to foreign investors and also reflecting relatively tighter liquidity in the Egyptian banking sector.” Monette Doss added

It is worth mentioning that, in its last meeting on 25 June, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to keep rates unchanged for the third time after undertaking a 300bps rate cut on 16 March in an unscheduled meeting.  Egypt’s annual headline inflation accelerated to 5.7% in June from 4.7% in the previous month, with monthly inflation remaining subdued at 0.1% m-o-m up from showing no increase in May, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS).

Investing After Covid-19: Why Invest Now

Posted on by Marwa Nakhla

  • Investing After Covid-19: Why Invest Now: Covid-19 has left the world reeling, and has led to countless infrastructural changes in societies around the globe. Consumers are becoming used to a new reality, and even as the world begins to open up again, things still aren’t back where they were six months ago. In the wake of the global change brought about by covid-19, however, it’s important to band together and support each other so that we can effectively reopen society and begin working together to move into a new future. Now more than ever, we need to help each other heal. That can look like healing through putting your investments into new and emerging industries, through supporting education and health companies that are working to rebuild society, or through supporting other economic activities. No matter what, the importance is that we band together and support each other in healing after the global pandemic. Let’s dive into what that looks like in the investment sector as we rebuild from COVID-19.

  • The Importance of Investing After Covid-19

While investing after Covid-19 may seem counterintuitive, this time is actually even more important for people looking to invest. Covid-19 has left the world reeling and in need of economic stimulation in order to get things up and running again, which is why putting your money in society is ever more important. Many businesses have continuity plans in place for opening their operations back up and for beginning to help society return to normal. These plans are taking into account widespread quarantines, travel restrictions, and school closures all while doing their best to continue operations and assist with the reopening. Investing in reopenings helps society to return to normalcy at a quicker rate and allows for you to start seeing a return on your investment much faster.

  • Investing in the Educational Sector

In the wake of a global crisis, there are several industries that can both provide better support for the economy as well as provide you with a more secure return on your finances. For one, educational institutions are a great choice for investment. As schools begin to reopen, the need for financial support is huge. Egypt is seeing huge profitability in the education sector with higher enrollment numbers in higher education institutions and new online learning platforms. Plus, as more people are stuck indoors with social distancing restrictions, the likelihood of enrolling in online classes and online learning is growing, making your investment more profitable.

  • Investing in the Healthcare Sector

One industry that certainly won’t be declining any time soon is the healthcare industry. Health care facilities are overloaded with patients suffering from covid-19, which is also putting a slow down in treating other ailments and diseases. By investing in healthcare facilities, you help these businesses to expand and support the healing of more people. Egypt’s healthcare industry has been booming in recent years, with modern technology allowing the country to offer more advanced treatments and care for patients. Egypt has also managed to keep covid-19 cases relatively low, thanks to investments in healthcare technology and infrastructure.

  • Investing In Technology

It’s not just education and health care which need strong financial backing in order to help society return to normal. Technological advancements are what make cures, treatments, and vaccines for covid-19 possible. The more support we’re able to give to the technology sector, the quicker we can begin to return to normal. Egypt is at the forefront of the hunt for a vaccine for covid-19, and researchers at Egypt’s National Research Center plan to begin human trials in the next five months. With extensive experience fighting MERS, Egypt is a country that’s already poised for success in creating a workable, lasting solution to prevent the spread of covid-19.

  • Investing in Worker Training

The last major industry where we’re seeing prolific growth and an opportunity for successful investing is in the training industry. Covid-19 has left businesses with the aforementioned contingency plans to carry out, requiring new worker training programs and different workplace protocols. Egypt has seen great success in implementing a covid-19 reopening program and is currently even beginning to allow tourists back into the nation. However, as the country leads the world in reopening travel and business operations, the need for support in creating lasting and careful training programs is also expanding.

  • Investing in Creating Strong Partnerships

Another part of the investing puzzle is partnering with investment companies that understand how to respond to global issues and economic downfall. HC is one of those teams, and with experience in not only helping to rebuild society after the decline of Covid-19 but also after many other issues that the world has faced. After both the international financial crisis of 2008 and the Egyptian revolution of 2011, HC helped investors to make informed and practical decisions that helped them rebuild their finances and achieve success through smart investments. Moving forward from Covid-19 is no different, and again requires the guidance and expertise of a team who understands financial difficulties in the wake of large-scale problems. Using the guidance and knowledge from experts who have tackled these situations before can help you to make smart financial choices that not only benefit you but which benefit society as well.

Are you ready to put your money where it matters? Reach out to the team at HC and start making investments that add value.

Egypt’s Banking Sector, Well shielded

Posted on by Marwa Nakhla

HC Brokerage just issued their report about Egypt’s banking sector asserting that it is facing the Covid-19 outbreak steadily and shared their evaluations of the three banks under their coverage, CIB, ADIB-Egypt and CA-Egypt.

  • Despite our downward GDP revision, Egypt provides attractive risk-adjusted return for carry-trade, while Egypt’s banking sector is strong enough to weather a business slowdown in 2020, in our view

  • CAPEX lending now delayed to 2021, however CIB, ADIB-Egypt and CAE are expected to maintain decent profitability, despite 2020e EPS downward revision, in our view,

  • We remain Overweight on CIB and ADIB-Egypt, and upgrade our rating for CAE to Overweight from Neutral, despite lower valuations for the 3 banks. CIB is our sector pick

Monette Doss, Chief Economist and Head of macro and financials at HC Brokerage declared that: “We lower our TP for CIB by c17% to EGP95.5/share, ADIB-Egypt by c14% to EGP21.8/share, and CAE by c21% to EGP41.0/share; and maintain an OW rating for CIB and ADIB-Egypt, while upgrade our rating for CAE to OW from N. CIB is our top pick: CIB is our top pick due to the bank’s s healthy balance sheet growth, high profitability, good asset quality and high capitalization. Even though we like ADIB-Egypt, we believe the delayed capital increase will continue to be an overhang on the share price. At current levels, we believe CAE is oversold.”

Monette explained: “Despite our downward GDP revision, Egypt provides attractive risk-adjusted return for carry-trade, while Egyptian banks are strong enough to weather a business slowdown in 2020, in our view: We believe tourism, private investment and consumer spending are the main GDP components hit by the COVID-19 outbreak in Egypt. Accordingly, we revised our FY19/20e GDP growth estimates downwards twice from 5.9% to 4.7% and now to 4.0% as we expect the economy to remain flat y-o-y in 4Q19/20e and account for 9M19/20 actual GDP growth of 5.4%. We also revised our FY20/21e GDP growth downward to 3.7% from 6.1% previously. In order to combat the negative effect of the COVID-19, the Egyptian government and the Central Bank of Egypt (CBE) launched several initiatives to support the private sector including a 300 bps rate cut by the CBE in March to stimulate economic activity. Using the Sharpe ratio for different emerging markets, we believe Egypt’s current treasury yields continue to offer relatively attractive risk-adjusted return coupled with low currency volatility. This in our view should lead to regained foreign inflows into the Egyptian treasuries market and therefore result in cooling off T-bills yields as well as banks’ cost of funding, while we expect corridor rates to remain unchanged for the rest of 2020. We believe that Egypt’s strong economic fundamentals will support banking sector profitability, despite our 2020e EPS downward revision.

“CAPEX lending now delayed to 2021. CIB, ADIB-Egypt and CAE to show decent profitability, in our view, despite our 2020e EPS downward revision on lower balance sheet and non-interest income estimates and higher provisioning: The outbreak of COVID-19 since mid-March, has led to a slowdown in business activity in Egypt as the government has implemented some precautionary measures including the imposition of a partial curfew and halting some transportation means. As a result, companies operating in Egypt have decided to delay their CAPEX plans to 2021 and only maintained working capital borrowing. The CBE launched several initiatives to ease the burden on individuals and businesses, including delaying loan repayment for personal and corporate loans for a 6-month period and waiving online fees and commissions. We believe that these initiatives will lower Egyptian banks’ 2020 profitability and pressure its cash flows, however other CBE initiatives of offering subsidized loans to the tourism, industrial, contracting and agriculture sectors provided a breather as the CBE compensates banks for the difference between mid-corridor rate + 2% and the subsidized 8% interest rate paid by these corporates. We revised downward our 2020e deposit estimates for Commercial International Bank, Abu Dhabi Islamic Bank-Egypt, and Crédit Agricole Egypt by an average of c11% in order to account for rising unemployment as well as significant decline in business activity. Similarly, we revise downwards our banks’ 2020e loan estimates by an average of c12% as we now expect investments to shrink by c12% in 1H20e, while maintained fund utilization at c106% for CIB and ADIB-Egypt and at c95% for CAE, as banks allocate their excess liquidity to government treasuries. Looking at asset/liability duration gaps we believe CIB is well positioned to achieve healthy NIMs over 2020e, while high L/D ratio and high local currency portion of loans support CAE’s NIMs. ADIB-Egypt’s significantly long liability duration should result in the lowest 2020e NIMs compared to the 2 other banks, in our view. We revise downwards our 2020e net profit estimates by an average c29% for the 3 banks on lower non-interest income and higher provisioning.” Monette Doss added.

Egypt’s Food & Beverage sector weathering the pandemic

Posted on by Marwa Nakhla

In a recent report, HC Brokerage presented their analysis of Egypt’s food & beverage sector in Egypt and a valuation of the four stocks within their coverage universe in light of the COVID-19 outbreak. HC maintains Overweight for Juhayna, Domty, Oburland and Edita.

  • While the coronavirus outbreak hindered a lot of industries, staples players benefited from panic buying and stockpiling of necessities

  • We expect a more rationalized consumer spending as economic recovery takes time to materialize. We differentiate between stocks based on elasticity of demand, cost outlook, pricing, and profitability

  • Maintain Overweight for all our Egypt’s Food & Beverage sector coverage, especially post recent sell-off. Juhayna is our top pick

Noha Baraka, the Head of Consumers at HC commented that: “Demand for staple products proved to be resilient in light of COVID-19 outbreak: Since the outbreak of the coronavirus in mid-March, the Egyptian government implemented precautionary measures to contain its spread, including a partial curfew and the halt of some transportation means, which resulted in panic buying and stockpiling of essential staple goods by Egyptian consumers. This was further helped by higher demand during Ramadan. On the other hand, companies delivering snack food products witnessed a demand slowdown during the same period of time, which we attribute to less commuting, the closure of schools, universities and sporting clubs, and not to mention consumers shying away from ready-made meals and shifting to healthier options as a precautionary measure. By the end of June, the government started lifting most of these measures, which will help stimulate economic activity, reduce unemployment, which spiked to 9.1% in April, and ultimately improve private consumption which we estimate to grow to 2.0% in FY20/21 from an estimated figure of 0.87% in FY19/20e. Having said that, we believe that the economic slowdown witnessed in the first 4 months of 1H20 took its toll on consumer purchasing power, suggesting that private consumption recovery will take time to materialize, and lead to a more rationalized spending skewed towards staple goods.”

“Companies to fare differently in 2020e; with Juhayna benefiting the most: Demand for staples is proving to be resilient, coupled with the continuation of a favorable cost outlook, which should bode well for F&B companies’ margins. We differentiate between companies based on elasticity of demand, cost outlook, pricing, profitability and FX exposure. Based on this, we see Juhayna standing out in terms of profitability mainly due to its products diversity in unsaturated segments and decent market share. On the contrary, Edita is the most exposed name, in our view, as it mainly targets on-the-go consumption and sells less essential products. We see Obourland offering the best exposure to the cheese sector, across our coverage, given its strength as a readily available product, attainable in underserved areas, having a low exposure to governmental channels, along with its expected revamped cheese packaging with an easy-open feature, which differentiates its offerings from that of competition. Despite that, we see Domty’ s new plain bread product launch as a good shift that could make up for some of the Domty Sandwich lost sales, yet we believe the stock rerating is contingent on the recovery of its core operations.” Baraka added.

“Egypt’s Food & Beverage sector offering compelling valuation; Juhayna is our top pick: The sell-off across the board left valuations undemanding for our Egypt’s Food & Beverage coverage universe, leading us to maintain our Overweight ratings for the 4 companies. We choose Juhyana as our top pick as we believe it is a strong defensive play during economic uncertainty given its well-diversified portfolio with strong presence in staple offerings, which suggests sustained demand. Also, being the most liquid stock across our F&B coverage sets it apart, in our view. We keep the company’s 12-month TP unchanged at EGP10.6/share. We also raise our 12-month TP for Obourland c9% to EGP10.0/share. Although we are fond of Obourland’s business model, yet a catalyst is needed for stock rerating, in our view. Due to lower cheese volumes mainly from lost government sales and lower bakery margins, we cut our 12-month TP for Domty c27% to EGP8.4/share. As for Edita, we cut our 12-month TP c32% to EGP14.7/share, mainly on a weaker demand for snack-food products in 2020e, but still maintain our Overweight ratings for both, on share prices’ weaknesses. We also like Juhayna for its attractive yields and multiples, however, it has higher multiples than Obourland, which we believe is being penalized for its lower stock liquidity. Juhayna is offering a 2021e dividend and FCF yields of c6%, and c12%, respectively, and trading at a 2021e EV/EBITDA multiple of 5.3x, a c44% discount to its peers’ implied multiple of 9.4x.” Baraka Concluded.

HC Comments on the IMF’s approval of a 12-month Stand-by Arrangement (SBA) for Egypt

Posted on by Marwa Nakhla

A 12-month Stand-by Arrangement (SBA) for Egypt was approved by the executive board of the International Monetary Fund (IMF), with access equivalent to SDR3.76bn (about USD5.2bn or c185% of quota) to address balance of payments financing needs arising from the COVID-19, it announced in a press release. The approval of the SBA for Egypt enables the immediate disbursement of about USD2bn, and the remainder will be phased over 2 reviews, it added. The new arrangement aims to help Egypt cope with challenges posed by the COVID-19 pandemic by providing Fund resources to meet Egypt’s balance of payments needs and to finance the budget deficit. The Fund-supported program would also help the authorities preserve the achievements made over the past 4 years, support health and social spending to protect vulnerable groups, and advance a set of key structural reforms to put Egypt on a strong footing for sustained recovery with higher and more inclusive growth and job creation over the medium term. (IMF)

HC’s Comment

“The USD5.2bn SBA will bring Egypt’s total recently secured external financing to USD13.0bn, including the USD2.8bn Rapid Financing Instrument (RFI) from IMF and the USD5.0bn proceeds from the recent Eurobond issuance, which will help in closing the Egyptian banking sector net foreign liability position and support the balance of payment (BOP).”

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