Beruflich Dokumente
Kultur Dokumente
Navigating Egypt
14 December 2009
www.hc-si.com
Research Department
Egypt
Navigating Egypt
60%
50%
40%
30%
20%
10%
0%
13-Dec
10-Dec
9-Dec
8-Dec
7-Dec
6-Dec
3-Dec
2-Dec
1-Dec
The CBE interest rate cutting cycle that started in February 2009
and has seen interest rates fall to an historic low has come to an
end. The CBE is talking hard on inflation and will not tolerate a rise in core
inflation to unacceptable levels. We expect a hike in inflation in 2010 based
on base effects of higher energy prices, a possible reduction in energy
subsidies by the government, and higher commodity prices in world markets
as the global economy recovers.
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
10000
8000
6000
4000
2000
1 09/10Q
4 08/09Q
30EGX
3 08/09Q
2 08/09Q
1 08/09Q
4 07/08Q
3 07/08Q
2 07/08Q
1 07/08Q
30-Nov
4.3%
5.1%
25-Nov
Overweight
14 December 2009
% of Value Traded
A Defensive Play
GDP growth
Egypt
Investment Case
Economic indicators are turning positive but recovery will be slow and pre-crisis growth levels will
now be reached during FY09/10.
Despite the challenges facing the economy, we are overweight on Egypt given the events that have
unfolded in Dubai.
Our top stock picks are Telecom Egypt, Mobinil, NSGB, Maridive, Citadel, and Eastern Company.
The linkages of the Egyptian economy to the developed world represent a risk to domestic growth, given the expectations of a
slow economic recovery in the latter. GDP growth in Egypt declined from the 7% average over the past few years to reach 4.7%
during FY08/09. This rate however, is better than expected given the recent global economic turmoil.
However, we remain cautious as we believe that growth rates have mainly been driven by government spending rather than the
private sector. Growth in the manufacturing sector has been stagnant (3.8%), while the construction sector (the main beneficiary
of government stimulus packages) grew at 12%. The manufacturing sector employs 10.4 % of the total labor force and represents
almost 30% of the economy (including extractions). As such, we would refrain from turning bullish on the macro economy until we
see a recovery in this crucial part of the domestic economy.
Government spending will likely continue in FY09/10 whilst the government awaits the private sector to pick up. The budget for
FY09/10 contains a stimulus package of EGP8 billion; a recent package of EGP10 billion was introduced and was not included in the
budget.
Indicators such as Suez Canal revenues, tourism receipts, foreign direct investments, and exports have already hit their lows and
are starting to shows signs of recovery. Total tourism revenues dropped 3.5% from January to November 2009 compared to the
same period last year. Suez Canal tolls have increased from their February 2009 low of USD301 million to reach USD397 million
and USD365.5 million during October and November, respectively. Net foreign direct investments during Q4 increased to USD2.8
billion, compared to USD1.9 billion during the same period last year. Exports increased from USD5.4 during Q2 FY08/09 to reach
USD5.6 billion and USD5.9 billion during Q3 and Q4 FY08/09 respectively. Given these developments, the outlook for Egypt
remains positive but we do not believe it is enough to reach pre-crisis levels of 7%.
After declining during 2009, inflation has started to pick up, reaching a low of 9% in August and increasing to 13.3% and 13.2% In
October and November, respectively. We expect inflation to rise in 2010 as a result of a rally in commodity prices, as the global
economy recovers and given the import nature of the Egyptian economy, in addition to base effects of higher energy prices. This is
negative given the high degree consumer spending on food and energy related products, and presents a hurdle for the Egyptian
consumer in light of the rise in unemployment and reduced remittances from abroad.
Following the recent interest rate cuts by the Central Bank of Egypt (CBE), it is likely that interest rates will be revised upwards in
2010, given the recent hike in inflation and the shift in focus of the CBE from supporting growth to targeting inflation.
Despite the challenges facing the Egyptian economy, we are overweight on Egypt and advise investors that the Egyptian equity
market will outperform its GCC peers given the recent events unfolding in Dubai.
Strategy Summery
With investors currently digesting the fallout of the risk of the Dubai Debt situation, we highlight a number of key factors that
investors should focus on, demonstrating why the Egyptian equity market will outperform its GCC peers over the interim:
I)
II)
III)
IV)
V)
Banking sector: Strong domestic banking sector with clear ability for large corporations to refinance and access
capital should alleviate any default risk.
Government support: Willingness of the government to support the domestic economy through continued
infrastructure spending, as well as the government's clear position within the corporate sector ,which removes the
risk of moral hazard.
Leverage: The Egyptian equity market is significantly underleveraged compared to GCC peers.
Defensive: Local investors, particularly retail, play a large part in the Egyptian equity market, limiting the effect of a
flight of capital by foreign investors. It is also more mature than its fledgling neighbors, with clearly defined
corporate governance and regulatory framework.
Value: Current valuations within the Egyptian equity market are not expensive.
Egypt
Banking Sector: As the Egyptian sector has stayed clear from the recent debt developments in the region due to its low
integration within the global economy, and abundant liquidity, helps create better earning visibility on the sector. With private
corporate lending making up 72% of total loans in the economy, loan advancement over the year remained almost flat,
synthesizing a slow economy is seen as the only challenge to the sector at current times, with asset quality remaining unaffected.
Despite sluggish corporate lending, considerably under penetrated retail market provide huge potential for lending growth deriving
their strength from domestic demand, unlike elsewhere.
NSGB (TP: EGP36.4/share, upside: 25.4%)
We believe NSGB's retail penetration offers strong growth potential as the corporate segment in Egypt remains a challenge. With
an embedded 15% retail clientele base in addition to a cross selling ratio of 3.4x, we believe the bank to capitalize on higher
lending opportunities than its peer, CIB until macro conditions reverse. Over the course of the year, NSGB remained a cautious
lender focusing on risk management translating to an improvement in its NPL ratio improving to 6.8% from 7.1% during 1H09. We
believe NSGB is set to deliver attractive bottom line growth at a CAGR of 17.9% over our forecasted period compared to a slower
14.9% for CIB.
Real Estate Sector:
The Egyptian property sector is undergoing a transformation driven by new integrated communities and an evolving mortgage
market. We believe that Cairo is the best placed to benefit from these trends, and hence prefer it over second home destinations
(e.g. North Coast and Red Sea). Overall, the sectors dynamics remain robust, characterized by favorable demographic trends and
an expanding middle class. Also, considering that the high end market is saturating, we believe that the low-to mid income market
is likely to drive demand going forward. In Egypt, while affordability remains restrained, we believe that further potential lies in
structural and regulatory reform to address low mortgage penetration. The affordability ratio (housing prices/annual income) in
Cairo ranges between 3.9 for mid-income apartments to 5.3 for high-income villas. While an affordability ratio of 5x is typically
considered reasonable, given the high mortgage rates the effective debt service ratio is high, well above 50% in some cases.
Accordingly, we feel that interest rate reform, as well as easing up home financing, should unlock further potential demand. In
current market conditions we look for high sales backlog, central land bank, and exposure to the hospitality sector.
Talaat Mostafa Group (TP: EGP9.1, Upside: 40%)
TMG has the largest backlog among its peers - standing at EGP28bn - to be realized over the next three to four years, hence
providing strong cash flows and earnings visibility. Also, c90% of the companys land bank is located in Cairo which has the
strongest fundamentals driven by huge pent-up demand and urban migration. Additionally, we like the companys exposure to the
expanding middle-income segment. The company also has exposure to the luxury hospitality sector (780 rooms), which we feel
puts a floor under its valuation. Our target price for TMG implies a 32% discount to NAV.
SODIC (TP EGP105.2, Upside: 27%)
Although SODICs 5.7m sqm land bank is the smallest among the Egyptian developers that we cover, it is more central, divided
between West and East Cairo. Given the prime location of its land, the company mainly targets the high end residential market.
Given the size of its land bank, we believe that this is a sound strategy, despite the limited potential of that segment. Our valuation
for SODIC represents a roughly 50-50% valuation from DCF and land. Our target price for SODIC implies a 30% discount to NAV.
Telecom Sector: We consider the telecom sector as a safe haven in light of the world financial crisis and recent sell-offs.
Consumer telecom spending was not significantly affected by the recent crises. We positively view the strong cash flow generation
ability of Egyptian Telecom companies, particularly TE. The sector presents us a diversified investment story with TE as a play on
yields and Mobinil as a play on growth. Our preferred stock is TE as at such times, investors tend to prefer high yielding stocks.
Telecom Egypt (TP: EGP23.46/share, upside: 40%)
TE offers a diversified business model with exposure to Egypt's fixed and mobile markets. The company has a strong balance sheet
and is a net cash position, at a time where most telecom stocks in the region are in a net debt position. We view TE as a play on
yields, offering dividend and FCF yields of 9.9% and 17.6% for 2009e, unmatched by regional peers. Mobinil deal acts as a positive
trigger for TEs stock given that TE will now offer the only exposure to Egypts lucrative mobile market through its stake in VFE.
The stock is trading at a discount to peers of 18.5% and 29.4% on 2010f PER and EV/EBITDA multiples respectively and we
estimate that TEs stake in VFE is valued by the market at a 38.7% discount to its fair value.
Mobinil (TP: EGP250.04/share, upside: 21%)
We see Mobinil as a play on growth rather than dividends, offering an EPS CAGR of 19% from 2010f-2012f. Mobinil enjoys the
most important two elements of growth: 1) subscriber growth and 2) ability to stimulate usage. Mobinil is the market leader by
subscribers in Egypt's attractive mobile market. And, Given that the market is approaching maturity, we give more weight to usage
as a future revenue driver and Mobinil stands to benefit the most due to having the highest price elasticity of demand for its
services, among local players. Mobinil is an acquisition target and a deal at a price of EGP245/share limits the downside risks to our
valuation. The stock trades at a discount of 11.3% and 18.7% to peers on 2010f PER and EV/EBITDA multiples respectively.
Other:
Macro & Strategy
Egypt
Citadel Capital (TP: EGP14.83; Upside: 55%)
Despite its risky profile, we like Citadel Capital as it trades at a 6% premium to its floor valuation. Recent announcement of a
planned sale of a 6% stake in each of ASEC Holding and United Foundries will enhance the companys cash balance, and assigns a
value to Citadel Capitals largest investment. Share price performance is a concern but we expect volatility to ease and positive
news flow to support the share price.
Eastern Company (TP: EGP150.5; Upside: 27%)
We like Eastern Company for its defensive nature and believe that it is still geared for margin expansion driven by a stronger fee
business as well as expected savings from relocation to a new complex. Other catalysts include new business ventures including an
under-development royalty business and plans to venture into lucrative export markets, as well as a decision on the impending fate
of the company's to-be-evacuated facilities valued at EGP1.2 billion. The stock is currently trading at a 28% discount to its 5-year
historical average P/E and at a 44% discount to peers.
Maridive and Oil Services (TP: USD5.35; Upside: 37%)
We recommend Maridive for its strong earnings visibility. The company has a backlog of USD800 million, around half of which will
be booked in 2010f. The OCS business is set to retain solid numbers with the company expected to receive 2 more pipe-laying
barges by the end of 2010f. Additionally, thesegment already began implementing USD180 million contracts in India as well as the
procurement phase of the USD380 million Aramco Manifa field contract. Despite recent pressures on OSV daily rates, we expect
the segment to continue to deliver solid growth driven by fleet expansion with 9 more vessels to be delivered until 2011f.
Recommendation
Buy
Buy
Buy
Buy
Hold
Hold
Buy
Buy
Buy
Buy
Buy
Hold
Buy
Hold
Hold
Target Price
EGP36.4
EGP: 63.93
EGP105.2
EGP9.1
EGP: 9.5
EGP: 95.0
EGP23.46
EGP250.4
EGP14.83
EGP150.5
USD5.35
EGP17
EGP946
EGP 279
EGP 28.69
Upside
25.4%
20%
27%
40%
32%
18%
40%
21%
55%
27%
37%
6%
28%
9%
20%
Source: HC Brokerage
Egypt
4
2
0
24682004
2005
2006
Egypt
2007
GCC
2008
2009
Turkey
The governance of the central government to respond quickly to the global financial crisis has enabled Egypt to outperform its
regional peers. The continued willingness of the government to support the domestic economy was clarified in the FY09/10a
budget (announced during Q2 FY 09/10 ) which contains a fiscal stimulus package of EGP8 billion, the third of its kind in two years;
on top of the EGP15 billion implemented in 2008-2009. An additional amount of EGP 10 billion is also likely to be added before end
2010. Although this increased spending comes at a cost (see page 12/13, Public Domestic Debt, and rise in Credit Default Swaps),
this should help to boost economic growth and will continue to focus on infrastructure development. A public private partnership
law is due to be reviewed by the legislature shortly, with the intention of combining public and private investments to improve
infrastructure in portable water, wastewater treatment, transportation, health and education. The construction sector will benefit
directly from the stimulus package, as the government will encourage both private and public investment to support housing
projects in the middle and lower ends of the market.
The strong regional performance of the Egyptian economy, when compared to regional competitors, is testament to its resilience
and the strong domestic demand that exists. However, with regional players expected to compete more aggressively for the share
of global demand and FDI investment, which are much lower than those available in the boom years, we do not believe Egypt is
fully out of the global economic slowdown.
Egypt
4
2
0
24682004
2005
Egypt
2006
Turkey
Algeria
2007
Morocco
2008
2009
Tunisia
Egypt
Q1
Q2
2008/2009
Q3
Q4
Q1
Q2
Q3
Q4
6.7
7.6
7.4
7.0
5.7
4.1
4.3
4.5
5.1
5.2
4.0
3.7
3.5
5.1
3.3
8.3
5.7
5.6
4.2
3.9
3.3
5.1
3.2
6.7
1.4
2.0
2.5
2.5
4.5
4.8
4.4
17.3
17.8
16.1
14.6
14.3
1.4
3.4
4.0
-34.4
9.5
3.2
-12.1
-7.5
-71.0
13.8
-12.7
4.1
Net Exports
The quarterly profile of GDP growth for Egypt shows Q2 FY 08/09a as the low point in the cycle, with growth subsequently turning
up. However, national account data must be read with caution, given the time lag in getting accurate data and the subsequent
revisions that often take place, thus the provisional tag given to data as far back as Q1 FY07/08a. In particular, we highlight the
4.3% growth rate achieved in Q3 FY 08/09a. This result is largely due to base effects and the downward revisions to Q3 FY07/08a
data, or more precisely the downward revision to household consumption. If the data had not been revised, the actual recorded
growth rate for Q3 2008/09 would have been 3.8% and not the turn in growth that is otherwise recorded. If household
consumption growth in FY 07/08a had not been revised down, the GDP growth rate in FY08/09 would have been 4.55%.
However, this is a small point on accounting and should not distract investors from the overall growth rate achieved over the last
12-months.
Private Consumption: The quarterly growth rate in consumption has continued to slow, with a low of 3.2% in Q3 FY 08/09 (we
treat the 6.7% growth rate in Q4 FY 08/09a with caution). As we highlighted in our July publication, the rise in unemployment and
loss of spending support through weaker remittances, has curtailed consumers ability to spend. Total remittances for FY08/09a
declined to US$7.8bn (in line with our forecast of US$7.4bn) from US$ 8.6bn in FY07/08a; remittances declined from USD1.9 billion
in Q4 FY08/09a to USD1.8 billion during Q1 FY09/10a. Transfers of workers abroad in Q4 FY08/09a are down 6% QoQ and 32%
YoY. The rise in unemployment to 9.26% in Q3 2009 (check) is slightly lower than our expectation of unemployment to rise to
9.7% but is moving towards the 10% level that we expect to see before unemployment peaks.
Fixed Investment: The rate of capital consumption has dropped precipitously from high double digit levels in FY 07/08a to
negative growth in FY 08/09a. A detailed breakdown of the sector composition of investment is given in table 2 below, along with
the associated growth rates of the economy by economic group.
Egypt
related to the construction sector. Secondly, the rise in commodity related growth in the Petroleum and Gas sectors can be
attributed to the increase in investment spending that has taken place in this group. This was one area within the private domain,
which we did not feel would see a dramatic change in the level of investment and is benefiting from the liquidity that is flooding
into commodity prices.
Sectors
Q1
Agriculture,
Extractions :
a) Petroleum
b) Gas
c) Other
Manufacturing
a) Petroleum
b) Others
Electricity
Water
Construction
Transportation
Communication
Suez Canal
Wholesale &
retail
Financial
services
Insurance
Tourism
Total
2007/2008
Q2
Q3
2008/2009
Q2
Q3
Q4
Q1
1697
1796
2738
1842
1585
1735
1627
1741
2041
5957
0
3950
6055
0
2511
2356
0
7907
5775
6
2084
9826
0
1598
9481
3
2105
10899
0
579.8
1381
0
1798
2023
1504
682
734
5132
2185
53
1117
11649
2443
1226
727
4176
3291
71
1548
11989
3112
1824
667
7016
3171
71
2483
9686
3666
3011
1187
8595
4694
210
1333
6041
2074
1573
844
3344
3233
75
1131
10591
3234
2039
948
4245
3722
122
1690
2693
4826
2612
958
8136
4083
87
1033
1034
2043
1166
1022
1278
1722
1836
4335
5245
2606
1090
5672
2808
147
476
142
144
135
242
83
129
122
4
688
33,530
12
1975
50,650
1
2122
51,905
115
517
63,449
0
1222
43,304
0
1452
52,522
0
1829
56,557
Q4
Q1
GDP Growth
2008/2009
Q2
Q3
2.9
10.0
12.0
9.0
1.9
4.4
1.0
4.6
7.4
6.1
9.5
3.5
11.9
18.5
3.1
4.8
4.7
4.9
3.2
3.8
-2.2
4.1
6.1
6.3
9.3
5.4
19.2
2.1
3.2
11.2
11.6
11.1
5.5
3.0
-5.9
3.5
3.2
7.5
16.1
6.8
13.6
-20.1
3.4
6.0
3.5
7.9
5.1
3.9
-16.6
5.1
4.3
7.9
13.9
6.4
14.6
-21.8
-0.7
-1.7
2.4
-0.2
3.6
6.4
16.9
5.7
3.8
4.5
-4.8
4.1
5.4
7.3
-6.9
4.3
5.9
7.6
14.5
4.5
Q4
104
0
708
44,737
Egypt
Q1
Q2
Q3
Q4
FY08/09 Total
1655
2943.1
1306.2
1036
40.6
43.5
400.1
326.1
294.9
168
61.9
54.8
2.8
5.8
1.6
31.2
274.8
-1288.1
2372.6
2832.5
664.4
1468.4
32.2
106.2
854.3
415.1
362.8
170.6
151.1
8.4
31.4
0.5
0.8
52.3
284.6
-459.9
1211.3
2968.8
826.2
991.7
8.3
46.2
483.7
961.5
844.4
65
739.7
24.8
0.1
6.3
8.5
117.1
189.2
-1757.5
2874.5
4091.7
718
2082.3
21.5
58.4
1493.7
327
252
110.5
84.7
30
18.7
7.9
0.2
75
964.4
-1217.2
8113.4
12836.1
3514.8
5578.4
102.6
254.3
3231.8
2029.7
1754.1
514.1
1037.4
118.0
53.0
20.5
11.1
275.6
1713.0
-4722.7
Q1
2969.1
3659.8
1633.9
1114.8
53.7
86.2
949.4
125.1
117.9
36.5
63.3
13.8
1.3
2.7
0.3
7.2
786
-690.7
Q2
4800.4
5572.5
2066.7
1351.9
127
225.2
887.8
1287.9
1182.4
37.6
107
1034.7
0.5
2.6
0
105.5
866
-772.1
Q3
3482.2
5282.7
1418.3
2011.2
4.6
808.8
948.3
660.2
588.1
42.4
413.2
104.6
3.1
24.5
0.3
72.1
1193
-1800.5
Q4
1984.8
3287.2
1316
636.2
12
129.7
255.6
985.8
859.5
101.2
134.6
434.7
179.8
4.9
4.3
126.3
349.2
-1302.4
FY 07/08*
13236.5
17802.2
6434.9
5114.1
197.3
1249.9
3041.1
3059
2747.9
217.7
718.1
1587.8
184.7
34.7
4.9
311.1
1215.5
-4565.7
The majority of foreign money has been flowing into the energy sector; this is unlikely to change given the governments recent
announcement of new energy exploration contracts with a number of foreign oil companies. Egypt signed six agreements to
explore oil and natural gas with Egypts Tharwa, British Petroleum and IEOC (a unit of Italys Eni SpA) with a total investment cost
of USD2.3 billion. The key issue is the direction of funds to the broader economy.
A most pronounced change in activity is centered on manufacturing, a key growth driver of the Egyptian economy. With a broad
brush, we can hypothesize that the dramatic slowdown in FDI and the lack of capital is impacting the manufacturing sector through
limited capital to facilitate expansionary activity. Although FDI flows were only USD 8.1 billion in FY 08/09a, (which accounts for
approximately 8% of total capital invested), they are directed to the largest segment of the economy and as such have significant
implications for employment.
Egypt
Share (%)
14515
1325.9
57.8
304.7
1686.2
642.2
93
14.7
77
6640.4
3673.1
2008/2009
100
9.13
0.39
2.09
11.61
4.42
0.64
0.10
0.53
45.75
25.31
Share(%)
8744.4
752.7
73.8
174.3
352
242.2
105
723.2
112.1
5927
282.1
100
8.61
0.84
1.99
4.025
2.77
1.20
8.27
1.28
67.78
3.22
The loss of certain growth drivers in the Egyptian economy in FY 08/09a and increased government spending has led to a number
of key developments in the employment demographics of the Egyptian economy
Table 5 looks at the sector composition of employment within the Egyptian economy. The Central Agency for Public Mobilization
and Statistics (CAPMAS) supply a breakdown of the percentage of labour force employed within each sector. By looking at the
total level of employment within Egypt, we are able to back-out the employment levels at the sector level. However, such data
must be treated with caution when the proportion of employment is extremely low, as the data provided is only to one decimal
place and changes in this rate can cause large changes in the level of employment.
Employment peaked in Q4 2007, with the unemployment rate trough taking place some two quarters later at 8.4%. The largest
employer of labour is the agricultural sector (32.2%), followed by Manufacturing (11.1%). Employment in the Building &
Construction and Electricity , Gas and Water sectors have benefited from government investment in these sectors but are likely to
suffer as the fiscal spending program initiated by the government abates. Also, government employees in Public Administration
and Defense and Education are likely to be held constant as governments continue to freeze hiring to control spending costs.
Looking at Manufacturing, employment has dropped from 2.85 million in Q1 2008 to 2.763 million in Q2 2009. This drop in
employment is consistent with the fall in FDI flows over this period of time, as highlighted above. Similarly the Wholesale and
retail trade sector (which employs 10.4% of the workforce) has seen its numbers drop from almost 2.7 million in Q4 2007 to
around 2.6 million in Q2 2009. Note the manufacturing sector, as we have discussed before, is a key contributor to economic
growth and contributed to substantial portion of the 4.7% economic growth achieved in FY 08/09a. We have talked at length
about the importance of FDI and the influence this has on economic growth and believe the slowdown in growth and employment
within Manufacturing, highlights this point. The Wholesale and retail trade sector has not been a beneficiary of FDI, and relies on
domestic finance. However, this is hard to come by, despite banks being cash rich, as SMEs are refused loans by banks and rely
on government sources for funding.
10
Egypt
Q3 2007
7890
Q4 2007
8316
Q1 2008
8121
Q2 2008
8167
Q3 2008
8413
Q4 2008
8178
Q1 2009
8199
Q2 2009
8017
(%)
32.2
25
25
25
50
25
50
25
50
0.2
2671
343
2840
330
2847
297
2674
350
2771
297
2651
325
2577
295
2763
324
11.1
11.1
2450
2282
2476
2473
2499
2601
2577
2589
10.4
2499
2688
2526
2597
2524
2626
2504
2589
10.4
1568
1623
1585
1698
1732
1726
1767
2041
8.2
392
456
495
500
520
475
417
199
0.8
221
203
173
200
148
175
221
199
0.8
539
456
470
500
445
425
393
398
1.6
2279
2257
2105
2098
1979
2101
2062
2191
8.8
2352
613
2485
659
2327
644
2348
649
2078
594
2226
650
2185
614
2191
573
8.8
2.3
613
659
569
599
643
700
614
622
2.5
49
51
50
50
74
75
49
50
0.2
25
24504
8.9
51
2535
9.1
25
24760
9.0
25
24975
8.4
25
24743
8.6
25
25008
8.84
25
24547
9.3
25
24896
9.42
0.1
11
Egypt
20
4.0
10
2.0
0.0
2.010-
4.0-
20-
6.08.0-
30-
10.01Q
Trade Balance
(Services (net
Transfers
2Q
3Q
4Q
Trade Balance
(Services (net
Transfers
Current Account Balance
Egypts main export markets are Europe and the US (which account for circa 70% of demand), therefore export growth and
important FX revenues from exports will remain under pressure due to expectations of a slow economic recovery in these markets.
New Data shows that the current account deficit increased to USD1.5 billion during FY 08/09a, compared to USD1 billion during the
same period last year. The trade balance for Q4 FY08/09 reached USD5.6 billion compared to USD5.5billion in Q4 FY07/08.
However the balance for Q1 FY09/10a reached a deficit of USD7.2 billion, compared to USD7 billion during the same period last
year, as a result of a 34% decline in exports which have reached USD5.4 billion. During the same period, imports declined 16.7%
to reach USD 12.6 billion.
Emerging markets, particularly developing Asian economies, are leading the economic recovery and unless Egypt is able to tap into
these markets, we do not see the trade balance improving in FY09/10a. Moreover, based on the slow recovery projected for
Europe and the US, the manufacturing sector in Egypt will continue to be suppressed. However, with growth returning to these
markets, as detailed by reported Q3 GDP figures, how quickly and by how much can we expect Egyptian exports to recover? The
answer lies with the consumer. Figure 4 looks at the monthly evolution of Egyptian exports and compares this to a weighted index
of US and Eurozone retail sales.
12
Egypt
18000
16000
120
Index
12000
10000
110
8000
105
6000
EGP Million
14000
115
4000
100
2000
95
Examining the country profile of the main destination of exports, Germany, France and Italy are among the top ten countries for
international sales; the UK does not register in the top 10 based on 2009 monthly data. As such, we feel monthly Euro zone retail
sales are a good proxy for European demand. To understand the demand profile for Egyptian exports, we have taken the monthly
US retail sales index, ex autos, and the Euro zone monthly retails sales index and created a joint index, weighted by the proportion
of exports from Egypt to the Euro zone (60%) and the US (40%). The correlation between the two is extremely high, 0.83, given
the density of exports to these two regions. However, if one were to lead retail sales to exports by 9 months, the correlation
increases to 0.91. A time lag of 2-3 quarters is reasonable to expect, given the length of time for orders to be placed and changes
in consumer activity to feed through to the producers in Egypt etc.
That said, the pronounced drop in retail activity in the US and Eurozone are likely to hold back exports from Egypt until consumer
demand in these markets recover. Current data shows the consumer is reluctant to spend. Peak levels of export activity seen in
2008, captured by the Egyptian FY 07/08a, will not be seen until the unemployment rate in the US and Euro zone return back to
the lows of 2007. With economic growth expected to be slow in these two important regions until 2011, another key driver of
Egyptian growth could be put on hold.
USD Million
3200
3000
2800
2600
2400
2200
2000
1Q
07/08
2Q
07/08
3Q
07/08
4Q
07/08
1Q
08/09
2Q
08/09
3Q
08/09
4Q
08/09
Tourism Revenues
13
Egypt
Tourism revenues in FY08/09a declined by USD0.3 billion to reach USD10.5 billion compared to USD10.8 billion last year. This
decline is much lower than what we had expected given the large share of arrivals from Europe, where the economy has been hit
hard by the global recession. However, as we highlighted in the July 2009 Egypt note "Global Recession, Local problem", survey
evidence from tour operators suggested that people were reluctant to fully cancel their holiday plans, preferring to delay their
holiday. This, along with the government's initiative to reduce landing fees, helped slow the decline in tourism revenues. We
expect that tourism arrivals and revenues should pick up in 2010 in line with the recoveries of world economies and concern
surrounding swine flu dissipate.
USD Billion
%
3
2.5
1.5
0.5
10
12
2003
2004
2005
.Remittances from US
2006
2007
2008
2009
2010
14
Egypt
2,500
500
2,000
400
1,500
300
1,000
200
Number of Vessels
600
500
100
0
Number of Vessels
However, revenues have witnessed a slow but steady month on month increase since February 2009, with tolls reaching USD365
million during the month of November 2009. We expect this trend to continue through the first half of 2010 against the assumption
of a slow global economic recovery. We use the Baltic Dry Index as a proxy for global trade and the YoY rate of growth of activity
provides a good guide as to future projections of Suez Canal revenues.
Chart 8: Baltic Dry Index (BDI) a Good Measure for Projecting Suez Canal Revenue
500
50
400
40
30
300
20
200
10
100
0
0
10
100
20
200
30
15
Egypt
1300
1250
1200
1150
1100
1050
1 09/10Q 2 09/10Q 3 09/10Q 4 09/10Q 1 10/11Q 2 10/11Q 3 10/11Q 4 10/11Q
Suez Canal Tolls
Source: HC Brokerage
Loan to Deposit
ratio (%)
52.3
57
Private Sector
credit/GDP (%)
34
60
90
100
96
85
74
100
63
37
47
40
30
73
Per capita
Deposits (USD)
1,645
16
5
Retail/Total
Loans(%)
20
39
7,875
NPL/Gross Loan
(%)
16
5
4
3
7
1
2
29
9
16
47
33
30
29
18
40,000
61
24
3,111
23,417
5,199
Retail Loans
16
Egypt
from international markets, most of the borrowing will be financed domestically and any risk of default or funding is unwarranted in
our view.
For revenue generation, the government may resort to the resumption of a program of reduction of subsidies on energy prices.
Measures to increase tax compliance are being introduced and the new property tax law will be implemented as of January 2010.
This may help in offsetting lower tax revenues resulting from lower economic activity. We expect the Egyptian government will
allow debt to grow in 2010 and will reduce spending and raise taxes in 2011; unless the private sector picks up momentum in
2011, we expect the Egyptian economy to be negatively impacted going forward.
2004/05
2005/06
2006/07
2007/08
2008/09
(%)
Source: Ministry of Finance, HC Brokerage
17
Egypt
20
15
10
Headline Inflation
Core Inflation
HC forecastHeadline Inflation
*Dotted Lines: HC
forecasts
Core Inflation
Inflation in Egypt has declined significantly in 2009, allowing the CBE to implement a series of interest rate cuts between February
and August 2009 to support economic growth. Inflation reached a low of 9% in August 2009, from a high of 23.7% in August
2008. This drop in inflation is attributed to the lagged effects of tight monetary policy, lower commodity prices and slower
domestic and global economic activity. Headline inflation however, has risen sharply with readings in both October and November
2009 exceeding 13%. The CBE attributes this rise to higher fruit and vegetable prices (which are extremely volatile). As a result,
the gap between headline and core inflation has been widening. Core inflation (which excludes fruits and vegetables) has risen
from 6.3% in September 2009 to 6.5% in October 2009 (November core inflation have not been released at the date of
publication).
The CBEs monetary policy committee left interest rates unchanged at its meeting on November 5th and although we expect the
CBE to leave rates unchanged at its meeting on 24th December, the loosening cycle has ended and the language from the CBE is
one of rate tightening to come soon. The tone of the CBE has shifted away from one of stimulating growth and viewing inflation as
a secondary concern, current CBE projections point to a further softening of domestic GDP growth (July 30th, 2009 press release),
to warning "while underlying inflation is expected to remain within the CBE's comfort zone in the period ahead, annual headline
inflation is likely to inch up over the coming months"(September 17th press release). Thus, we could see interest rates hike sooner
rather than later, especially if the Fed begins to raise its rates with growing signs of a sustained recovery in the US economy (see
below for more detail).
We expect the CBE to begin raising interest rates sooner rather than later for several reasons. The Egyptian government could
resume the program of reducing energy subsidies in 2010 (a program which was put on hold during the period of increasing
inflation). Also, as a result of base effects of higher energy prices in 2010, we can expect the rate of inflation to remain high and
the CBE could start raising interest rates again, should this be dictated by higher commodity prices in world markets as the global
economic recovery picks up momentum.
18
Egypt
June 09
July 09
August 09
September 09
October 09
12.5
12.2
13.4
13.4
17.4
22.2
7.9
7.9
7.9
7.9
0.0
0.0
13.4
13.4
13.4
3.4
3.4
3.1
November 09
22.1
0.0
3.7
Housing,Water,Elec.
1.7
,Gas,Fuel
4.2
4.2
3.1
2.5
2.5
2.0
Furniture
3.8
& Equipments
13.1
13.1
10.9
4.8
4.8
4.1
4.6
4.6
4.6
4.9
4.9
4.9
4.1
4.1
2.8
2.8
2.8
2.0
5.2
5.2
-0.1
-0.1
-0.1
-0.1
Health
4.8
Transport
1.9
Communication
-0.1
Recreation
5.8
& Culture
Education
Hotels,Cafes
19.7
4.7
14.9
4.7
6.6
4.7
5.7
4.7
1.0
4.7
5.7
9.4
12.7
8.2
10.2
12.7
8.3
9.9
16.3
8.2
9.9
16.4
9.6
9.0
16.4
10.2
10.7
10.5
24.4
13.2
9.4
10.5
Restaurants
Miscellaneous
Index
24.8
13.2
19
Egypt
5.70
29.0
5.60
30.0
31.0
5.50
32.0
5.40
33.0
5.30
34.0
5.20
35.0
5.10
36.0
Exchange Rates
Exchange Rate
As a consequence of this trade, foreign exchange reserves of the CBE have remained broadly stable. Foreign reserves increased to
USD34.11 billion in November 2009, compared to their low of USD31.18 in April 2009. A significant risk in 2010, is the reversal of
the US dollar carry trade. Although the US Federal Reserve has made it clear that they will not reverse ultra loose monetary policy
any time soon, for fear of making the same mistakes that plagued the US economy following the 1930 recession, as the US
government raised rates too quickly, and in Japan in the 1980s, the recovery in the domestic economy and the risk of asset
bubbles forming will force the hand of the US Fed. However, we do not expect the US fed to move rates higher in H1 2010 but
wait until H2 2010. The market will start to price in the risk of the reversal of the USD carry trade and we could see a depreciation
in the Egyptian pound. This will result in upward inflationary pressures, which will force the CBE to spend some of its FX reserves
to manage a controlled depreciation of the currency. The US Dollar index has recovered some 3% since its end November 2009
and could signal some decline in risk appetite and reversal of the US dollar carry trade.
20
Egypt
VIII)
IX)
X)
Banking sector: Strong domestic banking sector with clear ability for large corporations to refinance and access
capital should alleviate any default risk.
Government support: Willingness of the government to support the domestic economy through continued
infrastructure spending, as well as the government's clear position within the corporate sector ,which removes the
risk of moral hazard.
Leverage: The Egyptian equity market is significantly underleveraged compared to GCC peers.
Defensive: Local investors, particularly retail, play a large part in the Egyptian equity market, limiting the effect of a
flight of capital by foreign investors. It is also more mature than its fledgling neighbors, with clearly defined
corporate governance and regulatory framework.
Value: Current valuations within the Egyptian equity market are not expensive.
I. Banking Sector
The CBE announced on the 2nd of December that the total exposure of banks in Egypt to Dubai World is minimal (under USD100
million), and that the Dubai World loans were fully provisioned by the Egyptian banks involved. With uncertainty surrounding the
extent of exposure of regional banks to Dubai Debt, the limited exposure of Egyptian banks and strong governance to restrict
excessive lending should ensure their outperformance relative to regional peers.
Egypt
Bahrain
Jordan
Kuwait
Oman
Qatar
Saudi Arabia
Turkey
UAE
Loan to Deposit
ratio (%)
54
57
Private Sector
credit/GDP (%)
34
60
90
100
96
85
74
100
63
37
47
40
30
73
Per capita
Deposits (USD)
1,645
Retail Loans
7,875
NPL/Gross Loan
(%)
17
5
4
3
7
1
2
40,000
3,111
23,417
5,199
16
5
Retail/Total
Loans(%)
20
39
29
9
16
47
33
30
29
18
61
24
Egyptian banks have limited their lending to large corporations (approximately 72% of lending portfolio). Although this sector is
not immune from the negative effects of the global economic slowdown, the ability of these organizations to restructure, expand
into the broader North African region, and to capitalize on a robust domestic economy should enable them to maintain profitability.
The real estate dynamics within the Egyptian economy is another positive factor, lending support not only to banks and developers
but also to the broader markets through reduced financial contagion. With supply and demand dynamics in the real estate sector
causing much uncertainty in some GCC markets, as an unknown funding gap to developers impacts bond and equity holders, we
do not see these risks within the Egyptian real estate sector:
The housing market is relatively safe compared to other GCC markets in view of its cash rich nature, due to the late
introduction of mortgage financing in Egypt.
Mortgages are difficult to obtain and as a result there is little risk of mortgages defaults.
Banks face an under-penetrated market, limiting the risk of products being removed from the market and causing funding
21
Egypt
issues to buyers.
There is excess demand for housing units within inner cities, supported by an expanding middle class and urban
migration, which results in little risk of prices moving downwards.
Affordability remains an issue but structural and regulatory reform could help alleviate such concerns going forward.
In our note, Dubai Debt Default Overstated (1st December 2009), we highlighted the problem of Moral Hazard within the GCC
market. Due to complex ownership structures in the GCC region, people incorrectly assumed there was a blanket guarantee of
financial support from the government to Government Related Entities (GREs). With such a misunderstanding, corporate entities
were able to borrow excessively and maintain high credit ratings. Recent announcements from the Dubai government have tried
to remove this moral hazard and place the emphasis on corporations to work with creditors for a satisfactory resolution to the
situation. With limited involvement by the Egyptian government in corporate Egypt there has not been the excessive build up in
debt by corporations. As such, CDS spreads on government debt in Egypt have come back in from the highs on 30 November, and
should continue to contract; this is a positive for the equity market (see chart 14), as investors differentiate between high and low
risk countries
180
160
140
120
100
80
60
700
650
600
550
bps
200
Dubai CDS
500
450
400
350
300
250
(Qatar (LHS
(KSA (LHS
(Egypt (RHS
The relationship between the Egyptian Credit Default Swaps (CDS) and the EGX 30 is extremely close (correlation coefficient = 0.90). The credit market was correctly pricing in the removal of financial risk at the start of 2009 and as a result the equity market
Macro & Strategy
22
Egypt
rallied. Credit spreads started to tighten in mid January but the equity market did not start to rally until early February. The credit
market has also tended to move before the equity market on the down side, as seen by the expansion of credit spreads in May
2009 from 300bps to 400bps in June and again in September from 200 to 250 in October, highlighted in figure 14. On both
occasions the equity market reacted negatively to the increased risk being priced into the domestic market, moving markedly lower
but with a lag of about a month.
7,000
100
6,500
200
6,000
300
5,500
400
5,000
500
4,500
4,000
600
3,500
700
3,000
800
30EGX
Source: Bloomberg
If we are correct in anticipating a contraction for CDS in Egypt, as a result of the low risk nature of the market due to its stable
funding base and historical presence to run a high debt to GDP ratio, the narrowing in spreads should herald a rally in the equity
market.
III. Leverage
The Debt to Equity ratio of corporate Egypt is much lower than in other markets in the GCC region. In a time when cash is king,
we take a look at the Net Debt of listed equities as of the end of December 2008, and measure this relative to the market value of
outstanding equities. Although the reported figures are dated and we do not follow the text book formula for calculating leverage,
our aim is to simply show the under-leveraged status of the Egyptian equity market and we do not view there to be a credit risk
within the region.
Source: Bloomberg
After examining the prudent nature of banks within the Egyptian market, the conservative nature of corporate Egypt to not gear
balance sheets, along with the lack of government involvement that would have allowed corporations to build-up excessive levels
of debt, we do not believe there to be a credit risk within the region.
23
Egypt
IV. Defensive
The Egyptian equity market, as measured by the EGX 30, was at 12,000 in May 2008, then fell 70 per cent in just under a year.
The rise in the market since the low has been a staggering 100%. Before preaching market booms and busts, we would highlight
the sophisticated and strong retail base of investors in Egypt.
The Egyptian equity market remains predominately domestic;
75% of activity is local, with retail representing 60% and
institutional investors representing 40%. Foreigners represent about 25% of the market, with non GCC foreigners accounting for
15-20% and Arabs representing 5-10% of the market. Foreigners have been net buyers of the since the outbreak of the Dubai
Debt Crisis on 25th November. If domestic investors in Egypt are more aware of the macroeconomic conditions facing the country
and region, their reaction to recent events in Dubai , combined with foriengers turning net buyers of the market, could highlight
the defensive characteristics of the equity market.
Dubai (DFM)
6376
2093
2910
5868
6068
6240
6384
6379
1940
1831
2668
2573
1853
2673
6323
6365
6133
6193
1745
1638
1533
1641
2627
2539
2467
2502
-2.8%
-22%
-14%
Saudi Arabia(
TASI)
6356
Oman (MSI)
6386
6357
Qatar (DSM)
7193
6598
6949
7034
6288
6309
6247
6103
5954
-6%
Kuwait
(KSE)
6933
6282
6302
6215
5968
5976
7057
7132
6984
6845
6927
6745
6650
6698
6732
6679
6765
6743
6758
6819
-6.4%
-3.6%
-1.6%
Source: Reuters
In addition, we highlight the maturity of the Egyptian equity market, which is a lot more developed than some of its fledgling
neighbors and should provide further protection to investors. Having experienced two crashes in the last decade, market
participants are well versed in the volatility of the market and have become more sophisticated in being able to identity and invest
in sound companies for the long term. However, the key point to stress and that which distinguishes the Egyptian equity market
from other regional peers is that of the well defined property rights of investors. With well established corporate governance and
corporate disclosure and minimal involvement by the government in terms of equity ownership, investors are provided greater
certainty that their rights are best served by management.
24
Egypt
1/2/2004
1/2/2005
1/2/2006
1/2/2007
1/2/2008
1/2/2009
30EGX
Source: Reuters
V. Value
Chart 16: Egyptian Market PE and DY
Egyptian Market PE
Egyptian Market DY
80
14
70
12
60
10
50
40
30
20
10
0
Jan 00Jan 01Jan 02Jan 03Jan 04Jan 05Jan 06Jan 07Jan 08Jan 09
1/31/2009
1/31/2008
1/31/2007
1/31/2006
1/31/2005
1/31/2004
1/31/2003
1/31/2002
1/31/2001
1/31/2000
1/31/1999
1/31/1998
Egypt
UAE
On a valuation basis, as measured by the trailing PE multiple, the Egyptian equity market has moved up from extremely cheap
levels at the start of 2009, when the market was trading at just three times historic earnings. Currently, the PE multiple and the
cyclically adjusted PE for the market are trading at 10.9x, which is only marginally higher than the market average from 1998 to
2004, of just 10.2x. The market is no longer cheap but is not expensive either, given historic precedence.
Secondly, the
attractiveness of the market on a dividend yield perspective relative to the likes of the UAE is also compelling. The Egyptian Equity
market currently trades on an historic dividend yield of 4.0%, relative to a yield of less than 4% in the UAE. On a simple yield
enhancement basis, and with lower risk of cash flows being diverted to bond holders than equity holders, the switch to Egyptian
equities is further supported.
25
Egypt
Bahrain
Kuwait
Oman
Qatar
Saudi Arabia
Abu Dhabi
Dubai
Metric
PE (x)
Price to Sales (x)
Price to Book (x)
Dividend Yield (%)
PE (x)
Price to Sales (x)
Price to Book (x)
Dividend Yield (%)
PE (x)
Price to Sales (x)
Price to Book (x)
Dividend Yield (%)
PE (x)
Price to Sales (x)
Price to Book (x)
Dividend Yield (%)
PE (x)
Price to Sales (x)
Price to Book (x)
Dividend Yield (%)
PE (x)
Price to Sales (x)
Price to Book (x)
Dividend Yield (%)
PE (x)
Price to Sales (x)
Price to Book (x)
Dividend Yield (%)
PE (x)
Price to Sales (x)
Price to Book (x)
Dividend Yield (%)
2006
16.1
3.4
4.5
1.3
12.5
5.1
2.0
2.5
11.9
2.5
2.3
4.4
15.9
7.5
3.2
2.2
22.2
7.1
5.2
2.0
14.9
7.1
3.0
2.7
2007
15.2
3.1
3.5
1.8
8.9
4.3
1.8
3.4
12.1
5.1
2.4
2.7
12.3
2.7
2.9
4.0
13.5
6.0
3.3
2.9
15.9
4.8
3.4
2.6
13.6
5.5
2.4
2.5
13.2
5.0
2.5
1.7
2008
14.2
2.1
2.7
22.4
18.7
3.7
1.8
4.0
16.7
3.6
0.6
4.0
11.0
2.5
2.8
3.6
13.6
5.5
2.9
2.2
16.5
4.2
2.9
2.7
12.1
4.6
2.4
2.3
11.6
4.0
1.9
2.3
2009
10.9
1.9
1.7
4.0
8.6
2.9
1.0
6.1
13.5
1.2
3.1
4.9
1.7
1.8
4.2
12.7
5.0
1.9
5.8
16.8
3.2
2.0
2.9
8.5
2.0
1.0
4.7
9.7
1.6
0.7
3.7
26
Egypt
Sector Allocation
Events within the GCC region, most notably the Dubai Debt crisis, make us more confident on the Egyptian equity market due to
low exposure to credit default of companies operating within Dubai and much stronger governance within Egypt. Along with our
strategic Buy recommendation on the Egyptian equity market, table 15 outlines HC strategys sector allocation recommendation.
Table 15
Resources
Basic Industries
Industrials
Consumer Cyclical
Consumer Staples
Telecoms
Financials:
Banks
Real Estate
Other
Overweight
Overweight
Overweight
Underweight
Underweight
Overweight
Neutral
Overweight
Overweight
Underweight
Source: HC Brokerage
Resources: The increase in government spending to support domestic economies, which started in early 2009, was discounted
by commodity markets as bullish for a recovery in the global economy- commodity prices surged. With the economic recovery
expected to continue into 2010, we believe commodity prices will continue to do well, albeit with some selling pressure due to
heightened risk aversion at this moment in time. Also, the lowering of interest rates to record lows has fueled a liquidity surge into
commodities. With inflation expected to return to many economies in 2010, due to ultra loose monetary policy, commodities will
provide protection to investors. We recommend an overweight allocation to this sector.
Basic Industries/Industrials: The fiscal expansion by the Egyptian government to pump billions of EGP into the domestic
economy to stimulate demand is expected to continue in 2010, as highlighted above. The key beneficiary of increased spending by
the government is construction companies, as the government focuses on improving domestic infrastructure. With strong domestic
demand for Steel and Cement for such projects, and construction companies expected to be awarded new projects, we maintain
an overweight recommendation in these sectors.
Consumer Cyclicals: Due to the rise in unemployment, which is a lagging indicator, and is expected to rise further before
benefiting from the increase in economic activity, and weak external factors, namely lower remittance from abroad, that support
domestic consumption, and the expected rise in inflation, we are underweight consumer cyclicals.
Consumer Staples: Although we are advocating an allocation to the Egyptian equity market as a defensive play on uncertainty
within the broader GCC region, we do not believe that it is time to overly play a defensive strategy within the Egyptian equity
market. Also, with a lack of large cap stocks within this sector, (as we currently favour large cap stocks to small cap), there is a
lack of depth within the market to invest. However, we do currently like Eastern Tobacco on fundamentals.
Telecoms: The strong cash nature of the Telecom sector and the desire to place some defensive characteristics in the portfolio,
we overweight the Telecom sector, particularly TE. The sector presents a diversified investment story with TE as a play on yields
and Mobinil as a play on growth. Our preferred stock is TE as at such time, investors tend to prefer high yielding stocks.
FINANCIALS
Banks: As highlighted above, Egyptian banks are not heavily exposed to the real estate and construction boom in the GCC region
or the domestic market. Strong governance and a reluctance to lend to SMEs and other high risk groups should see this segment
of the market outperform its regional peers over the coming months, as other banks increase their loan loss provisions.
Real Estate: The real estate dynamic in Egypt is very different from that in the GCC region. Strong demand relative to supply
and the cash nature of transactions, should help the sector outperform regional peers. Also, if inflation returns to the market in
2010, real estate should be a winner.
27
Egypt
We prefer Egyptian banks to GCC players in the current context on the back of better earnings
visibility as the Egyptian sector has stayed clear from the recent debt developments in the region.
Liquidity continues to be solid in the Egyptian banking sector with low utilization levels and better
funding. This in turn would help the banks immediately benefit from the improvement in global
economic conditions without relying on international capital markets.
We remain positive on the Egyptian banking sector and prefer NSGB with exhibits strong earnings
growth and benign credit asset quality, given the current economic environment. Although we have
a Hold on CIB, we find the stock offering value in the short term with its defensive profile in the
current market dislocation.
We remain positive on the banking sector in Egypt which is free of the ongoing issues in the GCC. We reiterate our
positive view on the Egyptian banking sector based on low utilization rates, an under-penetrated market, strong funding, almost no
exposure to toxic assets and insignificant exposure to the troubled real estate sector in the GCC. These attributes translate to a
safe haven, especially in the current global economic climate. We find the sector resilient despite the slowdown in the Egyptian
banking sector which occurred for obvious reasons. FY08/09 GDP growth was 4.7% vs. the 3 year average of 7% due to a
slowdown in Suez Canal revenues and FDI. With corporate lending making up 72% of aggregate sector loans, banks loan portfolios
remained almost flat from FY08 levels. In line with the sector, banks under our coverage showed soft growth as corporate lending
remained constrained, with reluctance in launching new projects. Retail, a relatively smaller portion, was unaffected. Banks have
continued adopting a conservative lending approach and accumulated deposits. Liquidity remains solid in the banking sector with
loan to deposit ratio dropping further to 52%. We find the Egyptian banking sectors liquidity and lack of exposure to major asset
quality concerns, as opposed to the GCC, to be attractive.
Egyptian banks offer better growth potential vs. regional peers. With risk levels rising in the GCC banking sector due to
uncertainty surrounding the Dubai World debt and disclosure drawbacks, we find the Egyptian banking sector offers value with
better earnings visibility and growth potential (to some extent). Banks under our coverage do not have any exposure to Dubai
World and related entities and hence offer better earnings visibility versus regional peers. Currently, there is huge uncertainty in
terms of provisioning in the GCC banking sector after the default of the two Saudi conglomerates and the recent Dubai World
situation. Liquidity may tighten in the GCC if things turn out to be worse than expected. Tapping international capital markets will
prove to be especially challenging. The Egyptian banking sector is at an advantage given its solid liquidity, enabling it to benefit
from the growth once the global economy rebounds. NSGB shows strong earnings growth, ranking second among MENA banks in
terms of eps growth in the next two years, coming just after CBK. We find the stock offering value trading at a FY11e PE of 5.8x
and a return on equity (ROE) of 24%. CIB also exhibits strong profitability with a FY10e ROE of 24%, higher than NSGBs 24%.
Chart 1: Loan growth (MoM) remained soft while liquidity had steadily improved in the Egyptian banking sector
09Feb '
%1.5
1.2%
09Mar '
09Apr'
09May '
1.4%
09Jun '
09Jul '
09Aug'
%56.00
1.2%
0.9%
%1.0
%0.5
09Sep'
0.3%
0.1%
0.6%
0.5%
0.2%
0.5%
0.3%
%53.00
0.0%
-0.1%
%1.0-
Loans
%54.00
0.3%
%0.0
%0.5-
%55.00
Deposits
L/D
-0.3%
%52.00
%51.00
-0.6%
%50.00
28
Egypt
Chart 2: CIB & NSGB outperforming EGX upon Dubai World announcement, showing intact asset quality
CIB
CAR
NSGB
EGX
7200
7000
6800
6600
6400
6200
6000
5800
29
Egypt
Asset quality will continue to improve despite the recent debt events. Given the
recent developments in Dubai, we find the stock to be a safe haven with no adverse impacts
on its loan and investment portfolios and, hence, profitability. NSGB remains a cautious lender
focusing on risk management, translating to an improvement in its NPL ratio. Non-performing
loans to total loans ratio (NPL ratio) improved to 6.8% from 7.1% during 1H09, helped by
lower delinquencies. We expect this positive trend in asset quality to continue into the coming
quarters due to its conservative lending approach. Coverage ratio (loan loss provisions/NPL)
during 9M09 reached 93% and we expect it to improve further to a healthy 98% in FY09e as
the bank continues to book provisions. Loan loss provisioning was 67% lower than our
expectations during the third quarter, supported by recoveries. NSGB is likely to see stronger
recoveries in the coming quarter as well. We would expect coverage to exceed 100%
thereafter.
Benefits from a bigger retail book than its peer CIB, with relatively better growth
potential. During the quarter, NSGB adopted a prudent approach and grew its loan portfolio
by only 3% quarterly, and in line with our expectations. Unlike its peers, the bank limited its
participation in the loan syndications launched during the quarter. Another factor is its
corporate book, representing 85% of the total loan portfolio, which was affected by the
economic environment. Having said that, we prefer NSGB to CIB as it offers better growth
potential with its 15% retail book vs. CIBs 8%. Given the current economic context, the retail
sector provides better growth opportunities whilst corporate appears challenging in Egypt.
NSGBs retail penetration should drive growth, offsetting the negative consequences of the
corporate book to some extent.
NIMs expected to widen in an increasing interest rate environment. NSGB reported a
net income of EGP223.7 million in 3Q09, 7.6% below our forecasts mainly due to margin
compression. However, given the expectation of a rise in interest rates, we would expect this
situation to reverse. During the third quarter, NSGB re-priced loans and deposits following the
Central Bank of Egypt's rate cuts of almost 75 bps in July and September, translating to lower
net interest income. Net interest margin shrank by 40 bps quarterly to 3.45% in 3Q09, while
the bank managed to increase low-cost deposits by 11.3%, helping reduce its interest
expense. We expect NIMs to widen to 3.5% as NSGB re-prices its loan book upwards amid a
tightening interest rate environment.
36.4
29.0
25.4%
Listed on
Bloomberg
RIC
EGX
NSGB EY
NSGB.CA
9,663
1,767
No of shares (m)
333.2
Shareholding Structure
Societe Generale
Free Float
Price Performance Chart
45
40
35
(NSGB (LHS
(ADX (RHS
30
6,000
15
ROAE
ROAA
FY10e
1,612.3
1,868.3
1,604.2
1,859.6
2,494.6
1,083.0
3.43%
2,801.6
1,227.2
3.50%
2,536.6
1,002.7
3.42%
2,846.1
1,204.3
3.48%
29.8
33.0%
67.0%
3.25
1.01
3.47%
8.92
1.77
21.3%
2.2%
33.5
32.8%
73.0%
3.68
0.99
3.43%
7.87
1.45
20.8%
2.2%
30.4
33.4%
73.0%
3.01
0.93
3.22%
9.64
1.41%
19.9%
2.1%
34.2
33.1%
73.0%
3.61
0.98
3.36%
8.02
1.19%
20.6%
2.2%
4,000
10
5
2,000
FY09e
10,000
8,000
12,000
20
Engy El Dishish
Old
FY09e
FY10e
14,000
25
We reiterate our 'Buy' and adjust our TP to EGP36.4. We changed our cost of equity to
12.70% from 12.95% as we reduced the risk-free interest rate to 8.25% to fall in line with the
CBE rate cuts. We have revised our earnings estimates upwards, primarily on the back of
lower provisioning. Given the asset quality situation in the GCC region, we find value in the
stock, which is trading at an adjusted PB for FY10f of 1.45x.
New
77.2 %
22.8%
Index Performance(EGP)
Buy
engy.eldishish@af-hc.com
Germaine Benyamin
+971 42 935 353 (Ext. 382)
germaine.benyamin@af-hc.com
30
Egypt
3Q09a
401,311
173,458
574,769
292,876
281,893
15,818
223,699
3Q08a
359,868
249,970
609,838
284,668
325,171
22,787
247,471
35.4%
31.8%
27,666,430
43,399,470
YoY change
11.5%
-30.6%
-5.8%
2.9%
-13.3%
-30.6%
-9.6%
2Q09a
409,914
176,812
586,726
290,547
296,180
(12,951)
254,991
QoQ change
-2.1%
-1.9%
-2.0%
0.8%
-4.8%
222.1%
-12.3%
3Q09e
415,531
193,624
609,155
289,330
319,825
49,187
242,127
35.1%
25,670,061
36,607,742
7.8%
18.6%
Deviation
-3.4%
-10.4%
-5.6%
1.2%
-11.9%
-67.8%
-7.6%
33.0%
26,875,471
39,009,378
2.9%
11.3%
27,547,357
39,789,565
0.4%
9.1%
Chart 1: Valuation
FY10e PB vs. FY10e ROE
4.00
3.50
3.50
RJHI
RJHI
3.00
FY10e PB
2.50
2.00
1.50
1.00
0.50
0.00
%0
%5
FY10e PB
3.00
BKDBCBK
EGBE
NBK SAMBA
QIB QNB
RIBL
CIB
ARNB NSGB
DHB
CAE
NBAD
BKMB
ABK
CBQ FGB
BURG
CBD
UNB
ADCB
ADIB DIB ENBD
NSGB
%10
%15
%20
%25
%30
FY10e ROE
CBK
SAMBA
QIB
QNB
RIBL
ARNB
CIB
FGB
BKMB
NSGB
NBAD DHB
CBQ
BURG ADIB CBD CAE
DIB
ABK
ENBD EGBE
UNB
HDB
ADCB
2.50
2.00
1.50
1.00
0.50
0.00
0.00
0.50
1.00
1.50
2.00
FY10e ROE/COE
2.50
3.00
RJHI
RIBL
NBK
ARNB
10.0
FY11e PE
CBK
BKDB
12.0
SAMBA
8.0
QIB
CIB
HDB
CAE
6.0
CBD
4.0
2.0
QNB
BKMB
FGB
NSGB
ADIB
ADCB
%35
%40
0.0
%0
%5
%10
%15
%20
%25
%30
EPS Growth FY10eFY11e
%45
31
Egypt
Financial Statements
EGP Million
Income Statement
Interest income
Interest expense
Net interest income
Fees & Commissions
FX Income
Investment income
Other income
Non-interest income
Total income
Total operating expenses
Pre-provision income
Provisions
Associate and other income
Pre-tax income
Income taxes
Net income after tax
Minority interest
Net income
2008a
2009e
2010e
2011e
2012e
2013e
3,020.9
1,772.3
1,427.9
545.3
144.7
55.2
418.1
1,163.2
2,591.1
1,085.0
1,506.1
213.4
4.3
1,297.0
160.2
1,136.9
1,136.9
3,400.7
1,788.2
1,612.5
550.7
173.7
55.3
102.6
882.3
2,494.8
1,164.6
1,330.2
44.7
3.8
1,289.3
206.3
1,083.0
1,083.0
3,875.2
2,006.7
1,868.5
578.2
182.3
65.6
107.1
933.3
2,801.8
1,206.9
1,540.9
134.2
3.9
1,410.6
183.4
1,227.2
1,227.2
4,375.3
2,250.8
2,124.5
607.2
191.5
73.5
74.7
946.8
3,071.3
970.9
2,100.4
189.5
4.1
1,915.0
248.9
1,666.0
1,666.0
4,928.0
2,541.2
2,386.8
637.5
201.0
82.3
77.8
998.7
3,385.4
1,048.5
2,336.9
172.1
4.3
2,169.1
282.0
1,887.1
1,887.1
5,525.6
2,849.4
2,676.2
669.4
211.1
92.2
81.3
1,054.0
3,730.2
1,132.4
2,597.7
196.2
4.5
2,406.0
312.8
2,093.2
2,093.2
Balance Sheet
Assets
Cash & due from central bank
Due from banks
Investments
Gross loans
NPL provisions
Net loans
Other assets
Net fixed assets
Total assets
6,078.9
9,027.2
3,776.3
27,109.1
2,097.9
25,011.2
1,423.7
729.5
46,046.8
12,040.7
6,188.7
4,125.8
29,820.0
2,126.9
27,693.1
1,125.2
399.0
51,572.4
12,252.8
8,664.2
4,620.9
33,547.5
2,231.5
31,316.0
794.2
113.0
57,761.1
10,081.4
12,938.5
5,175.4
37,908.6
2,425.8
35,482.8
821.6
192.8
64,692.4
10,621.5
14,491.1
5,796.4
43,026.3
2,600.5
40,425.8
844.1
276.6
72,455.5
10,844.9
16,230.0
6,492.0
49,050.0
2,772.7
46,277.3
941.3
364.5
81,150.2
Liabilities
Total deposits
Due to banks
Borrowings
Other liabilities
Total liabilities
Shareholders equity
36,889.2
1,460.2
821.5
2,188.4
41,359.4
4,687.4
44,507.4
25.5
845.3
726.7
46,104.9
5,467.5
45,955.4
2,477.2
845.3
2,124.2
51,402.1
6,359.0
52,650.9
1,671.5
845.3
1,831.1
56,998.8
7,693.7
59,758.8
1,890.2
831.7
727.3
63,208.0
9,247.6
66,283.8
2,321.2
831.7
712.5
70,149.1
11,001.1
32
Egypt
Hold
We cut our FY09e and FY10f net income estimates by 9.5% and 9.0%
respectively on the back of weaker non interest income, which more
than offsets the potential NIM expansion. We maintain our 'Hold'
recommendation on the stock, slightly adjusting the target price to
EGP63.93. We adjust our CoE upon CBE rate cuts.
We like CIB as it delivers the best asset quality among its peers. We believe it is a
good candidate for cash allocation at current times in the financial sector. The bank managed
to deliver an NPL ratio of 2.9%, almost flat compared to 1H09. Serving Egypt's top tier
corporate firms, no exposure to Dubai World and related-entities, minimal real estate exposure
(1.3%) and no investments in toxic assets place CIB at an attractive position. We would like to
highlight that the bank's aggressive retail market penetration is likely to pose some upside risk
to delinquencies. NPL ratio is expected to increase to 3.1% in FY09e and FY10f with the
coverage ratio remaining healthy, exceeding 150% levels.
CIB's third quarter net income came in 7.5% below our estimates at EGP410.9
million on the back of lower-than expected non-interest income, which more than
offset better-than-expected net interest income and provisions. Net interest income
beat our estimates by 14.5% as NIMs widened to 3.43% from 3.38% during 1H09, thanks to
interest rates which moved south, helping the bank minimize costly deposits. We expect NIMs
to continue to improve to 3.51% and 3.57% in FY09e and FY10f as the bank should benefit
from reduction in its funding costs. We attribute this to the banks ability to secure cheaper
payroll based deposits and stronger interest income as the CBE is expected to raise interest
rates. On the other hand, weak fee and brokerage income took its toll on non interest income.
Since we do not expect a rebound during the remaining quarter of the year, we cut our noninterest income estimates by 17%.
Loans came in at EGP28.7 billion, below our expectations by a slight 3.5%, in line
with the slow private corporate credit expansion. Given its size and particularly its
corporate book, which represents approximately 85% of its portfolio, CIB was the lead
beneficiary in several loan syndications launched during the quarter. In addition, its loan
portfolio benefitted from expansion of the retail segment. We expect the loan book to see
strong growth during 4Q09 upon the finalization of the deals. Hence, utilization is expected to
rise to 59% for FY09e from 56.5% for 9M09.
We reiterate our 'Hold' and adjust our TP to EGP63.93. We changed our CoE to 12.70%
as we dropped the risk free rate to 8.25%, in line with the CBE rate cuts. We have revised our
earnings estimates upwards mainly on the back of lower provisioning and wider NIMs. The
bank is trading at an adjusted PB for FY10f of 1.65x, 6.2% premium to its implied PB of 1.57x.
According to our 70:30 weighting, we arrived at a TP of EGP363.9, providing an upside of only
15.3%. Although the valuations do not appear compelling under normal circumstances, we
view the stock as a good investment given its defensive profile in the current context when
asset quality poses significant downside risks to earnings.
ROAE
ROAA
FY09e
FY10e
Old
FY09e
FY10e
1,991.4
2,271.3
1,964.1
2,331.4
3,369.9
1,712.4
3.51%
30.5
35.44%
59.0%
5.85
0.92
1.66%
9.47
2.01
26.2%
2.9%
3,853.0
1,940.8
3.57%
33.4
34.41%
58.0%
6.64
0.83
1.50%
8.35
1.65
24.0%
2.9%
3,622.1
1,891.8
3.41%
30.8
32.98%
56.5%
6.47
1.02
1.79%
8.57
1.95
28.6%
3.1%
4,205.7
2,132.1
3.51%
34.8
31.52%
58.0%
7.29
0.91
1.60%
7.60
2.41
25.6%
3.1%
Consensus
FY09e
FY10e
-
63.93
55.4
15.3%
Listed on
Bloomberg
RIC
EGX
COMI EY
COMI.CA
16,213
2,895
No of shares (m)
292,500
Shareholding Structure
Ripple Woods Consortium
Actis Private Equity
Free Float
9.4%
9.3%
81.3%
14,000
60
(COMI (LHS
12,000
50
(ADX (RHS
10,000
40
8,000
30
6,000
20
4,000
10
2,000
Index Performance(EGP)
Engy El Dishish
+202 33328 636
engy.eldishish@af-hc.com
Germaine Benyamin
+971 42 935 353 (Ext. 382)
germaine.benyamin@af-hc.com
33
Egypt
3Q09a
553,400
273,812
827,212
308,248
518,964
26,776
410,941
3Q08a
450,675
245,814
696,489
289,668
406,821
30,170
304,768
Cost/Income
37.3%
41.6%
28,703,858
28,125,016
2.1%
28,809,405
-0.37%
29,731,306
-3.5%
50,836,118
47,823,186
6.3%
50,798,329
0.75%
51,306,313
-0.9%
YoY change
22.8%
11.4%
18.77%
6.4%
27.6%
-11.3%
34.8%
2Q09a
463,774
418,460
882,234
327,045
555,189
19,234
436,548
QoQ change
19.3%
-34.6%
-6.2%
-5.7%
-6.5%
39.2%
-5.9%
3Q09e
483,504
403,837
887,341
328,813
558,528
30,039
444,103
37.1%
Deviation
14.46%
-32.20%
-6.78%
-6.25%
-7.08%
-10.86%
-7.47%
37.1%
Gross loans
Deposit
Chart 1: Valuation
FY10e PB vs. FY10e ROE
4.00
3.50
3.50
RJHI
3.00
3.00
2.50
CBK
BKDB
EGBE
2.00
RIBL
ARNB
1.50
BKMB
ABK
BURG
1.00
0.50
ADCB
ADIB
QNB
NBK SAMBA
QIB
CIB
CAE
CBQ
UNB
DIB
0.00
0%
5%
10%
RIBL
0.50
0.00
NSGB
20%
15%
FGB
1.00
ENBD
QNB
ARNB
CIB
BKMB
NSGB
NBAD DHB
CBQ
BURG
CBD CAE
ADIB
DIB
ABK
ENBD
EGBE
UNB
HDB
ADCB
1.50
FGB
CBD
SAMBA
QIB
2.00
DHB
NBAD
NSGB
CBK
2.50
FY10e PB
FY10e PB
RJHI
25%
0.00
30%
0.50
1.00
FY10e ROE
1.50
2.00
2.50
3.00
FY10e ROE/COE
RJHI
RIBL
NBK
ARNB
10.0
FY11e PE
CBK
BKDB
12.0
SAMBA
QIB
CIB
8.0
HDB
QNB
CAE
6.0
CBD
DHB
4.0
CBQ
DIB ABK
NBAD
UNB
BKMB
FGB
NSGB
ADIB
ADCB
35%
40%
ENBD
EGBE
2.0
0.0
0%
5%
10%
15%
20%
25%
30%
45%
34
Egypt
Financial Statements
EGP Million
Income Statement
Interest income
Interest expense
Net interest income
Fees & Commissions
FX Income
Investment income
Other income
Non-interest income
Total income
Total operating expenses
Pre-provision income
Provisions
Associate and other income
Pre-tax income
Income taxes
Net income after tax
Minority interest
Net income
Balance Sheet
Assets
Cash & due from central bank
Due from banks
Investments
Gross loans
NPL provisions
Net loans
Other assets
Net fixed assets
Total assets
Liabilities
Total deposits
Due to banks
Borrowings
Other liabilities
Total liabilities
Shareholders equity
2008a
2009e
2010e
2011e
2012e
2013e
3,765.2
1,966.5
1,798.7
747.7
345.4
65.0
326.2
1,484.4
3,283.0
1,256.1
2,026.9
410.5
1,616.4
251.0
1,365.4
(5.2)
1,370.6
4,122.1
2,130.7
1,991.4
695.3
397.2
94.5
191.6
1,378.5
3,369.9
1,259.7
2,110.2
91.6
2,018.7
302.8
1,715.9
3.4
1,712.4
4,739.0
2,467.7
2,271.3
806.6
436.9
113.3
224.9
1,581.7
3,853.0
1,393.0
2,460.0
117.0
2,343.0
398.3
1,944.7
3.9
1,940.8
5,426.6
2,743.5
2,683.1
927.5
480.6
91.7
191.8
1,691.6
4,374.7
1,540.9
2,833.8
170.7
2,663.1
479.4
2,183.7
4.4
2,179.3
6,237.6
3,125.1
3,112.6
1,113.1
528.6
104.5
205.8
1,952.0
5,064.6
1,704.9
3,359.7
216.3
3,143.5
597.3
2,546.2
5.1
2,541.1
7,159.0
3,588.4
3,570.6
1,335.7
581.5
119.1
220.1
2,256.5
5,827.1
1,886.7
3,940.4
247.6
3,692.8
701.6
2,991.1
6.0
2,985.2
16,930.0
6,572.2
4,097.9
28,007.9
1,677.6
26,330.3
2,783.1
748.3
57,461.8
15,702.8
5,637.0
9,395.0
30,528.7
1,793.0
28,735.7
2,149.2
1,013.7
62,633.4
25,721.1
4,998.1
5,712.2
33,428.9
1,937.8
31,491.1
2,392.6
1,087.0
71,402.0
29,156.0
6,104.9
6,511.9
37,941.8
2,153.0
35,788.8
2,672.8
1,164.0
81,398.3
32,873.7
7,423.5
7,423.5
43,253.6
2,420.4
40,833.2
2,995.3
1,244.8
92,794.1
37,366.9
8,462.8
8,462.8
49,525.4
2,728.4
46,797.0
3,366.1
1,329.7
105,785.2
48,790.0
229.0
109.3
51,743.5
2,959.1
106.3
57,636.0
1,941.1
124.8
64,308.1
2,877.8
124.5
73,311.2
3,556.9
166.8
83,941.4
4,188.8
199.1
2,467.7
51,596.0
540.3
55,349.2
2,744.6
62,446.6
3,195.7
70,506.1
2,545.0
79,580.0
1,475.0
89,804.2
35
Egypt
Our preferred exposure is Cairo as it is best placed to benefit from underway sector transformation.
TMG is our top pick on EGP28bn backlog, exposure to Cairo, and hospitality business.
We believe the Egyptian property sector is undergoing a transformation driven by new integrated communities and
an evolving mortgage market. Cairo is the best placed to benefit from these trends, and hence we prefer it over second home
destinations (e.g. North Coast and Red Sea). Overall, the sector dynamics remain robust, characterized by favorable demographic
trends and an expanding middle class. Also, considering that the high end market is saturating, we believe that the low-to mid
income market is likely to drive demand going forward.
While affordability remains restrained in Egypt, further potential lies in structural and regulatory reforms to
address low mortgage penetration. The affordability ratio (housing prices/annual income) in Cairo ranges between 3.9 for
mid-income apartments to 5.3 for high-income villas. While an affordability ratio of 5x is typically considered reasonable, given the
high mortgage rates the effective debt service ratio is high, well above 50% in some cases. Accordingly, we feel that interest rate
reform, as well as easing up home financing, should unlock further potential demand.
On the demographic front Egypt represent a solid domestic demand. We estimate that the population of Cairo will grow at
a CAGR of 3% to reach c22m by 2015e. Based on economic growth and changing income distribution expectations, we assume
that the middle to high-income segment will expand by 50bps per annum to reach 28% of the citys total population by 2015e.
Accordingly, we estimate that the relevant target segment (which excludes the low income segment) will grow from 4m at the end
of 2007 to 6.2m by 2015e, at a CAGR of 19%. Furthermore, following historic trends, we assume that the average household size
will fall from 3.85 to 3.65 by 2015e, driven by a changing family structure and upward mobility. Consequently, we forecast that
roughly 565,000 units will be required by 2015e.
In terms of supply, we estimate that at the end of 2006, the number of housing units catering to the middle to
high-income segment stood at 1.1m, or 23.5% overall supply. Based on supply expectations of the regions big five
developers and conservatively assuming that smaller developers make up 50% of total supply, we forecast that our target market
housing supply will reach 1.65m units by 2015e, an addition of 550,000 units over 2006. As highlighted in the right chart above,
we estimate a shortage of c20,000 units by 2015e.
The hospitality industry in Egypt has recorded exceptional growth over the past few years. Based on data collected by
the Ministry of Tourism, the average tourist stay increased from 6.4 nights in 2001 to 8 in 2008, a CAGR of 3.3%. More
importantly, total hotel nights spent grew from 30m to 90m over the same period. That said, the global tourism industry in facing
strong headwinds this year on the back of the financial crisis, and Egypt is no exception. We expect tourist arrival in 2009e to be
10-15% lower compared to last year. Nonetheless, considering the shortage in hotel space and the relatively attractive rates, we
feel that Egypts hospitality industry is well positioned to benefit from the global economic recovery underway. Also, while the
hospitality sector in the Gulf States is dominated by five-star hotels, Egypt has a healthy mix. Given that economic growth is
expected to return to developed markets in 2010e, we could expect tourism numbers to return to 2008a recorded levels of 13
million by end of 2010e, as health concerns surrounding swine flu quickly dissipates as it did following the bird flu epidemic in
2004-05. Although it remained weak in 2009, historic precedence suggests that tourism numbers tend to recover quickly from
exogenous shocks and economic slowdowns.
On the positive note, the liquidity and gearing position of Egyptian developers remains very comfortable. Lower debt
to equities ratios also provide room to raise debt going forward. While we believe that all the companies under our coverage could
optimize their capital structure by infusing debt, raising equity could be a better option at this stage given the uncertainties
surrounding the pre-sales model. Many real estate companies have recently opted for rights issues as they protect against dilution
and provide the necessary liquidity. Accordingly, we view the recent announcement by SODIC to raise EGP500mn through a rights
issue as a positive indicator for the Egyptian real estate sector. Also, PHDs intention to fund its hotel venture through bond
issuance underlines the return of investor confidence in the sector, in our opinion.
In current market conditions we look for high sales backlog, central land bank, and exposure to the hospitality
sector, which based on, our preferred play is TMG and SODIC. TMG has the largest backlog among its peers standing at
EGP28bn to be realized over the next three to four years, hence providing strong cash flows and earnings visibility. Also, c90% of
the companys land bank is located in Cairo which has the strongest fundamentals driven by huge pent-up demand and urban
migration. Additionally, we like the companys exposure to expanding middle-income segment. The company also has exposure to
the luxury hospitality sector (780 rooms), which we feel puts a floor under its valuation. For SODIC also, we like its Cairo land bank
exposure and backlog worth EGP2.3bn in similar lines with TMG.
36
Egypt
TMG Holding
Buy
Large land bank and EGP28bn backlog provides earnings and cash
flow visibility.
TMG is one of the largest and most diversified real estate developers in
Egypt with a 49m sq m land bank located in Egypt and Saudi. The
development schedule of its land bank extends beyond 2020, mainly driven by
its flagship project Madinaty, divided over 8 phases with phase 1 deliveries set
to commence in 2010, ahead of schedule. In an effort to diversify its exposure,
TMG plans to launch projects in Saudi starting next year. That said, we believe
that over the medium term Egypt is likely to drive its valuation
The hospitality business provides support to TMGs valuation, while an
EGP28bn backlog provides further near term earnings visibility.
Although TMG is largely focused on mid-income housing developments, it also
holds several hotels (780 rooms) targeting the luxury segment. We believe this
recurring income stream provides a floor to the companys valuation considering
the strong hospitality sector fundamentals. Also, TMGs current development
backlog is worth EGP28bn (the highest among the Egyptian players), to be
delivered over the next three to four years. This, we feel, provides more clarity
on earnings potential.
9.1
6.5
40%
Listed on
Bloomberg Code
RIC
EGX
TMGH EY
TMGH.CA
16,317
1,576
13,044
2,393
2,006.8
67.8
12.4
Shareholders Structure
Promoters
Other Major Shareholders
Free Float
49.9%
25.6%
24.5%
300
30EGX
250
TMGH
200
150
100
2008a
3,977
1,237
1,082
591
0
11
2009e
5,927
1,529
1,321
1,173
1
12
0.5x
11.1x
0.6x
0
D
Ankur Khetawat
+971 4 2935387
ankur.khetawat@af-hc.com
Majed Azzam
50
2009c
6,190
1,766
1,683
1,288
1
12
Diff
-4%
-13%
-21%
-9%
-7%
1%
2010f
7,565
2,768
2,507
2,067
1
13
2010c
8,597
2,815
2,743
2,609
1
13
Diff
-12%
-2%
-9%
-21%
-20%
-2%
+971 4 2935385
majed.azzam@af-hc.com
Nermeen Abdel Gawad
+202 3332 8628
ngawad@hc-si.com
6.3x
0.5x
37
Egypt
% of sales
Gross Profit
Margin
2008a
2009e
2010f
2011f
2012f
2013f
3,977
(2,728)
5,927
(4,091)
7,565
(4,234)
7,917
(4,261)
6,389
(3,103)
5,306
(2,377)
69%
69%
56%
54%
49%
45%
1,249
1,836
3,331
3,656
3,285
2,929
31%
31%
44%
46%
51%
55%
(5)
(162)
(167)
1,082
(353)
(162)
(515)
1,321
(507)
(317)
(824)
2,507
(538)
(410)
(948)
2,708
(581)
(467)
(1,048)
2,237
(581)
(490)
(1,071)
1,858
27%
22%
33%
34%
35%
35%
(65)
147
(603)
561
(151)
182
591
(78)
120
2
1,365
(182)
(11)
1,173
(113)
149
5
2,548
(382)
(99)
2,067
123
152
5
2,988
(448)
(112)
2,428
385
155
5
2,783
(417)
(119)
2,246
629
159
5
2,651
(398)
(125)
2,128
15%
20%
27%
31%
35%
40%
Balance Sheet
Cash and Cash Equivalents
Trade & Other Receivables
Development Properties
Development Work in Progress
Other Current Assets
Total Current Assets
Investments in Associates
Long Term Investments
Total Non Current Assets
1,425
6,461
10,306
16,115
34,307
1
391
393
496
2,902
4,000
9,244
17,061
33,703
3
388
391
2,961
2,257
4,153
7,190
13,483
30,044
7
388
395
6,044
1,612
3,206
5,136
9,904
25,901
12
388
400
9,439
967
2,623
3,081
6,325
22,436
17
388
405
10,036
646
1,877
1,027
2,746
16,332
22
388
411
3,798
385
14,918
19,101
53,800
3,697
516
15,565
19,779
53,872
3,583
596
16,521
20,700
51,139
3,475
681
17,421
21,576
47,878
3,371
801
18,436
22,608
45,449
3,273
923
19,056
23,252
39,994
9,925
19,927
23,949
10,218
18,819
24,836
9,134
15,005
27,001
7,146
11,190
29,541
6,167
7,376
31,907
2,266
3,568
34,160
2,017
(2,964)
204
(743)
(4,285)
(2,164)
(6,449)
8,506
1,314
1,425
1,287
(1,170)
161
214
(187)
(436)
(8)
(630)
149
(267)
1,425
1,158
2,166
1,225
261
3,652
(178)
(1,004)
(5)
(1,187)
2,465
1,158
3,623
2,540
1,424
303
4,268
(188)
(992)
(5)
(1,184)
3,083
3,623
6,706
2,365
2,066
352
4,784
(228)
(1,156)
(5)
(1,389)
3,395
6,706
10,101
2,254
(1,007)
395
1,642
(235)
(804)
(5)
(1,044)
597
10,101
10,698
Margin
Net Financing cost
Other fin. Income/charges
Associate Income
Profit before Taxes
Income Taxes
Minority Shareholders' Interest
Net Profit (Loss)
Margin
Basic EPS
38
Egypt
Although SODICs 5.7m sqm land bank is the smallest among the
Egyptian developers that we cover, it is more central, divided between
West and East Cairo. Given the prime location of its land, the company mainly
targets the high end residential market. Given the size of its land bank, we
believe that this is a sound strategy, despite the limited potential of that
segment.
SODIC intends to extend its business model into all diversified real
estate verticals, including commercial and retail, going forward. Also,
the company plans to hold 26% of its portfolio for investment purposes, hence
tapping the attractive Cairo rental market. SODIC has partnered with Lebanese
developer Solidere, which we feel enhances its project design and marketing
capabilities.
We expect SODIC to turn profitable next year as deliveries in Allegria
commence. Also, the companys liquidity position is solid, with almost no
leverage as of 3Q09. In our opinion, the recent rights issue further strengthens
its balance sheet and provides funding for its planned investment portfolio.
We initiate on SODIC with a Buy recommendation and a target price of
EGP105.2, implying a potential upside of 27%. We value the company
using DCF and residual land methods. To be conservative, we do not include
future projects in our DCF, instead we apply a 50% discount to the land bank.
We value SODIC at a -30% discount to its 2009e NAV of EGP151 per share.
Buy
Target Price
Market Price (EGP)
Upside
Listed on
Bloomberg Code
RIC
2008a
232
26
26
26
1
63
88.9
1.3x
2009e
22
-47
-42
-50
-1
66
0.5x
NM
1.2x
2009c
35
-45
-56
-50
-1
Diff
-39%
5%
-25%
0%
5%
2,460
(500)
2937
536
35.6
2.3
12.5
Shareholders Structure
Free Float
Institutions
Individuals
Others
60.1%
28.1%
11.5%
0.3%
30EGX
200
SODIC
150
100
50
0
J
Ankur Khetawat
+971 4 2935387
EGX
OCDI EY
OCDI.CA
105.2
82.6
27%
2010f
427
139
149
130
4
79
2010c
525
186
176
173
5
Diff
-19%
-26%
-15%
-25%
-25%
ankur.khetawat@af-hc.com
Majed Azzam
+971 4 2935385
majed.azzam@af-hc.com
Nermeen Abdel Gawad
22.6x
1.0x
39
Egypt
2008a
2009e
2010f
2011f
2012f
2013f
232
(109)
22
(18)
427
(243)
1,303
(762)
1,418
(822)
431
(245)
% of sales
47%
85%
57%
58%
58%
57%
Gross Profit
123
184
541
596
186
Margin
53%
15%
43%
42%
42%
43%
(103)
(1)
38
(98)
25
(78)
(1)
40
(56)
(53)
(80)
(1)
42
(57)
127
(81)
(1)
44
(58)
484
(77)
(1)
46
(52)
544
(74)
(1)
49
(48)
138
Margin
10%
-250%
30%
40%
40%
30%
12
37
(10)
0
26
11%
1
2
(51)
3
1
(50)
-231%
(1)
26
153
(23)
130
30%
4
58
542
(81)
461
35%
13
70
614
(92)
522
37%
15
84
222
(33)
188
44%
5
Balance Sheet
Cash and Cash Equivalents
Trade & Other Receivables(Current and Non Current)
Amount due from customers
Allegria Development Properties
Other development properties
Other Assets
Total Current Assets
Total Non Current Assets
Property, Plant and Equipment
Investment Properties
Deferred Tax Assets
Total Permanent Assets
Total Assets
238
1,895
2
1,310
1
3,863
4
44
307
23
375
4,242
536
723
2
1,133
775
116
4,646
4
54
303
26
383
5,033
1,363
563
2
1,337
775
116
5,213
4
62
294
26
382
5,600
1,752
402
2
856
775
116
4,658
4
70
286
26
382
5,044
2,026
241
2
233
775
116
3,845
4
78
277
26
381
4,230
2,564
80
2
775
116
3,687
4
86
269
26
380
4,071
2,277
183
1,782
2,664
146
2,223
3,101
146
2,353
2,085
146
2,813
749
146
3,335
402
146
3,524
130
696
11
837
(10)
(10)
827
539
1,365
461
(72)
11
399
(10)
(10)
389
1,365
1,754
522
(249)
11
284
(10)
(10)
274
1,754
2,028
188
349
11
548
(10)
(10)
538
2,028
2,566
SGA Expenses
Other operating expenses
Other Operating Income
Operating Expenses
EBIT (incl Revaluation Gain)
Margin
Basic EPS
37
(83)
71
29
(14)
(217)
(229)
(17)
(217)
6,799
238
(65)
(53)
8
(107)
(14)
(114)
(128)
536
301
238
539
40
Egypt
Palm Hills
Hold
Palm Hills 40m sqm land bank is among the most geographically
diversified in Egypt, spread across Cairo, North Coast, Red Sea, Alexandria,
and Aswan. The company also recently acquired 8m sq m in the two largest
Saudi cities, Riyadh and Jeddah. PHD focuses on both mid- high range Cairo
residential communities as well as high-end second homes in resort towns,
mainly on the North Coast.
PHDs strategy entails the acquisition of attractively priced land plots
in untapped locations, transforming them into high value destinations.
The company has a property sales backlog of EGP9.1bn to be delivered over the
next three to four years, out of which 37% comes from Cairo, and the remaining
largely from the North Coast targeting second home buyers. PHD also intends to
foray into the hotel business through an acquisition.
We expect EPS growth of c29% over the next three years, driven by
unit deliveries. That said, we expect margins to come under pressure over the
same period, due to a shift in the mix from high margin villas (recognized on a
50% threshold of completion) and corresponding land (recognized on signing of
contracts) to apartments (recognized on delivery). Also, we expect the company
to increase its gearing to fund the hotel business.
Target Price
Market Price (EGP)
Upside
9.5
7.16
32%
Listed on
EGX, LSE
Bloomberg Code
PHDC EY, PHDC LI
RIC
PHDC.CA, PHDCQ.L
GDRs to Local Shares
1:5
Enterprise Value (EGPmn)
Net Debt (EGPmn)
Market Cap. (EGPmn)
Market Cap. (USDmn)
Number of Shares (mn)
Daily Turnover (USDm)
Daily Turnover (EGPm)
3.3
18.1
Shareholders Structure
MMID
Free Float
ESOP
Executive Director
54%
36%
3%
7%
30EGX
2007a
535
287
287
322
1.1
2008a
1,235
755
755
633
1.4
6.1
6.3x
5.0x
PHDC
200
150
100
50
0
D
Ankur Khetawat
+971 4 2935387
ankur.khetawat@af-hc.com
5,162
(51)
5,004
913
698.9
2009e
1,033
661
624
548
0.8
5.2
0.5x
9.1x
1.4x
2009c
1,288
697
644
506
0.7
Diff
-20%
-5%
-3%
8%
10%
2010f
2,174
1,113
1,078
1,032
1.5
6.5
4.9x
1.1x
2010c
1,938
1,001
2,171
724
1.0
Diff
12%
11%
-50%
42%
46%
Majed Azzam
+971 4 2935385
majed.azzam@af-hc.com
Nermeen Abdel Gawad
+202 3332 8628
ngawad@hc-si.com
41
Egypt
2007a
2008a
2009e
2010f
2011f
2012f
2013f
535
(142)
1,235
(293)
1,033
(254)
2,174
(949)
3,403
(1,967)
3,084
(1,799)
1,065
(623)
% of sales
27%
24%
25%
44%
58%
58%
59%
Gross Profit
393
942
779
1,225
1,435
1,285
442
Margin
73%
76%
75%
56%
42%
42%
41%
(111)
5
(105)
287
(211)
25
(187)
755
(146)
(19)
10
(156)
624
(110)
(38)
(147)
1,078
(116)
(36)
(152)
1,283
(125)
(35)
(160)
1,125
(125)
(34)
(160)
283
Margin
54%
61%
60%
50%
38%
36%
27%
24
311
11
1
322
(24)
731
(98)
633
34
658
(110)
548
54
1,132
(100)
1,032
48
1,331
(82)
1,248
70
1,194
(17)
1,177
83
365
(2)
363
Margin
60%
51%
53%
47%
37%
38%
34%
3,405
280
720
775
354
1,011
1,691
1,731
12
3,989
1,704
10,867
34
100
7,829
7,963
2,562
16,763
5,023
24,348
43,178
683
4,940
522
6,425
0
471
1,658
2,129
543
48
550
4,879
1,653
779
8,636
0
487
1,411
1,899
592
33
393
4,879
2,064
556
8,246
0
487
1,008
1,495
592
27
236
4,879
849
334
7,309
0
487
605
1,092
592
22
79
4,879
111
6,760
0
487
202
689
592
18
613
9,014
609
8,058
Basic EPS
Balance Sheet
Cash and Cash Equivalents
Notes Receivable (PDC)
Development Properties
Development Work in Progress
Other Current Assets
Total Current Assets
Investments in Associates
Long Term Investments
Notes Receivables (PDC)
Total Non Current Assets
Property, Plant and Equipment
Intangible asset
Other Permanent Assets
Total Permanent Assets
Total Assets
Total Current Liabilities
Total Non Current Liabilities
Shareholder's Equity
Cash Flow Statement
Net profit
Change in Working Capital
Other operating activities
Net cash generated from operating activities
Capex PPE
Advance Payments for investment acquisition
Net cash generated from investment activities
Net cash generated from financing activities
Net addition (deduction) in cash
Cash at beginning of fiscal year
Cash at end of fiscal year
3,748
15,068
24,397
223
(80)
25
167
(451)
(108)
(1,254)
756
(330)
-
591
9,145
707
4,879
1,036
1,001
8,344
0
487
1,815
2,302
591
41
632
11,278
2,681
3,633
2,832
6,926
743
3,609
719
(1,308)
11
(572)
(58)
(362)
(518)
1,359
268
-
779
(325)
24
481
(68)
(16)
(84)
55
451
451
624
11,159
5,936
673
4,550
941
(650)
38
329
(30)
(30)
(244)
55
451
506
618
10,360
4,289
374
5,697
1,146
(1,345)
36
(163)
(30)
(30)
(229)
(422)
506
84
2,194
123
6,697
1,001
(168)
35
868
(30)
(30)
(181)
657
84
742
986
37
7,034
337
354
34
725
(30)
(30)
(15)
680
742
1,422
42
Egypt
Hold
Target Price (CHF)
Market Price (CHF)
Upside
95.0
80.2
18%
Listed on
Bloomberg Code
RIC
EGX, SIX
ODHN EY, ODHN SE
ODHN.CA, ODH.S
2,381
350
1,863
1,864
23.2
0.55
0.54
Shareholders Structure
Promoters
Janus Capital Mgmt LLC
Free Float
Others
60%
6%
10%
24%
30EGX
250
ODHN
200
150
100
50
0
D
Ankur Khetawat
+971 4 2935387
2007a
407
126
126
84
3.6
22
2008a
568
168
202
96
4.1
35
22.1x
3.6x
19.3x
2.3x
2009e
562
162
176
87
3.7
39
0.6x
21.5x
2.1x
2009c
592
190
164
109
4.6
39
Diff
-5%
-15%
7%
-20%
-19%
0%
2010f
698
259
287
147
6.3
45
12.7x
1.8x
2010c
681
266
232
142
6.4
44
Diff
3%
-2%
24%
3%
-2%
2%
ankur.khetawat@af-hc.com
Majed Azzam
+971 4 2935385
majed.azzam@af-hc.com
Nermeen Abdel Gawad
+202 3332 8628
ngawad@hc-si.com
43
Egypt
2007a
2008a
2009e
2010f
2011f
2012f
2013f
407
(258)
568
(371)
562
(389)
698
(452)
825
(531)
769
(447)
650
(413)
% of sales
63%
65%
69%
65%
64%
58%
63%
Gross Profit
149
197
173
246
294
322
237
Margin
37%
35%
31%
35%
36%
42%
37%
SGA Expenses
Other Operating Expenses
Total Operating Expenses
(10)
(13)
(23)
(30)
(34)
(64)
(34)
8
(25)
(32)
17
(15)
(34)
17
(17)
(36)
15
(21)
(38)
13
(25)
126
133
148
231
277
302
212
Margin
31%
23%
26%
33%
34%
39%
33%
(12)
4
(5)
113
(10)
(15)
6
2
(1)
126
(10)
(16)
5
(0)
(9)
127
(16)
(19)
212
(32)
6
282
(42)
23
325
(49)
35
248
(37)
Income Taxes %
-9%
-8%
-13%
-15%
-15%
-15%
-15%
18
84
19
96
24
87
34
147
46
194
39
237
30
181
21%
17%
15%
21%
24%
31%
28%
10
Balance Sheet
Cash and Cash Equivalents
Trade & Other Rec Current and Non Current)
Development Properties
Development Work in Progress
Other Current assets
Total Current Assets
Investments in Associates
Other Financial Assets
Total Non Current Assets
Intangible asset
Property, Plant and Equipment
Permanent Assets
Total Assets
Total Current Liabilities
Total Non Current Liabilities
Shareholder's Equity
87
95
69
161
412
40
40
33
676
708
1,160
337
150
674
177
182
141
188
688
37
46
82
33
857
890
1,660
538
175
947
55
173
514
375
1,117
37
49
86
33
928
961
2,163
908
189
1,066
507
102
569
375
1,553
37
49
86
33
920
953
2,592
1,157
189
1,247
943
47
378
375
1,743
37
49
86
33
912
945
2,774
1,099
189
1,487
1,179
198
375
1,752
37
49
86
33
905
938
2,776
864
189
1,724
1,331
121
375
1,827
37
49
86
33
897
931
2,843
768
189
1,887
112
(94)
28
46
(151)
(10)
(33)
(194)
166
19
6,799
6,814
120
(106)
43
57
(199)
(28)
(40)
(266)
305
96
6,799
177
119
(198)
12
(68)
(10)
0
(10)
29
(49)
177
129
180
264
28
472
(20)
(20)
452
129
581
240
188
28
456
(20)
(20)
436
581
1,017
276
(8)
27
295
(20)
(20)
(39)
237
1,017
1,253
211
(19)
27
219
(20)
(20)
(48)
152
1,253
1,405
Minority Shareholders
Net Profit (Loss)
Margin
EPS
44
Egypt
We consider the telecom sector to be a safe haven in light of the world financial crisis and recent
sell-offs.
offs. Consumer telecom spending is not significantly
ificantly affected by the recent crises.
We positively view the strong cash flow generation ability of Egyptian Telecom companies,
particularly TE.
TE and Mobinil trade at a discount to regional peers on PER and EV/EBITDA multiples for 2010f
Chart 1: Egyptian players outperforming peers and MSCI Telecom EMEA, investors confidence in the sector
MSCI Telecom EMEA
Qtel
NMTC
ZAIN
ORTE
OTEL
EMOB
ETEL
430
330
230
130
30
16.0
Bharti
14.0 Maroc Tel. Telenor
12.0Telefonica
Turkcell Bezeq
WataniyaBelgacom
MTN
10.0
Zain
Cellcom
OTH
Partner
Reliance 8.0
TE
Mobinil
Qtel
6.0
Omantel
4.0
2.0
-
20.0%
10.0%
0.0%
10.0%
20.0%
30.0%
10.0
EV/EBITDA 2010f
PER 2010f
Bharti
Turkcell
8.0
Wataniya
Telefonica
Partner
Omantel
6.0
Belgacom
4.0
TE
Maroc Tel.
Qtel
Bezeq OTH
TelenorCellcom
Reliance
Zain
Mobinil
MTN
2.0
-
2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0% 12.0%
45
Egypt
Chart 3: Telecom players offer decent yields relative to regional peers, especially TE
Dividend yield of Egyptian telecoms relative to peers
(2009e)
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
11%10%
9%
25.0%
8% 8% 8%
20%
18%
20.0%
6%
5% 5% 4%
15.0%
3% 3%
2%
7%
5% 6% 7%
10.0%
1% 1% 1%
5.0%
11%12%12%
9% 10%
0% 1%
0.0%
-5.0%
-1%
46
Egypt
Buy
Target Price
Market Price
Upside
EGP23.46
EGP16.77
39.9%
Mobinil deal acts as a positive trigger for TEs stock given that TE will
now offer the only exposure to Egypts lucrative mobile market
through its stake in VFE.
Listed on
GDRs to local shares
Bloomberg Code
Reuters Code
EGX, LSE
1:5
ETEL EY
ETEL.CA
27.9 billion
-0.7 billion
28.6 billion
5.2 billion
1,707 million
25.2 million
4.6 million
TE posted strong 3Q09 results in line with our estimates. Revenue came in 2.0% below
our expectations due to lower contribution from the wholesale LoB, reflecting seasonality and
the impact of the new agreement signed with VFE offering the latter discounted rates. Despite
recording lower sales, net income came in line with our estimates with a deviation of 1.9% due
to a 16.9% higher than expected contribution from Vodafone Egypt (VFE) on the heels of
surprising EBITDA margin and higher usage. We believe that the wholesale LoB, broadband and
TE North are TEs top line growth saviors and positively view the recent offers introduced by TE
to compete with mobile players. We are estimating a downward trend in TEs EBITDA margin,
reflecting strong competition from mobile players. We forecast net income to grow at a CAGR of
6.7% from 2010f-2012f, backed by hefty contributions from VFE and cost savings.
TE is going through two arbitration cases against VFE and Mobinil in a dispute over
interconnection rates. This dispute has affected VFEs 2009 dividend distributions, as
Vodafone Group preferred not to distribute dividends and wait for the outcome of the
arbitration. We believe that its unlikely that the National Telecommunications Regulatory
Authority (NTRA) would go back on its decision and view this as a way by Vodafone Group to
pressure TE to change its stance with regards to the interconnection rates. We believe that TE is
in a solid position and it's a matter of time before the company starts receiving dividends from
VFE again (by 2010f, in our view). Excluding the withheld dividends from VFE, TE is expected to
close 2009e with a net cash position of around EGP1.4 billion, offering a dividend and FCF yields
of 9.9% and 17.6% respectively for 2009e.
We downplay the effect of the issuance of two triple play licenses on TEs voice
revenue stream given that these licenses wont include voice and would mainly be offering
internet services. Besides, the licenses are not expected to be operational before 2H10. The
winners of these licenses would service compounds with a maximum number of units of 5,000;
anything in excess would be serviced by TE. Also, TE announced that it would roll out fiber optic
cable networks in at least four to five big residential compounds next year, including Katameya.
We maintain our 'Buy' recommendation and increase our target price by 4.7% to
EGP23.46/share, reflecting lower WACC post MPCs rate cuts. The stock trades at a discount
to peers of 18.5% and 29.4% on 2010f PER and EV/EBITDA multiples respectively. The
EV/EBITDA multiples is adjusted to TEs stake in VFE. We estimate that TEs stake in VFE is
valued by the market at a 38.7% discount to its fair value.
Shareholders Structure
Government
Free Float
80 %
20%
EGX30
ETEL
23
21
19
17
15
13
11
N
NematAllah Choucri
+202 3332-8610
nchoucri@hc-si.com
Sarah Shabayek
EGP Million
Revenue
EBITDA
EBITDA Margin
Net income
EPS (EGP)
EPS growth
Net debt/EBITDA (x)
PER (x)
EV/EBITDA (x)*
Dividend Yield
Free cash flow yield
New
09E
10,314
5,093
49.4%
3,235
1.90
32.2%
-0.28
8.85
3.60
9.9%
17.6%
Old
10E
10,397
4,817
46.3%
3,374
1.98
4.3%
-0.57
8.49
3.41
10.0%
16.0%
09E
10,265
4,857
47.3%
3,086
1.81
26.1%
-0.38
9.28
3.61
9.5%
15.5%
10E
10,599
5,042
47.6%
3,441
2.02
11.5%
-0.65
8.32
3.24
10.2%
16.4%
Consensus
09C
10C
10,265
10,599
5,108
5,269
49.8%
49.7%
3,086
3,530
1.82
2.11
22.3%
16.0%
-0.36
-0.75
9.09
8.26
5.47
5.30
8.9%
10.2%
NA
NA
+202 3332-8640
sshabayek@hc-si.com
47
Egypt
3Q09a
9,631
-208
1,506
1,034
2,540
1,261
49.6%
768
30.2%
260
10.2%
2Q09a
9,840
-1,707
1,550
1,127
2,676
1,293
48.3%
741
27.7%
259
9.7%
QoQ
-2.1%
-87.8%
-2.8%
-8.3%
-5.1%
-2.5%
3.6%
0.2%
3Q08a
11,325
58
1,653
1,035
2,688
1,363
50.7%
891
33.1%
203
7.5%
YoY
-15.0%
-458.7%
-8.9%
-0.1%
-5.5%
-7.5%
-13.8%
28.4%
3Q09e
10,699
53
1,433
1,158
2,591
1,245
48.0%
754
29.1%
391
15.1%
Dev.
-10.0%
-494.8%
5.1%
-10.7%
-2.0%
1.3%
1.9%
-33.4%
9M09a
9,631
-2,071
4,524
3,219
7,742
3,830
49.5%
2,410
31.1%
697
9.0%
9M08a
11,325
96
4,558
2,934
7,492
3,667
48.9%
2,015
26.9%
658
8.8%
YoY
-15.0%
NM
-0.7%
9.7%
3.3%
4.5%
19.6%
5.9%
Access
%21
WS
%10
Wholesale
Revenue
%42
Retail
Revenue
%58
Voice
%28
Int'l WS
%31
TE trades at a discount to peers,, TEs stake in VFE valued at a 38% discount to its fair value
nd EV/EBITDA multiple of 3.4x
3.4 (adjusted to TEs stake in VFE),
VFE) which represents discounts of
TE trades at a 2010f PER of 8.5x and
18.5% and 29.4%
% to peers on 2010f PER and EV/EBITDA multiples respectively. We estimate that TEs stake in VFE is valued by
the market at a 38.7% discount to its fair value.
Bharti
Maroc Tel.Telenor
Turkcell Bezeq
Telefonica
Belgacom
10.0
Wataniya
MTN
Zain
Cellcom
OTH
Partner
Reliance
TE
Mobinil
Qtel
Omantel
5.0
10.0
EV/EBITDA 2010f
PER 2010f
15.0
%10.0
Turkcell
Wataniya
Telefonica
Partner
Omantel
6.0
Belgacom
4.0
TE
Maroc Tel.
Qtel
Bezeq OTH
Telenor Cellcom
Reliance
Zain
Mobinil
MTN
2.0
%20.0
Bharti
8.0
%0.0
%10.0
%20.0
%30.0
%2.0
%0.0
%2.0
%4.0
%6.0
%8.0
%10.0
%12.0
48
Egypt
Financial Statements
All figures in EGP Million
Income Statement
Retail Revenue
Wholesale Revenue
Total Revenue
EBITDA Margin
2008a
2009e
2010f
2011f
2012f
2013f
6,181
3,936
10,117
6,065
4,249
10,314
5,818
4,580
10,397
5,936
4,746
10,682
5,997
4,964
10,961
5,932
5,179
11,110
1.2%
1.9%
0.8%
2.7%
2.6%
1.4%
4,600
5,093
4,817
4,879
4,939
4,906
45.5%
49.4%
46.3%
45.7%
45.1%
44.2%
(2,696)
1,904
(2,686)
2,407
(2,406)
2,412
(2,271)
2,608
(2,131)
2,808
(2,001)
2,905
OPM
18.8%
23.3%
23.2%
24.4%
25.6%
26.1%
Investment income
Net Interest
Profit Before Taxes (PBT)
Taxes
Minority Interest
Net Profit
1,180
(118)
2,966
(512)
(6)
2,448
1,347
29
3,782
(541)
(6)
3,235
1,477
93
3,982
(601)
(7)
3,374
1,502
198
4,309
(674)
(8)
3,627
1,547
346
4,700
(757)
(10)
3,934
1,630
495
5,029
(816)
(11)
4,202
24.2%
31.4%
32.4%
34.0%
35.9%
37.8%
1.43
1.90
1.98
2.12
2.30
2.46
2.8%
32.2%
4.3%
7.5%
8.5%
6.8%
1.30
1.67
1.68
1.81
1.96
2.09
90.7%
88.0%
85.0%
85.0%
85.0%
85.0%
Balance Sheet
Intangible Assets
Tangible Assets
Investments
Total Fixed Assets
Total Current Assets
Total Current Liabilities
Total LT Liabilities
Minority Interest
Shareholders Equity
155
18,213
7,009
25,377
8,061
5,663
1,971
38
25,766
128
16,843
7,669
24,640
7,070
5,008
286
47
26,369
102
15,893
8,169
24,164
8,424
5,073
586
54
26,875
77
14,908
8,377
23,361
10,376
5,370
886
62
27,419
51
13,988
8,609
22,647
12,341
5,722
1,186
71
28,009
25
13,214
8,853
22,092
14,130
6,014
1,486
83
28,640
5,211
1,321
(342)
(522)
(823)
(1,706)
3,154
(1,869)
1,408
5,159
704
(192)
(532)
(935)
(2,219)
1,830
(2,504)
(551)
5,077
977
93
(541)
(1,430)
(2,847)
1,329
1,329
5,103
1,294
198
(601)
(1,260)
(2,868)
1,866
1,866
5,163
1,315
346
(674)
(1,185)
(3,083)
1,882
1,882
5,167
1,385
495
(757)
(1,202)
(3,344)
1,744
1,744
0.10
9.1%
(0.28)
9.7%
(0.57)
14.0%
(0.94)
12.0%
(1.31)
11.0%
(1.68)
11.0%
Key Ratios
Net Debt/EBITDA (x)
CAPEX to Sales
49
Egypt
Mobinil
Buy
Target Price
Market Price
Upside
EGP250.04
EGP205.97
21%
Listed on
Bloomberg Code
Reuters Code
EGX
EMOB EY
EMOB.CA
25.5 billion
4.9 billion
20.6 billion
3.8 billion
100 million
19.8 million
3.6 million
We believe that the Egyptian mobile market, with a penetration rate of 68%, still offers
room for growth relative to other markets in the region. However, we believe that the
growth drivers have changed, reflecting the markets stage of growth, approaching
maturity. We give a higher weight to usage and subscribers growth as a future revenue
driver, and a lower weight to value added services. For these reasons, we like Mobinil as
it is the market leader by subscribers (a 46% market share) and the demand for its
services is more elastic than that of Vodafone Egypt (VFE) (Etisalat Misr KPIs are not
publicly disclosed). Mobinils price elasticity of demand in 3Q09 was 1.78 vs. 0.47 for VFE.
Mobinil is seeking to acquire LinkDotNet and has three major upcoming payments with a
total combined value of around EGP2.6 billion, broken down as follows: an EGP750
million 2G related payment that was due in January 2009 but was postponed as the
company did not receive the required frequency (will most probably be paid in 2010), an
EGP750 million 3G payment that is due in January 2010, and an EGP1.1 billion 3G
payment that is due in December 2010. Given the tight credit environment the company
is operating in and the CBE regulations stipulating that banks are allowed to lend only a
certain portion of their total loans to any one client (the banks are linking Mobinils ability
to borrow to its shareholder OTH), the company has resorted to two solutions: 1)
lowering the dividend payout. Mobinil approved a DPS of EGP2.0 for 1H09, suggesting a
dividend payout of 21%, lower than 68% in 1H08 which suggests that total dividends for
2009e will be lower than those in 2008, and 2) issuing bonds with a maximum value of
EGP1.5 billion (USD273 million). We believe that Mobinils decision to lower its dividend
payout in 2009e is well justified.
Shareholders Structure
Free Float
29.0%
Mobinil
51.0%
Consortium*
OTH
20.0%
*Mobinil Consortium is 71.25% owned by France
Telecom and 28.75% owned by OTH.
We rate Mobinil as a 'Buy' based on our DCF target price of EGP250/share, offering a
21% upside. We forecast net income to grow at a CAGR of 19% from 2010f-2012f,
backed by operational growth and deleveraging. The stock trades at a discount of 11.3%
and 18.7% to peers on 2010f PER and EV/EBITDA multiples, respectively.
100
EMOB
50
EGX30
0
N
EGP Million
Revenue
EBITDA
EBITDA Margin
Net income
EPS (EGP)
EPS growth
Net debt/EBITDA (x)
PER (x)
EV/EBITDA (x)*
Dividend Yield
Free cash flow yield
New
09E
10,911
5,138
47.1%
1,892
18.9
-3.9%
0.93
10.88
4.94
3.1%
5.9%
Old
10E
12,272
5,706
46.5%
2,397
24.0
26.7%
0.95
8.59
4.56
7.0%
4.1%
09E
11,211
5,226
46.6%
2,007
20.1
1.9%
1.30
10.26
5.24
6.5%
3.4%
10E
12,237
5,602
45.8%
2,089
20.9
4.1%
1.23
9.86
4.90
6.8%
6.2%
Consensus
09C
10C
10,978
11,894
5,120
5,458
46.6%
45.9%
1,999
1,990
20.0
19.9
1.52%
-3.30%
1.01
1.13
10.41
10.22
4.81
4.51
4.89%
5.76%
N/A
N/A
NematAllah Choucri
+202 3332-8610
nchoucri@hc-si.com
Sarah Shabayek
+202 3332-8640
sshabayek@hc-si.com
50
Egypt
Chart 1: Egypts mobile penetration rate still below others in the region, usage is a key element to drive growth
120.0%
Maldives
100.0%
Morocco
80.0%
Malaysia
Jordan
Tunisia
Algeria
60.0%
Pakistan
40.0%
Iraq
Syria
20.0%
Iran
Lebanon
Egypt
China
Yemen
0.0%
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
MoU
190
0.60
170
150
110
90
0.30
70
50
0.20
130
Minutes
0.40
EGP/minute
130
110
90
70
50
0.50
EGP/minute
150
Minutes
MoU
0.40
0.30
0.20
51
Egypt
PER 2010f
14.0
12.0
Wataniya
Bhart
Maroci
Telecom
10.0
Reliance
8.0
Telenor
Turkcell
Telefonica
Cellcom
Partner
Qtel
TE
Omantel
MTN
Zain
OTH
Mobinil
6.0
%12.0
%2.0
%8.0
%18.0
EV/EBITDA 2010f
16.0
9.0
Bharti
8.0
Maroc
Telecom
7.0
Turkcell
Qtel
Wataniya
6.0
Telefonica
Telenor
5.0
Mobinil
OTH
Partner
Cellcom
4.0 Omantel
MTN
Reliance
Zain
TE3.0
2.0
1.0
-
%2.0
%3.0
%8.0
Mobinil deal to take place at implied EV/EBITDA of 5.5x and PER of 10.8x for 2010f
FT's offer to acquire up to 100% of Mobinil represents a premium of 18.9% to the market price, 17.7% to the average price for the
last six months, and 63.3% to the closing price on April 5th, 2009 (last share price before the arbitration ruling was announced). We
estimate the deal to take place at an implied EV/EBITDA of 5.5x and PER of 10.8x, suggesting a controlling premium of around
26%. FTs offer will be valid from December 15th, 2009 to January 14th, 2010.
According to FT, obtaining this approval was the only condition set by the Egyptian authorities that would enable the Trading
Committee of the Egyptian stock exchange to authorize the execution of the arbitration ruling that was handed down by the
Arbitration Court of the International Chamber of Commerce to settle the dispute between Mobinils two shareholders, FT and
Orascom Telecom Holding (OTH).
52
Egypt
Financial Statements
All figures in EGP Million
Income Statement
Revenue
EBITDA Margin
2008a
2009e
2010f
2011f
2012f
2013f
10,003
10,911
12,272
13,616
14,686
15,475
22.0%
9.1%
12.5%
11.0%
7.9%
5.4%
(5,257)
4,681
(5,773)
5,138
(6,565)
5,706
(7,321)
6,296
(7,928)
6,758
(8,382)
7,093
46.8%
47.1%
46.5%
46.2%
46.0%
45.8%
(1,660)
3,086
(1,910)
3,228
(2,104)
3,602
(2,224)
4,071
(2,265)
4,493
(2,307)
4,785
OPM
30.8%
29.6%
29.4%
29.9%
30.6%
30.9%
(72)
(546)
2,468
(499)
(1)
1,969
23
(674)
2,577
(683)
(1)
1,892
(586)
3,017
(618)
(1)
2,397
(532)
3,539
(726)
(1)
2,813
(467)
4,027
(825)
(1)
3,200
(330)
4,456
(913)
(1)
3,541
19.7%
17.3%
19.5%
20.7%
21.8%
22.9%
Appropriations
Net Profit after appropriations
(156)
1,813
(132)
1,760
(168)
2,229
(197)
2,616
(224)
2,976
(248)
3,293
EPS
19.69
18.92
23.97
28.13
32.00
35.41
7.7%
-3.9%
26.7%
17.3%
13.8%
10.7%
12.60
6.32
14.38
16.88
19.20
21.25
64.0%
33.4%
60.0%
60.0%
60.0%
60.0%
4,199
7,871
12,070
1,588
5,429
6,453
2,245
3,630
8,922
12,552
1,595
5,216
5,263
3,668
3,399
9,215
12,615
2,024
3,747
6,263
4,628
4,169
9,592
13,761
1,684
3,940
5,750
5,755
3,838
9,962
13,800
1,719
4,102
4,381
7,036
3,507
10,293
13,800
2,273
4,238
3,381
8,454
4,609
(491)
(562)
(3,532)
(1,197)
(1,173)
1,403
230
4,753
(106)
(431)
(2,340)
(908)
968
(747)
221
5,758
(585)
(683)
(3,667)
(1,438)
(615)
1,000
385
6,336
(532)
(618)
(3,370)
(1,688)
128
(513)
(385)
6,785
(467)
(726)
(2,305)
(1,920)
1,369
(1,369)
-
7,115
(330)
(825)
(2,307)
(2,125)
1,528
(1,000)
528
1.27
31.7%
0.93
22.0%
0.95
17.7%
0.84
16.7%
0.58
15.7%
0.34
14.9%
Balance Sheet
Key Ratios
Net Debt/EBITDA
CAPEX to Sales
53
Egypt
Buy
We like Eastern Company (EC) for its defensive nature. The company posted revenue
and earnings growth in 2008/09 of 4% and 11%, respectively, capitalizing on still-growing
cigarette consumption despite tough economic conditions. EC has seen the market share for
its own products drop at the expense of foreign brands produced at ECs own facilities (whose
market share increased from 17% in 2007/08 to 21% 2008/09). The increased demand on
foreign brands has been driven by a reduction in their price differential with ECs own brands
following retail price increases imposed by the government in May 2008. This trend bore
favorably on ECs margins (EBITDAR improved by 344 bps in 2008/09) given the fee nature of
the under-license business where no corresponding costs are booked. We expect margins to
remain near current levels as under-license revenues continue to contribute strongly to ECs
revenues. The company is in negotiations with government authorities to alter the current
multi-layered tax system on cigarettes, as any further price increases would subject ECs
brands to higher taxes with minimal benefits on ex-factory prices.
Margins are set to further expand upon relocation to a new production complex
expected in 2011/12. The complex, which is located in Sixth of October City and has an
investment cost of around EGP5.5 billion, will utilize new technologies that would lower costs
through reducing tobacco requirement per unit produced. The complex has placed some
funding pressures on the company, which resorted to the loan market for the first time in its
history. EC recently secured an EGP1 billion loan facility, in addition to an EGP672 million loan
and new lease contracts both of which were secured in 2008/09. Additionally, EC cut its
dividend payout (DPO) to 27% in 2008/09 from 45-50% historically to meet growing financing
needs as relocation nears. This year could see a similar DPO unless EC fully draws down its
existing debt facilities. We expect a sustainable DPO of 60-65% starting 2010/11. A decision
on ECs existing facilities, which will be gradually evacuated starting 2010, is expected in the
near-term. The facilities were valued at EGP1.2 billion by an independent appraiser in August
2009.
A potential royalty business and venturing into untapped export markets (both of
which are not included in our current numbers) could serve as growth drivers for
EC. The company is reportedly in the process of concluding a licensing agreement with a
Jordanian company to produce and market cigarettes under the EC brand in return for royalty
fees. EC is looking to secure similar agreements in other markets such as Sudan. Such
agreements could boost revenues and enhance margins given that their fee nature similar is to
ECs under-license business. Additionally, the company is looking to tap into new, promising
export markets to capitalize on new capacities available upon relocation (roughly an additional
20 billion cigarettes). Exports currently represent 2% of the companys revenue.
We have a Buy recommendation on EC based on a target price of EGP150.5/share
(27% upside). The stock is currently trading at a P/E (10e) of 6.83x, which is at a 28%
discount to its 5-year historical average and at a 44% discount to peers, which is below its
historical discount of around 24% (mainly due to its lower liquidity).
EBITDA Margin
150.5
118.3
27.2%
Listed on
Bloomberg Code
RIC
EGX
EAST EY
EAST.CA
7,036
1,119
5,917
1,086
50.0
3.1
0.6
Shareholding Structure
Free Float
Holding Co. for Chem. Ind.
Employee Association
Others
38.3%
55.0%
5.4%
1.3%
EGX
Hatem Alaa
+202 33328 614
halaa@hc-si.com
Mai Nehad
NEW
09/10E
10/11F
4,114
4,258
1,258
1,352
OLD*
09/10E
10/11F
4,104
4,251
1,324
1,409
CONSENSUS
09/10E
10/11F
4,206
4,426
1,352
1,448
30.6%
31.8%
32.3%
33.3%
32.1%
32.7%
867
17.3
906
18.1
875
17.5
923
18.5
802
16.0
835
16.7
EPS Growth
4%
5%
5%
6%
-3.4%
4.1%
DPS (EGP)
5.2
10.9
8.7
11.1
6.7
7.0
6.83x
5.58x
4.4%
-10.2%
6.53x
5.17x
9.2%
4.6%
6.76x
5.75x
7.4%
-7.5%
6.41x
5.03x
9.4%
11.6%
7.38x
5.11x
5.7%
-
7.09x
4.81x
5.9%
-
P/E
EV/EBITDA
Dividend Yield
FCF Yield
Target Price
Market Price (EGP)
Upside
54
Egypt
Financial Statements
2008/09a
2009/10e
2010/11f
2011/12f
2012/13f
2013/14f
INCOME STATEMENT
Local Cigarettes Volume (Bn Sticks)
Local Cigarettes Revenue
Under-License Revenue
Other Revenue
Sales Revenue
Revenue Growth
61.9
63.0
64.2
65.4
66.6
67.9
3,248
492
227
3,967
3,325
576
213
4,114
3,394
649
215
4,258
3,465
718
216
4,399
3,536
780
217
4,533
3,609
830
218
4,658
3.9%
3.7%
3.5%
3.3%
3.1%
2.7%
(2,085)
(336)
(56)
(43)
1,447
(2,138)
(366)
(61)
(41)
1,508
(2,172)
(396)
(65)
(43)
1,583
(2,125)
(453)
(70)
(46)
1,705
(2,185)
(483)
(74)
(50)
1,741
(2,240)
(512)
(78)
(54)
1,773
EBITDAR Growth
EBITDAR Margin
14.7%
36.5%
4.2%
36.7%
4.9%
37.2%
7.8%
38.8%
2.1%
38.4%
1.8%
38.1%
Lease Expense
EBITDA
Depreciation & Amortization
EBIT
Net Interest Income (Expense)
Provisions
Other Income (Expenses)
Non-Recurring Items
EBT
Taxes
Net Income Before Appropriations
(194)
1,253
(200)
1,053
(4)
(60)
(13)
43
1,018
(188)
830
(250)
1,258
(194)
1,064
(3)
(3)
(11)
10
1,057
(191)
867
(230)
1,352
(222)
1,130
(13)
(3)
(13)
1,100
(195)
906
(298)
1,408
(244)
1,163
(11)
(3)
(15)
1,134
(203)
932
(251)
1,491
(269)
1,222
(9)
(4)
(15)
1,194
(218)
977
(204)
1,569
(298)
1,271
(6)
(4)
(16)
1,245
(232)
1,013
10.5%
20.9%
4.4%
21.1%
4.5%
21.3%
2.9%
21.2%
4.8%
21.5%
3.8%
21.8%
(70)
760
4.50
(87)
780
5.20
(91)
815
10.87
(93)
839
12.11
(98)
879
12.69
(101)
912
13.17
420
39
2,425
41
2,925
3,836
50.454
3,887
6,812
172
56
2,648
42
2,918
5,177
49.835
5,227
8,145
197
73
2,879
43
3,192
5,678
49.835
5,728
8,920
330
91
3,118
44
3,583
5,696
49.835
5,746
9,329
374
110
3,364
45
3,893
5,682
49.835
5,732
9,625
480
129
3,617
46
4,272
5,627
49.835
5,677
9,949
488
323
1,845
2,656
672
699
1,371
4,027
2784.6
547
347
2,000
2,895
1,272
674
1,946
4,840
3304.7
112
633
634
2,128
3,507
1,160
677
1,837
5,344
3576.5
212
720
699
2,260
3,891
948
680
1,629
5,520
3809.4
193
811
732
2,396
4,133
755
684
1,439
5,572
4053.5
158
904
760
2,536
4,358
597
687
1,284
5,642
4306.9
830
224
97
1,151
(486)
(154)
(640)
(316)
196
867
191
(27)
1,030
(1,535)
6
(1,529)
251
(248)
906
240
(37)
1,109
(723)
(723)
(361)
25
932
261
(38)
1,155
(262)
(262)
(759)
133
977
284
(39)
1,222
(255)
(255)
(922)
44
1,013
311
(40)
1,285
(244)
(244)
(935)
106
55
Raw Materials
Direct Labor
SG&A Expenses
Other Operating Income (Expense)
EBITDAR
Appropriations
Net Income After Appropriations
DPS (EGP)
BALANCE SHEET
Cash & Equivalents
Receivables
Inventory
Other Current Assets
Total Current Assets
Net Fixed Assets
Other Non-Current Assets
Total Non-Current Assets
Total Assets
Short-Term Debt
Payables
Distributions Payable
Other Current Liabilities
Current Liabilities
Long-Term Debt
Other Non-Current Liabilities
Total Non Current Liabilities
Total Liabilities
Total Shareholders Equity
Egypt
Buy
5.35
3.92
36.5%
Listed on
Bloomberg Code
RIC
EGX
MOIL EY
MOIL.CA
1,130
92
5,469
1,003
256
11.0
2.0
5.35
Shareholding Structure
Free Float
Offshore Oil Services*
Zeid Family
Others
Eleish Family
CIB
44.48%
21.39%
14.26%
7.76%
6.11%
6.00%
MOIL
30EGX
2
D
NEW*
09E
10F
235
466
111
191
OLD*
09E
279
136
EBITDA Margin
10F
494
207
CONSENSUS
09E
10F
217
442
104
188
47.1%
41.0%
48.9%
41.9%
47.9%
42.5%
75
0.29
124
0.49
102
0.40
143
0.56
74
0.28
137
0.54
-2%
65%
33%
40%
-3%
82%
DPS
P/E
EV/EBITDA
Dividend Yield
FCF Yield
0.21
0.35
0.28
0.40
0.19
0.38
13.36x
10.95x
5.4%
5.8%
8.08x
6.62x
8.9%
7.8%
10.40x
9.28x
7.2%
4.3%
6.99x
6.47x
10.1%
6.2%
13.35x
10.63x
4.6%
-
7.32x
6.15x
9.1%
-
Hatem Alaa
+202 33328614
halaa@hc-si.com
*Old & New Estimates from Notes Dated Aug. 18th, 2009 and Dec. 7th, 2009, respectively
A = Actual; E/F = HCs Estimates/Forecasts; C = Consensus Estimates
56
Egypt
Financial Statements
USDm
2008a
2009e
2010f
2011f
2012f
2013f
257
(149)
108
235
(124)
111
466
(275)
191
438
(256)
183
451
(263)
188
453
(264)
189
42.2%
47.1%
41.0%
41.7%
41.8%
41.7%
(14)
95
(4)
(7)
84
(1)
(13)
69
(20)
91
(8)
3
86
(2)
(9)
75
(25)
166
(13)
1
154
(4)
(25)
124
(31)
152
(13)
138
(3)
(16)
119
(32)
157
(14)
143
(3)
(16)
124
(33)
156
(11)
145
(3)
(16)
126
26.8%
31.9%
26.7%
27.2%
27.5%
27.8%
(6)
63
(7)
68
(12)
112
(12)
107
(12)
112
(12)
113
Balance Sheet
Cash & Equivalents
Receivables
Other Current Assets
Total Current Assets
Net Fixed Assets
Other Non-Current Assets
Total Non-Current Assets
Total Assets
78
72
26
176
304
16
321
497
78
79
126
283
315
6
321
604
117
110
170
396
364
6
370
767
107
138
208
454
405
6
411
865
101
167
247
515
389
6
395
910
105
196
285
586
372
6
378
965
50
18
58
35
161
83
21
104
265
232
39
3
70
97
210
130
40
171
380
224
34
18
125
148
326
152
40
193
518
248
34
31
113
193
371
183
40
223
594
270
33
44
117
238
432
144
40
184
616
294
37
57
118
283
495
112
40
152
647
317
143
28
(12)
158
(106)
4
(102)
12
68
90
28
34
152
(70)
9
(61)
(91)
(0)
150
38
(8)
180
(75)
(75)
(66)
39
135
45
(9)
172
(72)
(72)
(109)
(9)
140
46
(9)
178
(16)
(16)
(167)
(6)
142
45
(10)
177
(16)
(16)
(157)
3
Income Statement
Revenue
Operating Expenses
EBITDA
EBITDA Margin
Depreciation & Amortization
EBIT
Net Interest Income (Expense)
Others
EBT
Taxes
Minority Interest
Net Income
Net Margin
Appropriations
Net Income After Appropriations
57
Egypt
Citadel Capital
Buy
Revenues (EGPm)
Net Income (EGPm)
EPS
FCF Yield
NEW*
09/10E
10/11F
459
314
0.47
1.38x
230
96
0.15
1.34x
OLD*
09/10E
10/11F
206
66
0.10
2.03x
230
94
0.14
2.02x
CONSENSUS
09/10E
10/11F
Listed on
Bloomberg Code
RIC
14.83
9.55
55.3%
EGX
CCAP EY
CCAP.CA
6,386
67
6,319
1,159
661.6
N/A
N/A
Shareholding Structure
Free Float & Others
Citadel Capital Partners
EIIC
Alaa Arafa
Amina Allam
Al Olayan Financial Ltd.
35.6%
40.0%
15.7%
3.3%
3.1%
2.3%
Hatem Alaa
+2 02 3332 8614
halaa@hc-si.com
Roaa Alian
+2 02 3332 8612
ralian@hc-si.com
Mai Nehad
+2 02 3332 8626
mnehad@hc-si.com
* Old and New Estimates from Notes Dated November 16th and December 8th, 2009, respectively
A = Actual; E/F = HCs Estimates/Forecasts; C = Consensus Estimates
58
Egypt
Financial Statements
2008a
2009e
2010f
2011f
2012f
2013f
2014f
Income Statement
Subsidiaries & Dividend Income*
Advisory Fee
Gains on Sale of Investments**
Total Revenue
General & Administrative Expenses
Impairment Loss on Assets
Provisions
Management Fee
Other Income
Net Operating Profit
Finance Expenses (Net)
Interest Income
Interest Expense
FX Gains (Losses)
Net Profit Before Tax
Deferred Income Tax (Expense)
Net Profit for the year
73
198
270
(174)
(18)
(11)
(3)
5
69
(47)
10
(45)
(11)
22
2
23
146
104
208
459
(149)
(7)
(31)
39
311
11
24
(10)
6
323
(9)
314
92
138
230
(135)
(5)
(11)
79
20
41
(20)
100
(4)
96
123
179
302
(148)
(4)
(18)
132
35
56
(21)
167
(7)
161
184
233
417
(163)
(3)
(29)
221
55
75
(21)
276
(11)
265
292
302
594
(180)
(2)
(46)
366
74
94
(21)
440
(18)
423
338
393
731
(198)
(1)
(60)
472
95
115
(21)
567
(23)
544
126
662
25
813
406
671
15
1,092
233
537
15
784
388
376
14
778
509
263
14
786
618
184
14
816
752
129
13
894
40
2,184
719
79
3,022
3,835
36
2,465
918
82
0.6
3,501
4,593
36
2,558
918
83
0.6
3,594
4,379
36
2,681
918
84
0.6
3,719
4,497
36
2,864
918
86
0.6
3,904
4,690
36
3,156
918
87
0.6
4,197
5,013
36
3,494
918
88
0.6
4,536
5,430
138
23
11
172
75
17
11
104
73
17
11
102
71
18
11
99
69
18
11
97
67
18
11
95
65
18
11
94
815
987
810
913
824
925
824
923
824
921
824
919
824
917
2,848
3,679
3,453
3,574
3,768
4,093
4,512
Balance Sheet
Cash & Equivalents
Due from Related Parties (Net)
Other Current Assets
Total Current Assets
Available-for-Sale Investments
Investments in Subsidiaries & Associates
Payments for Investments
Net Fixed Assets
Deferred Tax Assets
Total Non-Current Assets
Total Assets
Total Equity
*Equity consolidation of ASEC Holding, Glass Works and Pharos only given limited information on other ventures
**We have not included any exits in our numbers
***Current debt must be fully repaid by 2013f, but we believe it will be either re-financed or repaid through exits
59
Egypt
Hold
ESRS has witnessed a decline in top line and pressure on margins in 3Q09, along
with non operating expenses that include FX losses of EGP50 million, which led to a
significant decline in its bottom line. This quarter was a weak one in term of prices, which
eased 6.8% QoQ for rebars and 0.6% QoQ for HRC. However, revenues beat our estimates by
3.5% mainly on the back of 12.9% higher volume sold than estimated. The strong demand reenforces our outlook on resilient local steel consumption. 3Q09 showed weakness in EBITDA
margin, which retreated by 270 bps to 12.7% compared to 15.4% in 2Q09, but higher than
our estimates of 9%. This was a reflection of the delay in pricing alignment between end
products and raw materials, as explained in our last update Pressure on Selling Prices and
Margins Warrants a Downgrade, published on November 17th. Despite higher than expected
revenues and EBITDA, the companys net loss came higher than expected by 29.5% on the
back of higher than estimated net financing costs and FX losses.
Despite our positive outlook on the local steel sector, continuing fluctuation in raw
material prices remains a concern. We believe that 4Q09 and 1Q10 will be challenging
quarters for the companys profitability due to the flux in scrap prices. Although Rotterdam
scrap index showed a decline of 16% MoM in October, it climbed 11% in November, implying
that the company will continue to witness margin pressures in 4Q09. Steel imports (mainly
from Turkey) are another concern that continues to pressure local prices downwards. Despite a
5.4% increase in December rebars prices; we still see imports as a major threat to local prices
which are at a 2-3% premium to import prices. However, we note that the Ministry of Trade
and Industry is currently studying an anti dumping complaint from local steel producers. In
case it is proven that local producers need protection, an anti-dumping fee may be imposed,
which will at least temporarily improve producers margins.
We reiterate our Hold recommendation on ESRS based on a fair value per share of
EGP17 (upside 6.2%). Our SOTP-DCF valuation suggests that the bulk of the value comes
from EZDK (73%), followed by ESR/ESM (17%), and EFS (10%). We did not make significant
changes in our assumptions as since our last update published on November 17th. ESRS looks
expensive on 2010f multiples, trading at a PER of 28.9x (premium of 38% to steel peers). Main
catalysts for the share price would be: (i) a rebound in selling prices, (ii) increase in
construction activity, and (iii) the imposition of anti dumping fees on steel imports. Risks to our
valuation include: (i) a further decline in selling prices without a corresponding decline in raw
material prices, and (ii) any delay to the implementation of the companys upcoming
expansions plans. Our 2009e-2010f net income estimates are below consensus and we expect
the street to revise its estimates downwards.
10F
09E
10E
Consensus
09C
10C
Revenues
EBITDA
11,965
1,538
12,567
1,869
11,585
1,326
12,130
1,636
11,950
1,984
15,700
3,450
EBITDA Margin
12.9%
14.9%
11.4%
13.5%
16.6%
22.0%
Net Income
EPS (EGP)
3
0.01
301
0.55
9
0.02
209
0.38
276
0.51
691
1.27
EPS Growth
-99.7%
-77.4%
150.4%
DPS (EGP)
Net Debt/EBITDA (x)
P/E
EV/EBITDA
New
Old
-99.3%
0.0
3.7x
14.4x
0.06
2.6x
28.9x
11.4x
0.0
3.9x
16.4x
0.04
3.2x
41.8x
13.4x
2.7x
31.6x
8.0x
1.4x
12.6x
4.9x
0.0%
-0.3%
0.3%
3.7%
0.0%
-2.2%
0.2%
2.8%
Target Price
17.0
16.05
6.2%
Listed on
GDRs: Local Share
Bloomberg Code
RIC
EGX,LSE
1:3
ESRS EY
ESRS.CA
EV (EGPm)
Net Debt (EGPm)
Market Cap. (EGPm)
Market Cap. (USDm)
22,155
5,675
8,719
1,600
543.3
-
37.0
6.8
Shareholders Structure
Free Float
Ezz Industries
34.3 %
65.7%
ESRS
17
HCMI
15
13
11
9
7
5
J
Menna El Hefnawy
+02 33328632
melhefnawy@hc-si.com
Roaa Alian
+02 33328612
ralian@hc-si.com
60
Egypt
3Q09a
1,059
2,750
2,500
2,703
344
3Q08a
1,072
5,950
5,758
6,314
1,399
12.7%
22.2%
8.5%
(68)
502
(52)
-2.5%
7.9%
-2.0%
EBITDA margin
Net Income
NPM
YoY
-1.2%
-53.8%
-56.6%
-57.2%
-75.4%
3Q09e
938
2,714
2,545
2,611
221
% Dev.
12.9%
1.3%
-1.8%
3.5%
55.7%
2Q09a
1,047
2,951
2,516
2,976
459
2009e
4,206
2,929
2,734
11,965
1,538
2009c
N/A
N/A
N/A
11,950
1,984
15.4%
12.9%
16.6%
35
276
1.2%
0.0%
2.3%
-29.5%
QoQ
1.1%
-6.8%
-0.6%
-9.2%
-25.1%
% Dev
N/A
N/A
N/A
0.1%
-22.5%
-98.9%
35.0x
30.0x
ESRS
Blue Scope
30.0x
EZDK
25.0x
20.0x
OCI
20.0x
Boaoshan
Jindal
Novolipetsk
Wuhan
10.0x
Tala Steel
Posco
PER 2010
PER 2010
Angang
Temium 15.0x
EZDK
25.0x
ESRS
Usinas
Eregli D.
JSW
15.0x
OTH
TE
10.0x
Mobinil
NSGB
CIB
5.0x
5.0x
TMG
PHD
0.0x
-20%
El Sewedy
0.0x
0%
20%
40%
EPS CAGR (2010-2012)
60%
80%
100%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
61
Egypt
2008
2009
2010
2011
2012
2013
Income Statement
Revenues
COGS
Gross Profit
S. , G. & Adm. Expenses
EBITDA
21,792
(16,834)
4,958
(519)
4,439
11,965
(10,014)
1,950
(413)
1,538
12,567
(10,421)
2,147
(278)
1,869
13,458
(10,814)
2,644
(375)
2,269
14,208
(11,165)
3,042
(397)
2,646
14,876
(11,601)
3,275
(411)
2,864
20.4%
12.9%
14.9%
16.9%
18.6%
19.3%
(659)
3,807
(460)
(36)
3,311
(746)
(1,341)
1,223
(646)
892
(759)
(18)
114
(23)
(88)
3
(688)
1,181
(617)
(13)
551
(99)
(151)
301
(744)
1,525
(506)
(20)
998
(200)
(339)
460
(797)
1,849
(352)
(21)
1,476
(295)
(549)
632
(826)
2,038
(224)
(22)
1,791
(358)
(651)
782
5.6%
0.0%
2.4%
3.4%
4.4%
5.3%
2.25
9.0%
3.30
146.5%
0.01
-99.7%
0.00
10.0%
0.55
0.06
10.0%
0.85
52.5%
0.08
10.0%
1.16
37.5%
0.17
15.0%
1.44
23.8%
0.22
15.0%
4,090
58
3,178
455
7,781
10,810
18,590
991
114
1,974
479
3,557
11,740
15,298
967
119
2,074
503
3,663
11,387
15,050
1,042
128
2,019
538
3,727
11,530
15,257
1,612
135
2,344
568
4,660
10,920
15,580
2,037
207
2,946
669
5,860
10,267
16,127
3,914
831
2,427
7,172
3,736
746
1,757
6,811
13,410
5,180
2,743
718
1,093
4,554
3,924
757
1,846
7,104
11,080
4,218
2,311
754
1,193
4,259
3,530
791
1,996
6,920
10,576
4,474
1,884
1,009
1,363
4,255
2,881
922
2,335
6,790
10,393
4,864
1,785
1,023
1,421
4,229
2,158
939
2,884
6,708
10,211
5,369
1,527
1,026
1,512
4,066
1,493
1,039
3,535
6,882
10,132
5,994
3,559
0.8x
6.6%
23.6%
2.4%
40.2%
5,675
3.7x
0.0%
0.1%
10.4%
-0.3%
4,875
2.6x
2.0%
6.7%
6.9%
3.7%
3,722
1.6x
3.0%
9.4%
6.4%
8.2%
2,331
0.9x
4.1%
11.8%
1.2%
20.1%
982
0.3x
4.9%
13.1%
1.1%
22.8%
EBITDA Margin
Depreciation
Operating Profit -EBIT
Net Financing Cost
Non-Operating Income (Expense)
NPBT
Income Tax
Minority Interest
Net Income
NPM
Adjusted Earnings per share (EPS)
Growth in EPS
Adjusted Dividends per share (DPS)
Dividends Payout
Balance Sheet
Key Ratios
Net Debt
Net Debt/EBITDA
RoA
RoE
Capex/sales
FCF Yield
62
Egypt
Buy
Higher than estimated net financing cost offsets larger volumes and
revenues, which led to a significant decline in bottom line.
Despite larger than estimated volumes, EZDKs standalone 3Q09 net income
came 12.8% below estimates, on the back of higher net financing cost. Top line
beat our expectations by 22.8% driven mainly by volumes that came above estimates by
17.5%. Total volumes sold during 3Q09 advanced 36.9% YoY mainly on the back of
higher utilization to compensate for the production halt in Al Ezz Flat Steel (EFS). EBITDA
for 3Q09 surpassed our estimates by 25.7% mainly on the back of slightly lower than
estimated raw material prices. However, cost of production increased QoQ by 2.7%,
compressing margins by 220 bps. On the consolidated level, EZDK recorded a top line of
EGP2.2 billion, an estimated EBITDA of EGP330 million (EBITDA margin of 15.1%) and a
net profit of EGP50.9 million. We note that EFS became fully consolidated in EZDK as of
3Q09 without pro-forma statements for 2008.
On a standalone level, we are less concerned about the fluctuating scrap
prices effect on EZDKs profitability. This is mainly because of its reliance on iron
ore pellets as the main raw materials, with around 10% of raw materials contributed by
scrap. However, on the consolidated level, with EFS becoming fully consolidated, the risk
of margin contraction becomes higher. In addition, since both companies produce flat
steel, an increase in ones utilization would require a decrease in the others. With no
expected strong pickup in the flat market in 2010, we believe that EFS will use at least
30% of its utilization in producing billets that will be sold at production cost to its sister
company ESR/ESM.
Target Price
946
741.7
27.6%
Listed on
Bloomberg Code
RIC
EGX
IRAX EY
IRAX.CA
EV (EGPm)
Net Debt (EGPm)
Market Cap. (EGPm)
Market Cap. (USDm)
12,774
1,606
9,912
1,819
13.4
-
1.4
0.3
Shareholders Structure
Free Float
Al Ezz Steel
State Owned Institutions
6.38%
53.24%
40.38%
900
EZDK
HCMI
850
800
750
700
650
600
J
Revenues
EBITDA
09E
Old
10F
09E
10E
Consensus
09C
10C
9,264
1,461
7,627
1,438
9,295
1,367
7,833
1,879
8,957
2,853
17.6%
15.8%
18.9%
14.7%
24.0%
31.9%
Net Income
EPS (EGP)
473
35.36
391
29.23
533
39.88
402
30.05
948
70.95
1,586
118.67
EPS Growth
-84.1%
-17.3%
-82.0%
-24.6%
-68.0%
67.3%
DPS (EGP)
Net Debt/EBITDA (x)
P/E
EV/EBITDA
24.8
2.7x
21.0x
10.4x
26.3
2.3x
25.4x
10.0x
27.9
1.7x
18.6x
9.6x
27.0
1.8x
24.7x
10.1x
3.3%
3.5%
3.8%
3.6%
5.4%
8.9%
3.3%
8.0%
1.1x
6.6x
10.5x
-
0.8x
4.4x
6.3x
-
New
8,180
1,439
EBITDA Margin
Menna El Hefnawy
+02 33328632
melhefnawy@hc-si.com
Roaa Alian
+02 33328612
ralian@hc-si.com
63
Egypt
EBITDA margin
Net Income
NPM
3Q09a
3Q08a
YoY
691
2,750
2,500
1,934
355
505
5,950
5,758
3,022
1,336
18.4%
44.2%
110
974
5.7%
32.2%
36.9%
-53.8%
-56.6%
-36.0%
-73.4%
3Q09e
588
2,714
2,545
1,575
282
% Dev.
17.5%
1.3%
-1.8%
22.8%
25.7%
17.9%
-88.7%
126
8.0%
2Q09a
QoQ
725
2,951
2,516
2,051
422
-4.7%
-6.8%
-0.6%
-5.7%
-15.9%
20.6%
-12.8%
189
9.2%
2009e
2,775
2,929
2,734
8,095
1,490
18.4%
-41.8%
616
7.6%
64
Egypt
2008
2009
2010
2011
2012
2013
Income Statement
Revenues
COGS
S. , G. & Adm. Expenses
EBITDA
11,639
(7,109)
(238)
4,292
8,180
(6,502)
(238)
1,439
9,264
(7,615)
(189)
1,461
10,081
(8,083)
(284)
1,714
10,613
(8,278)
(303)
2,032
11,035
(8,504)
(315)
2,216
EBITDA Margin
36.9%
17.6%
15.8%
17.0%
19.1%
20.1%
Depreciation
Operating Profit -EBIT
Net Interest Expenses
Other Income (Expenses)
NPBT
Income Tax
NPAUI
Minority Interest
Net Income
(427)
3,865
(425)
65
3,702
736
2,966
2,966
(484)
955
(580)
49
466
96
371
102
473
(633)
828
(588)
93
444
76
369
22
391
(627)
1,088
(534)
66
723
145
579
(68)
510
(679)
1,353
(424)
69
1,090
218
872
(140)
732
(707)
1,510
(342)
72
1,333
267
1,066
(152)
915
NPM
25.5%
5.8%
4.2%
5.1%
6.9%
8.3%
222
35
29
38
55
68
Growth in EPS
29.2%
-84.1%
-17.3%
30.6%
43.4%
25.0%
210
95%
28.3%
25
70%
3.3%
26
90%
3.5%
34
90%
4.6%
49
90%
6.6%
62
90%
8.3%
2,525
61
1,895
223
4,704
5,550
10,253
2,552
705
1,764
5,021
1,579
509
2,088
7,109
3,145
1,171
393
1,881
41
3,486
8,924
12,412
1,435
3,272
432
5,138
3,600
509
(102)
4,007
9,145
3,268
1,235
445
2,131
46
3,857
8,588
12,448
1,141
3,706
460
5,306
3,466
509
(124)
3,851
9,157
3,291
1,326
484
2,319
50
4,179
8,301
12,483
1,281
4,033
583
5,897
2,814
509
(55)
3,268
9,164
3,319
1,274
509
2,441
53
4,277
7,990
12,270
1,160
4,139
798
6,097
2,219
509
85
2,813
8,911
3,359
1,307
530
2,538
55
4,430
7,650
12,083
862
4,304
975
6,140
1,787
509
237
2,533
8,673
3,410
1,606
0.37x
28.9%
94.3%
3.5%
44.5%
3,863
2.68x
3.8%
14.5%
47.0%
5.4%
3,371
2.31x
3.1%
11.9%
3.1%
8.9%
2,769
1.62x
4.1%
15.4%
3.3%
11.7%
2,106
1.04x
6.0%
21.8%
3.4%
14.4%
1,343
0.61x
7.6%
26.8%
3.3%
16.7%
Dividends Payout
Dividends yield
Balance Sheet
Cash and Excess Cash
Net Accounts Receivables
Inventory
Other Current Assets
Total Current Assets
Total Non Current Assets
Total Assets
Short Term Debt
Accounts Payable
Other Current Liabilities
Total Current Liabilities
Total Long Term Debt
Provisions For Deferred Taxes
Minority Interest
Total Long Term Liabilities
Total Liabilities
Shareholders' Equity
Net Debt
Net Debt/EBITDA
RoA
RoE
Capex/sales
FCF Yield
65
Egypt
Hold
Seasonal slowdown and low fertilizer prices and volumes sold pull
3Q09 revenues down but margin expansion offsets below the line
adversities.
Old
09E
10E
09E
10E
Revenues
EBITDA
EBITDA margin
Net Income
EPS
EPS Growth
DPS
Net Debt/EBITDA
PER
EV/EBITDA
Free Cash Flow Yield
3,977
791
19.9%
461
2.23
-35.9%
1.40
1.85x
21.1x
14.1x
-1.1%
4,443
975
21.9%
560
2.71
18.7%
1.41
1.10x
17.4x
11.1x
2.4%
4,067
807
19.8%
476
2.30
-33.8%
1.45
1.93x
20.4x
13.0x
-3.5%
4,807
994
20.7%
553
2.68
16.2%
1.39
1.06x
17.5x
10.1x
4.1%
Consensus
09C
10C
4,166
803
19.3%
464
2.24
-35.5%
1.31
1.46x
20.9x
13.6x
-
4,900
1,056
21.6%
651
3.14
40.2%
2.16
1.03x
14.9x
10.2x
-
Target Price
Market Price (EGP)
Upside
279
256
9.0%
Listed on
GDR to Local Shares
Bloomberg Code
RIC
EGX, LSE
1:1
OCIC EY
OCIC.CA
61,236
7,965
52,971
9,720
206.9
-
66.6
12.2
Shareholders Structure
Free Float
Sawiris Family
46%
54%
OCIC
270
HCMI
250
230
210
190
170
150
J
Roaa Alian
+202 33328612
ralian@hc-si.com
Menna El Hefnawy
+202 33328632
melhefnawy@hc-si.com
66
Egypt
3Q09a
118
816
933
3Q08a
251
778
1,029
74
211
63.3%
84.2%
Construction EBITDA
129
181
Construction EBITDA
margin
15.8%
23.2%
Consolidated EBITDA
203.5
392
EBITDA margin
21.8%
38.1%
Fertilizer NI
Fertilizer NPM
Construction NI
Construction NPM
Consolidated Net
Income
NPM margin
32
116
27.6%
46.0%
88
89
10.8%
11.5%
121
205
12.9%
19.9%
% YoY
-53.2%
4.9%
-9.3%
-64.8%
3Q09e
146
886
1,032
84
% Dev.
-19.4%
-7.9%
-9.6%
-11.3%
57.5%
-28.5%
113
197
14.2%
41
71
-21.2%
112
10.9%
126
2.5%
187
32
24.4%
70
1.3%
25.4%
7.3%
7.8%
102
09 New
476
3,501
3,977
17.9%
09 Old
545
3,523
4,067
295
338
62.0%
62.0%
496
470
14.2%
8.8%
26.2%
8.0%
-41.2%
21.8%
17.1%
28.2%
-1.3%
-3.8%
-15.8%
-14.4%
13.0%
3.3%
19.1%
-71.9%
61
% QoQ
50.0%
12.8%
-48.1%
2Q09a
122
969
1,091
% Dev.
-12.4%
-4.9%
-5.9%
-12.4%
1.4%
13.3%
791
807
19.9%
19.8%
158
176
33.2%
32.4%
303
300
8.6%
8.5%
461
476
11.6%
11.7%
-4.4%
-10.4%
0.8%
-3.2%
67
Egypt
Value (EGP/share)
Downgrade by
279.0
276.8
267.4
264.0
238.9
227.3
-0.8%
-4.2%
-5.4%
-14.4%
-19.0%
Source:
We remain positive on OCI's fundamentals despite current exposure to Dubai and Algeria on both construction and fertilizers
fronts. Generally, we believe OCIs dual business model and international exposure minimizes any adversities that can come from
its exposure to risky markets; specifically, we view worries about Algeria as over stated. We believe that:
In the case of backlog exposure to Dubai, while other contractors may be prone to project cancellations, OCI would be
more prone to delays in projects rather than cancellations. Possible delays in projects, we believe, come as a general
concern regarding the construction sector. OCIs backlog has minimal exposure in Dubai, at 4.5% of total backlog;
accordingly we estimate that Dubai has little contribution to our fair value for OCI. Thus, in a worst case scenario, a total
cancellation of Dubais backlog of USD324 million, would translate into a respective decline of 1.3%, and 3.4% in 2009
and 2010 construction revenues, and 1.3% and 4.5% in net income respectively. Hence, our fair value for OCI would be
reduced by a meager 0.8% to EGP276.8 per share.
OCI is considered one of the top contractors in Algeria, adding value to the Algerian economy over the past decade. OCI
employs around 12,000 employees in Algeria, of which 75% are Algerians. According to management, Algeria remains an
attractive market where future potential projects may materialize. The company is already paying a 19% tax rate on the
construction front, as its tax exemption expired in 2007. We believe that worries over exposure to Algeria are over stated
and will be short lived, thus we have minimal concerns regarding OCIs 23% backlog there. Nonetheless, if we exclude the
construction works in Algeria from our backlog, our revenue forecasts will come down by an average of 8% and net
income by an average of 12.4% over the forecasted horizon (09e-13f). Hence, our fair value for OCI would be reduced
by 4.2% to EGP267.4 per share.
%100
%32
%80
%60
%26
%25
%27
Industrial
%27
%34
%31
%14
Commercial
Others, 8%
KSA, 1%
%27
%25
%26
%13
%12
%14
%60
%63
%60
%40
%42
%20
%48
%56
%40
Abu Dhabi,
15%
Europe ,
9%
Dubai, 5%
%0
08Q1
08H1
08M9
2008
09Q1
09H1
09M9
Egypt,
24%
Algeria,
23%
Qatar, 15%
Source: OCI
We are less concerned on the fertilizer front given that OCI's partner in Sorfert Algerie is the Algerian state-owned
Sonatrach (49% stake), and that this project is a value added to the Algerian economy as well as a notable development
for the Algerian fertilizers sector. In a worst case scenario, which we believe is unlikely, should the government terminate
the current tax exemption, Sorfert will then be subjected to a 19% tax starting 2011; this would lower our valuation for
Sorfert by 36.5% from the current EGP40.7/share to EGP25.7/share, thus reducing OCIs total value by 5.4% to
EGP264/share.
68
Egypt
Since Sorfert accounts for 14.4% (EGP40.7 per share) of the total value of OCI in our valuation, if we totally exclude
Sorfert from our valuation, our target price for OCI will go down to EGP238.9 per share.
In an extreme case, if we exclude OCI exposure to Algeria altogether on both construction and fertilizers fronts, our fair
value for OCI will be reduced by 19% to EGP227/share.
OCI Stake
100%
100%
51%
60%
Equity Value
In USD million
4,607
5,987
WACC
3,398
1,522
1067
10,593
9.2%
11.3%
9.8%
9.1%
Value/share
In USD/Share
22.3
28.9
In EGP
% of total Value
121.3
157.7
43.5%
56.5%
16.4
7.4
5.2
89.5
40.1
28.1
32.1%
14.4%
10.1%
51.2
279.0
100%
Source: HC estimates
Out of caution, we have kept our fertilizer prices assumptions unchanged despite some signs of price recovery in the market; if
price increases persist, this would trigger more value. Other value triggers would be higher than expected new awards to come in
during 4Q09. We believe stock price catalysts would be further integration between OCI and international fertilizer distributors
and/or potential acquisitions or Greenfiled projects in new markets. Also, an increase in natural gas prices would position OCI at an
advantage given its low priced natural gas long term agreement. Moreover, more infrastructure spending in Egypt and the region
would provide an impetus to construction group value. The construction group valuation yielded a fair value of EGP121.7/ share
(USD22.3/share) (43.5% of total value) while the fertilizer group SOTP valuation yielded EGP157.7/share (USD28.9/share),
comprising 56.5% of OCI's total value.
Potential value driver: Building a fertilizer empire, OCI eyes expansion into international market
In line with our expectations, OCI revealed its openness to bidding for existing fertilizer players in an attempt to expand its fertilizer
group and establish a presence as a local player in international markets. Management has big plans for the fertilizer group during
2010, which we believe is timely since the current vulnerability of the industry presents consolidation opportunities. Moreover, we
believe that the companys plans to upgrade and increase its existing capacities and product mix in Egypt during the coming 6
months is in anticipation of a pickup in demand by the second half of 2010. Although we have not incorporated the expected
expansions as no details have been announced, we believe that upcoming plans would be strong value drivers for the fertilizer
group and OCI. Plans in the pipeline include:
Establishing an Ammonium Sulfate plant in EFC capitalizing on excess ammonia produced in EFC as well as EBICs
production.
Establishing a UAN production line in EFC to take advantage of the increasing demand on UAN worldwide.
Expanding presence in South America through similar ventures as the recently announced JV with FITCO, a Brazilian
distributor, if the opportunity arises.
Openness to bidding for the acquisition of existing international fertilizer producers and/or Greenfield licenses in countries
with abundant cheap natural gas, to establish OCI as a local player in high consuming markets. OCI expressed interest in
bidding for a Brazilian fertilizer producer, Copebras, owned by Anglo American, as well as a license to produce fertilizers in
India, one of the world's biggest consumers of fertilizers.
We are not concerned about OCIs debt exposure, even with a net debt/EBITDA level of 1.85x for 2009e, as we believe it is
natural given the current expenditure on Sorfert Algerie plant (to be operational 4Q10/1Q11). We believe OCI will be able to
manage its planned expansions through leverage as by the time Sorferts expenditure is complete expectantly by the end of
second half of 2010, net debt level would have improved. The companys current cash level is sufficient to meet its working
capital requirements.
69
Egypt
Towards the end of 4Q09, Urea market firms up and Ammonia stabilizes
Subse
Generally, we see the international fertilizer market as on to a slow but sure recovery, with ammonia prices holding steady within
in the range of USD280 and USD300 per ton and demand on urea picking up as 4Q09 approaches to end. We believe the main
highlights of 4Q09 going into 1Q10 include:
The anticipated increase in gas prices in Ukraine to take place in January 2010, which suggests that demand may increase
during December to fill tanks which would support ammonia prices at current levels or higher.
Positive outlook for the US spring season, even in the case of a delay in the fall season and restrictions outlined by the
late harvest. This is mainly a result of the US urea market gaining momentum and showing considerable strength,
providing a rising floor for prices in major export origins. Current Urea prices hover around the USD300 and USD305 level.
(Based on Profercy USA November 2009 report.)
Most major consumers are going into 1Q10 with low inventory levels, suggesting a pickup in demand during December
and into 1Q10.
Thus we believe demand prospects should be improving in 2010. However, we remain conservative on our forecasted prices until
we witness some sustainability in market recovery.
PER (2010)
18
35
25
CF Industries
12
Nagarjuna
20
China Railway
IJM
Gamuda
Enka
15
Tekfen Holding
OCI
China Com.
10Samsung Eng.Const.
Huyndai Eng.
GSEC
5
DSI Galfar
-
10
%20
K+S
OCI
Terra Ind.
IQ
Agrium
Arab Potash
Bunge
8
6
Hyundai Dev.
Bagfas
4
2
-
Arabtec
%0
Yara
Anzko International
14
IVRCL
%20-
Potash Corp.
16
Hindustan
Larsen &
Tourbo
PER (11)
PER (10)
30
%40
%60
%80
%100
%120
% 20-
%0
% 20
% 40
% 60
% 80
% 100
% 120
% 140
70
Egypt
2008
2009
2010
2011
2012
2013
3,073
644
3,717
60.0%
2,811
906
24.4%
(134)
772
20.8%
0.3
92
840
106
734
265
14
985
26.5%
3,501
476
3,977
7.0%
3,186
791
19.9%
(142)
649
16.3%
28.0
(63)
572
82
490
29
461
11.6%
3,770
673
4,443
11.7%
3,469
975
21.9%
(180)
794
17.9%
25.0
(48)
731
114
617
57
560
12.6%
4,087
1,026
5,113
15.1%
3,822
1,291
25.3%
(204)
1,088
21.3%
32.0
(27)
1,044
194
850
66
784
15.3%
4,282
1,145
5,427
6.1%
3,969
1,457
26.9%
(215)
1,243
22.9%
32.4
(18)
1,206
226
981
71
910
16.8%
4,398
1,157
5,555
2.4%
4,042
1,513
27.2%
(226)
1,287
23.2%
32.4
(9)
1,258
235
1,022
72
951
17.1%
3.48
229.9%
2.00
43.6%
4.3%
2.23
-35.9%
1.40
63.3%
3.0%
2.71
21.4%
1.41
52.3%
3.0%
3.79
40.0%
1.45
38.6%
3.1%
4.40
16.1%
1.69
38.6%
3.6%
4.59
4.5%
1.76
38.6%
3.8%
4,212
3,611
2,669
1,999
3,155
4,892
2,756
3,188
2,846
1,609
4,836
2,653
3,107
2,502
1,875
4,784
3,302
3,535
2,192
2,354
4,754
3,957
3,591
2,206
2,910
4,723
4,561
3,781
2,007
3,491
Key Ratios
Net Debt/EBITDA
RoA
RoE
Capex to Sales
0.60x
9.4%
20.7%
23.6%
1.85x
6.0%
19.8%
25.1%
1.10x
7.4%
33.9%
9.5%
0.27x
10.1%
39.3%
3.2%
-0.25x
10.8%
36.5%
2.7%
-0.71x
10.6%
31.2%
2.8%
71
Egypt
GB Auto
Hold
Passenger Car (PC) market recovery is still intact but priced in. Monthly PC
market sales volumes have increased 128% from their bottom in January 2009
reaching 16,212 units in October 2009, aided by the government-sponsored taxi
replacement program. GB Auto has been a clear beneficiary of the market recovery
with its quarterly PC sales revenues increasing 2.7-times from 1Q09 levels, and the
segments gross margins improved from 8% to 11% as overhead under-recovery
eased and dealer inventory (and thus GB Autos) inventory returned to normal
levels. GB Autos share price has reacted accordingly, increasing 175% since
reaching its low in March 2009.
GB Autos Commercial Vehicles (CV) business is of concern in light of stillweak corporate and tourism demand, high-cost inventory and overhead
under-recovery. The company is relocating its bus assembly facility from Qaliyoub
to Suez (the site of the GB Polo joint venture assembly plant) and so CV margins
are expected to remain impaired until GB Polo officially begins in 2Q10 (delayed
from 4Q09), affected by under-recovered overheads as well as price concessions to
reduce high-cost inventory. We are also concerned about the repeated delays of the
government-sponsored trailer replacement program, and we thus opt to exclude GB
Autos trailer sales to the program from our estimates until a timeframe becomes
clear. The Two- and Three-Wheeler segment bucked the business trend, advancing
2% YoY in 9M09, and has positive prospects especially with GB Autos expected
launch of a new microfinance venture by 1Q10, which will offer flexible payment
options for the segment.
Target Price
Market Price (EGP)
Upside
28.69
23.94
19.8%
Listed on
Bloomberg Code
RIC
EGX
AUTO EY
AUTO.CA
3,643
603
3,088
564
129.0
3.8
0.7
Shareholding Structure
Free Float
Ghabbour Family
Others
22.7%
70.6%
6.7%
AUTO
30EGX
25
20
OLD*
09E
10F
Revenues (EGPm)
EBITDA (EGPm)
4,154
407
5,113
562
4,498
466
5,649
672
EBITDA Margin
9.8%
11.0%
10.4%
11.9%
175
1.35
276
2.13
221
1.71
-58.0%
17.30x
8.93x
1.59x
8.1%
57.5%
11.00x
7.05x
1.40x
-5.9%
-46.9%
13.71x
8.20x
1.53x
3.1%
EPS Growth
P/E
EV/EBITDA
P/BV
FCF Yield
10
5
0
D
Mai Nehad
+202 33328 626
mnehad@hc-si.com
Hatem Alaa
+202 33328 614
15
CONSENSUS
09E
10F
364
2.82
4,550
482
10.6%
251
1.95
5,659
672
11.9%
363
2.81
64.8%
8.32x
5.83x
1.30x
1.6%
-39.6%
12.30x
8.93x
-
44.5%
8.51x
5.85x
-
halaa@hc-si.com
* Old and New Estimates from Notes Dated August 17th and November 23rd, 2009, respectively
A = Actual; E/F = HCs Estimates/Forecasts; C = Consensus Estimates
72
Egypt
Financial Statements
2008a
2009e
2010f
2011f
2012f
2013f
Total Revenue
5,192
4,156
5,115
6,185
7,852
9,677
Revenue Growth
12%
-20%
23%
21%
27%
23%
(4,320)
872
(3,613)
543
(4,388)
727
(5,279)
906
(6,646)
1,206
(8,177)
1,500
16.8%
13.1%
14.2%
14.7%
15.4%
15.5%
(277)
32
628
(246)
41
338
(271)
36
491
(312)
37
631
(383)
43
866
(460)
48
1,089
Income Statement
Gross Margin
SG&A Expenses
Other Operating Income (Expenses)
Operating Profit
Operating Margin
12.1%
8.1%
9.6%
10.2%
11.0%
11.3%
Net Provisions
Net Interest Cost
Other Non-Operating Income
(Expenses)
Net Income Before Taxes
Taxes
Net Income Before Minority
Interest
Minority Interest
Net Income Before
Appropriations
Appropriations
Net Income After Appropriations
19
(116)
6
(128)
(6)
(140)
(9)
(158)
(12)
(131)
(13)
(102)
(18)
512
(94)
16
231
(56)
5.11
351
(70)
6.19
470
(94)
7.85
731
(146)
9.68
984
(197)
418
(2)
175
-
281
(5)
376
(7)
585
(11)
787
(14)
416
(19)
397
175
(8)
167
276
(12)
263
369
(17)
352
575
(26)
549
773
(35)
738
-4%
8.0%
-58%
4.2%
57%
5.4%
34%
6.0%
56%
7.3%
35%
8.0%
EBITDA
698
408
563
717
957
1,186
14%
13.4%
-42%
9.8%
38%
11.0%
27%
11.6%
33%
12.2%
24%
12.3%
124
500
1,345
244
2,214
1,181
233
1,415
3,629
298
513
1,046
274
2,130
1,416
234
1,649
3,780
580
517
1,169
304
2,570
1,865
246
2,111
4,681
500
521
1,304
337
2,663
1,939
263
2,203
4,865
503
526
1,453
388
2,870
1,987
287
2,274
5,144
526
533
1,610
444
3,113
2,030
320
2,350
5,463
1,696
191
1,741
1,784
93
1,903
914
1,596
2,171
1,079
1,385
2,401
1,296
1,175
2,673
1,460
964
3,039
416
172
(542)
46
(255)
(4)
(258)
56
(156)
175
193
211
580
(298)
3
(295)
(111)
173
276
247
(137)
386
(526)
(9)
(535)
432
283
369
292
(150)
511
(170)
(14)
(183)
(408)
(80)
575
278
(167)
686
(150)
(20)
(170)
(513)
2
773
261
(177)
858
(152)
(30)
(182)
(653)
23
EBITDA Growth
EBITDA Margin
Balance Sheet
73
Egypt
Theme 2: Fallen Angels, stocks that were heavily sold off in 2008, despite good fundamentals
The financial risk of 2008 saw all stocks sell-off, the good the bad and the ugly. Through HC research we pick stocks that were
aggressively sold-off in 2008 and 2009 and have not yet recovered fully in 2009, rather than chasing stocks higher in 2010 that
have already been re-rated and done very well in 2009. We look for those stocks that, despite having good fundamentals and/or
being upgraded by sector analysts, have yet to see strong market performance. These fallen angels" offer investors an attractive
investment opportunity and protection from steep market sell-offs.
Revenue: We like those stocks that did not see declines in revenue in the latest financial year, having strong business
models and being able to maintain revenue growth in the next financial year.
EBITDA: We like strong earnings growth as companies restructure and cut costs.
Debt: Companies that have been able to pay down their debt or are cash rich, could have the upside surprise of a debt
upgrade from ratings agencies, do not have to worry about the need to refinance or could secure new assets at low prices
as rivals fail.
The result of the process aims at singling out (or emphasizing on) the potential stocks that are currently both in an up-trend and
are outperforming the benchmark (MSCI-GCC index).
Stocks are then assigned the following: Overweight (OW), Market Weight (MW) ,or Underweight (UW).
74
Egypt
Index
Liquidity (local
currency)
000s
Consensus
Earnings
Valuation on
History
Rev
Growth
Stock Market
Performance
EGX 70
EGX 70
Basic Materials
Basic Materials
3191
554
1192
7417
EGX 70
EGX 70
EGX30
Basic Materials
Basic Materials
Basic Materials
1459
3574
8719
10146
1317
36842
EGX 70
EGX 70
EGX 70
EGX 70
EGX30
EGX 70
Basic Materials
Basic Materials
Basic Materials
Basic Materials
Basic Materials
Basic Materials
Consumer,
Cyclical
Consumer,
Cyclical
Consumer,
Cyclical
Consumer,
Cyclical
Consumer,
Cyclical
Consumer,
Cyclical
Consumer,
Cyclical
Consumer,
Cyclical
Consumer,
Cyclical
Consumer,
Cyclical
Consumer,
Cyclical
Consumer,
Cyclical
Consumer,
Cyclical
10137
6291
319
212
5271
102
1747
4441
3389
885
10398
3648
1088
26993
377
18427
3088
4027
252
1328
1418
733
440
10977
307
773
933
4367
753
2468
46
2233
1674
3293
2317
1520
328
2550
EGX30
Ghabbour Auto
EGX 70
EGX 70
Delta Industrial Co
EGX 70
EGX30
EGX 70
EGX30
EGX 70
EGX 70
Oriental Weavers
EGX 70
B-Tech
EGX 70
EGX30
EGX 70
+
+
+
+
+
+
+
+
+
EBITDA
Grwth.
Net Debt
Change
HC Analyst
Rating
+
+
+
+
+
+
+
+
+
+
+
+
+
Hold
17.0
Buy
1090
Hold
28.7
+
+
+
+
+
+
+
Target
Price
75
Egypt
Sector
Liquidity (local
currency)
000s
Company
Index
Raya Holding Co
Alex Spinning & Weaving
Assiut Islamic Trading
Glaxo Smith Kline
Middle Egypt Flour Mills
Eastern Tobacco
Egyptian for Developing
Building Materia
El Nasr For
Manufacturing
Agricultural C
Egypt for Poultry
Gharbia Islamic Housing
Development
GMC Group for Industrial
Commercial & Fi
International Agricultural
Products
Ajwa For Food Industries
Co Egypt
North Cairo Flour Mills
Misr Oils & Soap
Mansourah Poultry
Northern Upper Egypt
Development
Cairo Poultry Co
Sharkia National Food
Delta Sugar Co
Extracted Oils
Maridive & Oil Services
SAE
Egyptians Abroad Inv &
Development
El Ahli Investment and
Development
Al Arafa Investments and
Consulting
Egyptian Real Estate
Group
Suez Canal Bank
Gulf Canadian Real
Estate Investment Co
EGX 70
EGX30
EGX 70
EGX 70
EGX 70
HERMES
Consumer, Cyclical
Consumer, Cyclical
Consumer, Staples
Consumer, Staples
Consumer, Staples
Consumer, Staples
304
441
88
1545
185
5917
5686
11557
2510
1352
2612
3985
EGX 70
Consumer, Staples
38
33
EGX 70
EGX 70
Consumer, Staples
Consumer, Staples
220
181
2249
8060
EGX 70
Consumer, Staples
28
1701
EGX 70
Consumer, Staples
146
3886
EGX30
Consumer, Staples
619
9812
EGX
EGX
EGX
EGX
70
70
70
70
Consumer,
Consumer,
Consumer,
Consumer,
Staples
Staples
Staples
Staples
1344
200
102
147
5258
2395
1145
1179
EGX 70
EGX 70
EGX 70
EGX 70
EGX30
Consumer,
Consumer,
Consumer,
Consumer,
Consumer,
Staples
Staples
Staples
Staples
Staples
63
1391
70
2316
241
3399
1259
3436
2022
7325
EGX30
Energy
1004
363
EGX30
Financial
216
12600
EGX30
Financial
399
10963
EGX 70
Financial
154
289
EGX 70
EGX 70
Financial
Financial
162
1504
2012
734
EGX 70
Financial
70
2235
Consensus
Earnings
Valuation on
History
+
+
Rev
Growth
Stock Market
Performance
EBITDA
Grwth.
Net Debt
Change
HC Analyst
Rating
+
+
+
+
+
Target
Price
Buy
120.46
Buy
5.56
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
76
Egypt
Sector
Company
Credit Agricole Egypt SAE
Cairo Investment & Real
Estate Developme
Commercial International
Bank
Development &
Engineering Consulting
Delta Construction &
Rebuilding
National Development
Bank/Egypt
Egyptian for Tourism
Resorts
Egyptians Housing
Development &
Reconstruction
Egyptian Kuwaiti Holding
Co
Cairo Housing &
Development Co SAE (El
Kahera Housing)
EL Shams Housing &
Urbanization
Giza General Contracting
& Real Estate I
Housing & Development
Bank
Heliopolis Housing
Egyptian Financial GroupHermes Holding
Mena Touristic & Real
Estate Investment
Medinet Nasr Housing
Naeem Holding
Namaa for Development
and Real Estate In
National Real Estate Bank
for Developmen
National Societe Generale
Bank SAE
Six of October
Development &
Investment
Palm Hills Developments
SAE
Pioneers Holding
Index
Consensus
Earnings
Valuation
on History
-
Rev
Growth
Stock Market
Performance
+
EBITDA
Grwth.
Net Debt
Change
EGX 70
Financial
3082
1166
EGX 70
Financial
132
947
EGX30
Financial
16213
35164
EGX 70
Financial
172
2462
EGX 70
Financial
178
2188
EGX 70
Financial
1069
5812
EGX30
Financial
1796
15403
EGX30
Financial
365
13162
EGX30
Financial
1514
2283
EGX30
Financial
674
23676
EGX 70
Financial
354
2962
EGX 70
Financial
152
4086
EGX 70
EGX 70
Financial
Financial
2168
2178
1580
7159
EGX30
Financial
10261
42544
EGX 70
EGX 70
EGX 70
Financial
Financial
Financial
297
2442
138
2515
8754
854
EGX 70
Financial
503
4571
EGX 70
Financial
66
2499
HERMES
Financial
9674
2709
EGX30
Financial
2996
11176
EGX30
EGX30
Financial
Financial
5004
3105
18116
45669
Target
Price
Hold
59.98
Buy
39.62
Buy
105.2
Hold
9.5
HC
Analyst
Rating
+
+
+
+
+
+
+
+
+
+
+
77
Egypt
Sector
Company
Index
Consensus
Earnings
EGX
70
EGX30
EGX30
Financial
Financial
Financial
557
13115
568
3981
68935
23149
EGX 70
Financial
447
5933
EGX 70
Industrial
1846
2307
EGX 70
Industrial
1742
4862
EGX 70
Industrial
281
2021
EGX 70
EGX30
Industrial
Industrial
828
605
1094
14318
EGX 70
EGX
70
EGX 70
EGX
70
EGX 70
Industrial
69
4140
Industrial
Industrial
271
687
6647
1722
Industrial
Industrial
511
240
2723
1657
EGX30
Industrial
52671
67163
EGX 70
Industrial
280
5101
EGX 70
EGX 70
EGX30
Industrial
Industrial
Industrial
1424
78
3306
6297
3213
13010
EGX30
EGX 70
EGX 70
Industrial
Industrial
Industrial
8580
374
48
21064
5036
2148
EGX30
EGX30
Telecommunications
Telecommunications
20597
28628
25841
31747
EGX30
Telecommunications
24311
79335
EGX 70
Utilities
831
2032
Valuation
on History
Rev
Growth
Stock Market
Performance
EBITDA
Grwth.
Net Debt
Change
HC
Analyst
Rating
Target
Price
Buy
9.1
Hold
258.9
Buy
Buy
250
22.4
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
78
Egypt
1. Performance: + = Heavily sold stocks in 2008 that have lagged behind in 2009
2. Earnings: Change in consensus 12-mth forward EPS estimates (+ = Upgrade - = Downgrade to last change in EPS)
3. Valuation: + = stock that is at 25% discount or more to historic P/B multiples
4. Net debt for companies that have been paying, down debts or are cash rich, thus less concerned about refinancing needs will have a positive rating "+
79
Egypt
Rating Scale
Recommendation
Buy
Hold
Sell
Upside
Greater than 25%
0-25%
Less than 0%
Disclaimer
This memorandum is based on information available to the public. This memorandum is not an offer to buy or sell, or a solicitation of an offer to buy or sell the
securities mentioned. The information and opinions in this memorandum were prepared by HC Brokerage from sources it believes to be reliable and from
information available to the public. HC Brokerage makes no guarantee or warranty to the accuracy and thoroughness of the information mentioned in this
memorandum, and accepts no responsibility or liability for losses or damages incurred as a result of opinions formed and decisions made based on information
presented in this memorandum. HC Brokerage does not undertake to advise you of changes in its opinion or information. HC Brokerage and its affiliates and/or its
directors and employees may own or have positions in, and effect transactions of companies mentioned in this memorandum. HC Brokerage and its affiliates may
also seek to perform or have performed investment-banking services for companies mentioned in this memorandum.
80
Egypt
HC Research
research@hc-si.com
Karim Khadr
karim.khadr@af-hc.com
+971 4 2935381
Chief Economist/Strategist
Junior Economist
tudor.allin-khan@af-hc.com
aabdelkhalek@hc-si.com
+971 4 2935386
+202 3332 638
NematAllah Choucri
Sarah Shabayek
Telecoms
Telecoms
nchoucri@hc-si.com
sshabayek@hc-si.com
Germaine Benyamin
Janany Vamadeva
Engy El Dishish
germaine.benyamin@af-hc.com
janany.vamadeva@af-hc.com
engy.eldishish@af-hc.com
+971 4 2935382
+971 4 2935384
+202 3332 8636
Roaa Alian
Hatem Alaa
Mennatallah El Hefnawy
Mai Nehad
Nadine Weheba
Industrials
Industrials
Industrials
Industrials
Industrials
ralian@hc-si.com
halaa@hc-si.com
melhefnawy@hc-si.com
mnehad@hc-si.com
nweheba@hc-si.com
+202
+202
+202
+202
+202
Majed Azzam
Ankur Khetawat
Nermeen Abdel Gawad
Real Estate
Real Estate
Real Estate
majed.azzam@af-hc.com
ankur.khatawat@af-hc.com
ngawad@hc-si.com
+971 4 2935385
+971 4 2935387
+202 3332 8628
Yasmin El-Rifae
Editor
yelrifae@hc-si.com
Head of TA Desk
Senior Technical Analyst
Technical Analyst
msaeed@hc-si.com
wael.atta@af-hc.com
skhalil@hc-si.com
3332
3332
3332
3332
3332
8612
8614
8632
8626
8644
traders@hc-si.com
Shawkat El-Maraghy
Managing Director
selmaraghy@hc-si.com
Ext. 200
Mostafa Saad
Yasser Mansour
Hossam Wahid
Hassan Kenawi
Abou Bakr Shaaban
Nihal Hany
Mohamed Helmy
Ahmed Nabil
msaad@hc-si.com
ymansour@hc-si.com
hwahid@hc-si.com
hkenawi@hc-si.com
ashaaban@hc-si.com
nhany@hc-si.com
mhelmy@hc-si.com
anabil@hc-si.com
Ext.
Ext.
Ext.
Ext.
Ext.
Ext.
Ext.
Ext.
General Manager
hassan.choucri@af-hc.com
Mohamed Hegazy
Mohamed Galal
Hesham Bakry
Anne Marie Browne
Richard Frost
Head of Sales
Head of Sales Trading
Institutional Sales Manager
Foreign Institutional Sales
Foreign Institutional Sales
mohamed.hegazy@af-hc.com
mohammed.galal@af-hc.com
hesham.bakry@af-hc.com
annemarie.browne@af-hc.com
richard.frost@af-hc.com
+971
+971
+971
+971
+971
213
217
206
300
238
219
207
218
4
4
4
4
4
293
293
293
293
293
5365
5309
5353
5301
5302
81