Egypt | Global externalities a setback; Favour defensive plays and value stocks
Global pressures pose risk to short-term outlook. Higher oil prices and global financial pressures encourage a conservative shift in fiscal and monetary policies. Our base case assumes an average 55% fuel subsidy cut in July, along with a 1% hike in policy rates in 3Q18. Based on the government’s budget for an oil price of USD67/bbl (vs. USD76 spot), and the USD:EGP rate of 17.25 for FY18/19, we calculate a combined EGP5bn increase in costs for each USD1 increase in Brent and 1% depreciation in the USD:EGP rate. We expect this to push the easing cycle to early 2019, diluting concerns of capital outflows. However, if the average fuel subsidy cut is <45%, our best case scenario is plausible, with the CBE maintaining rates in 3Q, and a faster pace of easing would be upside risk.
A pushback to domestic activity. Inflation accelerating to our forecast of 16% by July, sustaining high cost of funding, and demand side pressures will weigh on growth in investment, spending, and employment over the coming quarters. The favourable base effect, pushing real GDP growth to an expected 5.4% this year, 0.4% above our previous forecast, will not withstand in FY18/19. The planned EGP55bn in social stimulus (1% of FY18/19 GDP) is inadequate to ease spending pressures, unless unemployment falls steeper from 10.3% in 1Q18. We view further structural reforms and a faster pace of monetary easing as the optimal policy mix, ensuring higher sustainable growth and improved investor sentiment by 2019.
Comforting FX dynamics. We expect Egypt’s petroleum trade deficit to close FY17/18 at USD5bn, keeping deterioration in the trade deficit from the +USD10 in Brent price at USD1bn. Ongoing recovery in non-fuel exports, tourism, remittances, and FDI will lead to continued FX build-up, in our view, however, we expect USD:EGP stickiness to continue and, accordingly, revise our FY18/19 forecast to 17.3 from 16.3. The exchange rate has shown no meaningful response this year to the solid recovery in both NIR and NFAs, which recorded USD44bn in May (9 import months), and USD21bn in April, respectively. This is a sufficient buffer in case of USD:EGP pressures.
Play defensives and value stocks. AMOC, EK Holding, MOPCO, and Orascom Construction provide exposure to Egypt’s key top-down themes, amid the current backdrop, energy sector reforms, and infrastructure spending. Inflation hedging returns to be at the core of the thesis for real estate stocks (Emaar Misr and TMG). Pharma stocks (Ibnsina Pharma, EIPICO, and Alex Pharma) offer a low beta exposure to the sector’s gradual price deregulation. Within our value calls, QNB AA, Obour Land, and Raya Contact Center are strongly positioned in their sectors, trading at deeply discounted valuations.
Alexandria Mineral Oils Co SAE (AMOC) is an Egypt-based company that operates in the petroleum industry. The Company specializes in the production of essential mineral oils, paraffin wax and its derivatives, naphtha and butane, as well as distributes and markets them in Egypt and abroad. Its manufacturing facilities are spread over 500,000 square meters in the Salina area in Alexandria, and consist of two complexes: the Lube and Special Oils complex, which manufactures neutral oils, paraffin waxes, soft/slack waxes and aromatics, and the Maximization of Gas Oil complex, which manufactures gas oil, naphtha and liquid petroleum gas (LPG) for local consumption, waxy distillates, heavy residue and black oil for blending with exported fuel oil, and biological sulfur. The Company also operates four laboratories, and performs chemical analysis.
Alexandria Co for Pharmaceutical and Chemical Industries SAE, an affiliated company of Drug Holding Company, is an Egypt-based company engaged in the manufacture, development and marketing of pharmaceutical, chemical, veterinary and nutritional food products, as well as medical appliances, such as adhesive plasters, dental cartridges, medicated adhesive tapes, sterile gauze dressing and surgical gloves. The Company produces syrups & suspensions products, ampoules products, drops products, tablets, capsules, creams & gels products and suppositories products, among others. The Company exports its products to African and Middle Eastern countries, as well as to Romania, Russia and Kazakhstan. The Company has two Factories, one factory for production of pharmaceutical products and the other for production of adhesive tapes, plasters and sterile surgical gloves. The Company's subsidiaries include, among others.
Egypt Kuwait Holding is a long-term-term private equity holding firm in Africa and the Middle East. Co. has a portfolio of investments in the Fertilizers, Petrochemicals, Energy, Manufacturing, Insurance, Information Technology and Transport sectors. Co. generally acquires majority stakes and takes management control in most of its investments. As of Dec 31 2011, Co.'s investment portfolio inlcuded ALEXFERT; BKH; NFC; EHC; Sprea Misr; Plastichem; NATGAS; Shabakat; Nubaria Gas Company; Kahraba; Fayum Gas Company; Gas Chill; Tri-Ocean Energy; BMIC; African Paints; Al-Shrouk for Melamine and resins; GT; Delta Insurance; Nile General Takaful; Nile Family Takaful; ETC and MERT.
Co. is principally engaged in the manufacture and distribution of pharmaceutical products locally and for export. Co. currently has 196 products including analgesic, anthelmintics, antibiotics, anticatarrhal, antidepressant, antidysentrics & enterostatics, antihistaminic, cardiasc and vascularetics, cathartics, dermatological, endocrine system drugs, gastrointestinal, general anaesthetic, glucocorticoid, ophthalmic, orodentals, parasympathomimetic, pulmonics, skeletal muscle relaxants, spasmolytics, treatment of grout, urologic, vaginetics, vitamins and miscellaneous.
Misr Fertilizers Production Company Sae. Misr Fertilizers Production Co SAE, formerly Misr Oil Processing Co SAE, is an Egypt-based company that is engaged in the production, marketing, wholesaling and distributing of fertilizers and petrochemical products. The Company's various products include ammonia, urea and nitrogen.
Obour Land for Food Industries is an Egypt-based manufacturing company, which is specialized in the production, processing and packaging of white cheese. The Company's products include cheese olive with palm oil, istambolly cheese with palm oil, feta cheese, instanbully cheese, khazin cheese with palm oil, feta cheese with palm oil, talaga cheese, instanbully cheese with pepper, double cream cheese and baramily cheese. Obour Land for Food Industries' products can be found at supermarkets in pack sizes ranging from 80 grams to 500 grams.
Orascom Development Egypt SAE Formerly known as Orascom Hotels & Development. Orascom Hotels and Development SAE (OHD), a member of Orascom Group, is an Egypt-based company engaged in the hotel and tourism development sector. The Company focuses on developing a 3,356 million squire meter area for tourism purpose, and providing it with utilities and infrastructure to develop El Gouna area in Al Gardaqa, Red Sea Governorate, on the basis of 50% hotels and 50% tourist accommodations. The Company is active, along with its subsidiaries, in a range of sectors, including hotel, car rental, real estate and development, hospital, education, real estate mortgage, town management, leasing, agriculture, housing and tourism, among others. As of December 31, 2011, the Company's subsidiaries included, among others, Taba Heights Co., Orascom Limousine Co., Misr El Fayoum for Touristic Development Company SAE and El Gouna Hospital Company.
National Societe Generale Bank is an investment and commercial ank. Co. is organized in three business lines which are Corporate Banking, Retail Banking, and Other Businesses. The Corporate Banking segment includes current account activities, deposits, debit current accounts, loans, credit facilities and financial derivatives to large, medium and small entities. The Retail Banking segment includes current account activities, deposits, savings, credit cards, personal loans and real estate loans. The Other Businesses segment include other banking activities such as fund management. As of Dec 31 2011, Co.'s total assets was LE62,552,216,903.
Raya Contact Center Co. Raya Contact Center Co is an Egypt-based company engaged in the provision of business process outsourcing services. The Company's services are structured into four divisions: Contact Center, which offers customer service, inbound sales, technical support and tale-marketing; Back Office, including data management, finance & accounting and supply chain management; Inside Sales, which offers customer segmentation, channel development, campaign management, lead management and account management, and Professional Services, which includes human resources outsourcing, call center hosting, contact center and quality consultancy, and contact center training. The Company serves its clients from seven contact center facilities in Cairo and Hurghada, Egypt; Dubai, UAE, and Warsaw, Poland. Raya Contact Center focuses on industries, such as telecom, technology, consumer electronics, banking, automotive, travel and retail industries.
Talaat Moustafa Group is the a community real estate developer in Egypt, with a land bank of 50 million square meters. Co. is engaged in "community development" through establishing self-sustained residential city and community complexes for the upper and middle classes. Co.'s prominent development projects include Al Rehab City, East of Cairo, and the "Madinaty" project spanning over 33.6 million sqm of land with 600,000 target residents. Co.'s developments also include compounds such as May Fair in Al Shourouk, East of Cairo and Al Rabwa I & II in Six of October City, West of Cairo. Co.'s activities also extend to the hotels and resorts.
CI Capital is a diversified financial services group and Egypt’s leading provider of leasing, microfinance, and investment banking products and services.
Through its headquarters in Cairo and presence in New York and Dubai, CI Capital offers a wide range of financial solutions to a diversified client base that include global and regional institutions and family offices, large corporates, SMEs, and high net worth and individual investors.
CI Capital leverages its full-fledged investment banking platform to provide market leading capital raising and M&A advisory, asset management, securities brokerage, custody and research. Through its subsidiary Corplease, CI Capital offers comprehensive leasing solutions, including finance and operating leases, and sale and leaseback, serving a wide range of corporate clients and SMEs. In addition, CI Capital offers microfinance lending through Egypt’s first licensed MFI, Reefy.
The Group has over 1,700 employees, led by a team of professionals who are among the most experienced in the industry, with complementary backgrounds and skill sets and a deep understanding of local market dynamics.
CI Capital has been recognized as the “Best Investment Bank in Egypt” by EMEA Finance for four years running from 2013-2016, and by Global Finance in 2014 and 2015.
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