October 2023

HC believes the MPC is to increase the policy rates by 1% in its coming meeting

Posted on October 29, 2023 by Marwa Nakhla

HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled November 2^nd. Based on Egypt’s current situation, they expect the CBE to increase the policy rates.

Financials analyst and economist at HC, Heba Monir commented: “ We expect Egypt’s inflation to continue rising by 2.6% m-o-m and 38.0% y-o-y in October, similar to September’s figure, reflecting supply shortages of essential commodities and products mainly caused by the curbing of importation, exporting some crops and lack of USD availability and the seasonality effect of the partial start of schools and universities’ academic year. Moreover, Moody’s and S&P downgraded the Egyptian government’s long-term foreign and local currency issuer ratings with a Stable outlook. Besides the reasons mentioned by the rating agencies for the rating downgrade mostly related to Egypt’s worsening debt affordability, other concerning factors include (1) the surge in Egypt’s 1-year CDS to 2,013 bps from 1,230 in mid-September, (2) the widening of the gap between the parallel and official FX rates to as much as c50% and c30% between the Real Exchange Rate (RER) and Real Effective Exchange Rate (REER) models, based on our calculations, (3) the increase of the inflation differential between the US and Egypt to 34.4% in 4Q23 from 33.8% in 3Q23, and (4) the increase of the 12M yield on US treasuries to 5.42% currently from 4.67% in January 2023 while Egypt offers a negative real yield of 4.0% currently on its 12M T-bills, based on the latest 12M T-bills auction offering a nominal yield of 26.4% compares to a positive real yield of c2.7% on US treasuries. For Egypt’s real yield calculation, we used a 15% tax rate for US, UK, and Europe investors) and an average inflation rate of 26.4% for for FY24. We also estimate that the 12M T-bills required return is c28%. On a more positive note, Egypt’s overall balance of payment (BoP) recorded a surplus of USD601m in 4Q22/23 and USD882m as well in FY22/23. Net international reserves (NIR) increased by 5.34% y-o-y and 0.12% m-o-m to USD35.0bn in September, and deposits not included in the official reserves increased by c6.4% m-o-m and 3.82x y-o-y to USD5.05bn in September. Egypt’s banking sector’s net foreign liabilities (NFL) narrowed by USD585bn m-o-m for the second consecutive month to USD25.7bn in August due to a USD995m m-o-m decline in the CBE’s foreign liabilities, according to CBE data. Excluding the CBE, the banking sector’s NFL widened by USD220m m-o-m to USD16.4bn due to a larger drop in banks’ foreign assets (excluding the CBE) by USD868m m-o-m versus a decline of USD648m m-o-m in banks’ foreign liabilities. Based on Egypt’s economic situation, and although the inflation spike is supply-driven rather than demand-driven, we forecast a total 200 bps policy rate hike before year-end, including 100 bps for the 2 November meeting as we believe that the rate hike may help defend the currency against dollarization and purchases of gold by Egyptian citizens, despite that we would still be in negative real yield territory until inflation normalize again.”

It is worth mentioning that, in its 21 September meeting, the Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) decided to maintain the benchmark overnight deposit and lending at 19.25% and 20.25%, respectively, after it increased it by 300 bps y-t-d and 800 bps in 2022. Egypt’s annual headline inflation accelerated to a record of 38.0% in September from 37.4% y-o-y in August, according to the Central Agency for Public Mobilization and Statistics (CAPMAS) data. Monthly prices rose 2.0% m-o-m in September compared to a 1.59% m-o-m increase in the previous month. On the global front, the US Federal Reserve raised interest rates in July by 25 bps to a range of 5.25-5.50%, a total of 100 bps y-t-d and 425 bps in 2022, with most expectations likely to maintain rates in its meeting next week, according to Bloomberg.

About HC Securities & Investment

HC Securities & Investment is a leading investment bank in Egypt and the MENA region. Since its inception in 1996, HC has utilized its relationship-driven insights, local and regional market knowledge, and industry-specific expertise and strong execution capabilities to provide its clients with a wide range of services in investment banking, asset management, securities brokerage, research, custody and online trading through its offices in Egypt and the UAE (DIFC). HC Investment Banking has an outstanding track record of advising leading corporates in Egypt and the MENA region on M&A, capital market, and financing transactions in excess of USD6.6bn. HC Asset Management now manages 7 mutual funds for commercial banks and portfolios for institutions and sovereign wealth funds with assets under management in excess of EGP7bn. HC Brokerage is ranked among the top brokers in Egypt and provides a wide array of services, including research and online trading to institutional and retail clients.

HC: Edita Food Industries, Resilient Performance

Posted on October 16, 2023October 29, 2023 by Marwa Nakhla

Attractive product offerings and efficient pricing and working capital management strategies help Edita navigate challenging conditions
We forecast EBITDA and EPS to grow at a 2024–28e CAGR of c18% and c21%, respectively, driven by volume and price increases

In a recent report, HC Brokerage presented their evaluation of Edita Food Industries forecasting their revenue to grow.

Pakinam El-Etriby, Consumers Analyst at HC commented that: “Edita diligently navigating a double whammy: The COVID-19 pandemic outbreak and lockdowns in 2020 impacted energy, commodity supply, and prices. When economies started to open up in 2021, the limited supply caused production bottlenecks, further fueling inflation. The Russian-Ukrainian war in February 2022 exacerbated the situation, resulting in additional disruptions in global supply chains. The impact was especially notable for commodities like wheat, primarily sourced from Ukraine and Russia. By March 2022, crude oil and wheat prices reached their highest levels in three years (from 2020 to the present), standing at USD128/bbl for oil (up from an average of USD70.9/bbl in 2021 and USD89.7/bbl for the first two months of 2022) and around USD524/tons for wheat (up from an average of USD258/tons in 2021 and USD290/tons for the first two months of 2022). Furthermore, the three consecutive EGP devaluations in March 2022, October 2022, and January 2023, by a total of around 50%, further increased raw material prices for Egyptian food producers, which eventually influenced consumer spending patterns. As a result, companies hiked prices to navigate this challenging economic environment, with Edita standing out by preserving its margins while not negatively impacting the demand for its products. From 2021 through 1H23, it managed to increase its volumes by an average of c22% y-o-y per quarter and expand its market share, as smaller producers found it difficult to withstand the challenging operating environment, with some even exiting the market, allowing Edita to increase its market share. In 2022, EFID increased its revenue and net profit by c46% and 2x y-o-y, respectively, and the momentum continued into 1H23 with a c80% y-o-y growth in revenue and a c2x y-o-y hike in net profit. We expect EFID to continue passing the bulk of cost increases onto consumers, directly and indirectly, to protect its margins against higher raw material costs.”

“We forecast revenue to grow at a 2024–28e CAGR of c14% on higher volumes and prices: During 1H23, total volume increased c31% y-o-y to 1,994m packs, and blended price increased c37% y-o-y to EGP2.83/pack, leading to the c80% y-o-y revenue growth to EGP5.64bn. We expect a similar performance in 2H23, as the company capitalizes on its attractive product offerings, serving as a meal replacement, and its active pricing strategy. Therefore, we expect 2023e revenue to increase by c64% y-o-y to EGP12.6bn. Furthermore, we forecast revenue to grow at a CAGR of c14% over our 2024–28e forecast period, with volumes growing at a CAGR of c10% and average selling prices growing at a CAGR of c4%. We expect the cake and bakery segments to continue contributing more than c80% to Edita’s total revenue over our forecast period.” El-Etriby added.

“We forecast EBITDA and EPS to grow at a 2024–28e CAGR of c18% and c21%, respectively, helped by stable margins and efficient working capital management: In 2023, we expect GPM to contract by c2 pp y-o-y to c32%, impacted by higher commodity prices and a weaker EGP, with average cost/pack standing at EGP2.06/pack (up c44% y-o-y), surpassing the c40% annual increase in average selling prices of EGP3.03/pack during the year, based on our numbers. However, starting in 2024, despite the further expected EGP devaluation, we estimate GPM to gradually recover over our 2024–28e forecast period and reach 34.9% by 2028e, as we expect Edita to pass on cost increases to consumers and successfully migrate them toward higher-priced SKUs. We expect the EBITDA margin in 2023 to marginally decline to 19.0% y-o-y from 19.8% in 2022, supported by the high operating leverage and economies of scale, with SG&A and distribution costs representing c15% of total sales versus 17% in 2022, respectively. We expect Edita’s EBITDA margin to average c22% over our 2024–28e forecast period. Accordingly, we forecast EBITDA and EPS to grow at 2024–28e CAGR of c18% and c21%, respectively. Edita has always maintained an efficient working capital strategy characterized by a negative cash conversion cycle (CCC). However, during the past two years, receivable and inventory days on hand (DOH) relatively surged due to global supply chain disruptions and the EGP depreciation, with the CCC averaging c23 days and we expect it to decline to c10 days by 2028e.” Pakinam El-Etriby concluded.

About HC Brokerage

HC Brokerage is an affiliate of HC Securities & Investment– a full-fledged investment bank providing investment banking, asset management, securities brokerage, research, and custody services. HC Brokerage is an Egyptian registered company and member of Egypt’s Financial Regulatory Authority (FRA), and its registered address is 34 Gezirat Al-Arab St., Mohandessin, Giza, Egypt, Dokki 12311

For further information, please contact:

Research@hc-si.com

HC: Orascom Construction, Robust business model

Posted on October 8, 2023October 9, 2023 by Marwa Nakhla

Imminent inflection point in the GCC to support MENA operations
ORAS capitalizes on its U.S. presence, hedges setbacks, and further diversifies its exposure through BESIX
In a recent report, HC Brokerage issued an update note about Egypt’s construction sector, through shedding the light on Orascom Construction focusing on the the company’s exposure rebalancing.

Nesrine Mamdouh, Industrials Analyst at HC commented that: “Despite a challenging operating environment in Egypt, projects in the pipeline still offer moderate potential: In 2022, The Russian-Ukrainian war caused commodity market turmoil, supply chain disruptions, soaring global inflation, and hence rate hikes by major international central banks, pressuring the EGP and stressing Egypt’s state budget. As a result, the Egyptian government rationalized public spending, and despite delaying the implementation of new projects with a USD component (estimated at USD8bn), it allocated EGP587bn for investments (USD18.8bn) in the FY23/24 state budget. It also endorsed legislative and regulatory amendments to reduce its footprint in various economic sectors and encouraged private sector participation, including amendments to the executive regulations of the PPP Act for infrastructure projects to facilitate public-private partnerships in key projects. The budget also marks EGP600bn for private investments, representing c33% of total investments of EGP1.8trn and c50% by FY25/26, which is achievable if domestic macroeconomic visibility and investor sentiment improve, in our view. Regarding ORAS’s main business areas, we expect the transportation sector’s share of total investments to retreat after the completion of its ten-year (2014–2024) development plan with total investments of EGP1.7trn. We also see growth potential in the logistics, manufacturing (with expected investments of USD3.3bn in FY23/24), electric regional interconnectivity, and renewable energy sectors. Renewables include green hydrogen projects, which are attracting remarkable investments to Egypt, and water desalination projects with investments of USD3.1–3.3bn for the first phase of Egypt’s water desalination program, targeting a capacity of 3.35m cbm/day by 2025.”

“Rebalancing exposure in MENA in a quest for potential opportunities: We expect ORAS’s share of Egypt’s investments to soften to an average of c3.1% in 2023–2027e (a proxy for its awards from Egypt), from 3.7% in 2018–2022, as the government plans to scale down USD-intensive projects and as ORAS targets quality projects, entailing a foreign financing component. Having said that, we expect a c20% y-o-y decrease in Egypt awards to USD1.6bn in 2024e, while a faster-than-expected resumed USD spending on planned projects, and private sector participation would represent an upside risk to our numbers. However, the 2023e healthy backlog from Egypt, estimated at USD3.9bn, representing c69% of its total backlog, should secure decent sustained revenue over 2024 until the economy overcomes its bottlenecks and FX shortage. Also, the government’s compensations to negatively affected contractors by the EGP devaluation, should support its revenue from Egypt. As for MENA, we see ORAS capitalizing on its flexible and diversified business model to increase its exposure to the GCC through vigorous investment plans and mega projects aiming at diversifying their hydrocarbon-based economies. The GCC’s total underway and planned projects are estimated at USD2.6trn, of which c54% are in the KSA, c21% in the UAE, and are led by the construction sector at c56% of total investment projects, according to the GCC 2023 planned projects by MEED. As for KSA, which dominates the lion’s share of investments, we expect its awards to average c35% of investments over our forecast period, a growth of c2.2x, from an average of c16% in 2018–2022. Despite fierce competition, we see ORAS, relying on its expertise, actively bidding and consorting with national and international companies for various water projects, including desalination, transmission, strategic reservoir, and wastewater treatment projects.” Mamdouh added.

“Sustained business in the US and diversification benefit from Besix: The US Infrastructure Investment and Jobs Act (IIJA) signed in 2021 authorized USD1.2trn for transportation and infrastructure spending, of which USD550bn were allocated to new investments over five years in the nation’s bridges, airports (the Bipartisan Infrastructure Law provides USD15bn in airport infrastructure funding), waterways, and public transit among others. However, the Fed Reserve’s restrictive policy to curb inflation by raising rates by 525 bps since March 2022 to date to a range of 5.25–5.50%, created tighter credit conditions, gradually weighing down on growth. While supply chain bottlenecks are largely resolved, and inflation is gradually improving, it is still relatively high, at 3.7% as of August. Whereas in July 2023, the US total construction spending (SAAR) increased by c5.5% y-o-y to USD1.97trn, driven by a c17% y-o-y growth in total non-residential spending and a c71% y-o-y growth in notable private manufacturing spending. ORAS maintains its exposure to the US data center business, the recession-proof student housing, and the light industrial and commercial sectors, while increasing it to the advanced manufacturing and aviation infrastructure works. We foresee ORAS focusing on non-interest-rate sensitive and sophisticated projects where it possesses a comparative advantage, which should sustain its EBITDA margins at an average of c2.2%, on our numbers. As for Besix, despite a gloomy outlook for the European construction sector in 2023, the Eurostat Construction Production Index increased y-o-y as of June 2023 for Belgium, Netherlands, and Luxemburg, with a slight decrease for France, Besix’s main business markets in Europe. We foresee investments in these economies to maintain an average share of c33% of total Euro area fixed capital formation over 2023–2024e. Also, the infrastructure and renewable projects public tenders should sustain Besix’s business in concessions and assets. Moreover, the company’s expertise in marine, high-rise innovative buildings, its exposure to the Middle East, along with the phasing out of lower-quality projects should improve its net profit margin at an estimated average of c1.1%, suggesting a decent contribution to ORAS’s bottom line, further enhanced by the magnitude of any potential appreciation of the EUR/USD exchange rate.” Nesrine Mamdouh concluded.

About HC Brokerage

HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled November 2nd. Based on Egypt’s current situation, they expect the CBE to increase the policy rates.

Attractive product offerings and efficient pricing and working capital management strategies help Edita navigate challenging conditions

We forecast EBITDA and EPS to grow at a 2024–28e CAGR of c18% and c21%, respectively, driven by volume and price increases

Imminent inflection point in the GCC to support MENA operations

ORAS capitalizes on its U.S. presence, hedges setbacks, and further diversifies its exposure through BESIX

In a recent report, HC Brokerage issued an update note about Egypt’s construction sector, through shedding the light on Orascom Construction focusing on the the company’s exposure rebalancing.

HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled November 2^nd. Based on Egypt’s current situation, they expect the CBE to increase the policy rates.