“We expect a 1-year delay in the easing cycle and remain bullish on prospects of the Egyptian economy”
- We are bullish on construction, energy-related, consumer staples, financials, tourism, automotive, and select real-estate names.
- With a big portion of our coverage undervalued, our focus is on compelling stories with low forward PEG ratios rather than merely potential returns, filtering through to 12 high-conviction picks.
- HC Securities & Investment expects another round of subsidy cut slated for July, leading to renewed inflationary pressures. Based on HC’s view, this coupled with high global interest rates, should lead to a delay in the resumption of the monetary easing cycle to 2020e where we estimate a total 500 bps cut, compared to our previous estimate of a total 400 bps cut by the end of 2019.
“Our real effective exchange rate (REER) model implies a 9.5% gradual EGP devaluation by December 2019e to an EGP/USD rate of 19.6. This view is supported by the banking sector’s widening net foreign liability position, Egypt’s high level of foreign debt, and the delay in FDIs, which came in flat y-o-y in FY17/18 and even dropped c40% y-o-y in 1Q18/19. That said, we believe the Egyptian government will inevitably have to move toward full currency liberalization with the first sign being the Central Bank of Egypt (CBE) canceling the foreigner repatriation mechanism in November 2018. The IMF’s USD12bn Extended Fund Facility (EFF) also requires the CBE adopt a flexible exchange rate policy,” according to a report issued by HC’s Research Department.
“We remain bullish on the prospects of the Egyptian economy and believe it has managed to achieve considerable reforms, leading to a narrower current account deficit and nearly breaking even by FY20/21e, on our numbers. Following the resumption of monetary easing in 2020e, we expect private investments to be the main growth driver and believe that inflation moderation coupled with higher employment should help improve private consumption,” HC’s report added.
The report also shed light on compelling stories in 2019, stating that “this leads to 12 high-conviction picks in the construction, energy-related, consumer staples, financials, real-estate, tourism, and automotive sectors that offer compelling stories and low forward PEG ratios. Given our macro view, we prefer companies with strong balance sheets, that stand to benefit from EGP devaluation, and/or are able to pass rising costs onto consumers without hampering volumes (mainly consumer staples), and/or with exposure to robust government investments. We are also bullish on companies with exposure to underserved and profitable non-banking financial services, those with exposure to the rebounding tourism and automotive sectors, and select real-estate names. With a big portion of our coverage being undervalued, we stick to 12 high-conviction picks that offer compelling stories and low 2019e PEG ratios. In the banking sector, our picks are Commercial International Bank (COMI EY) and Crédit Agricole Egypt (CIEB EY). In the financial services sector, our picks are EFG Hermes Holding (HRHO EY) and CI Capital Holding (CICH EY). In the industrial sector our picks are El Sewedy Electric (SWDY EY) and Orascom Construction (ORAS EY, OC DU). In the consumer sector, our picks are GB Auto (AUTO EY), Juhayna Food Industries (JUFO EY), and Arabian Food Industries (Domty) (DOMT EY). In the real-estate sector, our picks are Orascom Development Egypt (ORHD EY), TMG Holding (TMGH EY), and Emaar Misr (EMFD EY).”
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