Category: HC News

• The price of the US Oil benchmark West Texas Intermediate (WTI) May-20 contracts fell below zero. Which is mainly attributed to the perceived large gap between supply and demand during 2Q20.This large gap led oil firms to rent tankers to store the surplus supply which has forced the price of WTI into negative territory.

April demand is estimated to decline by 29m bbl per day y-o-y. While demand across 2Q20 is expected to decline by 23.1m bbl y-o-y. The drop in demand in April was met by an increase in supply  resulting from the price war between Saudi Arabia and Russia, which in turn pressured May and June futures.

Earlier in April, OPEC+ agreed to reduce output by 9.7m bbl per day for a couple of months and planned to ease this cuts by 2H20, given the high production rate of April, the effective cut expected to be c10.7m bbl. Furthermore, additional reductions are set to come from other countries including USA and Canada, making the oil supply plunge by c12m in May, according to The International Energy Agency (IEA) forecasts.

HC’s comment: “Overall, we see that this cut is not sufficient to match the current drop in demand given the current offline refineries capacities due to the sharp decline of fuel demand and the shutdown of industrials facilities. Therefore, we expect the current pressure on oil futures to persist during 2Q20, and if demand doesn’t recover oil producers will have to cut production again to avoid further collapse in oil futures.”

• Egypt’s external position to deteriorate post the coronavirus outbreak, while public banks fill in the funding gap through short-term external financing, in our view

• In light of the Egyptian government’s downward growth revision, we lower our FY19/20 estimates and keep future estimates until further clarity

• Despite government initiatives, the foreseen delay in private sector pickup will adversely affect budget deficit and public debt figures, in our view

HC Securities and Investment Research Department released its latest macro note, updating its forecasts dated February 2020 in wake of the Coronavirus outbreak.

First updates were about Egypt’s external position, where: “Current pressure on Egypt’s external position could be offset in the short-run through banking sector external credit, in our view: We update our FY19/20e external account figures in light of the coronavirus outbreak and its negative effect on tourism receipts, worker remittances and net foreign portfolio investments. Our underlying assumption, for now, is that the coronavirus could be contained by June. Factoring this in our balance of payment figures, we assume almost no tourism revenue during March, excluding the first week of the month, and we slash it by c60% y-o-y in 4Q19/20e. This would result in c16% y-o-y decline in tourism receipts to USD10.6bn in FY19/20e, c21% lower than our previous estimate of USD13.4bn.”

Economist and banking analyst at HC, Monette Doss said: “Current international oil prices could adversely impact Egypt’s oil trade balance given the country’s plan to become a net exporter of oil, as opposed to a net importer as it has been for the past 6 years. Adjusting Egypt’s oil trade balance for last week’s average Brent price of USD27/bbl, resulted in an oil trade deficit of USD0.96bn for FY19/20e, compared to our previous expectation of a breakeven. With most of Egypt’s foreign direct investments (FDIs) concentrated in the oil and gas sector, and despite newly awarded concessions, we believe that FDIs could decline by c7% y-o-y in 2H19/20e to USD3.8bn, c23% below our previous estimate of USD4.9bn. Prolonged lockdown periods and depressed international trade activity could result, however, in significant import savings that could also come around. That said, we believe the trade balance deficit could narrow to USD31.5bn in FY19/20e from our previous estimate of USD35.8bn.”

“As for worker remittances, we assume a c10% y-o-y drop in 2H19/20e, comparable to the average c8% drop that took place during FY08/09 due to the global financial crisis and the c13% drop in FY15/16 amid doubts over a weakening EGP. This would result in remittances inching up to USD25.1bn in FY19/20e, down c11% from our earlier estimate of EGP28.2bn, given that it grew by c15% in 1H19/20. The assumptions under this scenario would result in a current account deficit of USD10.5bn in FY19/20e, higher than our previous estimate of USD8.2bn.

We now stress test our numbers assuming USD6bn foreign portfolio outflows from the Egyptian treasuries market in 2H19/20e. In order to fill this funding gap, Egyptian banks could rely on external credit facilities, similar to what happened in 2H18 during massive portfolio outflows from emerging markets.” Added Doss.

 

As for the GDP Growth, the report demonstrated HC Research’s expectations as follows: “GDP growth could come in at 4.7% in FY19/20e significantly lower than our initial 5.9% estimate on low consumer and investor confidence, as well as sluggish tourism: The Central Bank of Egypt (CBE), together with the government, have undertaken a number of decisions to motivate private consumption and investment. The CBE has cut corridor rates by 300 bps in an unscheduled meeting on 16 March, higher than our expected 200 bps rate cut for 1H20. Along the same lines, it reduced the rate on initiatives offered to the industrial and tourism sectors, as well as beneficiaries of middle-income mortgage loans, to a declining 8% interest rate from a previous 10%.

Corporates, individuals and SMEs were also allowed a 6-month extension period for repaying their dues on lending, leasing and factoring facilities without paying any penalties. Limits on mobile payments and debit card transactions were also increased, while also allowing clients to transfer funds between banks free of charge, through mobile banking. Lastly, the CBE allocated EGP20bn to be invested in the Egyptian Exchange (EGX) to support stock market activity.

The government from its side, has allocated a stimulus package of EGP100bn to face the negative effects of the new coronavirus outbreak on the economy. Energy prices to the industrial sector were also reduced, where natural gas prices decreased to USD4.5/mmBtu, and electricity tariffs for medium, high and ultra-high voltage users were decreased by EGP0.10/KWh. The Ministry of Planning is also working on formulating an EGP30bn incentive package to stimulate the industrial sector and other sectors negatively affected by the current situation.

Other measures, that we believe are part of the EGP100bn incentive package, include increasing the monthly allowance allocated for women in rural areas to EGP900 from EGP350, adding 60,000 families to the government’s social welfare program, initiating a program to support seasonal workers and increasing public salaries and pension allowances.”

“We however, believe that prolonged lockdown periods and global uncertainty could outweigh these measures resulting in investments declining by c20% y-o-y in 2H19/20e which is confirmed by official investment estimates for FY19/20e at EGP960bn (implying total investments of EGP400bn in 2H19/20e). Moreover, despite corridor rate cuts, public banks maintained rates on their fixed certificates of deposit (CDs), while the National Bank of Egypt (NBE) and Banque Misr introduced 1-year 15% CDs. Possible flight of funds from private banks and possible arbitrage opportunities could be the main reason why Commercial International Bank (COMI EY, Overweight, TP EGP115/share) raised its interest rate on its 3-year CDs by 2.00%–2.50%. If all private banks follow suit by raising interest on deposits and loans, the positive effect of the 300 bps corridor rate cut will largely be eroded. Accounting for possible higher unemployment and lower disposable income, we believe consumption growth could come in at c1% in 2H19/20e, lower than our c2% estimate previously. Accordingly, we see the possibility of GDP growing 4.7% in FY19/20e, significantly lower than our 5.9% estimate.” As per the report.

Monette Doss carried on: “Inflation could accelerate reaching a peak of 11.45% y-o-y in December while CBE measures could result in stable currency: Prices of food items increased following the announcement of the coronavirus outbreak in Egypt and could possibly remain elevated due to possible supply shortages, which could outweigh the government’s effort to monitor prices of staple goods and provide such products at stable prices. Therefore, inflation could accelerate over the rest of the year increasing monthly by an average of c1%, reaching a peak of 11.5% y-o-y in December; while the Egyptian government estimated inflation to accelerate to 9.8%, if the coronavirus continues until the end of 2020. Applying the higher inflation figure into our real effective exchange rate (REER) model yields, a rate of EGP16.34/USD by December 2020, slightly higher than our earlier estimate of EGP16.26/USD. The CBE’s efforts to discourage dollarization through putting a ceiling on USD deposits at LIBOR+100 bps, down from LIBOR+150 bps previously, putting limits on cash withdrawals and banks, and offering attractive interest rates on local currency deposits, support our view of an expected moderate EGP depreciation. We also expect currency stability as public banks rely on external credit to fill in the gap caused by foreign portfolio outflows from the Egyptian treasuries market.”

 

Finally, Doss affirmed that: “Higher expenditure and lower than expected economic growth could weigh on the government budget, resulting in a wider deficit and higher debt: Full details of the government’s EGP100bn incentive package have not been revealed yet. The government, however, has announced that it will not be deducted from the state budget but will rather be paid from emergency reserves. We accordingly expect that our government expenditure figures will not change materially. An extended period of slow economic activity and lockdowns over 2H19/20 could however reflect negatively on government revenue, which could come in lower than our initial estimates by EGP116bn at EGP939bn for FY19/20e. We note that this total revenue figure is quite conservative, representing c16% of GDP lower than the c19% witnessed during the financial crisis in FY08/09 and post the 2011 revolution in FY10/11. This would take the FY19/20e budget deficit to EGP481bn representing 8.1% of GDP, wider than our initial estimate 6.7%. Under this scenario, government external debt could come in at 24.3% of GDP in FY19/20e slightly lower than our 24.5% earlier estimate, while domestic debt could increase to 84.0% of GDP higher than the 80.9% estimated previously, as the government relies on domestic sources to fill in its funding gap.”

 

• The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) has decided to keep the benchmark overnight deposit and lending rates unchanged at at 9.25% and 10.25%, respectively, at its meeting on Thursday, according to a press release.

The CBE has also kept the rate of its main operation and the discount rate at 9.75%, it announced. Annual headline urban inflation declined to 5.3% in February from 7.2% in the previous month, supported by a favorable base effect as well as contained underlying inflationary pressures. Similarly, annual core inflation declined to 1.9% in February from 2.7% in the previous month, the lowest rate on record. GDP growth stabilized at 5.6% in 2H19, while unemployment reached 8.0% in 4Q19. Due to the coronavirus outbreak and the associated containment measures, the global economy and financial markets were considerably disrupted. This led the CBE to move preemptively and cut the interest rate by 300 bps in an unscheduled meeting on 16 March, aiming at supporting businesses and households in these exceptional times in order to avoid a prolonged economic slowdown and help speed the recovery once the outbreak is contained. Against this background, the MPC decided to keep policy rates unchanged which remains consistent with achieving the inflation target of 9% (±3%) in 4Q20 and price stability over the medium-term. (CBE)

HC’s Comment : The MPC decision came in line with HC’s expectations given their view of rising inflationary pressures over the rest of the year, the need to attract foreign portfolio investments to the Egyptian debt market, with rising 5-year USD CDS at 611 bps, and the elevated interest rates offered on long-term certificates of deposit (CDs) aiming at reducing dollarization and bank run, in HC’s view.

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• HC Securities & Investment assured that Egypt’s annual headline inflation decelerated to 5.3% y-o-y in February from 7.2% y-o-y in the previous month, with monthly inflation showing no increase compared to an increase of 0.7% m-o-m in January, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS).

Economist and banking analyst at HC, Monette Doss said: “Despite the decline in the inflation figure in February we believe that inflationary pressures could resume over the coming months due to stocking up of staple and pharmaceutical products following the announcement of curfew in Egypt, relatively higher demand during the month of Ramadan and possible supply shortages resulting from prolonged periods of lockdown. We believe monthly inflation could average c1% m-o-m over the rest of 2020e to record an average of 6.4% over 1H20, backed by a favorable base effect, and to reach a peak of 11.45% y-o-y in December.

We accordingly expect the CBE to maintain rates unchanged in its upcoming meeting. “Local public banks maintained interest on their 3-year CDs at an elevated 12.0%-12.25% and introduced 1-year 15% CDs while the Commercial International Bank (COMI EY) increased interest on its 3-year CDs by 2.0%-2.5% to reach 12.0%-12.25%. Given the current level of uncertainty, we perceive these elevated rates as necessary to discourage dollarization and bank-runs, while however, they dilute the potential positive effect of the recent 300bps rate cut on private sector growth. A similar trend is observed in the T-bill auctions where 6-month T-bills decreased by 76bps only to 13.55% currently, from 14.31% prior to the March rate cut which reflects high risk levels, in our view. Egypt 5-year USD CDS increased to above 612bps currently, from 298bps in end of February and significantly higher than Turkey’s 5-year CDS of 469bps. Current, risk levels discourage further rate cuts in our view.” Monette Doss added

It is worth mentioning that, on 16 March, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) held an unscheduled meeting where it cut interest rates by 300bps after keeping them unchanged in January and February.

• The Monetary Policy committee (MPC) of the Central Bank of Egypt (CBE) has decided to cut overnight deposit and lending rates by 300 bps to 9.25% and 10.25% respectively, at an unscheduled meeting yesterday, it announced in a press release. The CBE has also cut the rate of its main operation and the discount rate by 300 bps to 9.75%, according to the release. The MPC’s preemptive decision aims to support domestic economic activity given a challenging external environment, while the inflation outlook remains consistent with achieving the inflation target of 9% (±3%) in 4Q20, it added. (CBE)

HC’s comment: “The 300 bps interest rate cut announced by the CBE comes higher than our estimate of a 200 bps rate cut in 1H20, and comes after the US Federal Reserve and the Bank of England have cut rates by 50 bps to 0.5% and 0.25%, respectively, and following an announcement by the Fed of another possible rate cut to 0%, in light of the coronavirus outbreak. We believe the lower interest rates will help stimulate local private investment and local consumption, which we see as the main economic drivers going forward. We also believe that the decision will lower the Egyptian government’s debt servicing cost, easing the pressure on the budget deficit. The MPC decision will have a positive effect on the resumption of CAPEX lending, in our view, partially offsetting coronavirus fears. February inflation came in at 5.3% y-o-y, better than our expected 5.9% y-o-y and well below the CBE’s inflation target of 9% (+/-3%) for 4Q20. We expect increased demand for consumer staples resulting from the coronavirus to reflect in inflation picking up to an average 8.0% over 2020e, higher than our earlier estimate of 6.6%. We believe that the current Brent price at USD34/barrel could allow the government to reduce gasoline prices by the maximum allowed band of 10% quarterly. Applying Bloomberg 2021 consensus estimate for Brent at USD39/barrel, could allow the government to gradually reduce 92-Octane gasoline and diesel prices further, which would reflect positively on containing inflationary pressures. Applying our new inflation forecast into our real effective exchange rate (REER) model, we expect the EGP to devalue by c4% from current level by December up from our previous estimate of c3% devaluation. Also, assuming that the 12-month T-bills rate declines by c3% to 11.7%, applying 15% tax rate on T-bills for foreigners, and given our inflation forecast, we expect Egypt to offer 1.99% positive real interest rate compared to 0.3% for Turkey, with Egypt’s 5-year CDS at 517bps vs. 469 for Turkey, which suggests that Egyptian yields still look relatively attractive. Despite this, we expect that the coronavirus fears will lead to outflows from Egyptian treasuries and expect it to be financed by the Egyptian interbank market, similar to what happened during emerging markets massive outflows in 2H18. We accordingly expect Egyptian banks to move into a net foreign liability position, which could be reversed later with foreign portfolio inflows, as coronavirus fears subside. We believe that Egyptian banks will fill in the domestic funding gap especially after the Egyptian government announced that it is not planning to issue additional Eurobonds in FY19/20, beyond the issued USD2bn in November 2019. In our Navigating Egypt report published on 20 February, entitled Good stories with limited downside risk, we had accounted for 200 bps rate cut in 1H20 in our equity valuations, so the additional 100 bps rate cut act as an upside risk to our valuations, that might partially offset the negative effects of the coronavirus outbreak. For the real estate sector, the cut can attract liquidity from saving instruments and help boost developers’ sales, however we maintain our view that a recovery in demand is more likely towards the end of 2020, as affordability continues to be a concern. In the short-term, the cut is expected to reduce developers’ future financing cost, improving their execution pace and hence deliveries, in light of an expected increase in CAPEX spending, as well as lowering their interest expense bill for outstanding floating rate debt. Companies most likely to benefit from the cut include Palm Hills Development (PHDC EY) and Heliopolis Housing (HELI EY) due to their high leverage, while the rest of the sector to also benefit from cheaper future financing and lower interest expense on outstanding debt mentioned above. For the consumer sector, the policy rate cut would help in boosting private consumption pickup, which definitely bodes well for most of our coverage sales volumes. We still believe that companies delivering staple products would recover faster than discretionary ones owing to lagging wage increases and consumer consumption cautiousness, which will give the former companies an advantage given their responsive nature to improvements in private consumption pattern. We still believe it is too early to see recovery in automotive consumption given the distortion of the sector. We still believe the local demand for floor coverings will lag behind, given that carpet sales are mostly related to real-estate developers’ delivery schedule which have been dropping y-o-y in 2019. In light of the policy rate cuts, all of our consumer coverage will benefit from a lower interest expense bill, with the exception for Eastern Company (EAST EY) given its net cash position. Within our consumer staples coverage, we believe that Juhayna Food Industries (JUFO EY) and Arabian Food Industries (Domty) (DOMT EY) will benefit the most given their high leverage and since more than c90% of their debt is in EGP terms. While within our discretionary coverage GB Auto (AUTO EY) will benefit the most due to its high leverage. We do not expect Oriental Weavers to benefit given that almost all of its debt is in USD and Euro terms. Among our industrial sector coverage, only Ezz Steel (ESRS EY) is highly leveraged, which should see the cut reduce its interest bill EGP500–550m, but we see this dwarfed by the bad overall operating environment, both in terms of profitability and market demand, which has the company running a loss on the gross profit level, on our estimates.”

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Egypt turning into an oil trade balance surplus & tourism revenue exceeding pre-2011 revolution levels.

Our 2020e macro assumptions entail inflation moderation, some further 200 bps policy rate cuts, and EGP stability: With fiscal consolidation now behind us after reaching full cost recovery on different types of octane gasoline, and almost reaching it on diesel in July 2019, we expect inflation to moderate to an average 7.7% for 2020e, which we believe will enable the Central Bank of Egypt (CBE) to cut policy rates further by another 200 bps in 2020. Factoring in our inflation assumptions into our real effective exchange rate (REER) model implies an almost stable EGP with a minor devaluation by December 2020. We positively perceive Egypt turning into an oil trade balance surplus in FY18/19, the first time since FY12/13, tourism revenue exceeding pre-2011 revolution levels in FY18/19, worker remittances consistently recovering since FY16/17, Egyptian treasuries attracting some USD24bn in foreign investments by the end of January 2020, as Egypt’s carry trade remains attractive due to decent 12-month positive real interest rate of 3.59%, based on our calculations. All these factors have strengthened Egypt’s external position and supported the EGP. Although foreign direct investments (FDI) are starting to recover, as well as private investment gaining traction, growing by c76% y-o-y in FY18/19, we see room for further improvement, driving future economic growth, along with private consumption. That said, we remain bullish on the Egyptian economy.

Against this macro backdrop, we stick to compelling stories with limited downside risk, leading to 10 high-conviction picks in industrial, consumer, financials, and select real estate names: Given our macro view, we prefer companies benefiting from a stable EGP, private consumption recovery and a pickup in private investment. This leads us to pick stocks in industrial, consumer and financial sectors, in addition to some select over penalized real estate names. We excluded commodity-linked industrial stocks as end-product prices and spread cannot seem to find a bottom yet. With most of our coverage universe currently undervalued, we stick to 10 high-conviction picks that offer compelling stories with limited downside risk, in our view. Our picks are Orascom Construction in the industrial sector, Eastern Company, EIPICO, Juhayna and Obourland in the consumer sector, Commercial International Bank, ADIB Egypt and EFG Hermes Holding in the financial sector, and TMG Holding and SODIC in the real estate sector.

HC Research Department, HC Securities & Investment

• HC resumes coverage with an OW rating and a TP of EGP29.6/share; stock is oversold trading at a 2020e P/NAV of 0.23x and P/E of 3.33x.

• Worsened sector fundamentals over penalized strong players; HC favours developers with a higher DCF value contribution like SODIC.

• HC expects SODIC to maintain its strong cash collections momentum and estimate EGP132bn of future revenue recognition, of which EGP23.0bn from launched projects over 2020e-22e.

In its latest reports, HC Brokerage sees that Egypt’s worsened real estate sector fundamentals pulled valuations downwards indiscriminately; recovery more likely towards year-end: the report stated that:
“Egyptian real estate developers faced significant challenges over the past couple of years, with 2019 proving to be tougher, in our view. The rising gap, starting in 2016, between cumulative real estate price appreciation and cumulative growth in Egyptians’ disposable income, has significantly weakened affordability and sector demand, making it difficult for most sector players to meet their yearly sales targets in 2019, and saw some developers backlog drop or hardly grow, for the first time in years, despite relaxing their payment terms offering 0%–5% down payments and up to 8–10 year instalments. Also, unit deliveries of our coverage universe dropped c24% y-o-y and c7% y-o-y in 2018 and 9M19, respectively, indicating project cost overrun and cash shortfall for some developers. In light of this, and the sector’s abundant land supply, we continue to favour developers with strong balance sheets, recurring income streams, exposure to the recovered tourism sector, strong cash collections and clear earnings visibility. Accordingly, we prefer developers who have a higher value contribution from discounted cash flows (DCF) rather than from land valuation. Having said that, we believe the negative sentiment on the Egyptian real estate sector has over penalized some strong industry players who meet these criteria, despite benefiting from the consolidation of the client base towards them. Going into 2020, we expect inflation moderation and an economic pickup, helped by a total 450 bps interest rate cuts by the Central Bank of Egypt (CBE) in 2019, and as we expect further 200 bps rate cuts in 1H20, to have a positive impact on real estate affordability, however, the recovery is expected to take time, possibly towards year-end, in order for personal savings to reach a level that can stimulate real and investment demand again.”

“We expect a stronger 2020 for SODIC due to sizable and attractive launches in West Cairo, and estimate future recognition from launched projects of EGP23.0bn over 2020–22e: In March 2019, SODIC secured a 2.1m sqm plot of land in Sheikh Zayed extension through a revenue-sharing agreement with Egypt’s New Urban Communities Authority (NUCA) with expected proceeds of EGP43bn, where NUCA is entitled to a maximum total payment of EGP15.3bn over 11 years, of which EGP8.9bn are fixed payments, in addition to c15% of annual collections and the project is expected to have a development cost of EGP13.3bn, and was launched by the end of December 2019, generating EGP1bn of presales. Also in August 2019, SODIC received NUCA’s approval on the master plan of its West Cairo project The Estates (0.63m sqm) which enabled it to launch it 1 month later, generating EGP1bn of presales, while it expects total proceeds of EGP7.5bn from the project. The 2 projects combined make some 2.73m sqm of land available for development in West Cairo for SODIC, with expected proceeds of EGP50bn over the coming 10 years. Also, SODIC’s undeveloped 6.74m sqm (a proportionate of 4.99m sqm) land bank is now well diversified with c42% of it in West Cairo, c41% in East Cairo, and c16% in the North Coast. We expect 2020 to be a more positive year for SODIC as The Estates and Vye sales gain traction due to attractive product offering, location and pricing, especially in the case of Vye. SODIC East sales are also to gain momentum, especially after the company assigned construction works in the project and launched an apartment buildings phase in 3Q19. As sector demand starts to relatively recover, we believe SODIC is well-positioned to benefit, capitalizing on its strong balance sheet, execution capacity and cash collections. We forecast future revenue recognition of EGP23.0bn over 2020–22e from SODIC’s launched projects and EGP109bn from its un launched projects, as part of our land valuation, totalling EGP132bn with a blended margin of c48%. Our forecasts point to future cash collections of EGP18.0bn over 2020–27e from launched projects, of which EGP10.9bn are related to outstanding receivables”

We resume coverage with a TP of EGP29.6/share and an Overweight rating: We use a DCF methodology to value SODIC’s real estate and lease businesses and value its undeveloped land bank by accounting for the present value of the potential net cash flows of developing this land, net of liabilities. In our receivables collections assumptions for both DCF and land valuations, we have factored in prevalent relaxed payment terms in the market, also adopted by SODIC, entailing a c5% down payment with the rest over 8-year instalments. We incorporated a moving WACC into our model to capture further policy rate cuts in 2020e, which averaged at 18.4%. Around 52% of our value is coming from DCF and c48% from land valuation, which makes us more bullish on SODIC in light of overstated concerns on the Egyptian real estate sector. Launched real estate DCF valuation contributed EGP9.7/share, leasing DCF valuation contributed EGP0.72/share, the company’s net cash position contributed EGP4.86/share, and our land valuation with a DCF approach contributed EGP14.3/share. This sums up to a target price of EGP29.6/share, which offers a potential return of c134% over the 5 February closing price of EGP12.7/share. We, therefore, resume coverage with an Overweight rating. Our TP puts the company on a proportionate 2020e P/NAV of 0.54x, while we estimate it is trading at 0.23x (NAV/share of EGP54.8). In our view, the market is over penalizing SODIC because of the heightened bearish sentiment on the sector and the hurdles it witnessed over the past 2 years, with the stock trading at an implied negative value per sqm versus our land valuation of EGP1,004/sqm, which also implies a c64% discount to land spot prices. Our TP does not take into account the retail portion of Vye until more details on it are disclosed by the company. It is worth highlighting that SODIC is trading at an unjustifiably low 2019e and 2020e PE ratios of 5.3x and 3.3x, respectively.

Risks: Key downside risks to our valuation include (1) lower-than-expected net sales on either higher-than-expected cancellations or lower-than-expected gross sales, (2) higher-than-expected cost inflation pressures, (3) prolonged delay in launching North Coast project Malaaz, and (3) any potential disagreement with the company’s revenue-sharing partners.” as per the report.

• HC Securities & Investment expects the CBE to cut rates by 100 bps in its upcoming meeting, as they expect inflation to average 5.7% over the coming 6 months, well below the CBE target of 9% (± 3%) for 4Q20, providing room for the CBE to proceed with monetary easing to stimulate economic growth and stock market activity and given the global context of monetary easing.

Economist and banking analyst at HC, Monette Doss said: “Annual December inflation accelerated to current levels due to unfavorable base effect while monthly inflation declined for the second consecutive month driven by decreasing food prices as the government continues to make efforts avoiding possible supply shocks and ensuring the availability of basic food items at reduced prices. Over the coming months, we expect food prices to remain contained due to the stability of international prices of food commodities such as wheat, sugar and rice, compared to last year averages.”
Doss added: “Foreign holding of Egyptian treasury bills increased to USD15.3bn in November from USD14.8bn in October while we expect the December figures to reflect further inflows following the announcement of a phase-1 trade agreement between the USA and China which was followed by renewed inflows into emerging markets. We expect the Egyptian debt market to remain attractive for carry trade as it offers high positive real interest rate compared to other emerging markets such as Turkey.”

“We estimate Egypt’s real interest rate at 4.51% (using the latest 12-month T-bill rate of 14.54%, our estimated 100bps rate cut, our average 2020e inflation forecast of 7.0% and a 15% tax on Egyptian treasury holdings by US and European investors) compared to Turkey’s real interest rate of 0.58% (using the latest 12-month T-bill rate of 12.18%, Bloomberg 2020e inflation consensus estimate of 11.6% and factoring in that Turkish treasury holdings are tax-free), which suggests a positive interest rate differential of 3.93% in favor of Egypt. The two countries have similar risk profile as implied by Egypt’s 5-year CDS of 287.59, and Turkey’s 5-year CDS of 272.39.”, said Monette Doss.

It is worth mentioning that the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) rescheduled its last meeting from 26 December to 16 January after the formation of its new board of directors and its MPC. At its most recent meeting on 14 November 2019, the MPC reduced policy rates by 100 bps after undertaking rate cuts of 100bps and 150bps in September and August, respectively. Egypt’s annual headline inflation accelerated to 7.1% in December from 3.6% in the previous month, with monthly inflation decreasing 0.2% compared to a decline of 0.3% in November, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS).

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The National Bank of Egypt (NBE) and Banque Misr have lowered the interest rate on their new 3-year CDs by 1.00% to c12% effective last Thursday, according to banking sources.
(Al Borsa).

HC’s comment: Despite that the 2 banks have cut interest rates on their fixed-rate 3-year CDs by a total 300 bps since early 2019 (including last Thursday’s 100 bps cut), lower than the 450 bps cut that took place in 2019, the timing of their decision leads us to believe that this discounts the possibility of the Central Bank of Egypt (CBE) undertaking a rate cut by the same magnitude during the upcoming MPC meeting next Thursday, in our view. This also comes in line with our expectations of a 100 bps rate cut for the next MPC meeting.

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Given the global context of monetary easing, HC expect the CBE to cut rates by 50 bps in its upcoming meeting.

Monette Doss, Economist and banking analyst at HC commented that the monthly headline inflation declined in November driven by prices of food and beverage which has been decreasing by 1.51%, 1.81%, and 1.75% for 3 consecutive months in November, October and September, respectively. This can be partially attributed to government efforts to cut the prices of basic food items offered on ration cards as well as efforts to avoid possible supply shocks.

The government has also announced that it is planning to review the price of commodities (such as oil, sugar, flour and rice) covered by the ration card system quarterly, based on the EGP/USD rate and the price of commodities in international markets. As international prices of these commodities seem stable compared to last year averages, and due to EGP appreciation, HC expects to see general price stability over the coming few months. Due to unfavorable base effect, however, they expect December annual inflation to increase to 7.3%, well below the CBE target of 9% (± 3%) for 4Q20, providing room for the CBE to proceed with monetary easing to stimulate economic growth and stock market activity, Doss added.

Monette Doss added that the Foreign holding of Egyptian treasury bills declined to USD14.9bn in October from USD16.8bn in July, which happened concurrently with interest rate cuts in Egypt and emerging markets slow-down. Over the last week, however, the USA and China have announced reaching a phase-1 trade agreement which was followed by renewed inflows into emerging markets. Some USD1.15bn were added to US-listed emerging market exchange traded funds (ETFs) that invest across developing countries in the week ending December 13, up from USD142m in the previous week, according to data compiled by Bloomberg. Some USD490m were said to enter the Egyptian debt market on 16 December following the enhanced global economic scene, according to Egyptian banking sources, leading to EGP appreciation to EGP16.03/USD currently, the highest rate since April 2017.

She expects increased inflows into the Egyptian debt market over the coming few months as it continues to offer high positive real interest rate compared to other emerging markets such as Turkey. HC estimates Egypt’s real interest rate at 4.72% (using the latest 12-month T-bill rate of 14.89%, HC’s estimated 50bps rate cut, HC’s average 2020e inflation forecast of 7.52% and a 15% tax on Egyptian treasury holdings by US and European investors) compared to Turkey’s real interest rate of 0.38% (using the latest 12-month T-bill rate of 12.18%, Bloomberg 2020e inflation consensus estimate of 11.8% and factoring in that Turkish treasury holdings are tax-free), which suggests a positive interest rate differential of 4.34% in favor of Egypt. The two countries have similar risk profile as implied by Egypt’s 5-year CDS of 292.1, and Turkey’s 5-year CDS of 287.5.

It is worth mentioning that at its last meeting on 14 November 2019, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) reduced policy rates by 100 bps after undertaking rate cuts of 100bps and 150bps in September and August, respectively. Egypt’s annual headline inflation accelerated to 3.6% in November from 3.1% in the previous month, with monthly inflation decreasing 0.3% compared to an increase of 1.0% in October, according to data published by the CBE. Egypt’s annual core inflation also decelerated to 2.1% in November from 2.7% in the previous month, with the monthly core CPI decreasing 0.14% compared with an increase of 1.1% in October, CBE data showed.

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