Category: HC News

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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HC Sponsors the second “Egypt M&A and Private Equity Forum” — 13 November 2019 — Ritz Carlton The Nile – Cairo.

 

HC Securities & Investment assured that headline inflation continued to decelerate for the fourth consecutive month from its high level in May, at 14.1%, with September monthly inflation coming in lower than our expected 0.7% m-o-m.

Economist and banking analyst at HC, Monette Doss said: we see inflationary pressures largely subsiding till year end to an average of 4.6% for 4Q19 (with December monthly inflation being the largest, at an expected 7.8% due to unfavorable base effect), 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. Net foreign assets of Egypt’s banking sector increased to USD5.2bn in September from USD3.7bn in August implying healthy foreign currency inflows into the economy, and thus supporting a strengthening currency with the EGP appreciating 10.3% y-t-d. Moreover, in the global context of monetary easing, the Federal Open Market Committee lowered its benchmark funds rate by 25 basis points by the end of October to a range of 1.5% to 1.75% and Turkey has also cut its key rates by 250bps last month. That said, we expect the CBE to cut rates by 50 bps in its upcoming meeting.

We believe that Egypt’s carry trade will still be attractive as Egypt’s positive real interest rate will still be higher than other emerging countries like Turkey, even after we factor in our expected rate cut. We estimate Egypt’s real interest rate at 4.07% compared to Turkey’s real interest rate of 1.94% . In addition to this, Egypt has lower risk as implied by its 5-year CDS of 318.38 compared to Turkey’s 5-year CDS of 329.17. Monette Doss added

It is worth mentioning that the Central bank of Egypt’s (CBE) Monetary Policy Committee (MPC) at its last meeting on 26 September 2019, reduced policy rates by 100 bps after undertaking a 150bps rate cut in August 2019. Egypt’s annual headline inflation decelerated to 4.8% in September from 7.5% in the previous month, with monthly inflation reflecting no monthly price increase, compared to 0.7% in August, according to data published by the CBE. Egypt’s annual core inflation also decelerated to 2.6% in September from 4.9% in the previous month, with the monthly core CPI decreasing 2.26% compared with a decrease of 0.36% in August, CBE data showed.

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• Demand growth back on track on more positive economic outlook, with margins reverting back to historical averages

• We raise our 12M TP c26% to EGP21.6/share for Edita, but cut c16% to EGP12.6/share for Juhayna and c9% to EGP11.5/share for Domty; maintain our OW for all the 3 stocks

• Companies’ valuations remain compelling for most of the F&B sector, but we still favor Juhayna on a higher potential return, stronger balance sheet, and its history of outperforming in an uptrend market

Cairo, Sep 2019: HC Brokerage issued a report stating that its Research Department is more bullish on the consumer space in light of the improvement in the macroeconomic outlook, EGP appreciation, moderating inflation, and resumption of the monetary easing cycle, which should positively impact private consumption.

Head of consumer sector at HC, Noha Baraka expects volumes to pick up during 2H19, followed by a continued wave of stronger volume recovery across HC’s consumer universe, but they also believe the companies will fare differently, mainly on each segment’s penetration rate, per capita consumption, and level of competition, in addition to companies continuing to add or diversify their product portfolios, which should aid with faster demand recovery. On HC’s new estimates, they expect Edita’s volumes to be fully restored to 2016 levels by the end of 2019e, earlier than for Juhyana, which they expect to happen in 2020e, followed by Domty in 2021e (cheese and juice only)”.

Baraka added, We expect Juhayna to deliver the highest earnings growth rates, mainly on a more favorable whole milk powder (WMP) cost outlook, sustained volume growth thanks to low per capita consumption for most of its products, and a strong market position. Edita, comes next, on our numbers, aided by the nature of its higher margin product offering, ongoing portfolio optimization, and new product launches. At this stage, we are wary of any direct price increases implemented by the company, which we believe would interrupt its recovery. As for Domty, we are less bullish given the cheese segment has largely matured and is facing fierce competition. This, coupled with an unfavorable skimmed milk powder (SMP) cost outlook, which would see the company raising prices, in our view, jeopardizes volumes, despite the promising venture into the snack-food market through the launch of its high-margin product, the Domty Sandwich. We expect all 3 companies’ margins to converge to their historical averages, with Juhayna recording margins higher than its 7-year historical average, on our numbers.

“We differentiate between stocks based on their demand recovery, balance sheet position, and the health of their cash flow cycle. For dairy names, we have lowered our valuations on lower-than-expected demand recovery and rising costs with unmatched price increases, despite lower cost of capital taking into account potential interest rate cuts. We cut our 12-month target price for Juhayna c16% to EGP12.6/share and still maintain an Overweight rating given the stock has underperformed the market by c33% since the beginning of the year, not to mention its compelling valuation. For Domty, we cut our 12-month target price c9% to EGP11.5/share and maintain our Overweight rating. As for Edita, we raise our 12-month target price c26% to EGP21.6/share and also maintain our Overweight rating. Edita’s valuation remains compelling, but less so than Juhayna given that it outperformed the market by c6% y-t-d. Historically, Juhayna beats the stock market in times of recovery, given its relatively high beta, while Edita has a more defensive nature, and together with Domty remain less liquid than Juhayna. Given that all companies have strong fundamentals, we favor Juhayna in a recovering stock market” According to Baraka

HC Securities & Investment assured that headline inflation continued to decelerate for the third consecutive month from its high level in May at 14.1%, with August monthly inflation coming in lower than our expected 1% m-o-m.

Economist and banking analyst at HC, Monette Doss said: “We see inflationary pressures largely subsiding following the July subsidy cuts. Yearly inflation dropped below 9% y-o-y, well within the CBE target of 9% (± 3%) in 4Q20, providing room for the CBE to proceed with monetary easing to stimulate economic growth and stock market activity. Moreover, in the global context of monetary easing, with the European Central Bank (ECB) cutting its deposit rate by 10bps to -0.5% last week, Egyptian treasuries continue to provide attractive returns and encourage carry trade. That said, we expect the CBE to cut rates by 100 bps in its upcoming meeting.”

It is worth mentioning that the Central bank of Egypt’s (CBE) Monetary Policy Committee (MPC) at its last meeting on 22 August 2019 reduced policy rates by 150 bps after keeping them unchanged for 3 consecutive meetings since the last 100 bps rate cut in February 2019. Egypt’s annual headline inflation decelerated to 7.5% in August from 8.7% in the previous month, with monthly inflation reflecting a 0.7% monthly price increase compared to 1.8% in the previous month, according to data published by the CBE. Egypt’s annual core inflation also decelerated to 4.9% in August from 5.9% in the previous month, with the monthly core CPI decreasing 0.36% compared with an increase of 0.11% in July, central bank data showed.

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• Monetary easing key for resumption of CAPEX lending, in HC’s view.
• This should reflect in lower banking NIMs while strong CAR supports balance sheet growth, on HC’s numbers.
• HC raises their 12M TP c8% for CIB to EGP87.8/share and maintain OW, leave CAE largely unchanged at EGP51.9/share but downgrade to N, and maintain ADIB at EGP18.3/share and OW; ADIB is their top pick as the bank’s turnaround story is not fully priced-in.

Egypt’s economic environment conducive for an accelerated easing cycle, in HC’s view, which should trigger loan growth but reflect in lower NIMs: Following the EGP floatation in November 2016, the Monetary Policy Committee of the Central Bank of Egypt (CBE) hiked policy rates a total 700 bps, resulting in a slowdown in private lending. With economic improvements, the MPC cut rates consecutively in February and March 2018 a total 200 bps before cutting another 100 bps last February. According to surveys conducted by banks, private businesses are looking for a further 300–400 bps cut before resuming CAPEX borrowing. HC also anticipates that inflationary pressures will subside following the full removal of gasoline subsidies. They now expect the CBE to accelerate its planned rate cuts, with a possible 100–200 bps cut in 2H19e before another 200–300 cut bps in 2020e, fully reversing the initial 700 bps hike. On their numbers, this should take average NIMs for banks under coverage to 4.5%–5.0% by 2024e from 5.5%–6.9% over 2017–18.

Strong asset quality and capital base for banks under coverage accommodate for a stricter regulatory environment: Egyptian banks started reporting their financial statements according to IFRS 9 accounting standards in 1Q19, with banks now having to take provisions for expected future credit losses rather than based on historical performance of the credit facilities. Banks under HC’s coverage display strong asset quality, with NPLs ranging 2.5%–5.0% and coverage ratios ranging 141%–200%.

Effect of final amendments to income tax law on treasuries largely mitigated (compared to initial draft), in HC’s view: The final version of the tax law amendments entails separating the tax accounting of a bank’s income from treasuries from all other income. The cost of treasuries will now be calculated by multiplying the bank’s cost to income ratio (excluding provisions and depreciation charges) by 80% of treasury income, with a maximum of 70% of treasury revenue for 2019, 85% for 2020, and 100% of for the following years. The amendments became effective 17 May 2019 and will be applied on treasuries issued since 21 February 2019 as well as treasury re-openings since that date.On their numbers, the amendments should raise the effective tax rate for banks under coverage to range 26%–31% over their forecast period from 21%–28% in 1Q19, prior to the application of the law.

CAE and ADIB NIMs should outperform CIB over 2019–24e due to higher proportion of local currency loans, in HC’s view: As mentioned earlier, the resumption of monetary easing should reflect in NIMS cooling off across banks under coverage, with CIB averaging 4.9% over 2020–24e. HC expects CAE and ADIB, however, to outperform, with average NIMs of 5.4% and 5.2%, respectively, over their forecast period, driven by higher interest-earning, local currency loans as a percentage of total loans. HC also expects banks to lengthen their deposit duration to be able to finance CAPEX lending without breaching the maximum interest rate risk imposed by the CBE (15% of Tier-1 capital). This should reflect in tightened interest rate spreads to average 4.6% in 2024e from 6.3% in 2019e.

HC expects a loan CAGR of c22% for CIB and c18% for both CAE and ADIB over 2019–24e, with the banks allocating less to government treasuries: HC expects the pickup in private lending following the resumption of the easing cycle to be the main balance sheet growth driver for CIB and CAE given their strong capital adequacy ratios (CAR). On HC’s numbers, they expect CIB’s CAR to decline to 18.4% in 2024e from 22.6% in 2019e, CAE’s CAR to decline to 14.3% in 2024e from 18.5% in 2019e, well above the CBE minimum requirement of 14.5% and 12.5% for both banks, respectively. For ADIB, they see the capital increase expected by management to take place in 2020 and the reversal of its net retained loss position to support the bank’s CAR, which they expect to reach 15.9% in 2024e. On their numbers, CIB, CAE, and ADIB should show average 2019–24e effective tax rates of 29%, c26%, and 31%, respectively.

Banks under HC’s coverage display strong asset quality, but they maintain conservative provisioning for all 3 banks reflecting a stricter regulatory environment: HC expects NPLs to decline to 4.0% in 2021e for CIB and to be maintained at 3.0% for CAE, with average 2019–24e coverage ratios of c178% and c154%, respectively. On their numbers, this should translate to average 2019–24e provision charges of 8.9% of operating profit for CIB and 8.3% for CAE. As discussed in their 20 June ADIB update, they expect the bank’s NPLs to increase to 4.0% in 2022 from 2.5% in 1Q19, converging to the banking sector average. ADIB’s coverage ratio stood at c141% as of 1Q19 and they expect it to reach c150% in 2024e, translating to an average 2019–24e provisioning charge of c24% of net operating profit.

Downgrade to Neutral for CAE, maintain Overweight for CIB and ADIB: HC values the banks using an excess-return-based model and adopt a moving cost of equity. Accordingly, they raise their 12-month target price c8% for CIB to EGP87.8/share, which puts the bank at a 2019e P/B multiple of 2.67x . HC therefore maintains their Overweight rating, with the stock trading a 2019e P/B multiple of 2.16x. As for CAE, their 12-month target price of EGP51.9/share puts the bank at a 2019e P/B multiple of 2.3x and . HC downgrades their rating to Neutral, with the stock trading at a 2019e P/B multiple of 1.95x. HC estimates the terminal value of CAE using its 10-year average trading P/B multiple of 2.2x. Finally, for ADIB, they maintain their 12-month target price at EGP18.3/share, which puts it at a post rights issue 2019e P/B multiple of 1.75x, . HC therefore reiterates their Overweight rating. ADIB is HC’s top pick, trading at a post rights issue 2019e P/B multiple of 1.1x. In their view, ADIB offers the highest potential return as its turnaround story is not fully priced in.

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