Category: HC News

Egypt reported a balance of payments (BOP) deficit of USD2.06bn in 2Q18/19, down from a surplus USD0.51bn a year earlier and USD0.28bn in the previous quarter, data posted by the Central Bank of Egypt (CBE) showed. (CBE).

HC’s comment: Egypt’s capital and financial account registered net inflows of USD0.23bn, down from USD4.18bn in 2Q17/18. This drop was largely due to (1) a decrease in borrowings, which decreased to USD0.61bn in 2Q18/19 from USD4.49bn a year earlier, and (2) net portfolio investment outflows of USD2.63bn compared with a net portfolio investment inflow of USD0.55bn a year earlier. Despite net foreign direct investments (FDIs) decreasing c12% y-o-y to USD1.63bn in 2Q18/19, they increased c57% compared with the previous quarter, covering c77% of the current account deficit for the same period, which widened to USD2.10bn from USD1.79bn last year. Egypt’s trade balance deficit narrowed slightly to USD9.36bn from USD9.84bn a year earlier, mainly on the back of an increase in petroleum-export proceeds to USD3.20bn in 2Q18/19 from USD2.03bn a year earlier, while petroleum imports dropped to USD2.36bn in 2Q18/19 from USD3.23bn in the previous year. The services balance recorded a surplus of USD1.21bn in 2Q18/19, up from USD0.94bn a year earlier, mainly on the back of slightly higher travel receipts, which increased some c25% y-o-y to USD2.86bn, but dropped c27% q-o-q. Net unrequited transfers decreased c15% y-o-y to USD6.05bn in 2Q18/19.

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“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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Egypt’s net international reserves (NIR) declined to USD42.551bn in December from USD44.513bn in the previous month, according to Central Bank of Egypt (CBE) data. The decline was mainly attributable to: (1) redemption of treasury bills held by foreign investors whose holdings of Egyptian T-bills dropped to USD10.8bn as of the end of November from USD21.4bn in March 2018; (2) foreign debt servicing; and repaying foreign liabilities of some ministries and government entities, according to an unidentified CBE official. (Al Mal).

HC’s Comment: The USD0.9bn foreign portfolio outflow corresponds to net foreign liability position of domestic banks widening to USD7.3bn in November from USD5.5bn in October. Debt repayment scheduled for 2H18 amounted to USD7.2bn of which USD4.3bn are deposit repayments to Arab countries. HC accordingly attributes the USD2bn decline in foreign reserves to mainly debt repayment assuming USD1bn of debt rollover. HC expects the government to receive the fifth USD2bn installment of the USD12bn Extended Fund Facility (EFF) in January which could offset the decline in reserves. It is worth mentioning that debt repayment scheduled for 1H19 amounts to USD5.1bn of which USD2.6bn are deposit repayments to Arab countries.

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The Central Bank of Egypt (CBE) has decided to terminate the repatriation mechanism at the end of the 4 December business day for any fresh foreign currency portfolio investments wishing to enter the local treasuries or stock markets, the CBE announced in a release. Going forward, fresh foreign portfolio investments will be channeled through the interbank market and the decision will not apply to balances held inside the mechanism before the cut-off date, it added. (CBE)

HC’s comment: Foreign holding of Egyptian T-bills declined to USD11.8bn in October 2018 from USD21.5bn in March, a total outflow of USD9.7bn. Around USD8bn of the outflows were covered by commercial banks shifting them to a net foreign liability position of USD3.9bn as of September and the remaining USD1.7bn were covered from the repatriation fund which declined to USD7.8bn as of the end of October from USD9.7bn in March. HC expects the direction of foreign currency portfolio investments through the interbank systems to result in an FX rate reflecting supply and demand forces, supporting a floating currency mechanism. HC however, expects commercial banks to show limited ability to support the EGP at current rates due to holding a net foreign liability position, as HC earlier illustrated in thier Egypt macro note dated November 7, 2018. Therefore HC expects to see EGP devaluation of 5%-10% throughout 2019. That said, as the currency settles at market equilibrium rates HC would expect to see foreign inflows into the Egyptian T-bill market giving banks room to replenish the position of their foreign assets. Accounting for the potential devaluation, HC expects inflation to average 16%-17% over 2019, hence they do not expect interest rate hikes throughout 2019, as was also illustrated in their November macro report. Currently, international price of Brent declined to USD58.87/barrel, which should offset the potential EGP devaluation’s effect on the Egyptian government’s budget. On HC’s numbers, average FY18/19e Brent price of USD76.6/barrel translates to a budget deficit of 8.4% of GDP.

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Egypt’s Cabinet approved a new draft law modifying income tax on treasuries, which separates income earned on treasuries from corporates’ and banks’ other income sources, according to the Ministry of Finance sources. According to the draft law, income earned on government treasuries will be recorded net of a 20% tax and then will be added to the entity’s taxable income after deducting other treasuries related costs. The total net income will then be subjected to the 22.5% income tax rate. The amendment is expected to result in some EGP10bn in tax revenue to the government. (Al Borsa).

HC’s comment: Currently, banks are taxed at the highest of 22.5% of pre-tax income or 20% of treasury income. Egypt’s Ministry of Finance did not provide further clarification on the actual application of the new tax law. According to HC’s understanding, however, it appears the new law stipulates that banks will be entitled to 80% of treasury returns (net of 20% tax), which will enter the bank’s revenue stream and will later be subjected to 22.5% corporate income tax after deducting operating expenses, implying double taxation. If HC’s understanding is correct, this would imply a lower net profit for banks and possibly lower valuations. For banks under coverage, Abu Dhabi Islamic Bank – Egypt (ADIB EY) and Commercial International Bank (COMI EY) have the highest exposure to government treasuries, constituting c46% and c45% as of 3Q18, respectively, of total deposits, while Crédit Agricole Egypt (CIEB EY) has the lowest exposure to treasuries, constituting c36% of its total deposit base. HC awaits confirmation from domestic banks on their understanding of the new law before adjusting their numbers.

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HC Securities & Investment announced today that it acted as the sole financial advisor to Middle East Glass Manufacturing Co. (MEG) (MEGM.CA) and the Samaha family on the sale of 74% of the share capital of Medco Plast for Packing and Packaging Systems S.A.E (Medco Plast) to Indorama Ventures Public Company Limited (IVL), one of the world’s leading producers in the intermediate petrochemicals industry, for a value of EGP 843 Million. Additionally, HC Brokerage acted as the sole transaction broker for the buyer and the sellers.

“This is our fifth M&A transaction with MEG, where we have worked hand-in-hand over the years to ensure they meet their long-term objectives,” Mahmoud Selim, Head of Investment Banking at HC Securities & Investment, commented on the transaction.

HC Securities & Investment has previously advised MEG on several transactions, including the acquisition of 60% of Medco Plast in 2010, the acquisition of Wadi Glass in 2014, the private placement of 36% of MEG share capital to Gulf Capital, one of the leading private equity firms in the MENA region in 2014, and the acquisition of Misr Glass Manufacturing Company in 2016.

Medco Plast is the largest manufacturer of recyclable PET preforms, injection molded products, and closures to all the multinational soft drink and water manufacturers operating in Egypt, with a 25% market share. Medco Plast currently has 11 state-of-the-art production lines with a combined annual production capacity of 70,000 metric tons of PET preforms.
“Indorama is a global player that adds to the development of the packaging sector in Egypt, and transactions such as this provide confidence in the Egyptian economy and hopefully contribute to attracting more foreign investments to Egypt,” Selim added.

HC expects the MPC to keep interest rates unchanged at its upcoming meeting.
October monthly inflation came in significantly higher than HC’s expectation of it normalizing to c0.8%, mainly on supply shocks witnessed in the fruit and vegetable market leading to price hikes. Currently, inflation has exceeded the upper limit of the CBE’s targeted rate of 13% (+/-3%). HC accordingly raises its inflation forecast for October-December to 17.1% from 15.9%, previously, however, HC still believes the CBE will not undertake a rate increase due to a slow business activity, as indicated by the Egypt PMI index of 48.6, which has resulted in excess interbank liquidity currently (25% of deposits as of August 2018 compared to 21% in June 2017). Hence, HC believes attracting additional liquidity to the banking sector is not on the table at the moment. Higher corridor rates could also have a negative effect on consumer demand, already at low levels growing by an estimate of 1.5% in FY17/18e, below the normal population growth rate of 2.5%. Moreover, the CBE deputy governor said earlier this month that the CBE will begin to flexibly target inflation.

At its last meeting on 27 September 2018, the Central bank of Egypt’s (CBE) Monetary Policy Committee (MPC) kept its policy rates unchanged for the fourth time after 2 consecutive 100 bps cuts in both February and March, signaling the start of an easing cycle. Egypt’s annual urban consumer inflation accelerated to 17.7% in October from 16% in the previous month with monthly inflation accelerating to 2.6% from 2.5% in September, according to data published by the CBE. Egypt’s annual core inflation accelerated to 8.85% y-o-y in October from 8.55% y-o-y in September, with the monthly core CPI increasing 0.98% m-o-m, central bank data showed.

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– In its latest report, HC stated that “August monthly inflation came in higher than our expectation of it normalizing to c1%, mainly on higher fruit and vegetable price increases, reflecting the second round effects of the energy price hikes, but they are still within the targeted CBE rate of 13% (+/-3%). We expect the annual inflation rate to average 14.8% over September–December.”

Monette Doss, Equity Analyst|Macro and Banking Sector, expected high interest rates offered by other emerging markets to reflect on higher corridor rates since attracting domestic liquidity is not the main target at the moment. “In this regard, we note that local currency deposits grew 8.8% y-t-d to EGP2.3trn in July despite the maturity of the 18-month 20% certificates of deposit (CDs) that started to take place last May.” added Monette.

“Banque Misr and National Bank of Egypt (NBE) announced in early September that a total of EGP176bn of the 20% CDs have matured since May. However, based on July figures, it seems these deposits have not exited the banking sector, which makes higher rates aiming at attracting domestic liquidity unnecessary for the time being.” as per the report.
Monette concluded, “Contrary to our previous belief that the CBE would resume monetary policy easing in 4Q18, we now expect it to keep rates unchanged this last quarter, mainly due to the global high interest rate environment. That said, we expect the MPC to keep interest rates unchanged at its upcoming meeting.”

It is worth mentioning that, at its last meeting on 16 August 2018, the Central bank of Egypt’s (CBE) Monetary Policy Committee (MPC) kept its policy rates unchanged for the third time after 2 consecutive 100 bps cuts in both February and March, signaling the start of an easing cycle. Egypt’s annual urban consumer inflation accelerated to 14.2% in August from 13.5% in the previous month with monthly urban inflation decelerating to 1.8% from 2.4% in July, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS). Egypt’s annual core inflation edged up to 8.83% y-o-y in August from 8.54% in July, with the monthly core CPI remaining the same at 0.58% compared to the previous month, central bank data showed.

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– Egypt’s annual urban consumer inflation accelerated to 14.2% in August from 13.5% in the previous month, with monthly prices decelerating to 1.8% from 2.4% in July, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS).

Annual core inflation edged up to 8.83% y-o-y in August from 8.54% in July, with the monthly core CPI remaining the same at 0.58% compared to the previous month, central bank data showed. (Reuters, CBE)

HC’s comment: The monthly headline inflation figure is largely in line with HC’s expectation of 1.5%. In August, price increases of regulated items decelerated from hikes witnessed over the last 2 months following the energy subsidy cuts, but still showed the highest yearly increase. Fruit and vegetable prices increased, however, showing the highest monthly rise, reflecting the second-round effects of higher energy prices.

Core inflation, which excludes the prices of regulated items as well as fruits and vegetables, remained moderate at 8.83% y-o-y and 0.58% m-o-m. In their opinion, the high price increases of fruits and vegetables combined with moderate core inflation reflect conservative consumer spending that is more inclined toward necessities with relatively lower demand for unnecessary goods. HC expects core inflation to average 9.5% in September and October as the back-to-school season could impose higher demand for other goods and services.

HC expects the government to undertake more energy subsidy cuts in January, which in their opinion will likely renew inflationary pressures. In this regard, they expect inflation to average 18.2%–20.5% over 2H18/19, above the CBE target of 13% (+/-3%).

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– HC Securities & Investment has successfully acted as the exclusive financial advisor to Minapharm Pharmaceuticals and Chemical Industries S.A.E. (MIPH.CA) (www.minapharm.com) on the acquisition of an additional 15.76% of the share capital of its subsidiary Minapharm ProBioGen S.A.E., a company specialized in the R&D and manufacturing of biopharmaceuticals, in a transaction valued at EGP 95 Million. HC Brokerage acted as the broker for both the buyer and the seller.

Post the transaction, Minapharm Pharmaceuticals’ shareholding in Minapharm ProBioGen has increased to 75.01% from 59.25%.