Category: HC News

• Egypt’s annual urban inflation decelerated to 13.5% in July from 14.4% in the previous month, while monthly prices increased 2.4% compared with a 3.5% increase in June, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS). (Bloomberg, Reuters).

HC’s comment: The monthly inflation figure came higher than HC’s expectations of 1.5% on high food and beverage inflation of 2.1% m-o-m, contributing to 1.15% of the total monthly inflation figure, according to the published breakdown of total inflation, which highly mimicked urban inflation figures.

The second major contributor to the monthly inflation figure was housing and utilities, with prices rising 5.2% m-o-m following a 14.6% increase in the prices of electricity, natural gas, and other fuels products, contributing to 0.56% of the total monthly inflation figure. This was in addition to alcoholic beverages and cigarette prices rising 7.2% m-o-m after cigarette prices increased 7.6% m-o-m to contribute 0.34% of total monthly inflation.

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• Fitch Ratings has affirmed Egypt’s long-term foreign-currency and local-currency issuer default ratings (IDRs) at ‘B’ with a positive outlook, it said in a statement.

The ratings agency forecasts Egypt’s GDP growth at 5.5% in FY18/19 and FY19/20 and sees average inflation to drop to 11.6% in 2019, down from 13% in 2018. Fitch estimates general government debt-to-GDP to fall below 93.6% in FY17/18 from 103% in FY16/17, with further fiscal consolidation to reduce the figure to c88% in FY18/19 and c75% in FY22/23.

HC’s comment: fitch has revised the outlook on Egypt to positive from stable last January on improving macroeconomic stability from a fragile state. Affirming this outlook is a confirmation to the improving macroeconomic fundamentals, which should reflect positively on investor’s perception of Egypt’s risk profile, and should reflect in lower demanded yields on Egypt’s debt instruments.

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• Egypt’s passenger car sales rose c70% y-o-y to 11,593 cars in June compared to a c55% y-o-y increase to 10,994 cars in the previous month, according to a report by the Automotive Marketing Information Council (AMIC). Bus sales also rose c15% y-o-y to 1,314 buses, according to the report. (AMIC).

HC’s comment: Local passenger car (PC) sales grew c63% y-o-y to 32,981 cars in 2Q18, coming in c24% above HC’s estimate of 26,652 cars, with completely built-up (CBU) vehicle sales c64% above HC’s estimate, while completely knocked-down (CKD) vehicle sales were c10% lower than our forecast. Initial numbers from the AMIC report show Hyundai sales grew c98% y-o-y to 8,418 cars, c52% above HC’s estimate of 5,539 cars. This implies a market share of 25.5% for the quarter, which is 4.7 pp higher than HC’s estimate and 4.6 pp higher than a year earlier. Geely sales came in c85% lower than HC’s estimate (a c87% y-o-y drop) to stand at 78 cars, while Chery sales came in c16% lower than forecasted (c1% y-o-y drop) to stand at 1,226 cars in 2Q18. Mazda sales dropped c11% y-o-y to 214 cars, beating HC’s estimate by c18%. GB Auto’s (AUTO EY) total market share in 2Q18 stood at 30.1%, which is 1.3 pp above HC’s estimate, but 1.2 pp lower than a year earlier.

• The Egyptian government is targeting GDP growth of 8% by FY21/22 in its 4-year program, up from growth of 5.4% during FY17/18, according to the prime minister.

The government is also planning to reduce domestic debt to no more than 90% of GDP by the end of FY19/20, and further cut it to 80%–85% by the end of the program during FY21/22, he added. The country aims to reduce the budget deficit to 6% of GDP and achieve a surplus of 2% by the end of the program, and to reduce unemployment to 8% from 10.6% last fiscal year. The program also calls for eliminating subsidies and allocating the funds to those who absolutely need it, he added.

Some 85% of Egypt’s economic reform program has already been implemented, and the government will take urgent measures to support citizens and mitigate the burden associated with the reform program, according to the prime minister. (Bloomberg, Mubasher).

Egypt received the fourth USD2bn tranche of the International Monetary Fund’s (IMF) USD12bn Extended Fund Facility (EFF) on Friday, according to an unnamed senior official source. (Al Masry Al Youm).

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• Egypt reported a balance of payments (BOP) surplus of USD5.4bn in 3Q17/18, up from a surplus USD4.1bn a year earlier and USD0.5bn in the previous quarter, data posted by the CBE showed. (CBE).

HC’s Comment: Egypt’s capital and financial account registered net inflows of USD8.6bn, up from USD7.0bn in 3Q16/17. This increase was largely due to the issuance of Egyptian Euro bonds worth USD3.3bn in 3Q17/18, and an increase in long-term borrowings of USD3.1bn in 3Q17/18, compared with USD1.8bn a year earlier. Despite net foreign direct investments (FDIs) decreasing 2.2% y-o-y to USD2.2bn in 3Q17/18, they fully covered the current account deficit for the same period, which narrowed to USD1.9bn from USD3.7bn last year. Egypt’s trade balance deficit widened slightly to USD9.3bn from USD8.4bn a year earlier, mainly on the back of the non-oil trade deficit widening to USD8.0bn from USD7.2bn. The services balance recorded a surplus of USD865m in 3Q17/18, down from USD1.0bn a year earlier, mainly on increased payments.
Net unrequited transfers increased c77% y-o-y to USD6.5bn in 3Q17/18.

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• HC Brokerage raised Juhayna’s 12-month target price c36% to EGP16.1/share.

  For Domty, they raise our 12-month target price c29% to EGP13.9/share and therefore maintain their Overweight rating for both companies.

Equity Analyst, Consumers Sector at HC Brokerage, Noha Baraka stated that, Market indicators suggest there was broad-based market slowdown in 2017 that was more aggressive than we initially anticipated. To us, the aggressive price hike environment has posed a drag on volumes, which indicates that demand was more elastic to price increases.

Although we expect to see an improvement throughout 2018e, as already evident by Juhayna and Domty’s 1Q18 results, the expected inflationary pressures stemming from another round of subsidy cut in July will likely further weigh on private consumption, in our view. Our new estimates point to volumes being fully restored by early 2019e, later than our previous 2H18e forecast, as inflation moderates to an average 12.8% from an expected 15.0% this year on the upcoming round of economic reform measures and the fuel and electricity subsidy adjustments. We still expect Domty to stand a better chance than Juhayna in terms of volume recovery despite fierce competition in part due to its cheese products, which are a low-cost, relatively high-protein food. This is in addition to the company ramping up utilization rates of its Domty Plus brand, which saw great acceptance from customers and has secured bulk sales to one of its big clients.

Noha added: Over the short term, we expect Domty’s margins to recover faster than Juhayna’s on a more favorable skimmed milk powder cost outlook, which is a key pillar for margin expansion. This, along with the company’s efforts to fully restore its raw milk price discount advantage, should accelerate margin recovery. Our numbers point to a c14% y-o-y drop in the blended milk cost in 2018e. Notwithstanding this, the aggressive pricing strategy in 2017 has allowed Domty to withstand a c13% higher EGP/USD rate, further supporting our estimates of 5.6 pp margin expansion in 2018e. As for Juhayna, we estimate its blended milk cost will grow c15% y-o-y in 2018e on a less favorable milk cost outlook, reflecting a higher EGP/USD rate given the depletion of the whole milk powdered milk inventory it had procured earlier at low prices.

However, we expect this to be largely offset by the price increases the company is planning to adopt throughout the year, thus implying a 1.3 pp increase in 2018e margins. Both companies’ ongoing cost efficiencies by localizing a big portion of their raw materials, continued sales‐mix shifts toward higher margin products, constant portfolio optimization, and boosting retail sales should also support restoring margins back to historical levels. According to Noha.

Noha Added, We still favor Juhayna on stronger balance sheet, healthier cash flow cycle, and higher potential return: We raise our valuation for both companies as we roll over our forecast period 1 year. We also adopt a blended moving WACC to account for potential interest rate cuts, which translates to a lower average cost of capital than we previously used. We continue to add a 1‐year semi‐explicit period to our forecasts to account for the lower growth in perpetuity, which has a significant impact on our FCF calculation for the terminal year. We raise Juhayna’s 12-month target price c36% to EGP16.1/share. Our new target price implies a 2019e P/E multiple of 16.0x and EV/EBITDA multiple of 9.6x, and offers a potential return of c28% over the 4 June closing price of EGP12.5/share. We therefore maintain our Overweight rating. In our view, the current valuation is compelling, with the stock trading at a c62% discount to its peers’ implied 2019e EV/EBITDA multiple of 19.0x. For Domty, we raise our 12-month target price c29% to EGP13.9/share. Our new target price implies a 2019e P/E multiple of 10.5x and EV/EBITDA multiple of 8.1x and offers a potential return of c27% over the 4 June closing price of EGP10.9/share. We therefore maintain our Overweight rating. The stock is trading at a c60% discount to its peers’ implied 2019e EV/EBITDA multiple of 16.2x.

Finally, Noha Said that Juhayna remains our top pick within the dairy sector on a stronger balance sheet, a healthier cash flow cycle translating to higher FCF yields, and a higher potential return.

• HC Securities and Investment: Egyptian economy growing out of the vulnerability status. Chief economist at HC , Sara Saada: IMF report is positive stating that Egypt’s economic outlook as “favorable,” provided a cautious easing cycle and more inclusive growth

HC Securities and Investment assured that reforms are starting to bear fruit, but at the expense of a higher short term debt burden. Last year, the Egyptian government adopted tight monetary and fiscal policies, and managed to restore its net international reserves (NIR) to pre-2011 levels.

Chief Economist at HC, Sara Saada, stated that, “we believe this move was vital to kick starting the economy and providing a more favorable outlook. The International Monetary Fund (IMF) published its 2017 Article IV consultation and second program review under the USD12bn Extended Fund Facility (EFF), and referred to Egypt’s economic outlook as “favorable,” provided a cautious easing cycle and more inclusive growth”

“Egypt has managed to achieve a number of targets, including lowering inflation and increasing NIR, but this has come at the price of higher debt.”
“While we believe the current high level of local debt (97% of GDP) is a burden to the fiscal budget, we are confident that with its commitments to the reform program, fiscal consolidation plan, and our expectation of accelerating GDP growth, local debt-to-GDP should gradually drop.” According to Sara.
“However, the rise in external debt to USD100bn in January from USD67bn in December 2016, according to the latest announced figures, is currently a major source of vulnerability to the Egyptian economy, in our view. Other external risks include the increase in global oil prices, which may jeopardize the balance between price stability and the government’s fiscal consolidation plan. Moreover, we believe private investment growth is key to more sustainable GDP growth, in line with the IMF report. With the ambition of more comprehensive growth, we expect a number of monetary and fiscal policy measures to be adopted by the government to stimulate private investment growth over the short term.” Said Chief Economist.”

Sara added that decelerating inflation suggests a strong case for easing cycle; we estimate 800 bps in total cuts throughout 2018–2019 – We expect annual inflation to continue decelerating to an average c13% in FY18/19e and c11% in FY19/20e, which, along with a largely stable FX rate in the short term, should further improve the investment climate in Egypt and stimulate growth. In our view, the Central Bank of Egypt’s (CBE) decision to cut interest rates by 100 bps in both February and March is quite a positive move, marking the start of an easing cycle. We expect the CBE to continue easing, though at a cautious pace as the government is not yet done with its fiscal consolidation plan, which poses inflationary risk over the short term. That said, we expect the easing cycle to be rational and take longer than the hiking cycle.
“Given the lagged effect of policy rate movements on inflation and the possible rise in monthly inflation ahead of Ramadan and the partial lifting of energy subsidies in July. We believe the CBE will not cut rates further in 2Q18 and 3Q18, and proceed with easing in 4Q18. That said, we do not see the easing cycle posing capital flight or currency devaluation risks given the strong reported external position figures” according to Sara.

Adding that, with the current account deficit fully covered by foreign direct investments in 1H17/18, a trend we anticipate will continue, and GDP growing 5.23% from 3.83% in the same period last year. These figures, in our view, should be further enhanced by a number of upcoming legislative reforms. Accordingly, we see real GDP growth at 5.3% in FY17/18e, before accelerating to 6.0% in FY18/19e and 6.2% in FY19/20e.

“The Fiscal consolidation measures on track, with our expectation of a primary surplus of 3.1% in FY19/20e”
On the fiscal front, Sarah said that we believe the government will continue to press ahead with its fiscal consolidation efforts, despite a short-term inflationary impact, as these reforms are crucial for long‐term price stability. The government has also adopted a comprehensive fiscal reform program, targeting a primary surplus of 1.8%–2.0% next fiscal year, largely in line with our expectations, with that figure set to rise to 3.1% in FY19/20e, on our numbers. This is largely on the back of our estimate of tax revenue-to-GDP, which we believe will rise to 14.2% in FY17/18e, 14.7% in FY18/19e, and to 15.2% in FY19/20e, from 13.3% last year. Expenses excluding interest expense should drop as a percentage of GDP to c18% this fiscal year, c17% next fiscal year, and c16% the year after, on our numbers, from c21% last fiscal year. Moreover, we expect the government’s planned 3-year partial asset sale program to positively influence the overall deficit over the short term, with the bulk of the asset sale to be realized in FY18/19e, in our view. We therefore expect an overall budget deficit-to-GDP of 10.1% in the current fiscal year, 8.4% in FY18/19e, and 7.1% in FY19/20e.

• In its recent report, HC Securities & Investment believes that the MPC will likely cut policy rates by 100 bps at its upcoming meeting on Thursday 15th February referring to the strong reported external position figures and the rise of foreign holdings in local T-bills by around USD1bn since the beginning of the year, despite the drop of 1-year T-bills yield by c200 bps.

Sara Saada, Chief Economist at HC declared “From our belief that policy rate movements should react to inflation expectations, and that the start of an easing cycle is a catalyst to growth, we expect the CBE to start cutting rates at its February MPC meeting. That said, we do not see the monetary easing as a pressing risk to capital flight nor currency devaluation.”

She added “Although we agree on the importance of price stability and stimulating private growth, we see the start of an easing cycle as the true catalyst to private investment growth at the current stage rather than further legislative reforms. While the IMF expects inflation to decelerate to 12% by July 2018, the report considers the premature easing of monetary policy as a foreseen risk.”

According to Saada, At its last meeting on 28 December 2017, the Central bank of Egypt’s (CBE) Monetary Policy Committee (MPC) kept policy rates on hold for the fourth time after 2 consecutive 200 bps hikes on 21 May and 6 July. Yearly headline inflation decelerated to 17% in January from 22% in the previous month, while monthly prices dropped 0.1% from a drop of 0.2% in December, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS). Annual core inflation also decelerated to 14% in January from 20% in the previous month, while monthly core inflation decelerated to 0.17% from 0.37% in December, data posted on the CBE website showed.

Sara Saada also explained that in the last couple of months, the drop in monthly prices was mainly due to a decrease in food prices, which is the largest contributor of the consumer price index (CPI). This puts the last 6 months’ average monthly inflation at around 0.7%, which HC believes is a stronger indicator of price stability than yearly figures.
In its Article IV consultation and second program review, the International Monetary Fund (IMF) urges the CBE to focus on seasonally-adjusted monthly inflation trends, and consider gradual monetary easing only if inflation expectations and different key macroeconomic indicators suggest the absence of demand-pull pressures and second-round effects. The report added that private investment growth is key to a more sustainable GDP growth, Said Saada.

Saada assured that the reported balance of payments for 1Q17/18 shows strengthening fundamentals, with the current account recording an annualized deficit of USD6.56bn, narrower than the annualized deficit of USD19.13bn for the same period a year earlier and an actual deficit of USD15.58bn in FY16/17. Additionally, 1Q17/18 foreign direct investments almost fully cover the current account deficit, implying strong external position fundamentals.