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Securities & Investment

Category: HC News

Eastern Company – HC revises their estimates on higher selling prices

Posted on by Marwa Nakhla

In a recent report, HC Brokerage presented their updated evaluation of Eastern Company where they upward revised their revenue estimates.

  • Higher local cigarette selling prices should support EAST’s operating margins over our FY22/23–27/28e forecast period

  • Machinery leasing income and investment income from UTC should also preserve EAST’s profitability and cash distribution capabilities 

Pakinam El-Etriby, Consumers Analyst at HC commented that: “ We upward revise our revenue estimates by c78%, with an average 16.9% y-o-y price increase over our FY22/23–27/28e forecast period: On 25 March 2023, Eastern Company’s board approved increasing the retail price of its local cigarette brands by EGP1.00–3.00/pack, following the EGP2.00/pack price increase in September 2022, to preserve its operating margins and withstand higher raw tobacco cost, translating into a c34% y-o-y increase in the FY22/23e ex-factory price to EGP5.72/pack. Furthermore, we forecast an average increase of c13% in the blended local ex-factory price over FY23/24–27/28e, from our previous estimated average increase of 3.11%, assuming that the company still operates within the EGP4.00/pack flat tax bracket as the Egyptian government did not yet announce any revision to the flat tax brackets. Moreover, EAST’s 24%-owned subsidiary United Tobacco Company (UTC) increased its ex-factory prices to an average of EGP17.2/pack from an average of EGP14.7/pack, positively contributing to EAST’s profitability. Nevertheless, we estimate FY22/23–23/24e local cigarette volumes to drop by an average of c6% y-o-y, negatively impacted by the FX shortage implications. Yet, over FY24/25–27/28e, we expect volumes to normalize and increase by an average c5% y-o-y to 71.9bn cigarettes by the end of our forecast period. Therefore, we estimate EAST’s top line to grow at a 6-year CAGR of c19% over our forecast period, translating into an upward revision of c78% in our FY22/23–27/28e total revenue estimates.”

“We upward revise our FY22/23–27/28e gross profit estimates by c95%, on average: We upward revise our FY22/23–27/28e gross profit estimates on the higher local cigarette selling prices, leaving our GPM to average c42% over our forecast period, up from a previously estimated average of c39% over the same forecast period. However, we estimate a c5 pp y-o-y drop in FY23/24e GPM to 39.9% due to a weaker EGP and inflationary pressures, inflating EAST’s imported raw material costs. Moreover, May’s average tobacco prices increased by c45% y-o-y to USD6,780/ton, according to Brazil’s tobacco export data from the Ministry of Economics of Brazil. Nonetheless, starting FY24/25e, we expect GPM to normalize, reaching c43% by the end of our forecast period.  As a result, we forecast the EBITDA margin to average c40% over our forecast period, leaving our terminal margin at c41%. As for EAST’s NPM, we expect it to average c41% over FY22/23–27/28e, up from an average of c27% over the past six years, primarily backed by both the machinery leasing income and investment income from UTC. We expect the investment income from UTC to start appearing on EAST’s 4Q22/23 income statement.” Pakinam concluded

 

About HC Brokerage

HC Brokerage is an affiliate of HC Securities & Investment– a full-fledged investment bank providing investment banking, asset management, securities brokerage, research, and custody services. HC Brokerage is an Egyptian registered company and member of Egypt’s Financial Regulatory Authority (FRA), and its registered address is 34 Gezirat Al-Arab St., Mohandessin, Giza, Egypt, Dokki 12311

For further information, please contact:

Research@hc-si.com

 

 

 

 

 

 

HC believes the CBE to keep the policy rates unchanged

Posted on by Marwa Nakhla

  • HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled June 22nd. Based on Egypt’s current situation, they expect the CBE to keep the policy rates unchanged.

Financials analyst and economist at HC, Heba Monir commented: “We expect the MPC to leave the overnight deposit and lending rates unchanged, despite the latest 2.72% m-o-m increase in May’s monthly inflation figure. We base our belief on: (1) the government’s need not to increase the burden on corporates’ borrowing capabilities, as they struggle with rising input prices and weak demand, (2) the Egyptian government’s need to keep its local debt servicing cost in check, (3) the drop in Egypt’s 1-year CDS which lowered the 12-moth required return on Egyptian T-bills compared to one month earlier. Despite the delay in the IMF’s program review and hence the tranche disbursement, Egypt’s 1-year CDS eased significantly to 1,221 currently from its record high of 2,510 in mid-May, lowering the required 12M T-bills rate by c200 bps from one month earlier, based on our calculations; and (4) the Egyptian government’s direction not to devalue the EGP currently due to the high inflation figures taking a toll on affordability, as announced by Egyptian President Abdel Fattah El Sisi yesterday. Despite a slight m-o-m improvement in the latest figures of the Egyptian banking sector’s net foreign liability (NFL) position and net international reserves (NIR), they evidence the USD shortage, and we continue to monitor them closely. Egypt’s banking sector’s NFL, including the CBE, narrowed slightly to USD24.1bn in April from USD24.5bn in March, according to CBE data. Excluding the CBE, the banking sector’s NFL also narrowed slightly to USD15.0bn from USD15.4bn in March. Also, net international reserves (NIR) slightly increased by 0.3% m-o-m up to USD34.7bn in May, while deposits not included in the official reserves dropped by c8% m-o-m to USD3.7bn in May.”

It is worth mentioning that, in its 18 May meeting, the Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) decided to keep the benchmark overnight deposit and lending rates unchanged at 18.25% and 19.25%, respectively, after it raised it by 200 bps on 30 March, which is the total rate hike y-t-d.  Egypt’s annual headline inflation accelerated again to 32.8% y-o-y in May from its record low of 30.6% y-o-y in April since it started accelerating in July 2022, according to the Central Agency for Public Mobilization and Statistics (CAPMAS) data. Monthly prices rose 2.72% m-o-m in May compared to 1.7% m-o-m in the previous month. On the global front, the US Federal Reserve maintained interest rates on Wednesday after it increased it by 25 bps on 4 May to a range of 5.00-5.25%, with a total of 75 bps y-t-d and 425 bps in 2022.

HC Brokerage has been awarded the Best Overall Forecaster for Egypt in 2023

Posted on by Marwa Nakhla

HC Brokerage has been awarded the Best Overall Forecaster for Egypt in 2023 by Focus Economics

Cairo, Egypt – June 2023: HC Brokerage research team has been honored for its exceptional performance with the prestigious “The Best Overall Forecaster for Egypt in the 2023 Focus Economics Analyst Forecasts Awards”. The Research team has also secured the top spot in inflation forecasts and ranked third in exchange rate and fiscal balance forecasts.

This remarkable achievement is a testament to the team’s proactive efforts in building robust relationships with a diverse range of experts and sources, enabling them to gain valuable insights into economic trends and events, improving the accuracy of their forecasts and earning them well-deserved recognition in the industry.

Focus Economics is recognized for its exceptional provision of macroeconomic insight, offering a diverse array of solutions, including renowned Consensus Forecast – which provides comprehensive and easily digestible coverage of the latest economic developments. All evaluations have unequivocally commended HC’s exemplary performance in economic analysis and forecasting.

Hassan Choucri, Managing Director of HC Brokerage, expressed his pride in receiving the award for “The Best Overall Forecaster for Egypt in 2023.” He said: “This award is proof of HC’s research team’s exceptional dedication to maintaining the company’s position as the leading provider of economic analysis and forecasting services. The team’s steadfast commitment to accuracy, dependability, and innovation has been instrumental in the company’s success, allowing it to provide clients with the highest-quality economic evaluations and outlook.”

It is worth noting that HC Brokerage HC as an affiliate of HC Securities & Investment– the full-fledged investment bank has consistently maintained its position as a dynamic participant in the region. The company’s primary objective is to support its partners, clients, and staff in achieving their goals by providing exceptional financial services in various markets across the region.

 

 

Avior – HC Egypt Virtual Conference 22-25 May

Posted on by Marwa Nakhla

  • Over 4 days 22-25 May, HC Brokerage and Avior Capital Markets hold their third Virtual Conference

  • “Avior – HC Egypt Conference May 2023”

The Avior-HC Egypt Virtual Conference started yesterday and runs until 25 May, offering financial institutions from the US, Canada, Europe, South Africa, the UAE, and Egypt insights on compelling investment opportunities within the Egyptian equities market. Investors will e-meet representatives of 29 listed companies on the Egyptian Exchange (EGX) through group and one-on-one meetings.

The CEO of the Sovereign Fund of Egypt (SFE), Mr. Ayman Soliman, was the keynote speaker of the opening session of the conference, where he shared highlights of the Egyptian government’s partial asset sale program currently underway.

Hussan Choucri, Managing Director of HC Brokerage, said: Our third initiative, in cooperation with Avior, comes within our relentless endeavor to promote investment opportunities in Egypt, especially in light of the current global economic conditions.

 

For Further details on Avior Capital Markets, please visit: https://avior.co.za/

For Further details on HC Brokerage, please visit: https://www.hc-si.com/

 

About Avior Capital Markets

Avior Capital Markets (Pty) Ltd is an independent, globally recognized capital markets research and trading firm providing in-depth and insightful research in a broad range of equities, fixed income, and derivatives in South Africa and Sub-Saharan Africa. Avior Capital Markets US LLC is a FINRA registered broker-dealer (CRD # 172595) formed for that purpose in the State of Delaware with its principal office at 733 Third Avenue, New York, New York 10017.

 

About HC Brokerage

HC Brokerage is an affiliate of HC Securities & Investment– a full-fledged investment bank providing investment banking, asset management, securities brokerage, research, and custody services. HC Brokerage is an Egyptian registered company and member of Egypt’s Financial Regulatory Authority (FRA), and its registered address is 34 Gezirat Al-Arab St., Mohandessin, Giza, Egypt, Mohandessin 12655

 

For further information, please contact:

Research@hc-si.com

HC believes that a 100bps hike is possible

Posted on by Marwa Nakhla

  • HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled May 18th. Based on Egypt’s current situation, they expect the CBE to increase the policy rates 100bps.

 Financials analyst and economist at HC, Heba Monir commented: “ Our comment: We see the recent deceleration in inflation rate to be short-lived and expect inflation to inch up 1% m-o-m in May following the recent increase in diesel prices and changes in the ration cards system, averaging at 30.2% for 2H23, on our numbers. Also, the banking sector’s net foreign liabilities (NFL), including the CBE, widened to USD24.5bn in March from USD23.0bn in February, according to CBE data. Excluding the CBE, the banking sector’s NFL widened significantly to USD15.6bn in March from USD13.8bn in February. As a result of the pressure on the local currency, Egypt’s 1-year CDS reached a record high. On a more positive note, the current account registered a surplus of USD1.41bn in 2Q22/23 for the first time in many years compared to a deficit of USD3.80bn a year earlier, mainly due to significant import control. On the other side, the capital and financial account recorded a deficit of USD1.63bn in 2Q22/23, reversing a surplus of USD5.38bn a year earlier, mainly due to a USD3.96bn deficit in the assets of the banking and other sectors compared to a surplus of USD2.38bn a year earlier and net foreign portfolio outflows reached USD855bn in 2Q22/23 bringing these outflows to USD3.01bn in 1H22/23. The external debt increased by c5% q-o-q and c12% y-o-y to USD163bn in December 2022.  A 100 bps policy rate hike in the coming meeting could increase the required 12M T-bills rate to 27.5%, based on our calculations, due to a significant hike in Egypt’s 1-Year CDS to 2,510 bps from only 618 at the beginning of the year and a widening in the inflation differential between Egypt and US to 29.1% in 2Q23 from 24.2% in 1Q23, which would translate into a real interest rate of 6.57% based on our calculation (accounting for a 15% tax rate for US and European investors and 16.5% inflation in May 2024) compared to 3.63% currently and 0.50% in the US. We believe this could attract carry trade again, especially with the Federal Reserve hinting that are no more hikes expected soon. So, considering our inflation expectations until year-end, the need to attract carry trade, the banking sector’s widening NFL, and the delay in the partial asset sale program, we expect the MPC to raise the policy rates by 100 bps. The downside of a rate hike is higher debt servicing costs; however, we see bridging the FX shortage through carry trade as a more urgent priority.”

It is worth mentioning that, in its 30 March meeting, the Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) decided to raise the benchmark overnight deposit and lending rates by 200 bps to 18.25% and 19.25%, respectively, with a total of 200 bps y-t-d and 800 bps in 2022. Egypt’s annual headline inflation decelerated to 30.6% y-o-y in April from 32.7% y-o-y in the previous month, according to the Central Agency for Public Mobilization and Statistics (CAPMAS) data. Monthly prices rose 1.7% m-o-m in April compared to an increase of 2.7% m-o-m in the previous month. On the global front, the US Federal Reserve raised interest rates by 25 bps on 4 May to a range of 5.00-5.25% with a total of 75 bps y-t-d and 425 bps in 2022. Based on Egypt’s current economic situation, we provide below our expectations for the likely outcome of the 18 May MPC meeting.

Impact of Multipolar System on Egypt’s Economy

Posted on by Marwa Nakhla

 

Impact of Multipolar System on Egypt’s Economy

Recent developments in the global economy, including the Ukraine-Russia conflict and the COVID-19 pandemic, have contributed to a shift towards an economic multipolar system. At HC Securities & Investment, we are closely monitoring these economic trends and their potential impact on the MENA region. Our focus is ensuring that our investors and clients’ interests are protected, and we are committed to providing sound and expert advice based on our analysis of the evolving economic landscape.

 

A multipolar economy defined

An economic multipolar system is a global economic system in which multiple countries possess significant economic impact and influence, in contrast to a unipolar system where only one country exerts dominant influence over the global economy.

 

In the past, the United States has typically been considered to drive the global economy. However, rapid growth in emerging markets such as China, Brazil, South Korea and India in recent years has contributed to the shift to a multipolar system, in which multiple countries carry major economic impact.

 

Impact of the Ukraine – Russia conflict

The conflict between Ukraine and Russia has contributed to the shift towards multipolarity. Sanctions imposed on Russia by the West have weakened its economic position and created opportunities for other countries to increase their investment and influence in the region.

 

Globally, the sanctions on Russia brought about a degree of economic uncertainty, leading its closest trade allies to reassess their relationships and redirect their economic influence to other countries to maintain stability.

 

Impact of COVID

The COVID-19 pandemic has also accelerated the shift towards a multipolar system. Emerging economies, such as China, that were more resilient to the pandemic increased their economic influence, while countries all over the world struggled with the unexpected consequences of the pandemic. The pandemic also led to changes in global trade and investment patterns, as countries sought to diversify their supply chain and reduce their dependence on one country.

 

Egypt’s future in a multipolar world

Multipolarity presents both challenges and opportunities for Egypt’s economy. As one of Russia’s major trading partners, sanctions on Russia have led to a decline in trade between the two countries. Additionally, the COVID-19 pandemic slowed down Egypt’s economy and led to a decrease in tourism, which is a crucial source of foreign currency for the country.

However, as the world becomes more interlinked, Egypt is presented with promising opportunities for economic expansion. Emerging markets can boost trade and investment in Egypt and diversify the country’s economy. With the global economic landscape rapidly evolving and competition among markets intensifying, now is an opportune time for Egypt to take advantage of these opportunities. By attracting foreign investment, leveraging technology and expertise, and improving its overall competitiveness, Egypt can strengthen its position in the  multipolar system.

At HC Securities & Investment, we keep pace with the rapidly changing times by offering innovative products to meet the evolving requirements of our diverse clients, which include commercial banks, regional sovereign wealth funds, government and private institutions, insurance firms, and high net worth individuals.

To find out more about the impact of the multipolar world on Egypt’s economy, our HC Research team provides expert insights and analysis across various sectors, including financials, real estate and construction, chemicals, consumer goods, and more, along with macroeconomic coverage of the Egyptian economy.

HC believes the MPC is to increase the policy rates

Posted on by Marwa Nakhla

  • HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled March 30th. Based on Egypt’s current situation, they expect the CBE to increase the policy rates.

Financials analyst and economist at HC, Heba Monir commented: “ We expect the MPC to continue tightening policy rates by around 200 bps in its 30 March meeting to tame increasing inflation rates, which we expect to continue rising, peaking at 35.9% by July, on our numbers, before it decelerates to 30.3% by December. We anticipate that March and the coming months’ inflation figures will reflect; (1) the early March c7-11% increase in octane gasoline prices and the c20% increase in heavy fuel oil (mazut) prices for all industries except food and electricity generating sectors; (2) the expected increase in household electricity effective 1 July; (3) the recent liberalization of the prices of essential food commodities like rice; (4) the shortage in local poultry supply due to problems related with animal feed prices and availability, affected by the Russia-Ukraine war, and (5) the continuing EGP devaluation which reached c20% y-t-d. As a result of the USD shortage, Egypt’s banking sector net foreign liabilities (NFL), including the Central Bank of Egypt (CBE), widened to USD21.6bn in January 2023 from USD20.0bn in December 2022. Excluding the CBE, the banking sector’s NFL widened to USD13.0bn from USD11.7bn in December 2022. In light of the inflationary pressures, the USD shortage, and Egypt’s need to keep the carry trade attractive, we calculate a required 12M T-bills rate of 25.18%, which considers soaring Egypt’s 1-Year CDS to 1,419 from 670 at the beginning of February. Foreign holdings in Egyptian T-bills increased by USD2.4bn from December 2022 to USD10.4bn by the end of January 2023. The latest 12M T-bills auction recorded an average yield of 19.19% (accounting for a 15% tax rate for US and European investors), which offers a real yield of negative 2.31%, given our inflation expectation of 21.5% in March 2024, solidifying our view of a needed increase in policy rates. We estimate the real yield to turn to a positive1.33% based on our calculated required after-tax 12M T-bill rate and expected inflation of 20.1% for April 2024.

On a more positive note, deposits not included in the official reserves increased for the third consecutive month, increasing in February by c19% m-o-m to USD2.61bn, yet it still remains below its level of USD9.18bn a year earlier, and net international reserves (NIR) inched up for the sixth consecutive month by 0.4% m-o-m to USD34.3bn in February, while dropping 16.2% y-o-y.”

It is worth mentioning that, in its 2 February 2023 meeting, the Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) decided to keep the benchmark overnight deposit and lending rates unchanged at 16.25% and 17.25%, respectively after it hiked policy rates by 800 bps in 2022 and by 500 bps in 4Q22 alone. Egypt’s annual headline inflation accelerated to 31.9% y-o-y in February from 25.8% y-o-y in the previous month, according to the Central Agency for Public Mobilization and Statistics (CAPMAS) data. Monthly prices rose 6.5% m-o-m in February 2023 compared to an increase of 4.7% m-o-m in the previous month, mainly due to increasing food and beverage prices by 14.4% m-o-m compared to an increase of 10.1% m-o-m in January. On the global front, the US Federal Reserve raised interest rates on Wednesday by 25 bps, bringing its total rate hikes y-t-d to 50 bps after it increased interest rates by 425 bps in 2022.

Arabian Cement – Diligently navigating headwinds

Posted on by Marwa Nakhla

In a recent report, HC Brokerage shed the light on the cement industry in Egypt, specifically on Arabian Cement Company (ARCC) where they cut our 2022–25e EBITDA estimates by c12%.

 

  • The market is still digesting new macroeconomic and industry developments, which entails prudent pricing and cost management

  • Despite lowering our gross margin estimates, reflecting inflationary pressures, we expect ARCC to maintain its cost advantage

  • We cut our 2022–25e EBITDA estimates by c12%

 

Nesrine Mamdouh, Analyst of Industrials at HC commented that: “ Market supply/demand imbalance pressures local prices: While the Egyptian government’s introduced quota system in July 2021 curtailed local sales to 51–52m tpa, the increases in effective quota for 2022 left the effective total market capacity at around 56m tpa, 8.3% higher than the original 2021 quota. Our estimates reflect the Egyptian Competition Authority (ECA)’s July 2022 decision to increase the local cement sales quota by 8.0% and allow cement companies to exceed their quotas in certain months to regulate supply and demand. In 2022, local cement sales increased by c5% y-o-y to 51.2m tons, with the market achieving 91.4% of the quota while ARCC achieved 96.5% of its quota, demonstrating its above-average ability to take advantage of quota increases. For 2023e, if cement companies pass through the higher costs onto their customers, the retail selling price will increase to as much as EGP2,100-2,140/ton, negatively affecting demand. Therefore, we expect companies to absorb part of the increase in costs and forecast 2023e local cement prices at a range of EGP2,042-2,068/ton, moderately pressuring their margins depending on each company’s cost structure and exposure to export markets. We project local demand in 2023 to grow by an average of c2-3%, down from 5.4% a year earlier, reflecting the slowdown in construction activity. Maintaining the 2023 quota without occasional monthly increases will improve cement companies’ pricing power. Over 2023e–26e, we estimate local cement demand to increase by an average of c2.3% y-o-y and to grow at a CAGR of 2.27%. A recovery in private sector investments and any potential upcoming government decisions on private building permits are key upside risks to our numbers. As for ARCC, we expect local sales to increase by 2.1% y-o-y in 2023e to 3.29m tons, maintaining the 2023e quota. An occasional higher monthly quota would translate to an increase of up to c4% y-o-y in local sales. We forecast local sales to grow at a 2024e–26e CAGR of 2.51%.”

 

Nesrine Mamdouh added: “Exporting seems a more viable option for Egyptian cement players, especially following the recent EGP devaluation: Despite slimmer margins on cement and clinker exports historically, the EGP devaluation made exports more attractive and inflated the cash margins in EGP terms, improving the overall margins of exporting cement companies. In 2022, cement companies’ export volume increased c19% y-o-y to 9.56 m tons, and exports went mainly to Africa. Given an EGP devaluation of c37% in 2022, and c19% y-t-d.  ARCC captured a significant share of 10.5% of 2022 exports, following military-owned factories with an export share of c67%, Suez Cement Group with c12%, and other sector players with 10.5%, topped by Lafarge. We expect ARCC to maintain its high export volume of around an average of 1m ton/year over our forecast period and foresee a potential further increase in export in 2023e in case of lower-than-expected local demand and/or lower-than-expected local price adjustment to devaluation. Exporting gives the company a comparative advantage in securing its FX needs, lowering fixed production costs on larger-scale production, and offering an attractive cash margin in EGP terms. Also, we expect ARCC to further benefit from the government’s export promotion program and expect a higher income from export rebates, as implied by the FY22/23 state budget.”

 

Nesrine Mamdouh concluded: “Inflationary pressures squeeze cement companies’ margins, yet we expect ARCC to maintain its cost advantage: In February 2022, Russia’s invasion of Ukraine led to supply chain disruptions, driving commodities into a price spiral. As a result, coal prices increased dramatically, reaching an all-time high in August 2022 of USD388/ton (CIF), an increase of 3.05x over January 2022 average prices. This was fueled by the European ban on Russian coal exports, effective August 2022, which later caused significant divergence and distortions in coal prices across regions. However, coal prices softened to USD142/ton as of 1 February 2023, after Europe had already heavily stockpiled coal as an alternative energy source to natural gas. Russia redirected its coal sales at very competitive prices to other non-sanction destinations, including China and India, which are also likely to boost their domestic production in 2023, according to S&P Global forecasts. Furthermore, on 9 October 2022, the Egyptian Cabinet more-than-doubled the natural gas price for cement producers to USD12.0/mmbtu from USD5.75/mmbtu. However, natural gas was partially used by a few cement players and fully by very few companies like South Valley Cement (SVCE EY) which increased its cash cost per ton. This will also alter the fuel mix of the cement companies that partially use natural gas in their fuel mix, leading them to rely more on cheaper options. Based on our calculations, coal prices above USD285/ton CIF should make companies indifferent between using coal or natural gas. On 27 October 2022, the Central Bank of Egypt (CBE) decided to raise the benchmark overnight deposit and lending rates by 200 bps to 13.25% and 14.25%. Also, it moved to a durably flexible exchange rate regime, leaving the forces of supply and demand to determine the value of the EGP against other foreign currencies. On 22 December, it raised the policy rates further by 300 bps, increasing cement companies’ working capital financing costs. The EGP devaluation of c19% since 27 October 2022 to date increased the cash cost per ton of cement players due to their coal imports and other foreign currency cost components of production. However, their exports will benefit from the EGP devaluation as they will become more competitive. Thus, we expect the devaluation to compress sector margins moderately in 2023e, holding all else constant, including export levels and cost structures. We expect coal and petcoke prices to normalize throughout our forecasting period, limiting sharp, abrupt increases in the cash cost per ton and alleviating the negative effect of EGP devaluation on margins. For ARCC, we are positive about its future performance and expect it to maintain its cost advantage due to: (1) its flexibility in changing its fuel mix to the most cost-effective one, 2) its effective raw material procurement and inventory management strategies, which proved to be successful, especially over the last two years, 3) its growing reliance on solar energy to cut costs, and (4) its remarkable export level, estimated at c23% of total sales in 2023e.”

 

Egypt real estate – Subpar economic conditions warrant selectivity

Posted on by Marwa Nakhla

HC Brokerage issued their update about Egypt’s real estate sector shedding the light on six main players’ performance following the most recent market dynamics.

  • While sector investment demand benefited from inflation and EGP devaluation fears, currently, it is hurt by lower affordability, cost overruns, and challenging financing

  • We expect further market consolidation following sector conditions and the EGP devaluation; revaluation of assets is currently underway for the acquisition targets

Mariam Elsaadany, real estate analyst at HC Brokerage commented that: “ Soaring inflation is pressuring affordability and leading to cost overruns; in our view: A high inflation environment, causing negative real interest rates, has historically served the Egyptian real estate sector well, as investors usually view it as a safe haven. However, the current macro environment is challenging to the industry, in our view. Cost-inflationary pressures, caused by soaring inflation rates, which averaged 13.8% in 2022, led to cost overruns and pushed developers to resort to receivables securitization more than bank debt, which pressured their operating margins. We expect this to continue into 2023e as we expect inflation to average 21.5%. The Central Bank of Egypt (CBE) raised the key policy rates by 800 bps in 2022, and the EGP devalued by c37% in 2022 and by c18% y-t-d. To fend off dollarization and keep inflation in check, Egyptian public banks issued high-yielding certificates of deposits (CDs), offering an interest rate of as much as 25.0%, and private banks followed suit. In our view, the high-yielding CDs compete with investment in the real estate sector, adversely impacting its pre-sales which only grew by c8% in 9M22 in terms of value, while volume dropped c5% y-o-y for the six developers we track, as opposed to growing by c59% in 2021, which was volume and value-driven. Developers could not extend payment plans further, as previous years’ extended payment plans had already stretched their cash flows, raising concerns about affordability. In 2023e, we expect pre-sales growth to be price-driven.”

Elsaadany added: “Tourism recovery and EGP devaluation lead us to prefer developers with hospitality exposure; while we keep an eye on M&A targets: Given the currency outlook and a recovering tourism sector, as evidenced by higher occupancy rates, we like companies with significant hospitality operations, namely Orascom Development Egypt (ORHD EY) and Talaat Moustafa Group Holding (TMGH EY). Also, in light of a high-interest rate environment, we like developers who have been active in deleveraging their balance sheets and building on their ready-to-move inventory, putting themselves at a cost advantage, like Palm Hills Developments (PHDC EY). The three stocks also enjoy solid fundamentals and decent market liquidity. We believe three of the six companies under our coverage are subject to M&A speculation and/or currently the subject of a potential deal with ORHD’s sale of its subsidiary, Orascom Real Estate (ORE) to SODIC, under study. Also, in our view, MNHD and HELI are the two other developers we believe are most likely to be the subject of a potential acquisition due to their attractive land bank. As a result, the stock prices of ORHD, MNHD, and HELI rallied c20%, c43%, and c18%, respectively, during 2022, implying a value of EGP615/sqm of land for HELI and EGP1,227/sqm for MNHD at the current market prices. Given the outlook on the EGP, we maintain a favorable view on acquisition targets during 2023e despite them offering lower potential returns based on our valuations. The valuations for the deals/potential deals seen by the market ranged from EGP878/sqm—1,192/sqm of undeveloped land. The most recent offer by SODIC to acquire Orascom Real Estate (ORE), a subsidiary of Orascom Development Egypt (ORHD EY), implied a price of EGP878/sqm, or USD45/sqm. In our view, future potential deals should see a significant increase on an EGP basis.”

“The sector challenges are reflected in stock prices which are currently oversold with an average 2023e P/NAV and P/E ratios of 0.34x and 6.08x (excluding HELI), respectively, suggesting that the overselling is excessive, in our view. PHDC and TMGH stocks have not rallied as much as other real estate names despite both companies delivering good results, PHDC initiating a share buyback program, and both stocks paying dividends. PHDC is trading at a 2023e P/NAV of 0.29x, and TMGH is trading at 0.32x, lower than the sector’s average. PHDC offers the highest potential return of c83% and TMGH c57%, while the market assigns a negative value to TMGH’s land bank. Therefore, we maintain our Overweight recommendations for the two stocks.

In our view, an economic pickup, monetary easing, and the development of the mortgage market for the upper-middle segment would be the sector’s key triggers.”, Mariam Elsaadany concluded.

HC believes the MPC is to keep the policy rates unchanged

Posted on by Marwa Nakhla

 

  • HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled February 2nd. Based on Egypt’s current situation, they expect the CBE to keep the policy rates unchanged.

Financials analyst and economist at HC, Heba Monir commented: “We expect the MPC to keep the policy rates unchanged to allow the market to absorb the 300 bps hike of the 22 December 2022 meeting. Also, the CBE declared that foreign investments in the Egyptian market exceeded USD925m in the week following the EGP/USD movement on 11 January 2023, mentioning that carry trade is becoming more attractive to foreign investors. We expect the headline urban inflation to accelerate and reach 23.5% in July 2023 before it retreats to 18.2% in December 2023, averaging 21.5% throughout 2023. We expect the EGP 1-Year T-bills to average around 20.6% in 2023 (accounting for a 15% tax rate for US and European investors), taking into the calculation a 200 bps rise in the corridor that we expect to materialize over the rest of the year. This considers fluctuations in Egypt’s CDS 1-Year, which currently records 504.7, down from its peak at 1,774 on 27 July 2022, yet still high compared to its record low of 181 on 17 September 2021. The EGP depreciated by c17% over the past month, registering EGP29.9/USD, due to the accumulated pressures on Egypt’s balance of payment (BoP) and high foreign debt obligations, although there was a slight improvement in (1) Net International Reserves (NIR) inching up 1.4% m-o-m for the first time since December 2020 versus a 16.9% y-o-y decline to USD34.0bn in December 2022, (2) the banking sector’s net foreign liability (NFL) position, excluding the CBE, narrowing by 16.7% m-o-m to USD13.7bn in November 2022 for the first time since July 2022 while widening by 93% y-o-y. The latest 12M T-bills auction yield of 18.57% (accounting for a 15% tax rate for US and European investors) offers a real yield of positive 0.57%, given our inflation expectation of 18.0% in January 2024, solidifying our view of a needed increase in policy rates until the end of the year.”

It is worth mentioning that, in its 22 December 2022 meeting, The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) decided to raise the benchmark overnight deposit and lending rates by 300 bps to 16.25% and 17.25%, respectively. This decision accelerated its tightening pace by 500 bps in 4Q22, raising policy rates by 800 bps during 2022. Meanwhile, headline urban inflation surged to 21.3% in December 2022, with an average of 13.8% during 2022. On the global market, the US Federal Reserve raised interest rates by 425 bps versus an average inflation rate of 6.5% during 2022.