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Category: HC News

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.

 

HC believes that the CBE is expected to hike policy rates by 200bps

Posted on by Marwa Nakhla

HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled December 22nd. Based on Egypt’s current situation, they expect the CBE to hike policy rates by 200 bps for inflation-targeting purposes and to make carry trade attractive in the following meeting

Financials analyst and economist at HC, Heba Monir commented: “We expect the MPC to hike policy rates by 200 bps for inflation-targeting purposes and to make carry trade attractive. Inflation accelerated in November, rising 2.3% m-o-m and 18.7% y-o-y, and exceeded our estimate of 16.5%. This acceleration in inflation, coupled with the current shortage in foreign currency inflows, led us to expect an annual inflation rate of 19.1% in December. The EGP depreciated by c7.0% since 27 October 2022 and 36.2% y-t-d due to the accumulated pressures on Egypt’s balance of payment (BoP) and high foreign debt obligations as (1) external debt to GDP is expected to increase to 38.8% in FY22/23 from 37.7% in FY21/22, according to official estimates, (2) net International reserves (NIR) retreated by c18% y-o-y in November to USD33.5bn, with a 67.7% y-o-y increase in gold versus 22.3% y-o-y decline in foreign currencies, (3) August remittances declining c8% m-o-m to USD2.2bn, (4) the banking sector’s net foreign liability position, excluding the CBE, widening to USD16.4bn in October from USD5.0bn a year earlier, (5) the drop in foreign currency deposits, not included in the official reserves, to USD1.67bn in November from USD11.5bn a year earlier, and (6) Egypt’s external debt repayment schedule showing repayment of dues of USD20.2bn over FY22/23. The 12-month after-tax T-bills average yield reached 15.99% (accounting for a 15% tax rate for US and European investors) in the most recent auction with a bid-to-cover ratio of 3.20x, indicating higher required yields. Egypt’s 12-month T-bills currently offer a real yield of negative 0.1%; factoring in the 200 bps increase will make carry trade more attractive.”

It is worth mentioning that, in a special meeting on 27 October, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to raise policy rates by 200 bps and 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, which led to a c14% EGP depreciation. Accordingly, this brought the cumulative interest rate hikes in 2022 to 500 bps, concurrent with the Federal Reserve Bank’s (Fed) cumulative interest rate increases of 375 bps y-t-d.

HC’s take on the CBE’s interest and exchange rates decisions

Posted on by Marwa Nakhla

The CBE’s 200 bps policy rate hike aligns with our previously announced expectations of a 200 bps interest rate increase before year-end, which should help contain inflation, which reached 15.0% in September, and makes carry-trade more attractive. Assuming that the rate hike will be reflected in the treasuries market, we estimate that the 12-month T-bills will offer a positive real interest rate of 2.36% (up from 0.66% before the rate hike) compared to a negative real yield in the US. Our calculations consider the latest after-tax 12-month T-bills auction, a 15% tax rate on treasuries imposed on US and European investors, and our estimate of a yearly inflation rate average of 14.62% over the coming 12 months. As for the CBE’s decisions on the FX system in Egypt, allowing banks to use FX derivatives and gradually canceling import trading through LCs, we believe it will make the USD more available in the market and help restore business activity in Egypt. This morning the EGP devaluated by c13.7% to EGP22.84/USD against the USD, which implies a REER level of 91.82, suggesting the EGP is undervalued by c8% at current levels, based on our calculations.

As for the impact of the decisions on the banking sector, today’s announced high-yielding CDs by state-owned the National Bank of Egypt (NBE) will increase competition for private sector banks. However, we don’t expect it to be material considering the recently offered CDs by some private banks at higher rates and the higher yields on their treasuries investments, which will safeguard and improve their profitability.

As for the stock market, although higher interest rates are not generally positive for investment in the stock market, however, we believe that the stock market will react positively to the decisions due to very depressed market valuations that were reflecting the stagnation of business activity in Egypt.

As for the USD9bn of external aid that Egypt secured from the IMF and multilateral institutions, we believe it would fully cover Egypt’s 2H22 total debt repayment and part of that of 1H23. Most importantly, the agreements constitute a vote of confidence in Egypt’s structural reform program and guarantee that it continues on the right economic reform path. Egypt’s structural reform program will include policies to unleash private sector growth, including reducing the state footprint, adopting a more robust competition framework, enhancing transparency, and ensuring improved trade facilitation, which in our view, could unleash Egypt’s economic growth potential, that was held back for several years.

HC: Is The Supply Chain Crisis Impacting Capital Markets

Posted on by Marwa Nakhla

  • Is The Supply Chain Crisis Impacting Capital Markets

 

Banks and investors are monitoring current supply chain imbalances closely. Capital markets are definitely impacted when the global supply chain experiences turbulence. Therefore, Capital Market suppliers like banks and investors in the Middle East and Egypt are paying close attention to how certain circumstances are impacting the global supply chain and capital markets.

 

As the world comes out of a global pandemic, we are entering into a Russia/Ukraine war that further compounds what was already a supply chain crisis. The doubling of these two worldwide occurrences has created a supply chain imbalance that hasn’t been previously observed. HC Securities & Investments is taking this moment to carefully navigate Capital Markets with our investors and clients’ best interests in mind. In this article, we will discuss exactly what is causing the supply chain crisis. As well as how Capital Markets are being impacted by it.

 

  • Global Factors & Geopolitical Issues Impacting The Supply Chain Crisis & Capital Markets

Just when COVID restrictions have begun to clear up, geopolitical conflicts like the Russia/Ukraine war offer new limitations and have caused some serious supply chain crises. Here are a few reasons why.

 

  • Port Congestion As China Increases Output

Chinese ports have been working in overdrive to first take in as many returning empty shipping containers as possible. As Chinese manufacturers ramp up production to meet increased consumer demand, the shortage of containers and surplus of goods has created massive congestion that is impacting Middle Eastern & Egyptian supply chains. Because the global supply chain and capital markets are inextricably linked, we are seeing a residual knock-on effect from port congestion that stimulates market volatility.

 

  • Spillover Impacts Global Ports Already Congested From Covid Restrictions

The Russia/Ukraine war has been raging with no sign of surrender from either side. Grain & fuel shortages around the globe are only one of the spillover effects the Middle East & Egypt are facing. Additionally, global ports where cargo has traditionally been shipped are facing extreme congestion as they try to compensate for other ports that have been closed or shut down due to the Russia/Ukraine conflict. This congestion only further bolsters supply chain imbalances that skyrocket consumer demand, and consequently inflation.

 

  • Russian Airspace Restrictions Delays Air Freight Transportation

Air transportation, especially along the Asia-Europe route has been severely altered. While air freight from China to the Middle East can avoid Russian and Ukrainian air space. The overall limitations and additional restrictions have created an environment where air freight liners are forced to prioritize certain, more important goods over others, causing shortages of goods in some areas.

 

  • Global Shortage of Truck Drivers Still Looms

Manufacturers, ports, and logistics firms were already being pushed to the edge throughout covid. This new Russia/Ukraine conflict has added an extra layer of pressure that has caused many truck drivers and port machine operators to simply quit. A global shortage of truck drivers everywhere has to be factored into the cost of goods now.

 

  • Congested Overland Rail Freight From China

Ports and rails are being pushed to the limit to keep up with consumer demand. This push to deliver has even congested overland rail freight routes coming out of China. Everyone destined for Northern European regions now have to avoid Russian rails and ship through Asia. The overall burden placed on rail operators is enormous.

 

  • Banks & Investors See Correlation Between Supply Chain Issues & Inflation

As many of the global factors and geopolitical issues listed above stimulate supply chain issues, inflation seems to tag along as an undesirable consequence. Foundational supply & demand principles dictate as consumer demand increases, manufacturers produce increased inventory to meet the demand. This in turn stimulates rises in costs, and inflation as customers are willing to pay increased costs for the products they demand.

 

Investors in the Middle East and Egypt understand this all too well and have taken a position within inflation-resistant markets. Firms like HC Securities & Investments is helping investors manage supply chain imbalances and inflation by shifting investor portfolios to more stable investments. Research shows that industries like healthcare and information technology have been somewhat resistant to the supply chain crisis and offer better stability for banks and investors.

 

 

 

HC expects the CBE to hike policy rates by 200 bps

Posted on by Marwa Nakhla

  • HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled August 18th and based on Egypt’s current situation, they expect the CBE to hike policy rates by 200 bps.

Head of macro and financials at HC, Monette Doss commented: “ The July inflation figure came in higher than our estimate of 13.0% y-o-y, and we expect it to average 14.2% over the rest of the year, well above the CBE’s inflation target of 7% (+/-2% for 4Q22). Looking at Egypt’s external accounts, we believe that pressure is accumulating on the country’s balance of payment (BoP), including (1) our FY21/22e current account deficit estimate of 4.8% of GDP, up from 4.6% a year earlier, (2) April remittances declining c7% m-o-m to USD3.1bn, (3) the banking sector’s (excluding the CBE) net foreign liability position widening to USD11.5bn in June, (4) the drop in foreign currency deposits, not included in the official reserves, to USD0.89bn in July from USD11.2bn in December, (4) net international reserves settling at USD33.1bn representing 4.71 months of imports coverage, and (5) Egypt’s external debt repayment schedule showing dues (excluding GCC deposits) of USD12.1bn over FY22/23. Against this backdrop, we believe a 200 bps interest rate hike coupled with c9% currency devaluation to EGP21.2/USD is necessary to support the currency and combat dollarization. As such, we also perceive the possibility of reintroducing high-interest rate deposits by state-owned banks to boost remittances, especially with rising GCC income levels. Assuming full currency floatation and applying Egypt’s current 1-year USD sovereign credit default swap (north of 1,400 bps) together with Egypt-US inflation differential, we believe that 12M T-bill yields could increase to 18.3%, from 16.4% currently. At this rate, Egypt’s 12M T-bills will be offering a real yield of 288 bps (given our 12M inflation estimate of 12.7% and a 15% tax rate for European and US investors) compared to a real return on the US 2-year notes of negative 265 bps (given 1-year notes yield of 3.10%, Bloomberg average 12M inflation estimate of 5.75% and assuming no taxes). That said, we expect the MPC to hike policy rates by 200 bps in its upcoming meeting.”

It is worth mentioning that, in its last meeting on 23 June, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to keep key policy rates unchanged after increasing it by 300 bps y-t-d, including 200 bps in May and 100 bps in March, concurrent with the Federal Reserve Bank’s (Fed) cumulative interest rate cuts of 225 bps y-t-d. Egypt’s annual headline inflation accelerated to 13.6% in July from 13.2% in the previous month, with monthly inflation increasing 1.3% m-o-m, compared to a decline of 0.1% m-o-m in June, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS).

CIRA: Favorable growth dynamics

Posted on by Marwa Nakhla

  • CIRA expansion plan implies increasing registered students and revenue at a 2022–29e CAGR of c13% and c25%, respectively, with some pressure on EBITDA due to rising OPEX

  • Planned annual CAPEX average EGP940m over the next five years  for CIRA with average debt/equity of 1.19x, on our numbers

CIRA’s expansion plan should reflect in the number of registered students growing at a 2022–29e CAGR of c13%, on our numbers: The company’s Badr University in Assuit (BUA) should start operations next September with six to seven science-focused faculties including physical therapy, nursing, dentistry, and biotechnology. The company plans to add two new faculties annually to reach 16 faculties by 2028e with a total capacity of 24,000 students. The company plans to start the operations of its Cairo Saxony University for Applied Sciences and Technologies (CSU) in 2024e with some four cohorts and add two annually to reach a total of 16 faculties by 2030e, with a total capacity of 32,000 students. CSU will be established under a joint venture between CIRA and Al Ahly Capital, named Al Ahly CIRA for Educational Services, in which CIRA owns 51%. CIRA will own 60% of CSU and Al Ahly Capital 40%. The company also expects to start the operations of its New Damietta university in 2025e with some four faculties and will add two annually to reach 16 faculties by 2031e with a total capacity of 24,000 students. The New Damietta university will be established under a joint venture between CIRA and El Sewedy Capital Holding, named Cairo Egypt for Education (CEE), where CIRA will own 60% of the university and El Sewedy Capital will own 40%. The company plans to increase its higher-education capacity from 25,000 students in Badr University in Cairo (BUC) in 2022 to 105,000 students in all of its universities by 2031e. We, accordingly, incorporate all universities’ expansions and account for the recent change in the university admission system by the Ministry of Higher Education. In the academic year 2020/21, the Egyptian secondary examination system was renovated, leading to a 20 pp decline in average students’ grades. The minimum grades for acceptance into private universities were not adjusted proportionally, leading to a lower number of students’ eligibility for enrollment and hence less utilization of the available seats. As a corrective action, the Supreme Council of Private Universities (SCPU) recently decided to revert to the pre-2020/2021 direct enrollment system, allowing students to apply to universities through their websites. The SCPU has also agreed to adjust the minimum grading for all faculties after the release of secondary-school grades. For K–12. The company currently owns 27 schools, 16 under the Futures brand, serving lower-middle-income families. Two schools under the British Columbia Canadian International School (BCCIS) and one under Saxony International School (SIS) are geared towards the higher-income segment, with the rest of the schools in between. In November 2021, CIRA signed a partnership with The Sovereign Fund of Egypt (TSFE) to provide high-quality, affordable education to all segments and governorates in Egypt. The partnership involves launching two new schools in the Cosmic Village with an investment cost of EGP350m, and plans to start the operations of the first one in 2024e. The company plans to add one new school annually over our 2023–29e forecast period to reach 36 schools with a total capacity of 49,000 students. The Egyptian government’s public-private partnership (PPP) program provides an upside risk to our numbers as the government is offering some 57 schools, of which the company is bidding for 12 schools. The program is under a build, own, operate, and transfer (BOOT) scheme, where the government will offer the land, while the winning company will build and operate the schools for 30 years, after which the ownership will be transferred to the government and the company will be awarded a management contract. The average annual tuition fees for these schools will approximately be EGP18,000/year, fitting well with CIRA’s Future schools brand average annual tuition fees of around EGP14,000–15,000 per student. CIRA’s management believes the program will give them access to highly scarce land in Egypt’s Delta region.

We expect revenue to grow at a 2022–-29e CAGR of c25% with an average EBITDA margin of c47%: We largely maintain our K–12 revenue estimates over our forecast period but downward revise our 2022e revenue estimates by c9% as the Futures brand continues to be the main contributor to K–12 tuition revenue (c61%) as opposed to our earlier assumption of a more pronounced shift towards the high-end brands. For higher-education, we downward revise our 2022–25e revenue estimates by c9% due to a one-year delay in opening BUA in addition to lower-than-expected student registration in BUC as a result of the applied registration process, which took place in the 2020/2021 academic year. Over 2028–31e, we raise our higher-education revenue estimates by c8% to capture revenue from the New Damietta university. Based on our numbers, the K–12 and higher-education expansions imply revenue growing at a 2022–29e CAGR of c25%. We expect rising costs to reflect in K–12 OPEX 8-year CAGR of c14%, with an average EBITDA margin of c28%, down from our earlier estimate of c32%. For higher-education, we expect OPEX to increase at 2022–29e CAGR of c33%, reflecting the launch of BUA in 2023e, CSU in 2024e, and New Damietta university in 2025e. We note that universities will break-even in the third year of operations and start making profits in the fourth year. We accordingly expect the higher-education EBITDA margin to decline from c67% in 2021 to an average of c58% over our forecast period, largely unchanged from our previous estimate of c59%.

CIRA secured all the land for its planned expansions and is working on securing diverse funding sources for its CAPEX plan: The company has already secured a 40-acre land plot in Badr City for its CSU for EGP873m, paid 15% as a down payment, and the rest payable over ten years ending 2031. It also purchased a 58-acre land plot for its New Damietta university for EGP1.06bn, paid a 15% down payment, and the rest payable over ten years ending 2031. The company expects no more land additions over our forecast period. According to management guidance, we raise our 2022–26e CAPEX estimates c31% to EGP4.55bn from EGP3.46bn previously to reflect New Damietta university, which was not fully captured in our earlier estimates, rising prices of construction material and the March 2022 EGP depreciation. The company plans to allocate its 2022–26e CAPEX spending of EGP4.55bn as follows: (1) EGP1.07bn for K–12 schools, (2) EGP1.18bn for BUA, (3) EGP990m for CSU, and (4) EGP1.25bn to New Damietta University. We expect the planned CAPEX to reflect in higher debt (including land liabilities)-to-equity ratio from 1.24x in 2021 to an average of 2.11x in 2022–23e and gradually decline to 0.77x in 2026e. Recently, the company obtained an EGP348m loan from Al Ahli United Bank (AUB) at a floating rate of 1%+ corridor rate, better than its previous loan from AUB at 2.5% markup. The new AUB loan has a 2-year grace period with principal payments starting 2024. The company also secured an EGP260m loan from Qatar National Bank Al Ahli (QNBA EY) at a floating rate of 1%+ corridor rate, better than its previous loan from QNB at a 1.5% markup, including a 2-year grace period with principal payments starting in 2024e. To diversify the funding sources, the company’s board called the EGM to convene to look into starting a 3-year EGP2.0bn securitization program against future cash flows, with the first issuance expected to amount to EGP800m. On our calculations, we account for the company’s future funding needs as bank loans with an interest rate of 1% above the corridor rate, similar to recent terms of bank debt secured by the company.