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Securities & Investment

Category: HC News

HC’s Head of Equity Research Nemat Choucri, shares her views

Posted on by Marwa Nakhla

HC’s Head of Equity Research Nemat Choucri, shares her views about the economic sectors in Egypt

  • Tourism sector

We don’t expect a recovery in tourism before 2H21 until COVID-19 vaccinations become more available to the general public in Egypt and abroad, and accordingly we don’t expect a recovery in tourism to pre-COVID-19 levels to take place in 2021

  • Stock market

We expect a rebound in the Egyptian stock market activity in 2021 in light of the rolling out of COVID-19 vaccinations, currently prevailing low interest rates (a total of 400 bps policy rate cuts in 2020), compelling valuations, increased participation of retail investors, and the Egyptian government’s efforts and initiatives to support local industries and attract private local and foreign investments

Foreign holdings in Egyptian treasuries recovered to USD23bn in November, after it fell by USD14bn in March, when COVID-19 was announced as a pandemic, from a level of USD28bn in February. We expect Egyptian equities to also attract foreign portfolio investments in 2021 especially that the market is currently oversold (down c24% y-t-d), and foreigners were net sellers in 1Q20, 2Q20 and 3Q20

  • Foreign direct investments (FDIs)

FDIs have significant room for growth as it fell by c10% y-o-y in FY19/20 to USD7.5bn, and by c11% y-o-y in 4Q19/20 to USD1.52bn. We expect the Egyptian government’s recent efforts including lowering interest rates, the new customs law, the unified tax law and the amendments to the investment law to bear fruit and attract significant FDIs

We also expect the said efforts, in addition to the government’s recent initiatives to support local industries and an expected cut in natural gas prices to industrial users to also stimulate private local investments

Consumer spending positively affected by the declining unemployment, HC expects the CBE to keep interest rates unchanged

Posted on by Marwa Nakhla

  • HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled December 24th and based on Egypt’s current situation, they expect the CBE to keep interest rates unchanged.

Head of macro and financials at HC, Monette Doss commented: “We believe December inflation figures could accelerate further to 6.1% y-o-y and 0.2% m-o-m possibly correcting for November price increases resulting from supply shocks of some vegetables. However, inflation would still remain within the CBE’s target of 9% (+/- 3%) for 4Q20. We believe that declining unemployment levels to 7.3% in 3Q20 from 9.6% in the previous quarter has reflected positively on consumer spending recently. We also believe that the relative improvement in investor confidence together with monetary easing started to bear fruit as indicated by Egypt’s Purchasing Manager Index (PMI) exceeding the 50 benchmark in September, October and November, coming in at 50.4, 51.4 and 50.9, respectively. Given our December inflation forecast, real interest rate on short-term deposits and loans is estimated at c2% and c4%, respectively, significantly higher than their historical 12-year average of c-3% and c1%. On a different front, we expect foreign inflows into Egyptian treasuries to slow down over the coming months due to possible diversion of funds towards recovering emerging markets’ stocks this is beside possible outflows due to profit taking in December. Compared to other emerging markets, Egypt offers attractive real after-tax yields of 3.03% (based on 1-year T-bill rate of 13.0%, our 2021e inflation estimate of 8.0% and a tax rate of 15% applied on US and European investors). This is, for example, significantly higher than Turkey’s real yield of -1.60% (based on 1-year T-bill rate of 9.6%, Bloomberg 2021 inflation estimate of 11.2% and 0% taxes), given that Egypt tends to show a relatively better risk profile with its 5-year foreign currency CDS at 353 currently, compared to 378 for Turkey. That said, we believe the CBE has room for another 100 bps rate cut that we expect to take place in 1Q21, while we expect it to hold rates unchanged in its upcoming December meeting, since we expect markets to show muted response to an interest rate change during the holiday season.”

It is worth mentioning that, in its last meeting on 12 November, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to cut rates by 50 bps for the second consecutive month after keeping them unchanged for 4 consecutive meetings since April.  Egypt’s annual headline inflation accelerated to 5.7% in November from 4.5% in the previous month, with monthly inflation increasing 0.8% compared to an increase of 1.8% m-o-m, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS).

HC comments on Egypt’s balance of payment (BOP): It recorded a deficit of USD3.47bn

Posted on by Marwa Nakhla

Egypt’s balance of payment (BOP) recorded a deficit of USD3.47bn in 4Q19/20, reversing a surplus of USD0.25bn a year earlier, with the current account deficit widening to USD3.83bn in 4Q19/20 from a deficit of USD1.09bn a year earlier, data from the Central Bank of Egypt (CBE) showed. The trade balance deficit slightly widened to USD8.41bn from a deficit of USD8.29bn in 4Q18/19. Egypt’s travel receipts fell c90% y-o-y to USD0.31bn leading to a total services balance surplus of USD0.55bn, down from a surplus of USD3.28bn in 4Q19/18. Worker remittances also declined c11% y-o-y to USD6.16bn, and FDI also fell c11% y-o-y to USD1.52bn. Portfolio inflows in Egypt amounted to USD0.64bn in 4Q19/20, of which net bond inflows amounted to USD3.74bn, offsetting the outflows from the shorter-term portfolio investments, the data showed. (CBE)

HC’s comment: The impact of the coronavirus on Egypt’s external position came in largely as expected, with the exception of the trade balance deficit which came in significantly wider than our estimate of USD5.59bn, as imports of non-petroleum products remained flat y-o-y at USD13.02bn, c36% above our estimate of USD8.38bn. The services balance came in better than our estimated deficit of USD0.79bn due to lower than expected services payments. Worker remittances came in c5% above our estimate of USD5.85bn. The current account balance figure was largely in line with our estimate of USD4.25bn. FDIs came in largely in line with our estimate of USD1.03bn.

Investing In StartUp’s Post Coronavirus

Posted on by Marwa Nakhla

  • Consider your approach to investing in startups before the coronavirus pandemic and consider your strategy now. If you’re taking the same investment strategy, then you know things need to change. The world has changed and the way you invest in startups needs to change also. From an investment standpoint, everything you do should be based on leading the competition. Here are a few strategies and new norms that you should consider to be integral to your new investment strategy and startup philosophy.

 

  • Remote Sales Reps Vs In-house Sales Teams

Sales is the most critical aspect of a company. Some would argue that a startups business process and management team are equally important. However, a recent study concluded that most executives feel customer acquisition and sales strategies are the most important reason why they would invest in a startup. Therefore, adapting your sales strategy to be remote and extremely cost-efficient is a great selling point for both investors and startup founders looking to save money and operate in the new coronavirus landscape.

Think about it. Those startups and even enterprise organizations that successfully leverage remote sales reps over in-house sales consultants will win at the end of the day. They will win in both cost efficiency, agility, adaptability, and longevity. Startups that make sales a remote ordeal, and do it successfully have been known to achieve higher revenues.

A study by 99 Firms concluded that 75% of buyers prefer not to waste time meeting face to face. Why waste time meeting in person when you can conduct a transaction remotely. If buyers and prospects are already accustomed to doing business online and over the phone, it only makes sense that any startup you operate or invest in takes advantage of that.

  • Food & Technology are Recession-Proof

When looking into recession-proof investment options, food & technology always win. If it’s two things that industry analysts around the globe agree on, it’s that the consumer packaged foods industry and tech-based innovations will never be struck too hard by any recession or pandemic. People always have to eat and the world craves new innovation.

The term recession-resistant has been used quite frequently when discussing consumer packaged goods. Our society uses these food items and beverages every day. Take a look around your kitchen and you’ll find a wealth of consumer packaged goods that you consider to be essential. Even in the middle of a pandemic, you’ll still need to buy salt, water, eggs, oatmeal, and a whole host of other consumer packaged food items.

Now let’s talk about technology. You can’t read this article, watch the news, or even buy anything without some form of technology. The world operates at a foundational level with the help of integrated technological devices like smartphones, payment processing platforms, databases, etc. These are tech-based innovations that never go into a recession. Consider this as an investor when trying to keep a healthy portfolio during the coronavirus pandemic.

  • The Lean Startup Model Is Now More Important Than Ever

Harvard business school has coined the term, “The Lean Startup”. It refers to startups and businesses that look at things from an agile and lean perspective. Before dedicating your time, resources, and energy to assuming what the customer wants, get out and ask them directly. Get out and make contact with your customers by asking them, is this solution something you can use, how much would you pay for it, and questions like these. This is more important than ever in a time like the coronavirus pandemic.

Modern business trends and customer’s buying behaviors have forever changed. Therefore, startups that maintain a lean and agile philosophy will be more successful than those that don’t. Whether you are an investor or startup executive, keeping this in mind is critical.

The basic philosophy behind staying lean is never assuming you know what the customer wants. Asking them directly will help you pivot and adapt in the right direction. Take for example a company like McKinsey & Company. They are constantly adapting to the evolving marketplace and innovating new services based on what customers want. It’s one of the reasons why they are the largest consulting firms in the world. Things change every day and unless you ask the customer, how would you know?

Based on our experience and diverse investment portfolio, these are the most important aspects of business startups and investment strategies that need to be considered in this new coronavirus landscape. Don’t hesitate to reach out to our team of expert investment strategists. We’re ready to help you gain a foothold in a pandemic resistant sector.

HC: GB Auto Profitability should be back on track 3Q20

Posted on by Marwa Nakhla

In a recent report, HC Brokerage shared their valuation of GB Auto updating the market on the auto/auto related business. HC maintains their OW rating on compelling valuation.

  • Auto and auto related operations are gaining traction on improved market dynamics and GB Auto presence; auto business to revert to profits this year, on our numbers

  • We forecast GB Capital to continue delivering solid earnings growth and impressive NIMs, filtering through to a 4-year bottom line CAGR of c11%

  • We slightly cut our 12M TP c3% to EGP5.13/share on lower GB Capital valuation, but maintain our OW rating on compelling valuation

Noha Baraka, the head of consumers at HC commented that: “Back on track: The auto and auto related business had been loss-making for almost 8 consecutive quarters. This was mainly driven by a series of events significantly hurting Egypt’s automotive sector. Starting primarily with the delayed availability of foreign currency in 2015, then the EGP floatation, moving to the fierce competition and price wars following the alleviation of import tariffs on European cars, then the “Let It Rust” campaign, and most recently the coronavirus outbreak. However, recent market numbers suggest an improvement since the government lifted some of its precautionary measures leading to the resumption of the licensing and registration of cars, and a c26% y-o-y increase in 3Q20 local passenger car sales volume. Accordingly, we expect a marginal improvement in sales in 4Q20 to reach c43,800 cars, a c9% y-o-y increase, as consumer demand is likely to remain depressed in the short term. Going forward, we expect the PC market to gradually recover and grow at a 4-year CAGR of c10% aided by pent-up demand, lack of public transportation and infrastructure, and not to mention the increased momentum coming from falling interest rates and stable FX rates. We are now more bullish on GB Auto’s outlook given its new launches of more competitive CKD models such as the Chery Arizzo and the Hyundai Accent RB to recoup some of the lost Verna sales, and the introduction of new CBU models such as the Hyundai CN7, along with a focus on high-end cars such as Tuscon, not to mention discontinuing all loss making models. This should be enough for the company to regain some of its lost market share and most importantly partially restore its profitability, despite fierce competition, in our view. We expect GB Auto PC volumes to grow at a 2020–24e CAGR of c13%, implying a terminal market share of 20.8% by 2024e from 16.5% in 2Q20. Similarly, the 3-wheeler business has begun to gain traction once again after being severely hit on a series of new licensing limitations, thanks to strong market dynamics, while the 2-wheelers has continued to show strong performance especially after its cut in prices, which allowed GB Auto to capture some market share gains. We expect volumes to grow at a 2020–24e CAGR of c14% fueled by a robust underlying demand. However, the main challenge will be coming from the regional PC business, in our view, in light of the company’s decision of liquidating its Hyundai brand in Iraq, pushing the remaining 1,700 kit this year, which will weigh on the auto business’ top line. Accordingly, GB Auto announced that it has secured its representation in Iraq through launching MG brand (which is of a higher margin compared with Hyundai), starting with only 250 kits on a monthly basis to assess the market perception of the new brand. Therefore, we opt to be conservative and assume the new MG brand representation in Iraq to stand at 500 cars in 2020 and 3,000 cars in 2021, before growing at a 2021 –24e CAGR of c3%, on average. Thus, our numbers point to auto and auto related 2020–24e revenue CAGR of c13%, some c28% lower than our previous estimates, dragged down by lower regional PCs operations, and to a lower extent due to lower local PC market share for GB Auto.”

“The impact on profitability is more profound with 3Q20 witnessing profits generation: As far as margins are concerned, we expect continued portfolio optimization through the rolling out of new models, in addition to a stronger EGP/USD rate should help the company defend its high margins in the short term. We see auto and auto related business’ gross profit margin expanding 2.9 pp to reach 13.1% in 2020e, however, we believe these high margin levels are unlikely to be sustained over the long-run, reflecting the intensified competition that GB Auto is facing, especially in the PC business. Therefore, we forecast the terminal gross profit margin for the auto and auto related business to stand at 12.3%, still 2.5 pp higher than our previous estimates. We expect the business EBITDA margin to increase to 7.7% in 2020e, from 5.5% in 2019, before normalizing at an average of 5.3% over our forecast period on the back of high SG&A expenses, and as 2Q20 EBITDA was partially inflated by the sale of a land plot. We also see the line of business benefiting from declining interest rates, given its highly leveraged nature, and forecast a c48% cut in 2020–23e interest charges bill. We now expect the auto and auto related business to realize profits starting 3Q20, and be value accretive, removing an overhang on GB Auto’s operations.” Noha Baraka added.

Noha continued: “GB Capital to continue to shield overall company’s profitability: GB Capital has continued to be the company’s star performer despite the pandemic, expanding its EBIT by c21% y-o-y in 1H20, and its loan portfolio by c14% from the end of last year to EGP10.1bn, with NPLs remaining in check at 1.5%. We expect loan portfolio to grow another c10% to reach EGP11.1bn by year end and we do not rule out securitization taking place in 4Q20. We believe GB Capital will continue to deliver solid earnings growth and impressive NIMs until 2021e, despite the cut in interest rates, thanks to its asset/liability duration mismatch through lending at fixed interest rates while borrowing at variable ones, along with the company’s efforts to get preferential rates from banks. Post 2021e, we expect to see the increased competition to cool off NIMs by 1.8 pp to stand at 16.3% by 2024e and largely stabilize at these levels. Accordingly, we expect the business bottom line to grow at a 2020–24e CAGR of c11%, c5% lower than our previous net income estimate, mainly on the back of lower loan portfolio growth and higher provision expenses. More securitization taking place should bolster earnings growth, in our view.”

“Maintain Overweight on compelling valuation: We raise our valuation for auto and auto related business c57% to EGP0.93/share, mainly on the back of our new estimates, lower working capital needs fueled by stronger EGP/USD rate, in addition to using a lower average cost of capital (13.9% versus 14.9% previously). Our valuation of EGP0.93/share puts auto and auto related business at a 2021e EV/EBITDA multiple of 4.8x and an EV/IC of 1.1x. As for GB Capital, we continue to value the business separately, yielding EGP4.20/share, slightly lower from our previous valuation of EGP4.71/share, based on equally weighted global 2021e peers’ average P/B and P/E multiples of 0.9x and 9.3x, respectively, using our 2021e net profit figure of EGP693m. Our 12-month target price of EGP5.13/share implies a potential return of c89% over the 4 November closing price of EGP2.71/share. We therefore maintain our Overweight rating. In our view, the valuation remains compelling, with the stock trading at a 2021e P/E multiple of 3.5x, a c76% discount to its peers’ implied multiple of 14.8x. GB Auto investment case is gaining traction capitalizing on GB Capital’s ongoing solid performance, in addition to a turnaround in the auto and auto related business, lowering the pressure on the group’s balance sheet and hence creating some room for FCF generation, in our view. This should be enough to lift the overhang on the stock performance given that for at least the last year the market has not been assigning any value for the auto business, and has even undermined the value of the group’s financing arm. The long-awaited automotive directive could add further upside to our auto and auto related business numbers, if it goes through.” Noha Baraka concluded.

 

HC expects the CBE to cut interest rates 50bps

Posted on by Marwa Nakhla

  • HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled November 12th and based on Egypt’s current situation, they expect the CBE to cut interest rates 50bps.

Head of macro and financials at HC, Monette Doss commented: “We believe October inflation figures could accelerate further to 4.2% y-o-y and 1.5% m-o-m mainly impacted by the back-to-school season, however, it would still remain well below the CBE’s target of 9% (+/- 3%) for 4Q20. We believe high unemployment levels and suppressed consumer spending are the main factors underlying low inflation levels, while monetary easing started to bear fruit in October as indicated by Egypt’s Purchasing Manager Index (PMI) coming in at 51.4 signaling economic expansion for the second consecutive month. Based on our October inflation forecast, we estimate Egypt’s real interest rates on short-term deposits and loans at 4.4% and 5.9%, respectively, significantly above their 12-year average of -3.3% and 0.8%. Also, foreign portfolio investments in Egyptian treasuries recovered sooner than we expected reaching USD21.1bn in mid-October from USD10.4bn in May, according to official announcements, resulting in the Egyptian banking sector increasing its net foreign assets position to USD2.06bn in September, excluding the CBE, reversing a net foreign liability position of USD1.09bn in August. Compared to other emerging markets, Egypt offers attractive real after-tax yields of 3.56% (based on 1-year T-bill rate of 13.6%, our 2021e inflation estimate of 8.0% and a tax rate of 15% applied on US and European investors). This is, for example, significantly higher than Turkey’s real yield of -1.60% (based on 1-year T-bill rate of 9.6%, Bloomberg 2021 inflation estimate of 11.2% and 0% taxes), given that Egypt tends to show a better risk profile with its 5-year foreign currency CDS at 408 currently, compared to 528 for Turkey. That said, we expect the CBE to cut interest rates 50bps in its upcoming meeting in order to stimulate private investment and consumption and drive GDP growth, especially in light of a potential second COVID-19 wave. We expect this to have almost no effect on foreign portfolio inflows in Egyptian treasuries, with its yields declining by only 100 bps since March, despite a total of 350 bps rate cuts by the CBE over the same period of time.”

It is worth mentioning that, in its last meeting on 24 September, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to cut rates by 50 bps after keeping them unchanged for 4 consecutive meetings since April.  Egypt’s annual headline inflation accelerated to 3.7% in September from 3.4% in the previous month, with monthly inflation increasing 0.3% reversing a decline of 0.2% in August, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS).

HC: Egypt financials – Outperform on sturdy NBFS growth

Posted on by Marwa Nakhla

HC Brokerage recently updated the market on Egypt financials and their NBFS resilient performance. HC stated that EFG Hermes is their top pick on regional exposure and higher potential return.

  • Private sector rebound witnessed in 1Q20 relapsed due to low visibility on the future development of the pandemic in our view, while we expect interest rate stability over the rest of 2020

  • Despite our 2020e earnings downward revision, NBFS are showing high resilience with companies under our coverage seeking profitable investments and synergies with commercial banks

  • We decrease our 12-month TP for EFG Hermes by c10% to EGP21.1/share and for CI Capital by c23% to EGP4.59/share on downward earnings’ revision, while maintain Overweight for both. EFG Hermes is our top pick on regional exposure and higher potential return

Monette Doss, head of macro and financials commented: “Low visibility on the future development of the pandemic dilutes 1Q20 private sector rebound, in our view, while we expect interest rate stability over the rest of 2020: Private consumption grew 5.3% y-o-y in 3Q19/20, the highest level since FY12/13. Another significant development during 9M19/20 was private investment growing 14.1% y-o-y, outpacing government investments which declined by 4.5% y-o-y. Both developments confirm our earlier expectation that the private sector’s contribution to economic growth should gain traction following the materialization of the easing cycle and the completion of Egypt’s economic reform program. Since the outbreak of the pandemic, the government demonstrated efforts to support the private sector through giving a monthly allowance to daily workers, in addition to decreasing natural gas prices to USD4.5/mmbtu for industrial users from USD5.5/mmbtu previously and reducing electricity prices by EGP0.1/KWh for medium, high and ultra-high voltage users, and fixing electricity tariffs for other industrial users for a period of 3–5 years and directing financial support to the healthcare and tourism sectors. Moreover, the Central Bank of Egypt (CBE) undertook rate cuts of 300 bps in March and another 50 bps in September, decreased interest on its EGP100bn subsidized loan initiative to the industrial sector to a declining interest rate of 8% from 10% previously and extended the initiative to include the agricultural and contracting sectors, delayed loan repayment for all credit clients for 6 months and canceled fees on electronic transactions for 6 months. Going forward, the government is currently looking into methods to support industrial growth through further reduction of natural gas prices to possibly USD3.0/mmbtu and revamping the export rebate program. The CBE is also looking into doubling its industrial initiative to EGP200bn and following the expiry of the 6-month loan repayment grace period in September, the CBE requested banks to restructure loans for all credit clients according to their expected future cash flows without imposing additional financial strain on them. Despite low consumption spending, lagging investment growth and high real interest rate environment, we expect policy rates to remain stable around current levels due to relatively low interbank liquidity and also in order to support the domestic currency.”

“Despite declining 2020e revenue, NBFS are showing high resilience with companies under our coverage seeking profitable investments and synergies with commercial banks: At the sector level, new leasing contracts were slashed by c43% y-o-y in 2Q20, however it grew c13% y-o-y in 1H20 to EGP25.7bn with net leasing portfolios for EFG Leasing and CI Capital’s Corplease growing c25% y-t-d and c22% y-t-d, respectively, to EGP3.8bn and EGP8.4bn, as of June. Hence we estimate 2020–24e net leasing portfolio CAGR of c22% and c18%, respectively, for the 2 companies. Corridor rate cuts accompanied with the CBE initiatives to provide different businesses with subsidized loans resulted in compressed NIMs for both companies under our coverage to an average 4.3% in 2Q20 down from 5.5% in 2019. The compressed NIMs happened sooner than we initially expected as we were expecting a more gradual decline over our 2020-24e forecast period. We downward revise our 2020–24e net profit estimates for both EFG Leasing and Corplease by an average of 23% and 27%, respectively, due to higher than previously expected provisioning, on possibly higher NPLs and lower NIMs. For the microfinance business, sector-wide loans grew c25% y-o-y to EGP17.2bn in 2Q20, down only c4% q-o-q due to lockdowns during most of 2Q20 with a penetration rate of c7%, on our calculations. For EFG Hermes’ Tanmeyah, its loan book remained flat y-o-y in 1H20 at EGP3.3bn (before securitizing EGP540m of its loan book in 2Q20), while CI Capital’s Reefy saw its loan portfolio grow c25% y-o-y to EGP783m in 1H20, mainly due to a favorable base effect. Accordingly, we downward revise our 2020e loan book estimates for Tanmeyah by c11% implying flat y-o-y growth and for Reefy by c5% implying a growth of c44% y-o-y. Over our 2020–24e forecast period we expect NIMs for both companies to gradually decline by an average of 530 bps due to higher competition. We downward revise our 2020–24e net profit estimates by an average c16%–c21%, for Reefy and Tanmeyah, respectively, on higher than previously expected provisioning and lower fees and commissions. Despite the economic downturn taking its toll on brokerage, advisory and asset management revenue, the firms under our coverage sought expansions in the high potential educational sector through EFG Hermes’ GEMS Egypt for Education Services (a JV between GEMS Education and Egypt Education Fund managed by EFG Hermes), and CI Capital’s 16.5% stake in Taaleem Services Management Company, owner of the Nahda University. Both firms are also seeking synergies with commercial banks, with EFG Hermes and the Sovereign Fund of Egypt (SFE) currently conducting a due diligence to acquire 51% and 25% stakes, respectively, in Arab Investment Bank (AIB) through a EGP5.0bn capital increase. The acquisition will help EFG Hermes secure a stable revenue stream smoothing out the high volatility in its IB business, acquire funding for its NBFS platform at favorable terms and deploy a part of its excess cash to a profitable investment and, on the other hand, support AIB capitalization. This will allow for future growth and the compliance of AIB to the CBE’s minimum capital requirements. The deal could occur at 2020e P/B of 1.0x–1.2x, in our view, leading to a deal value of EGP2.6–2.7bn for EFG Hermes, representing c42% of its excess cash, based on our calculations. For CI Capital, Banque Misr acquired 24.7% stake in the company which will also help the firm get favorable funding for its NBFS activities in addition to giving the commercial bank exposure to the highly profitable NBFS market. As a manifestation of the high-growth potential of NBFS, the Egyptian Exchange (EGX) is expected to see some 4 NBFS initial public offerings (IPOs) slated for 2021, namely: (1) Raya Holding’s (RAYA EY) subsidiary Aman for Financial Services, (2) Ebtikar, a JV between MM Group for Industry and International Trade (MTIE EY) and B Investments (BINV EY) or one of its subsidiaries, (3) one of the subsidiaries of Sarwa Capital (SRWA EY), and (4) one of the financial subsidiaries of Orascom Financial Holding (OFH) that will emerge from the demerger of Orascom Investment Holding (OIH EY).” Monette Doss added.

HC’s head of macro and financials concluded: “We decrease our 12-month TP for EFG Hermes by c10% to EGP21.1/share and for CI Capital by c23% to EGP4.59/share on downward earnings’ revision, while maintain Overweight for both. EFG Hermes is our top pick on regional exposure and higher potential return: We value both companies using a SOTP methodology with an excess return model for their core operations and, for EFG Hermes, we add the company’s excess cash and non-operating assets while completely writing off its 8.813% stake in Credit Libanais. For CI Capital, we value Taaleem using a DCF methodology applying a beta of 1, up from our previous education sector average beta of 0.6, to account for the current risky market conditions. For both firms we use a cost of equity applying our forecast for 12-month T-bill yields leading to an average cost of equity of 17.5%. For EFG Hermes investment bank, our base assumption for the cost of equity is a weighted average of Egypt and the MENA region based on geographical revenue contribution leading to an average cost of equity of 11.9%. Individually, we value EFG Leasing at EGP0.84/share (c15% lower than our previous estimate) and CI Capital’s Corplease at EGP2.06/ share (c25% lower than our previous estimate) putting the businesses at a 2020e P/E multiple of 16.2x and 10.1x, respectively. For the microfinance, we value EFG’s Tanmeyah at EGP2.83/share (c8% lower than our previous estimate) and CI Capital’s Reefy at EGP0.90/share (c13% lower than our previous estimate), putting the businesses at a 2020e P/E multiples of 16.8x and 9.17x, respectively. For the investment banks, we value EFG Hermes at EGP8.72/share (almost the same as our previous estimate) and CI Capital at EGP0.92/share (c30% lower than our previous estimate on lower expected earnings). For EFG Hermes, we then add the company’s excess cash position, 2020e dividends (net of tax), and investment property valued at around EGP6.71bn, or EGP8.73/share (c17% lower than our previous estimate as we exclude Credit Libanais from our valuation). We calculate it as the company’s total cash position, add available net receivables and remove seed capital. Finally, we add the company’s 2020e revenue from treasury capital market operations. For CI Capital, we value Taaleem at EGP0.71/share (c14% lower than our previous estimate on a higher beta) putting the business at 2020e EV/EBITDA of 15.1x, 2.06x its acquisition value. For EFG Hermes, the NBFS platform makes up c17% of the stock’s total value, the investment bank c41%, with cash and non-operating assets (NOA) accounting for the remaining c42%. These sum up to a 12-month target price of EGP21.1/share, which yields a potential return of c62% on the 27 September closing price of EGP13.0/share. We therefore maintain our Overweight rating on EFG Hermes Holding. For CI Capital, the NBFS platform makes up c65% of the stock’s total equity value, the investment bank c20%, with Taaleem accounting for the remaining c15%. These sum up to a 12-month target price of EGP4.59/share, which yields a potential return of c35% on the 27 September closing price of EGP3.39/share. We therefore maintain our Overweight rating on CI Capital. For EFG Hermes, our 12-month TP of EGP21.1/share puts the stock at a 2020e P/E multiple of 20.1x and a P/B multiple of 1.22x, while it is trading at 2020e P/E and P/B of 12.4x and 0.75x, respectively. For CI Capital, our 12-month TP of EGP4.59/share puts the stock at a 2020e P/E multiple of 11.8x and a P/B multiple of 1.54x, while it is trading at 2020e P/E and P/B multiples of 8.73x and 1.14x, respectively.”

HC comments on the MPC’s 50 bps interest rates cut

Posted on by Marwa Nakhla

  • The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) has decided to cut the benchmark overnight deposit and lending rates by 50 bps to 8.75% and 9.75%, respectively, at its meeting on Thursday, according to a press release. The CBE has also cut the rate of its main operation and the discount rate to 9.25%, it announced.

HC’s comment

The MPC’s decision came in against our, as well as consensus, expectation of keeping rates unchanged. We believe the MPC’s decision, together with the recent announcements by commercial banks to reduce interest rates on their CDs by 2.0%–3.5%, and canceling the 1-year 15% CDs aims at encouraging consumer spending as a significant driver for GDP growth. This also coincides with the government’s efforts to promote the role of the private sector as the main player in the economy, building on pre-COVID-19 growth trends where private consumption grew by 5.3% y-o-y in 1Q20, the highest rate since FY12/13 where it averaged 2.9% over FY12/13–FY18/19. Also, private investments grew at c14% y-o-y in 9M19/20 (in real terms) outpacing government investment which declined by c5% y-o-y. Having said that, we however believe that the decline in policy rates could have a limited short-term effect on consumption, as already much liquidity is allocated to the 1-year 15% CDs together with high unemployment rates. Moreover, we believe the rate cut will not necessarily correspond to a similar decline in T-bill rates. Yields on 12-month T-bills declined by only 100 bps since March despite the previous 300 bps rate cut undertaken by the CBE.

Inflation levels remain subdued and HC expects the CBE to keep interest rates unchanged

Posted on by Marwa Nakhla

  • In its latest report about their expectations on the likely outcome of the MPC meeting scheduled on 24 September and based on Egypt’s current situation and the inflation levels, HC expects the CBE to keep interest rates unchanged. 

Head of macro and financials at HC, Monette Doss commented: “Inflation levels remain subdued coming in well below the CBE target of 9% (+/- 3%) for 4Q20 and also less than our earlier expectation of 4.2% y-o-y for August, on declining food prices in addition to low consumer spending on other non-food items, in our view. We now expect inflation to average c5% in 4Q20 down from our earlier estimate of c6%. Real interest rates in Egypt reached a high of 4.7% and 7.0% on short-term deposits and loans, respectively, significantly above their 12-year average of -3.3% and 0.8%. We, however, believe that the high real interest rate environment is justified by relatively low liquidity in the banking sector as well as the net foreign liability position held by banks currently. The CBE open market operations, as an indicator for interbank liquidity, declined to c10% of total local currency deposits in August well below its 12-year average (excluding 2011-2013) of c21%. On another front, the banking sector has been holding a net foreign liability position since the massive foreign portfolios outflows that took place in March, however, partially narrowing to USD1.8bn in July. We accordingly expect interest rates, including the 1-year 15% CDs offered by public banks, to remain at elevated levels in order to preserve the banking sector liquidity. A larger scale rebound of foreign portfolio inflows would enhance interbank liquidity and result in cooling off T-bill yields from current levels, in our view. That said, we expect the MPC to keep interest rates unchanged in its upcoming meeting.”

It is worth mentioning that, in its last meeting on 13 August, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to keep rates unchanged for the fourth time after undertaking a 300bps rate cut on 16 March in an unscheduled meeting.  Egypt’s annual headline inflation decelerated to 3.4% in August from 4.2% in the previous month, with monthly inflation declining 0.2% m-o-m compared to an increase of 0.4% m-o-m in July, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS).

HC: Madinet Nasr Housing is further challenged. However, we maintain our OW rating

Posted on by Marwa Nakhla

HC Brokerage issued their update about Egypt’s real estate sector assuring that sector conditions continuing to be difficult due to Coronavirus outbreak and they maintain the OW rating on Madinet Nasr Housing.

  • Sector conditions continuing to be difficult have pushed Madinet Nasr Housing to resort to one-off sales and cash sale discounts to overcome liquidity shortage

  • This has also impacted deliveries which are expected to pick up in 2021e. We forecast revenue to grow at 3-year CAGR of c21% and pre-sales to grow modestly at c3%

  • We maintain our OW rating on Madinet Nasr Housing, while lower our TP c44% to EGP7.05/share; implying a 2020e TP/NAV of 0.35x, while it is trading at half of that

Mariam Elsaadany, real estate analyst at HC Brokerage commented that: “Coronavirus worsens already difficult sector conditions impacting deliveries and pre-sales: Weak affordability has impacted the real estate sector pre-sales in 2019 leading to a muted c7% y-o-y growth, while the coronavirus has further worsened pre-sales and deliveries. Madinet Nasr Housing was no exception especially that it was facing fierce East Cairo competition, in addition to delivery delays. Despite its relatively strong balance sheet (net debt to equity stood at 0.39x in 2Q20), we believe the company has been facing some liquidity shortfall, triggered by the infrastructure spending needs mainly in Sarai, as well as the relaxed payment plans it introduced to the market during the launch of Sarai in late 2016. To resolve this, the company opted to: (1) offer more of its inventory on cash basis after slashing unit prices by up to c50% on some EGP500m worth of inventory, prioritizing cash flows over profitability, (2) resorting to bank debt by signing a EGP2.19bn syndicated loan with a consortium of banks (although management expects to only withdraw some EGP1.40–EGP1.50bn of the facility in 2020), (3) engaging in one-off commercial land plot sales, and (4) launching some EGP1bn of Sarai Mansions, selling residential land to individuals, which offers a different product to the company’s portfolio. It is worth mentioning that the company has delayed its delivery time for new sales currently to 4 years from 3 years previously to accommodate the delays in delivery. The company has been steadily growing its backlog, which grew at a 3-year CAGR of c28%, standing at EGP8.53bn in 2Q20 with 2020 expected to be a strong year for its deliveries as it had targeted to handover some 2,500 units, implying 14.1x y-o-y growth. With the economic implications of the coronavirus affecting all sectors indiscriminately, we believe the company may not be able to meet this target, further affecting the pace of its execution cycle.”

“We expect total pre-sales of EGP14.6bn over 2020–22e implying a 3-year CAGR of c3%: We expect collections of EGP21.8bn over 2020–30e and CAPEX of EGP9.22bn over 2020–25e. Our estimates take into account the launched phases of Taj City (including Tag Sultan, T-Zone, Shalya, Lake Park Studios, and Cobalt) and Sarai (including Taval, Croons Condos, S2, Cavana Lakes, while we exclude future sales from MNHD’s 36% stake in its JV with Palm Hills Developments (PHDC EY, Overweight, TP EGP3.75) Capital Gardens and only accounting for the project’s existing backlog). We expect the company’s backlog to be maintained at current levels as it delivers S1 in Sarai that it launched in 4Q16. Our collection period across the company’s project portfolio is also extended to capture the company’s relaxed payment plans approach in sales as the 7-year and 8-year plan are currently the most prevalent. We exclude the company’s Nasr Gardens from our forecasts and value the project’s inventory at book value. Despite our expectation for delays in deliveries, we expect 2020–25e revenue of EGP19.7bn, with an average gross profit of EGP10.1bn, implying a margin of c51% as the company delivers its backlog. We expect the company’s cash offers to have little impact on its receivables portfolio average collection period and margins, as units sold on cash basis were only around EGP500m, c5% of its receivables portfolio’s balance.” Mariam El Saadany added

The real estate analyst at HC concluded her update on MNHD stating that: “We lower our TP c44% to EGP7.05/share but maintain our OW rating: We use a DCF valuation to value MNHD’s launched real estate phases in its 2 projects, Taj City and Sarai and value the company’s undeveloped land bank by accounting for the present value of the potential cash flows from developing this land in the future, using the master plan for each plot. We exclude future sales from Capital Gardens from our valuation due to lack of visibility on future launches and on the slow sales pace, while only account for the project’s existing backlog. Our 5-year average moving WACC stands at 16.6%. Of our TP, c27% is from DCF and c73% is from land valuation, with the DCF value of launched real estate project at EGP2.90/share, undeveloped land value at EGP5.14/share, while a net debt position of EGP1.42bn shaves off a total of EGP0.99/share and yields a DCF value of EGP7.05/share. Our TP puts the company at a P/NAV of 0.35x, and implies a potential return of c107% over the 25 August closing price of EGP3.41/share, leading us to maintain our Overweight rating. We estimate the stock is trading at a 2020e P/NAV of 0.17x, lower than the peer average of 0.28x. On our numbers, the market is assigning a value of EGP406/sqm to the company’s undeveloped land compared to our valuation of EGP1,395/sqm (c33% lower than our previous value of EGP2,076/sqm), and representing a c71% discount to market prices.”