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Securities & Investment

Category: HC News

Investing After Covid-19: Why Invest Now

Posted on by Marwa Nakhla

  • Investing After Covid-19: Why Invest Now: Covid-19 has left the world reeling, and has led to countless infrastructural changes in societies around the globe. Consumers are becoming used to a new reality, and even as the world begins to open up again, things still aren’t back where they were six months ago. In the wake of the global change brought about by covid-19, however, it’s important to band together and support each other so that we can effectively reopen society and begin working together to move into a new future. Now more than ever, we need to help each other heal. That can look like healing through putting your investments into new and emerging industries, through supporting education and health companies that are working to rebuild society, or through supporting other economic activities. No matter what, the importance is that we band together and support each other in healing after the global pandemic. Let’s dive into what that looks like in the investment sector as we rebuild from COVID-19.

  • The Importance of Investing After Covid-19

While investing after Covid-19 may seem counterintuitive, this time is actually even more important for people looking to invest. Covid-19 has left the world reeling and in need of economic stimulation in order to get things up and running again, which is why putting your money in society is ever more important. Many businesses have continuity plans in place for opening their operations back up and for beginning to help society return to normal. These plans are taking into account widespread quarantines, travel restrictions, and school closures all while doing their best to continue operations and assist with the reopening. Investing in reopenings helps society to return to normalcy at a quicker rate and allows for you to start seeing a return on your investment much faster.

  • Investing in the Educational Sector

In the wake of a global crisis, there are several industries that can both provide better support for the economy as well as provide you with a more secure return on your finances. For one, educational institutions are a great choice for investment. As schools begin to reopen, the need for financial support is huge. Egypt is seeing huge profitability in the education sector with higher enrollment numbers in higher education institutions and new online learning platforms. Plus, as more people are stuck indoors with social distancing restrictions, the likelihood of enrolling in online classes and online learning is growing, making your investment more profitable.

  • Investing in the Healthcare Sector

One industry that certainly won’t be declining any time soon is the healthcare industry. Health care facilities are overloaded with patients suffering from covid-19, which is also putting a slow down in treating other ailments and diseases. By investing in healthcare facilities, you help these businesses to expand and support the healing of more people. Egypt’s healthcare industry has been booming in recent years, with modern technology allowing the country to offer more advanced treatments and care for patients. Egypt has also managed to keep covid-19 cases relatively low, thanks to investments in healthcare technology and infrastructure.

  • Investing In Technology

It’s not just education and health care which need strong financial backing in order to help society return to normal. Technological advancements are what make cures, treatments, and vaccines for covid-19 possible. The more support we’re able to give to the technology sector, the quicker we can begin to return to normal. Egypt is at the forefront of the hunt for a vaccine for covid-19, and researchers at Egypt’s National Research Center plan to begin human trials in the next five months. With extensive experience fighting MERS, Egypt is a country that’s already poised for success in creating a workable, lasting solution to prevent the spread of covid-19.

  • Investing in Worker Training

The last major industry where we’re seeing prolific growth and an opportunity for successful investing is in the training industry. Covid-19 has left businesses with the aforementioned contingency plans to carry out, requiring new worker training programs and different workplace protocols. Egypt has seen great success in implementing a covid-19 reopening program and is currently even beginning to allow tourists back into the nation. However, as the country leads the world in reopening travel and business operations, the need for support in creating lasting and careful training programs is also expanding.

  • Investing in Creating Strong Partnerships

Another part of the investing puzzle is partnering with investment companies that understand how to respond to global issues and economic downfall. HC is one of those teams, and with experience in not only helping to rebuild society after the decline of Covid-19 but also after many other issues that the world has faced. After both the international financial crisis of 2008 and the Egyptian revolution of 2011, HC helped investors to make informed and practical decisions that helped them rebuild their finances and achieve success through smart investments. Moving forward from Covid-19 is no different, and again requires the guidance and expertise of a team who understands financial difficulties in the wake of large-scale problems. Using the guidance and knowledge from experts who have tackled these situations before can help you to make smart financial choices that not only benefit you but which benefit society as well.

Are you ready to put your money where it matters? Reach out to the team at HC and start making investments that add value.

Egypt’s Banking Sector, Well shielded

Posted on by Marwa Nakhla

HC Brokerage just issued their report about Egypt’s banking sector asserting that it is facing the Covid-19 outbreak steadily and shared their evaluations of the three banks under their coverage, CIB, ADIB-Egypt and CA-Egypt.

  • Despite our downward GDP revision, Egypt provides attractive risk-adjusted return for carry-trade, while Egypt’s banking sector is strong enough to weather a business slowdown in 2020, in our view

  • CAPEX lending now delayed to 2021, however CIB, ADIB-Egypt and CAE are expected to maintain decent profitability, despite 2020e EPS downward revision, in our view,

  • We remain Overweight on CIB and ADIB-Egypt, and upgrade our rating for CAE to Overweight from Neutral, despite lower valuations for the 3 banks. CIB is our sector pick

Monette Doss, Chief Economist and Head of macro and financials at HC Brokerage declared that: “We lower our TP for CIB by c17% to EGP95.5/share, ADIB-Egypt by c14% to EGP21.8/share, and CAE by c21% to EGP41.0/share; and maintain an OW rating for CIB and ADIB-Egypt, while upgrade our rating for CAE to OW from N. CIB is our top pick: CIB is our top pick due to the bank’s s healthy balance sheet growth, high profitability, good asset quality and high capitalization. Even though we like ADIB-Egypt, we believe the delayed capital increase will continue to be an overhang on the share price. At current levels, we believe CAE is oversold.”

Monette explained: “Despite our downward GDP revision, Egypt provides attractive risk-adjusted return for carry-trade, while Egyptian banks are strong enough to weather a business slowdown in 2020, in our view: We believe tourism, private investment and consumer spending are the main GDP components hit by the COVID-19 outbreak in Egypt. Accordingly, we revised our FY19/20e GDP growth estimates downwards twice from 5.9% to 4.7% and now to 4.0% as we expect the economy to remain flat y-o-y in 4Q19/20e and account for 9M19/20 actual GDP growth of 5.4%. We also revised our FY20/21e GDP growth downward to 3.7% from 6.1% previously. In order to combat the negative effect of the COVID-19, the Egyptian government and the Central Bank of Egypt (CBE) launched several initiatives to support the private sector including a 300 bps rate cut by the CBE in March to stimulate economic activity. Using the Sharpe ratio for different emerging markets, we believe Egypt’s current treasury yields continue to offer relatively attractive risk-adjusted return coupled with low currency volatility. This in our view should lead to regained foreign inflows into the Egyptian treasuries market and therefore result in cooling off T-bills yields as well as banks’ cost of funding, while we expect corridor rates to remain unchanged for the rest of 2020. We believe that Egypt’s strong economic fundamentals will support banking sector profitability, despite our 2020e EPS downward revision.

“CAPEX lending now delayed to 2021. CIB, ADIB-Egypt and CAE to show decent profitability, in our view, despite our 2020e EPS downward revision on lower balance sheet and non-interest income estimates and higher provisioning: The outbreak of COVID-19 since mid-March, has led to a slowdown in business activity in Egypt as the government has implemented some precautionary measures including the imposition of a partial curfew and halting some transportation means. As a result, companies operating in Egypt have decided to delay their CAPEX plans to 2021 and only maintained working capital borrowing. The CBE launched several initiatives to ease the burden on individuals and businesses, including delaying loan repayment for personal and corporate loans for a 6-month period and waiving online fees and commissions. We believe that these initiatives will lower Egyptian banks’ 2020 profitability and pressure its cash flows, however other CBE initiatives of offering subsidized loans to the tourism, industrial, contracting and agriculture sectors provided a breather as the CBE compensates banks for the difference between mid-corridor rate + 2% and the subsidized 8% interest rate paid by these corporates. We revised downward our 2020e deposit estimates for Commercial International Bank, Abu Dhabi Islamic Bank-Egypt, and Crédit Agricole Egypt by an average of c11% in order to account for rising unemployment as well as significant decline in business activity. Similarly, we revise downwards our banks’ 2020e loan estimates by an average of c12% as we now expect investments to shrink by c12% in 1H20e, while maintained fund utilization at c106% for CIB and ADIB-Egypt and at c95% for CAE, as banks allocate their excess liquidity to government treasuries. Looking at asset/liability duration gaps we believe CIB is well positioned to achieve healthy NIMs over 2020e, while high L/D ratio and high local currency portion of loans support CAE’s NIMs. ADIB-Egypt’s significantly long liability duration should result in the lowest 2020e NIMs compared to the 2 other banks, in our view. We revise downwards our 2020e net profit estimates by an average c29% for the 3 banks on lower non-interest income and higher provisioning.” Monette Doss added.

Egypt’s Food & Beverage sector weathering the pandemic

Posted on by Marwa Nakhla

In a recent report, HC Brokerage presented their analysis of Egypt’s food & beverage sector in Egypt and a valuation of the four stocks within their coverage universe in light of the COVID-19 outbreak. HC maintains Overweight for Juhayna, Domty, Oburland and Edita.

  • While the coronavirus outbreak hindered a lot of industries, staples players benefited from panic buying and stockpiling of necessities

  • We expect a more rationalized consumer spending as economic recovery takes time to materialize. We differentiate between stocks based on elasticity of demand, cost outlook, pricing, and profitability

  • Maintain Overweight for all our Egypt’s Food & Beverage sector coverage, especially post recent sell-off. Juhayna is our top pick

Noha Baraka, the Head of Consumers at HC commented that: “Demand for staple products proved to be resilient in light of COVID-19 outbreak: Since the outbreak of the coronavirus in mid-March, the Egyptian government implemented precautionary measures to contain its spread, including a partial curfew and the halt of some transportation means, which resulted in panic buying and stockpiling of essential staple goods by Egyptian consumers. This was further helped by higher demand during Ramadan. On the other hand, companies delivering snack food products witnessed a demand slowdown during the same period of time, which we attribute to less commuting, the closure of schools, universities and sporting clubs, and not to mention consumers shying away from ready-made meals and shifting to healthier options as a precautionary measure. By the end of June, the government started lifting most of these measures, which will help stimulate economic activity, reduce unemployment, which spiked to 9.1% in April, and ultimately improve private consumption which we estimate to grow to 2.0% in FY20/21 from an estimated figure of 0.87% in FY19/20e. Having said that, we believe that the economic slowdown witnessed in the first 4 months of 1H20 took its toll on consumer purchasing power, suggesting that private consumption recovery will take time to materialize, and lead to a more rationalized spending skewed towards staple goods.”

“Companies to fare differently in 2020e; with Juhayna benefiting the most: Demand for staples is proving to be resilient, coupled with the continuation of a favorable cost outlook, which should bode well for F&B companies’ margins. We differentiate between companies based on elasticity of demand, cost outlook, pricing, profitability and FX exposure. Based on this, we see Juhayna standing out in terms of profitability mainly due to its products diversity in unsaturated segments and decent market share. On the contrary, Edita is the most exposed name, in our view, as it mainly targets on-the-go consumption and sells less essential products. We see Obourland offering the best exposure to the cheese sector, across our coverage, given its strength as a readily available product, attainable in underserved areas, having a low exposure to governmental channels, along with its expected revamped cheese packaging with an easy-open feature, which differentiates its offerings from that of competition. Despite that, we see Domty’ s new plain bread product launch as a good shift that could make up for some of the Domty Sandwich lost sales, yet we believe the stock rerating is contingent on the recovery of its core operations.” Baraka added.

“Egypt’s Food & Beverage sector offering compelling valuation; Juhayna is our top pick: The sell-off across the board left valuations undemanding for our Egypt’s Food & Beverage coverage universe, leading us to maintain our Overweight ratings for the 4 companies. We choose Juhyana as our top pick as we believe it is a strong defensive play during economic uncertainty given its well-diversified portfolio with strong presence in staple offerings, which suggests sustained demand. Also, being the most liquid stock across our F&B coverage sets it apart, in our view. We keep the company’s 12-month TP unchanged at EGP10.6/share. We also raise our 12-month TP for Obourland c9% to EGP10.0/share. Although we are fond of Obourland’s business model, yet a catalyst is needed for stock rerating, in our view. Due to lower cheese volumes mainly from lost government sales and lower bakery margins, we cut our 12-month TP for Domty c27% to EGP8.4/share. As for Edita, we cut our 12-month TP c32% to EGP14.7/share, mainly on a weaker demand for snack-food products in 2020e, but still maintain our Overweight ratings for both, on share prices’ weaknesses. We also like Juhayna for its attractive yields and multiples, however, it has higher multiples than Obourland, which we believe is being penalized for its lower stock liquidity. Juhayna is offering a 2021e dividend and FCF yields of c6%, and c12%, respectively, and trading at a 2021e EV/EBITDA multiple of 5.3x, a c44% discount to its peers’ implied multiple of 9.4x.” Baraka Concluded.

HC Comments on the IMF’s approval of a 12-month Stand-by Arrangement (SBA) for Egypt

Posted on by Marwa Nakhla

A 12-month Stand-by Arrangement (SBA) for Egypt was approved by the executive board of the International Monetary Fund (IMF), with access equivalent to SDR3.76bn (about USD5.2bn or c185% of quota) to address balance of payments financing needs arising from the COVID-19, it announced in a press release. The approval of the SBA for Egypt enables the immediate disbursement of about USD2bn, and the remainder will be phased over 2 reviews, it added. The new arrangement aims to help Egypt cope with challenges posed by the COVID-19 pandemic by providing Fund resources to meet Egypt’s balance of payments needs and to finance the budget deficit. The Fund-supported program would also help the authorities preserve the achievements made over the past 4 years, support health and social spending to protect vulnerable groups, and advance a set of key structural reforms to put Egypt on a strong footing for sustained recovery with higher and more inclusive growth and job creation over the medium term. (IMF)

HC’s Comment

“The USD5.2bn SBA will bring Egypt’s total recently secured external financing to USD13.0bn, including the USD2.8bn Rapid Financing Instrument (RFI) from IMF and the USD5.0bn proceeds from the recent Eurobond issuance, which will help in closing the Egyptian banking sector net foreign liability position and support the balance of payment (BOP).”

This content is just for general information.

Interest rates to remain unchanged by the CBE, according to HC’s expectations

Posted on by Marwa Nakhla

  • In its latest report about their expectations on the likely outcome of the MPC meeting scheduled on 25 June and based on Egypt’s current situation, HC Securities & Investment expects the CBE to maintain interest rates unchanged. 

Chief economist, and head of macro and financials at HC, Monette Doss said: “We believe that release of inflationary pressures is mainly driven by lower private consumption due to rising unemployment and significantly less social gatherings following the Coronavirus outbreak. Current price levels also reflect lower demand compared to relatively higher consumption levels during the month of Ramadan. Going forward, we remain cautious as recent EGP devaluation of c3%in addition to possible supply disruptions resulting from lower international trade could lead to some price increases. Hence, we expect inflation to average 8.4% over the remaining of 2020, well within the CBE target of 9% (+/- 3%) for 4Q20. We accordingly, expect the CBE to maintain interest rates unchanged in its upcoming meeting.”

“Applying Egypt’s current 1-year foreign currency credit default swap (CDS) at 330 bps, USA 12m T-bill rate at 0.18%, and Egypt-USA inflation differential into our model shows that Egypt’s current T-bill rates are fairly priced, in our view. We, hence, expect to see some foreign inflows into the Egyptian treasury market going forward, as the global panic arising from the Coronavirus resides. In this regard, there are unofficial announcements that Egyptian treasuries has attracted some USD300m-USD400m in foreign investments over the past week. We believe that this could be seen in the high coverage of treasury auctions during this period compared to the prior period.” Monette Doss added

It is worth mentioning that, in its last meeting on 14 May, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to keep rates unchanged for the second time after undertaking a 300bps rate cut on 16 March in an unscheduled meeting.  Egypt’s annual headline inflation decelerated to 4.7% in May from 5.9% y-o-y in the previous month, with monthly inflation showing no increase compared to an increase of 1.3% in April, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS).

Automation Is Changing Job Markets Across the Globe

Posted on by Marwa Nakhla

The way business is done has been changed forever. Many factors have led to an increased reliance on automated technology within the job market. For many years, enterprise-level organizations, startups, and international operations have all pushed for more and more automation.

Currently and in wake of Covid-19 outbreak, the world has no choice but to adapt. Automation has become essential to help make up for the thousands of individuals not capable of performing their duties from home. As the job market catches up, many of the tasks that unskilled workers used to perform will be taken over by sophisticated automation protocols.

  • Automated Technology to Follow

One technology you should pay attention to is called Robotic Process Automation. This form of AI machine learning is how computers are beginning to do what humans can do. Virtually any repetitive task you perform on a computer can be managed by RPA. Whether that’s updating account information, verifying or declining applications, and even customer outreach.

All it takes is a knowledgeable programmer to instruct the program on what to do. Then, what previously took one employee all day to finish can be done in 1 hour with a 0% error rate. That’s greater efficiency and a greater quality all wrapped up into one program.

  • How Is Automation Impacting the World?

The job market is being changed sector by sector. Different industries are responding differently to the push for automation. Some sectors will thrive in the new landscape and others will die. Take a look at the following sectors below to see how automation is impacting them specifically. When you’re ready, reach out to HC to see how we can help you gain a foothold in the changing marketplace.

  • Education

The education sector has always been at the forefront of the technological revolution. Recently, a greater push towards automation has created some interesting investment opportunities. Intelligent Tutoring Systems (ITSs) are gaining in popularity and offer an incredible opportunity to invest in an emerging technology set to take over the education sector.

The automated instruction of classes has been a hot topic for many years. It hasn’t been until recently that the technology has really taken off. As the education sector scrambles to evaluate various solutions, the market is wide open.

  • Training

In the same way that Intelligent Tutoring Systems (ITSs) are becoming more popular in the education sector, automated training platforms are showing promise in the corporate world. As enterprise organizations concentrate on building digital workforce and technology to facilitate that remote workforce, automated training protocols will become necessary.

Systems designed to train vast numbers of digital workers will be needed in the coming shift. This opens the floodgates for technology firms with the capacity to develop automated systems for corporations to use.

  • Technology Infrastructure

Investing in technological infrastructure is similar to buying real estate. Businesses and citizens will always need a reliable digital network to pretty much do anything. Investing in technological infrastructure puts you at the forefront of development in a region. As we shift towards a greater reliance on digital processes, the world will need larger servers, stronger networks, and greater resources.

The future belongs to those that control the flow of information. This is your chance to become a stakeholder in the digital realm. When you control the technology, you control the user.

  • New Economic Growth

Establishing new economic sectors will help absorb the rate of rising joblessness while bringing a sizable return on investment. In the current climate, new economic sectors can be established in the IT industry, remote workforce sector, on-demand services industry, and many others.

Any industry that operates with a reliance on the internet would be a quality investment to consider. Establishing new economic sectors can be done by leveraging a team of expert investment bankers that keep their fingers on the beating pulse of the industry.

  • Global Investment Opportunity

It’s about more than creating investment opportunities in Egypt and around the Middle East. The current climate calls for a global investment opportunity, unlike anything you’ve ever seen. It’s time to awaken the sleeping giant within the room. Here are some sectors you can make an impact on by investing With HC.

  • Emerging Markets

  • Energy

  • IT

  • And a few others…

Don’t forget that HC is here to help point you in the right direction. When it comes to making a sound, and correct choice, you want to rely on the best. Our team of investment bankers will lead you down the path of least resistance. Experience the impact of smart investing by contacting our team today.

HC maintains the Overweight rating of Orascom Development Egypt (ORHD)

Posted on by Marwa Nakhla

In a recent report, HC Brokerage issued an update note about Orascom Development – Egypt (ORHD) in light of the coronavirus outbreak stating that they maintain their Overweight rating on the steep drop in share price

  • In light of the coronavirus outbreak, the stock takes a hit due to its tourism sector exposure, despite impressive real estate operations 

  • We cut hospitality occupancy rates to a 2020e–2021e average of c62% in Gouna, c36% in Taba Heights and c26% in Fayoum, and we account for a gradual recovery in 2H20e

  • We reduce our TP by c33% and maintain our Overweight rating of Orascom Development on the steep drop in share price

Mariam Elsaadany, real estate analyst at HC Brokerage commented that: “Tourism exposure takes a toll on Orascom Development ’s operations and share performance: The company’s tourism exposure (c32% of 2019 revenues and c30% of 2019 EBITDA) has led to a steep decline in its share price (down c50% y-t-d vs only c26% for the EGX30) as investors perceive it to be amongst the most badly hit by the coronavirus and the restrictive measures taken to combat it. Across our coverage, ORHD is the company with the highest tourism exposure, which warrants a significant downward revision in 2020e earnings, in our view. Accordingly, we expect 2020e hospitality revenues and town management to drop by c56% y-o-y and c68% y-o-y, respectively. Despite the government’s announcement of the reopening of hotels and resorts on 15 May for domestic tourism, we are still conservative in our assumptions for 2020e, as hotels will only be permitted to operate at a maximum capacity of 25% for the remaining months of 2Q20 and at only at 50% by July, which justifies the downward revision in our 2020 estimates. For the real estate segment, we expect the sector to suffer further from weak presales due to the coronavirus outbreak, however we believe the risk of a steep increase in cancellations is low. We expect demand for the second homes segment to suffer the most, in our view, which affects the real estate operations of ORHD’s destinations, Gouna, Makadi and Fayoum. We perceive O West as a successful project as it captured EGP5.31bn in sales since its launch and up to 1Q20, however, we believe the company’s execution capacity on such a large scale project will be tested in 2020e. We believe O West can capture a decent market share because of the developer’s strong name and superior West Cairo location. Despite our general positive outlook for O West, we expect ORHD’s total real estate sales to drop c33% y-o-y in 2020e on the back of lower volumes. It is worth noting that construction work for O West had already begun in January 2020 and the measures taken to combat the coronavirus so far do not pose a risk to delay deliveries, which are set to begin in 2023e, according to management.”

“ We cut recurring income stream on the expected decline in tourist arrivals due to the coronavirus outbreak: We reduce hospitality occupancy rates, room revenue and margins across the company’s destinations portfolio. Our estimates for 2020e-2021e occupancy rates average c62% in Gouna (c82% in 2019), c36% in Taba Heights (c48% in 2019) and c27% in Fayoum (c29% in 2019) as we account for a gradual recovery in occupancy rates, following a steep drop in 1H20e, on the back of the government’s decision to promote local tourism. This reduces our total hospitality revenues by c56% y-o-y in 2020e, and increase it by c63% y-o-y in 2021e, mainly on base effect. We maintain room rates, in line with 1Q20 KPIs reported by management, while apply lower margins as we expect hospitality EBITDA margin to drop 8 pp y-o-y in 2020e to c25% and increase by 2 pp y-o-y in 2021e to c27%. It is worth noting that the company is optimistic that local tourism will partially replace foreign tourism starting 3Q20, according to management’s best case scenario, which would be an upside to our numbers. For real estate operations, we forecast a slowdown in 2020e sales with some EGP4.66bn in contracted sales, c33% lower y-o-y while we expect total 2020e–2026e contracted sales of EGP58.3.4bn, mostly attributable to O West. Our forecasts point to total collections of EGP84.0bn over 2020e–2034e (adjusted for ORHD’s share of O West collections) against CAPEX of EGP47.6bn (including NUCA’s in-kind stake of O West). We expect total 2020e–2023e revenues of EGP29.2bn against costs of EGP21.3bn, implying an average gross profit margin of c27%. We forecast the company’s 2020e net debt-to-equity (including land liabilities) to drop to 1.89x (liabilities mostly related to O West) from 2.38x in 2019. We expect the company’s cost efficiency efforts to reflect positively on its SG&A expenses, additionally, a drop in LIBOR rates and local interest rates should reduce financing expenses.” El Saadany added

The real estate analyst concluded her update on  Orascom Development stating that “We reduce our TP by c33% despite accounting for O West in our valuation and maintain our OW rating: We reduce our target price mainly on the back of lower hospitality and town management estimates. This comes despite including O West in our numbers since the project was launched in 2019, and lower risk free rates on the back of the Central Bank of Egypt’s (CBE) decision to cut interest rate by 300 bps in March. Despite this, our WACC increased to an average of 14.3% from 14.0% previously, as the drop in interest rates was offset by a sharp increase in the stock beta to 1.38 from 0.87 previously, which also partly explains the c33% downward revision of our TP. Of our TP of EGP9.44/share, DCF contributes c43% (from c46% previously) and our land valuation contributes c57% (from c54% previously). Our DCF component includes EGP3.50/share from launched real estate projects (EGP3.72/share previously), EGP2.64/share from hospitality operations (EGP4.19/share previously), EGP0.47/share from town management operations (EGP1.12/share previously), while a net debt position of EGP1.89/share and minority interest of EGP0.60/share shave off a total of EGP2.50/share, which yielded a total DCF value of EGP4.12/share. Our TP of EGP9.44/share puts the company at a P/NAV of 0.61x, and implies a potential return of c175% over the 19 May closing price of EGP3.44/share. We therefore maintain our Overweight rating. We estimate the stock is trading at a 2020e P/NAV of 0.22x, slightly higher than the peer average of 0.20x. On our numbers, the market is assigning a negative value of EGP26/sqm to the company’s undeveloped land compared to our valuation of EGP264/sqm, which represents a c68% discount to market prices.”

HC advised Gulf Capital on the sale of Metamed

Posted on by Marwa Nakhla

  • HC Securities & Investment advised Gulf Capital on the sale of Metamed, the largest diagnostic imaging company in the MENA region to a consortium of investors that includes Mediterrania Capital Partners, Cairo Scan for Radiology and Labs(S.A.E.), DEG, FMO, Proparco and EBRD.

 

 

  • Media Coverage:

https://www.zawya.com/mena/en/markets/story/Gulf_Capital_sells_Metamed_to_Ray_Lab-SNG_175488369/

https://gulfnews.com/business/banking/gulf-capital-sells-metamed-to-ray-lab-and-a-consortium-of-global-investors-1.71709066

https://www.thenational.ae/business/gulf-capital-sells-metamed-to-a-consortium-of-international-investors-1.1025460

HC Expects the CBE to maintain rates unchanged in its upcoming meeting

Posted on by Marwa Nakhla

HC Securities & Investment expects that, with inflation remaining within the CBE target of 9% (+/- 3%) for 4Q20, the CBE to maintain rates unchanged in its upcoming meeting next Thursday.

Chief Economist at HC, Monette Doss said: “We believe that inflationary pressures are mainly driven by increasing prices of necessary goods, namely food items, due to relatively higher demand during the month of Ramadan and the panic demand following the imposition of curfew in Egypt; following the Covid-19 outbreak. Less working hours has also disrupted production activity possibly leading to relative supply shortages of some goods also posing inflationary pressures”.

“We estimate foreign portfolio outflows from the Egyptian government debt during March and April at USD16bn-USD17bn. Maintaining interest rates at current levels imply a positive real return of 1.1% on 12-month T-bills, given 12-month T-bills of 12.6%, 15% taxes on treasury income and our average inflation estimate of 9.6% over the coming 12 months.”, Doss added.

It is worth mentioning that, in its last meeting on 2 April, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to keep rates unchanged after undertaking a 300bps rate cut on 16 March in an unscheduled meeting.  Egypt’s annual headline inflation accelerated to 5.9% y-o-y in April from 5.1% y-o-y in the previous month, with monthly inflation increasing 1.3% up from 0.6% increase in March, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS).

Global steel market takes another hit after the coronavirus outbreak and oil slump

Posted on by Marwa Nakhla

In its latest reports, HC Brokerage shed the light on the steel industry in Egypt in light of the global condition stating that “Global steel market takes another hit; recovery unlikely before 2021”

  • Global steel market takes another hit, braking its preliminary recovery from a bad 2019, with the local market dynamics providing a breather

  • Ezz Steel could remain in the red for another couple of years and is likely to call on the CBE initiative for a new financing facility

  • We cut our 2020–23e EBITDA estimates c22% and our TP c37% to EGP7.5/share and reiterate our Neutral rating

Mariam Ramadan, the Head of Industrials at HC commented that “The global steel market had recently emerged from a difficult 2019 (during which the industry wrestled with trade wars, weak economies and an ailing automotive sector), with prices and margins edging higher in the first couple of months, before the coronavirus outbreak and oil slump posed a risk to its nascent recovery. In the wake of the pandemic, plant closures have been the last line of defense for governments, and in many cases were only demand-driven, implying production downtimes have been outweighed by demand destruction, which sent finished steel prices lower (Turkey rebar 8% lower y-t-d), whereas iron ore prices bucked the trend on continued price-supportive supply issues in Brazil and Australia (only 4% lower y-t-d). The caveat is that recovery may not be V-shaped when the pandemic resolves, with the better half of economists and industry players seeing it lasting into 2021.”

“Egypt being Ezz Steel’s anchor market is a positive but government measures alone are insufficient: Egypt has so far been holding up relatively well, with the construction sector specifically enjoying business as usual, at least for existing projects, as the government bets on it to drive the economy at this time, and which is evident in current volumes (1Q20 local consumption slightly higher y-o-y). This, coupled with the cuts to energy prices and the extension of higher protective tariffs gave a breather to the sector locally, besides the accelerated easing cycle. Ezz Steel could also benefit from the EGP100bn CBE initiative as it talks over a new financing facility. The steel licenses offering was an anomaly on the government’s part, but we are not concerned as we believe it will be of no interest to investors at current economics, and will result in no addition to finished steel capacity, only backward integration if anything for a couple of rerollers. While the government seems more inclined to ease restrictions going forward than head into a full lockdown, we still opt to cut our total sales volume forecasts c18%, on average, as the private sector takes a back seat in the near/medium term and export markets remain muted (1Q20 exports down c35% y-o-y).” , Ramadan added.

The Head of Industrials at HC carried on “Reiterate Neutral: Along with a c5% cut to our EGP/USD estimates, this filters through to a c22% downward revision to our 2020—23e EBITDA forecasts, and we now expect the company to remain in the red a couple more years before turning around in 2023. We also now account for Ezz Steel’s stake in EZDK at 64%, with the ownership unlikely to be effected before 2H20 when the legal procedures complete. The transfer of EFS and ERM has nevertheless taken effect in 4Q19 against a credit balance on EZDK’s balance sheet. This translates to a c37% cut to our TP to EGP7.5/share, which puts the company on a 2021e EV/EBITDA multiple of 8.4x (trading at 8.8x), and implies a potential return of 3.0% on the 30 April closing price of EGP7.3/share, and we hence reiterate our Neutral rating. Our TP excludes the proportionate addition of some EGP1.6bn owed to ESR from EZDK post the latter’s capital increase, which translates to EGP1.1/share in today’s terms, that it is likely however to remain an open balance between the two against future DRI supplies for instance than be settled in cash. In our view, current valuation is not compelling, with the stock trading comfortably above its peers’ implied and historical 12M forward EV/EBITDA multiple.”

“It is worth mentioning that The Egyptian Parliament’s recent decision to impose a 10% development fee on finished steel imports is good news for the company as it raises the price ceiling for local rebar sales (though actual prices have lately been more linked to billet imports), but is more importantly positive for HRC sales volumes and/or prices, following the recent surge of imported material and the failure of producers to lobby for protective tariffs.”, Mariam Ramadan concluded.