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Securities & Investment

Tag: Inflation levels in Egypt

HC: We expect the MPC to leave interest rates unchanged at its upcoming meeting.

Posted on by Marwa Nakhla

  • In light of Egypt’s macro economy developments and the geopolitical tensions, HC Securities & Investment expects the CBE to leave the interest rates unchanged in its upcoming meeting scheduled November 21, 2024

Financials analyst and economist at HC, Heba Monir commented: “Egypt’s external position remains stable while reflecting improvement, (1) with net international reserves (NIR) increasing by USD205m m-o-m in October to USD46.94bn from USD46.737bn in September, (2) the banking sector net foreign assets (NFA) position increasing by 6.0% m-o-m to USD10.3bn in September, reversing a net foreign liability (NFL) position of USD26.8bn a year earlier, and (3) Egypt’s 1-year CDS dropping to 349 currently, from 857 bps on 1 January. On the economic activity front, the PMI index rose slightly to 49.0 in October, 48.8 in September, recording below the 50.0 neutral, signaling that the non-petroleum sector in Egypt is still not growing. However, the sub-components to the PMI offered a mixed picture, with only the Output and New Orders indices keeping the headline measure below the neutral mark. And although October’s inflation of 26.5% came lower than our expectation of 28.5% despite the government increasing gasoline prices by c11–13%, and diesel prices by c17%, in mid October, we expect inflationary pressures to persist as November is expected to capture the full effect of the energy price increase. We also see Egypt’s carry trade as still attractive given no expected sizable EGP devaluation until year-end and in 2025 and our estimate of positive real interest rate of 2.9% on Egypt’s latest 12-month average T-bill rate of 26.241%, net of 15.0% tax on US and UK investors and factoring in our inflation estimate one year from now of 19.4%. So, given the inflationary pressures and Egypt’s expected external debt repayment in November of around USD4bn based on news flow and its repayment of USD1bn of its dues to foreign oil companies in November, we expect the MPC to leave interest rates unchanged at its upcoming 21 November meeting.”

It is worth mentioning that, in its 17 October meeting, the Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) maintained the benchmark overnight deposit and lending rates unchanged at 27.25% and 28.25%, respectively, after it hiked them by 600 bps in March, bringing total rate hikes to 1,900 bps since it started its tightening policy, including 300 bps in 2022, 800 bps in 2023 and 800 bps in 2024. Egypt’s annual headline inflation inched up to 26.5% y-o-y in October from 26.4% y-o-y in September, according to the Central Agency for Public Mobilization and Statistics (CAPMAS) data. Monthly prices rose 1.1% m-o-m compared to a 2.1% m-o-m increase in September. On the global front, on 6 November, the US Federal Reserve cut the federal funds rate by 25 bps to 4.50-4.75, bringing total cuts to 75 bps after it hiked rates by 525 bps since it started its tightening policy in 2022. Also, the European Central Bank (ECB) lowered the key ECB interest rates for the main refinancing operations, the marginal lending and deposit facility by 25 bps in October to 3.40%, 3.65% and 3.25%, respectively, bringing total cuts to 75 bps, after it hiked rates by 250 bps since it started its tightening policy in 2022. Based on Egypt’s current economic situation, we present below our expectations for the possible outcome of the 21 November MPC meeting.

About HC Securities & Investment

HC Securities & Investment is a leading investment bank in Egypt and the MENA region. Since its inception in 1996, HC has utilized its relationship-driven insights, local and regional market knowledge, and industry-specific expertise and strong execution capabilities to provide its clients with a wide range of services in investment banking, asset management, securities brokerage, research, custody and online trading through its offices in Egypt and the UAE (DIFC). HC Investment Banking has an outstanding track record of advising leading corporates in Egypt and the MENA region on M&A, capital market, and financing transactions in excess of USD6.6bn. HC Asset Management now manages 7 mutual funds for commercial banks and portfolios for institutions and sovereign wealth funds with assets under management in excess of EGP7bn. HC Brokerage is ranked among the top brokers in Egypt and provides a wide array of services, including research and online trading to institutional and retail clients.

HC: We expect Juhayna to preserve its market share and margins

Posted on by Marwa Nakhla

Juhayna Food Industries

  • We expect relative inflation easing to improve consumer demand and estimate JUFO’s volume to grow at a 2025–29e CAGR of c5%
  • Capitalizing on its leading dairy local market share, we expect JUFO to preserve its market share, margins, and increase exports. We estimate its 2025-29e EBITDA and EPS to grow at c19% and c24%, respectivel

  • In a recent report, HC Brokerage resumed their coverage of Juhayna Food Industries forecasting JUFO to preserve its market share and margins.

Pakinam El-Etriby, Consumers Analyst at HC commented that: “ JUFO navigating a challenging 2021–24 operating environment: In 2021, JUFO experienced a c3 pp y-o-y decline in gross profit margin (GPM) to c29% from a previous three-year average of c31%, impacted by the 2020 COVID-19 lockdowns, disrupting supply chains and energy and commodity prices. As economies began to reopen in 2021, the supply bottlenecks led to further inflationary pressures. In February 2022, the Russian-Ukrainian war worsened the situation, causing additional global supply chain disruptions, leading to higher commodities prices, with crude oil prices surging c40% y-o-y in 2022 after a c64% y-o-y increase in 2021, corn prices rising c19% in 2022 and c60% y-o-y in 2021, soybean prices increasing c13% y-o-y in 2022 and c44% y-o-y in 2021, sugar prices increasing by c5% y-o-y in 2022 and c39% y-o-y in 2021, and skimmed milk powdered (SMP) increasing c15% in 2022 and c23% y-o-y in 2021.  In 2023, while commodity prices began to normalize – with oil prices dropping by c17% y-o-y, corn c19%, soybean c9%, and SMP c31% – JUFO’s 2023 GPM remained below c30% due to the several EGP devaluation rounds in October 2022 of c19% and January 2023 of c18%, as JUFO imports more than c30% of its COGS, mainly packaging and SMP, and to a lesser extent concentrates. Nevertheless, in 1H24, JUFO’s GPM improved by c10 pp y-o-y to c35%, helped by the March 2024 economic reforms and the Ras El Hekma investment deal, allowing it to source its USD needs from banks at the official rate, c4% y-o-y lower SMP price, and higher exports margin from concentrates. JUFO’s concentrates revenue (c15% of 1H24 total revenue, up from c9% in 1H23) benefited from the global supply shortage of oranges (expected to last for three years) due to climate change and the March 2024 EGP devaluation, increasing its competitiveness and export margins.

“We forecast JUFO’s revenues to grow at a 2025–29e CAGR of c19% on higher volumes and prices: We expect a relative moderation in inflation in 2025 to a yearly average of c23% from c30% in 2024 to help consumer demand recover. We project JUFO’s volumes to grow at a CAGR of c5% and average selling prices at c13% over 2025–29e. In 2024e, we expect revenues to grow by c48% y-o-y to EGP23.9bn, largely due to a threefold y-o-y increase in concentrate exports to EGP3.24bn (c14% of total sales from c6% in 2023), partially hedging JUFO’s FX needs. In 2025e, we expect revenues to rise by c26% y-o-y to EGP30.0bn, mainly driven by a c25% y-o-y increase in blended selling prices to EGP61.7/liter and a c31% y-o-y increase in concentrates revenue to EGP4.70bn. Starting 2026e, we expect interest rate cuts, declining inflation, and salary adjustments to accelerate consumer demand recovery and drive revenue growth, leading us to estimate a 2025-29e revenue CAGR of c19%.” Pakinan added.
“We estimate JUFO’s EBITDA and EPS to grow at a 2025–29e CAGR of c19% and c24%, respectively, on healthy revenue growth and higher export rebates despite higher net interest expense: In the absence of any external shocks, we generally expect the company to pass additional costs onto consumers to preserve its margins. We expect JUFO’s GPM to expand to 32.5% in 2024e from 26.2% in 2023, despite higher transportation costs in 4Q24 due to the c17% increase in diesel price on 18 October. However, in 2025e, we project a slight c1 pp y-o-y decline to 31.4% and to increase slightly to c32% in 2026e. In 2024e, we forecast EBIT margin to expand by c7 pp y-o-y to 19.8% on the GPM expansion and c4x y-o-y higher export rebates to EGP392m, and project EBIT margin to average c19% over our 2025–29e forecast period, with export rebates growing at a 2025–29e CAGR of c17%. Accordingly, we estimate JUFO’s EBITDA to grow at a 2025–29e CAGR of c19%. Despite expected higher net interest expenses in 2024e and 2025e due to JUFO’s higher EGP-denominated debt – reporting a net debt of EGP2.14bn as of June 2024, up from EGP1.21bn as of 30 March 2024 and EGP150m as of December 2023 – we expect net profit margin (NPM) to expand by c5 pp y-o-y to 11.3% in 2024e, and 12.2% in 2025e. However, starting 2026e, we forecast a gradual increase in NPM to 14.0% by 2029e, driven by easing interest rates. We estimate JUFO’s EPS to grow at a 2025–29e CAGR of c24%.” Consumers Analyst concluded.  

About HC Brokerage

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

 

For further information, please contact:

Research@hc-si.com

HC expects the CBE to maintain the interest rates, waiting for more inflation deceleration

Posted on by Marwa Nakhla

  • In light of Egypt’s macro economy developments and the global conditions, HC Securities & Investment expects the CBE to keep the interest rates unchanged in its upcoming meeting scheduled September 5th, 2024

Financials analyst and economist at HC, Heba Monir commented: “We expect urban inflation to decelerate to 24.9% y-o-y for August on a favorable base effect. However, we anticipate a 1.0% m-o-m increase on the recent energy and transportation cost hikes at the beginning of August. Egypt’s PMI index surpassed the 49.0’s level over the last three consecutive readings, coinciding with the deceleration in inflation. Egypt’s external position showed a stable outlook, as follows: (1) Egypt received USD820m from the IMF, representing the third tranche of its USD8.0bn EFF, (2) the banking sector’s net foreign assets (NFA) narrowed by USD1.27bn m-o-m to USD13.0bn in June from USD14.3bn in May, reversing a net foreign liability (NFL) position of USD27.0bn a year earlier. We attribute the m-o-m lower NFA to probably normalized FX inflows, (3) net international reserves (NIR) increased c33% y-o-y and 0.2% m-o-m to USD46.5bn in July, and deposits not included in the official reserves rose 2.11x y-o-y and 3.0% m-o-m to USD9.86bn in the same month, (4) Egypt’s REER index decreased to 91.9 in July from 126 in January, and the NEER index also retreated to 16.6 from 25.5 in January, according to Bruegel data, (5) Egypt’s 1-year CDS recorded 403 currently, down from its figure of 857 bps on 1 January. On the global front, the US sovereign 12M rate also retreated to 4.40% from its peak at 5.23% on 30 April. Thus, our interest rate model estimated the required interest rate by investors on the 12-month T-bills at 33.1%, which implies a real positive interest rate of 7.1% (after deducting a 15% tax rate for European and US investors and based on our 12M average inflation rate forecast of 21.1%), higher than the estimated positive interest rate of 1.2% over the latest 12M T-bill rate of 26.2%. All these factors pave the way for interest cuts; however, we expect the MPC to maintain rates unchanged at the 5 September meeting, waiting for more inflation deceleration, given recent electricity bill hikes scheduled to take effect in September.”

It is worth mentioning that, in its 18 July meeting, the Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) maintained the benchmark overnight deposit and lending rates unchanged at 27.25% and 28.25%, respectively, after it hiked them by 600 bps in March, bringing total rate hikes to 1,900 bps since it started its tightening policy, including 300 bps in 2022, 800 bps in 2023 and 800 bps in 2024. Egypt’s annual headline inflation decelerated to 25.7% in July from 27.5% in June, according to the Central Agency for Public Mobilization and Statistics (CAPMAS) data. Monthly prices inched up 0.4% m-o-m, compared to an increase of 1.6% m-o-m in the previous month. On the global front, the US Federal Reserve maintained the target range for the federal funds rate at 5.25–5.50% after it hiked rates by 100 bps in 2023 and 425 bps in 2022, with a total of 525 bps since it started its tightening policy, while the European Central Bank (ECB) lowered the key ECB interest rates for the main refinancing operations, the marginal lending and deposit facility by 25 bps to 4.25%, 4.50% and 3.75%, respectively after nine months of holding rates steady on an improved inflation outlook. Based on Egypt’s current economic situation, we present below our expectations for the possible outcome of the 5 September MPC meeting

About HC Securities & Investment

HC Securities & Investment is a leading investment bank in Egypt and the MENA region. Since its inception in 1996, HC has utilized its relationship-driven insights, local and regional market knowledge, and industry-specific expertise and strong execution capabilities to provide its clients with a wide range of services in investment banking, asset management, securities brokerage, research, custody and online trading through its offices in Egypt and the UAE (DIFC). HC Investment Banking has an outstanding track record of advising leading corporates in Egypt and the MENA region on M&A, capital market, and financing transactions in excess of USD6.6bn. HC Asset Management now manages 7 mutual funds for commercial banks and portfolios for institutions and sovereign wealth funds with assets under management in excess of EGP7bn. HC Brokerage is ranked among the top brokers in Egypt and provides a wide array of services, including research and online trading to institutional and retail clients.

 

 

 

HC expects the CBE to maintain the overnight deposit and lending rates

Posted on by Marwa Nakhla

  • Based on Egypt’s macro economy developments, HC Securities & Investment expects the CBE is to most likely keep the policy rates unchanged in its upcoming meeting scheduled May 23rd, 2024

Financials analyst and economist at HC, Heba Monir commented: “ We expect the MPC to maintain the overnight deposit and lending rates at its upcoming meeting given (1) the y-o-y deceleration in headline inflation for two consecutive months, despite m-o-m increases, (2) improved FX liquidity post the Ras El Hekma investment deal after receiving around USD25bn from the UAE and the IMF, which helped increasing net international reserves (NIR) by c19% y-o-y and c1.7% m-o-m to USD41.1bn in April and narrowing the net foreign liabilities (NFL) of the banking sector significantly by c81% m-o-m and c83% y-o-y to USD4.18bn in March, (3) the improvement in Egypt’s one-year CDS to 287 bps from 857 bps on 1 January, and (4) the recent improvement in Egypt’s credit outlook by Moody’s to Positive from Negative and to Positive from Stable by Fitch and S&P.

Egypt’s latest 12M T-bill rates retreated to 25.98%, implying an estimated negative real yield of c6.8%, down from its peak of 32.30% in mid-March. The decline in T-bills rates reflects a rebound in foreign holdings in treasuries by around USD11-12bn until 8 April (according to banking sector sources), following the CBE’s decision to allow market supply and demand forces to determine the FX rate, the Ras El Hekma investment deal, and resumed IMF program.

It is worth mentioning that, the Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) hiked the benchmark overnight deposit and lending rates by 600 bps on 6 March in a special meeting to 27.25% and 28.25%, respectively, bringing total rate hikes to 1,900 bps since it started its tightening policy, including 300 bps in 2022, 800 bps in 2023 and 800 bps in 2024. Egypt’s annual headline inflation decelerated to 32.5% in April from 33.3% y-o-y in March, according to the Central Agency for Public Mobilization and Statistics (CAPMAS) data. Monthly prices rose 1.1% m-o-m in April, compared to an increase of 1.0% m-o-m in the previous month. On the global front, the US Federal Reserve maintained interest rates at its current range of 5.25-5.50% after it hiked rates by 100 bps in 2023 and 425 bps in 2022, with a total of 525 bps since it started its tightening policy. Based on Egypt’s current economic situation, we present below our expectations for the possible outcome of the 23 May MPC meeting.”

 

About HC Securities & Investment

HC Securities & Investment is a leading investment bank in Egypt and the MENA region. Since its inception in 1996, HC has utilized its relationship-driven insights, local and regional market knowledge, and industry-specific expertise and strong execution capabilities to provide its clients with a wide range of services in investment banking, asset management, securities brokerage, research, custody and online trading through its offices in Egypt and the UAE (DIFC). HC Investment Banking has an outstanding track record of advising leading corporates in Egypt and the MENA region on M&A, capital market, and financing transactions in excess of USD6.6bn. HC Asset Management now manages 7 mutual funds for commercial banks and portfolios for institutions and sovereign wealth funds with assets under management in excess of EGP7bn. HC Brokerage is ranked among the top brokers in Egypt and provides a wide array of services, including research and online trading to institutional and retail clients.

 

HC believes that a 100bps hike is possible

Posted on by Marwa Nakhla

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

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

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

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.

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: we expect 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 June 23rd 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: “The May inflation figure came in lower than our estimate of 14.0% y-o-y, and we expect it to average 14.4% over the rest of the year, however, well above the CBE’s inflation target of 7% (+/-2% for 4Q22). We believe inflation is largely imported and reflects some product shortages due to less domestic manufacturing and lower importation. Egypt’s PMI came in at 47.0 in May, with the data pointing to low consumer spending, falling new order volumes at the quickest pace since 2020, and reduced business input purchases and staffing. We believe that consumer and business spending is largely subdued, with much of the liquidity directed to high-yield banking deposits. As of April 2022, local currency deposits increased to c66% of GDP from the pre-pandemic level of c49% in April 2019. However, domestic credit to the private business sector remained subdued at c20% of GDP in April 2022, slightly up from c16% in April 2019, and below its pre-revolution level of c26% in April 2010. Given the current economic dynamics, we believe that further interest rate hikes will not prove effective in combating inflation and could prove self-defeating by suppressing business activity, leading to more supply shortages. We still believe that carry trade is essential for supporting Egypt’s net international reserves (NIR) given its recent decline to USD35.5bn in May from USD40.9bn in February, the drop in foreign currency deposits not included in official reserves to USD1.04bn in May from USD9.2bn in February, and the widening net foreign liability position of the banking sector to USD12.7bn in April from USD3.29bn in February. However, an overvalued EGP, as indicated by the JP Morgan real effective exchange rate index at 108 bps, the change in outlook on the Egyptian economy to negative from stable by Moody’s, the emerging markets sell-off , and subdued increase in 12M T-bills are hindering carry-trade and diluting the benefit of an interest rate hike, in our view. We note that the yield on 12M T-bills increased by only 90 bps following the 300 bps policy rate hikes, while the yield on 3M T-bills increased by 370 bps. This resulted in low coverage of the longer-term T-bill auctions, reducing the weighted average duration of issued T-bills from 22 March to 16 June to 5.5 months, from 9.8 months (from 1 January to 15 March). Given Egypt’s current 1-year USD credit default swap at 808 bps, and given the Egypt-US inflation differential, we believe interest on 12M T-bill rates should increase to the north of 16.0% to reflect the 300 bps rate hike undertaken so far, to translate to a real interest of 0.27% from -1.73% currently, before resorting to hiking rates further. That said, we expect the MPC to keep rates unchanged in its upcoming meeting.”

It is worth mentioning that, in its last meeting on 19 May, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to increase key policy rates by 200 bps after increasing it by 100 bps in March and following the Federal Reserve Bank’s (Fed) decisions to increase the interest rate by 25 bps in March and by 50 bps in May. The Fed also said that it is likely to increase interest rate by 50-75 bps in its next meeting in July. Egypt’s annual headline inflation accelerated to 13.5% in May from 13.1% in the previous month, with monthly inflation increasing 1.1% m-o-m, compared to an increase of 3.3% m-o-m in April, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS).

HC expects the CBE to increase interest rates by 0.5-0.75 bps

Posted on by Marwa Nakhla

  • HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled March 24th and based on Egypt’s current situation, they expect the CBE to increase interest rates by 0.5-0.75 bps

Head of macro and financials at HC, Monette Doss commented: “We raise our 2022e inflation estimate to 11.5% from 7.2% previously on increasing international prices of wheat and oil and our expectation of less importation of consumer goods that could lead to some supply shortages. Our calculations are based on Bloomberg 2022 consensus wheat price estimate of USD1,086/bushel, c53% higher than its 2021 average price of USD712/bushel and consensus Brent price estimate of USD91.7/barrel, c55/% above its 2021 average of USD59/barrel. We also expect new regulations requiring letters of credit (LCs) for most imported goods to ultimately result in less importation of consumer goods, possibly leading to some supply shortages and imposing some inflationary pressures. On a different front, our calculations suggest that carry-trade currently requires a 12M T-bill rate of 14.8% (162 bps higher than the latest auction) based on; (1) Egypt’s current 1-year USD credit default swap of 560 bps, (2) Bloomberg 2022 consensus estimate for the Federal Reserve rate at 1.55%, and (3) Egypt-USA 2022 inflation differential of 544 bps (given our Egypt 2022e inflation estimate of 11.5% and Bloomberg USA 2022 inflation estimate of 6.1%). We believe that carry trade is key at the moment to support Egypt’s net international reserves (NIR), more so with the banking sector’s net foreign liability (NFL) position widening to USD11.5bn in January and possibly worsening further as net foreign portfolio outflows reached USD2.3bn since the beginning of the Russia-Ukraine war. That said, we expect the MPC to increase interest rates by 0.5-0.75 bps in its upcoming meeting.”

It is worth mentioning that, in its last meeting on 3 February, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to keep rates unchanged for the tenth consecutive time. Egypt’s annual headline inflation came in at 8.8% in February, with monthly inflation increasing 1.6% m-o-m, compared to an increase of 0.9% m-o-m in January, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS).