• Share
  • Email
  • Embed
  • Like
  • Save
  • Private Content
Cibc Egypt Year Book 2009
 

Cibc Egypt Year Book 2009

on

  • 8,524 views

 

Statistics

Views

Total Views
8,524
Views on SlideShare
8,523
Embed Views
1

Actions

Likes
1
Downloads
230
Comments
0

1 Embed 1

http://www.linkedin.com 1

Accessibility

Upload Details

Uploaded via as Adobe PDF

Usage Rights

© All Rights Reserved

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Processing…
Post Comment
Edit your comment

    Cibc Egypt Year Book 2009 Cibc Egypt Year Book 2009 Document Transcript

    • November 11, 2008 EGYPT | TABLE OF CONTENTS Sector/Co. Page No. STRATEGY 3 11 ECONOMY INDUSTRY 22 BANKING 30 CEMENT 41 FERTILIZERS 50 POULTRY 58 REAL ESTATE 67 STEEL 80 SUGAR 91 TELECOM 101 WHITE CONSUMER GOODS EQUITY AL-EZZ CERAMICS & PORCELAIN (GEMMA) 107 109 ARAB COTTON GINNING CO. (ACGC) COMMERCIAL INTERNATIONAL BANK (CIB) 111 113 CREDIT AGRICOLE EGYPT (CAE) 115 DELTA SUGAR 117 EASTERN COMPANY (EC) EGYPTIAN FINANCIAL & INDUSTRIAL CO. (EFIC) 119 121 EIPICO EZZ AL-DEKHEILA STEEL 123 EZZ STEEL (ES) 125 MARIDIVE & OIL SERVICES 127 129 MISR BENI SUEF CEMENT (MBSC) 131 MISR CEMENT (QENA) MOBINIL 133 135 NASR CITY HOUSING & DEVELOPMENT (NCHD) 137 NATIONAL SOCIETE GENERALE BANK (NSGB) OLYMPIC GROUP 139 141 ORASCOM CONSTRUCTION INDUSTRIES (OCI) 143 ORASCOM TELECOM (OT) 145 ORIENTAL WEAVERS CARPETS (OWC) PAINTS & CHEMICAL INDUSTRIES (PACHIN) 147 149 PALM HILLS DEVELOPMENTS RAYA HOLDING 151 153 SINAI CEMENT 155 TELECOM EGYPT (TE) TMG HOLDING 157
    • November 11, 2008 THIS PAGE IS INTENTIONALLY LEFT BLANK 2
    • November 11, 2008 EGYPT | STRATEGY AN OASIS OF GROWTH AND VALUE THAT SURPASSES RISK Welcome to CI Capital Research (CICR)'s first Egypt Book, where we look from the top to drill down through 9 sectors and into 26 companies, which we think demonstrates a wide and deep knowledge of the market. WHY HERE? WHY NOW? The Egyptian market has been hit hard by factors not of its own making. Ever since its reformist government has been in place it has managed c.7% p.a. growth, and now, despite global events, is widely recognized as a market of least risk characteristics for its ability to continue delivering growth. Yet, as high com- modity prices brought inflation to emerging markets and as the dawning realization that the global financial crisis would have a global economic impact, then the Egyptian market was hit by an outflow of (largely foreign) portfolio investments. This saw the market plummet some 50% year-to-date. This is despite the potential to grow, despite the robustness of its banking system, despite the lack of toxic financial products, and despite economic growth being driven nearly 3/4's by local demand. In short, this has left investors with a market with the potential to grow through these turbulent times, the potential for strong long-term growth, a market of low-cost production, and at valuations often lower than their developed and emerging market peers. We conclude, therefore, that whilst the Warren Buffet approach of buying value for the long-term at times like these is correct, it is entirely possible that the returns may be seen rather sooner. Compelling macro backdrop Egypt’s reformist government is determined to keep growth going, to minimize risk, and to complete a program to bring rising living standards to the masses. It is a consumer-led environment, stimulated by investments, and gradually lowering interest rates. Long-term growth is assured by demographics and geographic loca- tion. Summary macro snapshot Actual Forecasts 2005/6 2006/7 2007/8 2008/9 2009/10 2010/11 2011/12 Real GDP Growth (%) 6.8% 7.1% 7.2% 5.0% 4.4% 5.7% 6.3% Population (000) 71,347 72,798 74,357 75,844 77,361 78,908 80,486 Avg. Population (>15<45 yrs old) 35,531 36,253 37,030 37,770 38,526 39,296 40,082 GDP/Capita, Current (US$) 1,527 1,792 2,191 2,305 2,455 2,698 3,026 Private Sector Credit Growth 5.3% 9.1% 13.4% 10.5% 9.0% 12.3% 14.0% Fiscal Deficit % GDP 8.0% 7.3% 6.6% 6.5% 6.0% 5.7% 5.3% Source: CBE and CICR forecast FIVE TOP PICKS We suggest below five interesting investments spread between a wealth of oppor- tunities and investment requirements. We have chosen these from among the lar- ger stocks, although within the body of the report there are exciting stories for those interested in smaller stocks. Top recommendations LE m LE LE 2008 2009 2008 2009 2008 2009 2008 2009 Up- 12M side EV/ EV/ Name M.Cap Price FV % PER PER PBV PBV EBITDA EBITDA Yield Yield NSGB 5,468 18.1 35.8 98% 5.4 4.8 1.27 1.07 N/A N/A 2.8% 4.1% EFIC 2,064 29.8 50.1 68% 9.7 4.5 2.91 2.33 6.5 3.3 2.9% 3.7% Mobinil 11,537 115.4 206.0 79% 6.2 5.5 8.54 6.51 3.9 3.6 13.9% 14.6% Ezz Steel 5,949 11.0 34.2 212% 3.3 4.4 0.99 0.81 1.8 2.1 2.7% 2.1% EIPICO 1,763 24.5 43.7 79% 6.6 5.9 1.50 1.36 3.2 2.6 7.8% 9.2% Source: CICR forecast 3
    • November 11, 2008 EGYPT | STRATEGY VALUATION AND STOCK SELECTION Our analysts use one main method of valuation, namely a discounted cash flow (DCF) model. This discounts the explicitly forecast free cash flow for our 5 year forecast period, then a terminal value at an assumed long-term growth rate. For the real estate companies, the analyst discounts only the expected performance of the known projects. Our basic cost of equity (COE) is taking a risk-free rate of 11.5% (derived from a 10-year bond) and 8% equity risk premium, which is con- siderably higher than the traditional 5-5.5% seen in global equity research for emerging markets. Individual company models have different COE, adjusting for specific risk and leveraged beta. Basically we think you want to see at least 20% upside potential from a share price performance in the current environment. After the steep market fall, it is unsurprising that every stock has a significant up- side potential to the thus-calculated methodology. Clearly in times like these, the sensitivities of DCF go awry, not least as the market perception is perhaps saying that the required rates of return have gone stratospheric. Whilst we are indeed debating changing the valuation methods (in addition to DCF) and how we choose a target price and recommendation, it is convenient to leave this in place, if noth- ing else to emphasize the fact that EGYPT is way below its long-term potential and indeed the whole market may be a “BUY”. For the purposes of this report, rather than a simple relative ranking between the stocks versus DCF upside potential, we have developed an “S” Score (or Subjec- tive) rating in order to rank the stocks in some order of preference. We do this by looking at a number of “screens” for Profitability, Momentum and Valuation, and by looking at some charts to highlight this relative positioning. We bring this together by including a number of factors, with weights to then pro- vide a ranking order of the stocks, and from this derive a focus list of five compa- nies drawn from different sectors. The factors and weightings we use include our relative assessment of: management, size and tradability of the shares, valuation from PER, PBV and EV/EBITDA, profitability from ROE or ROIC, balance sheet risk from gearing, industry risk from our top-down view, and relative DCF upside. We weight the factors subjectively, having higher weights for management and industry risk than DCF upside potential. We also add a factor if we think the com- pany may be an acquisition target. We only produce the result here in the form of a ranked chart and is only one factor in considering our assessment of our top rec- ommendations. FROM THE TOP - SECTORS From our view on the sustainability of growth in the economy, and with reducing but high inflation, we try to think about which sectors are most and least at risk. Given that the economy is 70% driven by local consumption, and given the gov- ernment’s desire to sustain economic growth, we generally think the least risky sectors should be the ones that would benefit from any investment program and are linked to domestic consumption. More risky In this global environment, it is perhaps easier to think about where nerves should settle, or where risks are increasing. The sectors below - we think - are relatively high risk: Housing & construction, particularly at the high-end of the market. De- mand has been falling away here and the market looks somewhat satu- rated. If economic growth continues and inflation abates, then there should be reducing pressure on the middle classes, and this is reflected in the housing companies’ shift towards the middle classes away from the top- end. It is worth noting that there has not been the property boom to the ex- tent there has been in parts of the Middle East, and property is still consid- 4
    • November 11, 2008 EGYPT | STRATEGY ered more affordable in Egypt than in the Gulf. PALM HILLS DEVELOPMENTS, SODIC, and TMG HOLDING are companies in this segment Tourism: Falling global demand should place tourist receipts at risk. In re- cent years, tourists have been coming not only from Europe and the Middle East but increasingly from CIS. Egypt is a relatively low-cost location, with good-all-year weather. Nonetheless, in our macro estimates, we pare the growth of tourist receipts and think this sector potentially at risk. Export oriented: With the slowdown in global trade expected, so too ex- ports, particularly of consumer goods, are at risk. Egypt has some advan- tage in that it is generally considered to be a low-cost producer. In addition, we expect some currency weakness and export incentives to mitigate this slowdown. Companies such as ORIENTAL WEAVERS CARPETS and OLYMPIC GROUP (the latter to a lesser extent; only 10% of sales come from exports to Arab and African countries) spring to mind as exporters in categories that may suffer from falling global consumption, and yet these companies will also spend efforts in focusing on domestic consumption as the export mar- kets weaken. Less Risky Agriculture: We think food and food services is an interesting sector from the top-down. Firstly, food is needed whatever the economy. Secondly, after the rapid rise in basic food staples last year, Egypt realizes it has to make more of its fertile crescent, and we think this is a sector which will receive investment. Fertilizer, sugar, poultry ,and flour mills all make inter- esting sectors. Included in this report are EFIC (fertilizers), DELTA SUGAR, and EASTERN COMPANY (tobacco). (Our industry team would be happy to help with bespoke requests on sectors, such as the milling sector, and companies not included in this report.) Non-housing construction: Since we think that there will be investment in infrastructure and help for strategic sectors, then construction per se should still be an activity going on in Egypt. Included in this should also be building services and materials companies. OCI is the principal company in this sector, but the larger proportion of its construction activity is outside of Egypt (mainly GCC). However, its main profit growth driver comes from the fertilizer segment. Other construction-related companies include EZZ STEEL (virtual monopoly in Egypt). In addition, we include cement companies, which is a sector wrongly out of favor – in our view. Within this, there are speculative investments (MISR CEMENT – QENA) and totally mispriced (MISR BENI SUEF CEMENT) and which foreigners can buy. Oil & oil services: We think the energy sector is also a strategic sector for further development. Mostly, we think this will benefit construction compa- nies in the quoted sector. MARIDIVE & OIL SERVICES is an oil services com- pany and has most of its earnings generated globally. Mostly, we think we shall see continuing foreign direct investments (FDIs) in this sector as in- deed recent press articles have continued to highlight the foreign interest in the sector. 5
    • November 11, 2008 EGYPT | STRATEGY DRILLING DOWN In this section we drill down from the top, running several screens and charts for consideration. We only show the top and bottom companies in each screen, so our top picks, including our quot;Squot; Score chart, may have companies that have not featured in these tables, but nonetheless in our opinion do well. PE versus growth 12.0 10.0 OCIC SUGR MCQE 8.0 ETEL 09E PER EAST ACGC MOIL 6.0 PHAR EMOB IRAX NSGB PACH COMI ORWE CIEB OLGR RAYA4.0 ESRS MBSC SCEM 2.0 0.0 -10% -5% 0% 5% 10% 15% 20% 25% 30% 35% 40% 3-year EPS CAGR Source: CICR forecast The downward sloping trend line perhaps indicates that growth is not the main factor on investors’ minds at the moment, or even that the very high growth rates are disbelieved. In any case, as the cycle goes round, growth should undoubtedly come back into fashion and now is the time to look at companies and markets with the potential for long-range growth – Egypt! Noteworthy above is Palm Hills Developments (PHDC), but this growth is coming off a very low base. We circled the quot;Sweet Spotquot; i.e. companies growing at a credible pace at under 6x earnings. ROE vs. PBV and ROIC vs. WACC The ROE versus PBV is in effect a diagram of the PER, and the slope of the line greatly affected by the outliers. The correlation is low, r-squared is just 0.25, but pictorially it does give a snapshot and prompt one to think about whether stocks in the bottom right hand corner really are cheap. The PBV, or Market Value to In- vested Capital, compared to the ROIC/WACC, or in a banks case ROE/COE, al- lows some comparison across sectors, adjusted for risk. The ROE/COE implies the level at which the equity or book value or invested capital should trade, and then (ignoring growth) can be compared to the PBV. ROE vs. PBV ROIC (ROE) vs. WACC (COE) 3.5 45% OCIC EMOB 40% 09E ROIC (ROE for banks) 3.0 MCQE COMI 35% EFIC EFIC 2.5 IRAX IRAX CIEB SUGR 30% MCQE 09E PBV SCEM 2.0 NSGB 25% SUGR PACH PHAR EAST MOIL CIEB PHDC 20% 1.5 ORTE MBSC EAST COMI PHAR MOIL OLGR ESRS OCIC PHDC 15% ETEL NSGB PACH OLGR RAYA ORTE 1.0 ECAP TMGH ESRS MBSC 10% ETEL ORWE ORWE ECAP MNHD 0.5 5% SCEM ACGC RAYA TMGH 0% - 7% 9% 11% 13% 15% 17% 19% 21% 23% 0% 10% 20% 30% 40% 50% 60% 09E ROE WACC (COE for banks) Source: CICR forecast Source: CICR forecast 6
    • November 11, 2008 EGYPT | STRATEGY VALUATION Company 2008E 2009E Company 2008E 2009E Cheapest PER PER Cheapest PBV PBV Sinai Cement 4.0 2.5 TMG Holding 0.35 0.32 Palm Hills Developments 4.4 2.9 Arab Cotton Ginning 0.48 0.46 TMG Holding 4.1 3.4 Raya Holding 0.55 0.50 Misr Beni Suef Cement 3.6 3.5 Oriental Weavers 0.65 0.60 Raya Holding 4.1 3.6 Sinai Cement 0.83 0.65 Dearest PER PER Dearest PBV PBV Delta Sugar 9.0 8.9 EFIC 2.91 2.33 OCI 9.5 9.4 Misr Cement (Qena) 2.95 2.52 Orascom Telecom Holding 12.3 9.5 OCI 2.82 3.16 Al-Ezz Ceramics 13.4 22.4 Mobinil 8.54 6.51 Nasr City Housing & Dev. 36.4 33.4 Nasr City Housing & Dev. 15.31 12.99 Company 2008E 2009E Company 2008E 2009E Highest Yield Yield Cheapest EV/EBITDA EV/EBITDA Mobinil 14% 15% Sinai Cement 3.3 1.5 Credit Agricole Bank-Egypt 10% 12% Palm Hills Developments 2.2 1.6 Ezz Al-Dekheila 14% 11% Arab Cotton Ginning 2.5 1.9 Misr Beni Suef Cement 6% 10% Misr Beni Suef Cement 2.9 2.0 Olympic Group 7% 9% Ezz Steel 1.8 2.1 Lowest Yield Yield Dearest EV/EBITDA EV/EBITDA Al-Ezz Ceramics 0% 0% Olympic Group 5.5 5.2 Maridive & Oil Services 0% 0% Delta Sugar 4.9 5.3 PACHIN 0% 0% Misr Cement (Qena) 5.5 5.3 Palm Hills Developments 0% 0% OCI 8.9 11.7 TMG Holding 0% 0% Nasr City Housing & Dev. 28.5 25.4 MOMENTUM Company 2009E 3yr CAGR Company 2009E 3yr CAGR Fastest EPS EPS Fastest EBITDA EBITDA Palm Hills Developments 52% 100% Palm Hills Developments 42% 105% EFIC 116% 69% TMG Holding -1% 95% TMG Holding 21% 47% EFIC 86% 62% Al-Ezz Ceramics -40% 42% OCI -12% 41% OCI 1% 40% Olympic Group 30% 25% Slowest EPS EPS Slowest EBITDA EBITDA Nasr City Housing & Dev. 9% -3% Eastern Company 2% 5% Delta Sugar 1% -5% Ezz Al-Dekheila -20% 5% Arab Cotton Ginning 10% -6% Nasr City Housing & Dev. 13% 1% Raya Holding 14% -6% Misr Cement (Qena) -4% -2% Orascom Telecom Holding 30% -27% Delta Sugar -7% -6% Company 2009E 3yr CAGR Company 2009E 3yr CAGR Fastest CASH CASH Fastest BVPS BVPS Sinai Cement 1389% 244% Maridive & Oil Services 29% 48% Maridive & Oil Services 5% 200% Ezz Steel 22% 36% Palm Hills Developments -4% 78% CIB 28% 29% EFIC 70% 53% Ezz Al-Dekheila 19% 26% TMG Holding 37% 45% Misr Beni Suef Cement 20% 25% Slowest CASH CASH Slowest BVPS BVPS Ezz Steel -28% -2% Delta Sugar 7% 7% Misr Beni Suef Cement 1033% -8% Arab Cotton Ginning 5% 5% Ezz Al-Dekheila -12% -11% PACHIN 5% 5% Raya Holding 5% -19% Telecom Egypt 4% 4% Nasr City Housing & Dev. -14% -24% Nasr City Housing & Dev. 18% 1% Source: CICR forecast The cheapest rated stocks, (PER) tend to come from the sectors out of favor, such as cement, real estate, and IT services, with steel not far behind. Similarly the highest yields are found there. Dividend yields are approaching money market rates, which should enhance any total return for an investment. Whilst a sector like cement is out of favor with investors, there really appears a good longer-term op- portunity. Consider that the government is trying to sustain growth through invest- ment, and there continues to be much need for infrastructure investment in Egypt to such an extent that the companies are finding it necessary to increase their capac- ity (see the industry section), and there is some sector consolidation to consider. 7
    • November 11, 2008 EGYPT | STRATEGY PROFITABILTY & RISK ROE 2008 2009 EBITDA Margin 2008 2009 Best Best Mobinil 120% 135% Palm Hills Developments 66% 59% EFIC 32% 58% Misr Cement (Qena) 53% 53% Ezz Al-Dekheila 74% 45% Telecom Egypt 50% 52% Palm Hills Developments 43% 43% TMG Holding 39% 51% Nasr City Housing & Dev. 36% 42% Misr Beni Suef Cement 56% 46% Worst 2008 2009 Worst 2008 2009 Oriental Weavers 13% 13% PACHIN 20% 20% Telecom Egypt 10% 12% Ezz Steel 22% 20% TMG Holding 9% 10% Oriental Weavers 17% 17% Arab Cotton Ginning 6% 6% Olympic Group 15% 16% Al-Ezz Ceramics 7% 4% Raya Holding 6% 6% NET DEBT/EQUITY 2008 2009 Net Interest/Revenue 2008 2009 Best Best Al-Ezz Ceramics 54% 37% Arab Cotton Ginning 33% 35% Orascom Telecom Holding 78% 50% OCI 8% 11% Olympic Group 51% 78% TMG Holding 8% 11% OCI 52% 113% EIPICO 5% 5% Misr Cement (Qena) 2% 4% Worst 2008 2009 Worst 2008 2009 PACHIN -20% -22% Oriental Weavers -12% -10% Palm Hills Developments -36% -33% Mobinil -9% -10% EIPICO -41% -45% Orascom Telecom Holding -21% -18% Misr Cement (Qena) -32% -45% Raya Holding -25% -19% Delta Sugar -48% -46% Olympic Group -16% -19% Source: CICR forecast Mobile telephony may start to benefit from sector rotation as recent results from MOBINIL suggest the concerns of a downturn in subscriber activity may have been overdone. Clearly, the market also fears the housing and real estate com- panies which seem already to be discounting a major downturn in real estate prices. This also is a sector where consolidation may occur, especially amongst smaller players, as in this environment the larger companies seek to acquire land banks. If our analysts are right there is considerable momentum still to be seen in Egypt. Even those ranking in the “worst section” have reasonable growth expectations. EZZ STEEL, almost a steel monopolist in Egypt, stands out as lowly rated and growing quickly. The catalyst again should be construction volumes as it can control its margin. MISR BENI SUEF CEMENT also falls into this category and looks potentially mispriced. EFIC has fast growing earnings and is cash generative, and a look at the com- pany pages shows that it too is not highly rated. This is in a strategically- important sector as the government wants to increase the agriculture capacity and is still benefiting from better pricing even if fertilizer prices are well off their peak. The lowly-rated housing and cement sector rank well on EBITDA margin, and MOBINIL in terms of returns on shareholders’ equity, but this latter is also one of the most highly leveraged, just escaping our list of bottom 5. Reducing interest rates, now that the cycle is turning may be of some help, but this is increased financial risk for the returns. Even the worst appear to have reasonable returns measured as EBITDA margin. 8
    • November 11, 2008 EGYPT | STRATEGY quot;Squot; SCORE Given the weightings and factors we include, the highest ranked stocks do not necessarily have the most compelling valuations. In this way, OCI has come out highly paced, and is indeed one of Egypt’s premier blue chips, with a well- regarded management. The banks as cheap and tradable come out well in this scoring too. “S” Score ranking 140 120 100 80 60 40 20 0 RAYA ORTE IRAX MNHD SUGR PHAR TMGH MOIL ETEL EAST ORWE ESRS CIEB NSGB PACH OLGR PHDC EFIC OCIC SCEM ECAP MCQE EMOB ACGC MBSC Source: CICR forecast CI Capital Research Universe LE m LE LE 2008 2009 2008 2009 2008 2009 2008 2009 Up- Price 12M side EV/ EV/ Div. Div. Name M.Cap (11/6/08) FV % PER PER PBV PBV EBITDA EBITDA Yield Yield Al-Ezz Ceramics 254 5.0 7.2 45% 13.4 22.4 0.80 0.78 5.6 4.2 0.0% 0.0% Arab Cotton Ginning 1,020 4.1 10.1 148% 8.0 7.3 0.48 0.46 2.5 1.9 3.8% 4.1% CIB 8,989 30.7 N/A N/A 5.1 4.3 1.69 1.32 N/A N/A 3.3% 4.1% Credit Agricole Bank-Egypt 2,959 10.3 15.3 49% 5.6 4.9 1.68 1.52 N/A N/A 9.7% 12.1% Delta Sugar 2,170 22.0 32.3 47% 9.0 8.9 2.42 2.27 4.9 5.3 8.3% 8.4% Eastern Company 5,450 218.0 305.6 40% 7.1 7.1 1.75 1.54 4.7 4.4 6.7% 7.0% EFIC 2,064 29.8 50.1 68% 9.7 4.5 2.91 2.33 6.5 3.3 2.9% 3.7% EIPICO 1,763 24.5 43.7 79% 6.6 5.9 1.50 1.36 3.2 2.6 7.8% 9.2% Ezz Al-Dekheila 12,249 896.2 1,501.9 68% 4.2 5.4 2.62 2.21 3.4 4.1 14.4% 11.2% Ezz Steel 5,949 11.0 34.2 212% 3.3 4.4 0.99 0.81 1.8 2.1 2.7% 2.1% Maridive & Oil Services 3,781 2.6 5.1 99% 7.8 6.5 1.85 1.44 5.9 4.6 0.0% 0.0% Misr Beni Suef Cement 936 46.8 152.5 226% 3.6 3.5 1.11 0.92 2.9 2.0 5.5% 10.0% Misr Cement (Qena) 2,310 77.0 98.5 28% 8.5 7.8 2.95 2.52 5.5 5.3 7.1% 7.7% Mobinil 11,537 115.4 206.0 79% 6.2 5.5 8.54 6.51 3.9 3.6 13.9% 14.6% Nasr City Housing & Dev. 3,122 31.2 42.8 37% 36.4 33.4 15.31 12.99 28.5 25.4 1.7% 1.8% NSGB 5,468 18.1 35.8 98% 5.4 4.8 1.27 1.07 N/A N/A 2.8% 4.1% OCI 42,192 196.5 330.5 68% 9.5 9.4 2.82 3.16 8.9 11.7 2.3% 2.9% Olympic Group 1,450 24.1 55.1 128% 5.5 4.2 1.51 1.23 5.5 5.2 7.2% 9.4% Orascom Telecom Holding 33,116 36.8 96.1 161% 12.3 9.5 1.46 1.28 3.9 3.3 2.7% 3.5% Oriental Weavers 1,708 22.9 48.3 111% 5.3 4.6 0.65 0.60 5.0 4.2 6.8% 7.8% PACHIN 585 29.2 83.4 185% 5.3 4.5 1.14 1.09 4.1 3.4 0.0% 0.0% Palm Hills Developments 3,774 8.1 24.3 199% 4.4 2.9 1.25 1.20 2.2 1.6 0.0% 0.0% Raya Holding 259 4.6 11.5 152% 4.1 3.6 0.55 0.50 3.6 3.0 8.0% 9.1% Sinai Cement 1,150 32.9 93.0 183% 4.0 2.5 0.83 0.65 3.3 1.5 5.0% 8.0% Telecom Egypt 26,801 15.7 24.3 55% 9.9 7.9 1.00 0.96 5.6 4.8 6.6% 8.2% TMG Holding 7,857 3.9 12.8 231% 4.1 3.4 0.35 0.32 3.0 2.4 0.0% 0.0% Source: CICR forecast *Maridive & Oil Services share price is in US dollar 9
    • November 11, 2008 EGYPT | STRATEGY CONCLUSIONS Summarizing the charts, tables and data above, these are the main conclusions we draw: A. Mispriced in our opinion: SINAI CEMENT - Heavily sold off and half the value of its peers. RAYA HOLDING - Consumer electronics, slow growth, and its net debt rank- ing belies a liquid balance sheet and investments into a growing service sector. EIPICO – Low PER, high yield, decent (defensive - pharmaceutical) growth, good margins and profitability. The banks (see industry section) do not make most of the screens but are rela- tively well placed as well capitalized and liquid, profitable, growing, and cheaply rated. Now that the interest rate cycle has stabilized, interest may return to this segment, not least as it is one banking sector in the world capable of lending to a market with the potential to grow. B. Speculative interest: RAYA HOLDING - Cheap liquid balance sheet could be made to sweat more. MISR CEMENT (QENA) - Cement in the right place at the right time, and ASEC is building a stake. Our top five picks From the above and from our “S” Score, we highlight the following investment opportunities from different sectors and in no particular order: NSGB: profitable, good returns, sound balance sheet, and still gaining restructuring benefits, trading at 4.8x 2009E earnings, 1.1x 2009E BV, ROE 24%, while earnings growing at 31% over next three years. EFIC: Sound high returning growth in a strategically-important agricul- tural sector, valued at 4.5x 2009E earnings. EIPICO: Defensive play in the healthcare sector. Stable earnings with long-range potential as health becomes an increasingly important issue in Egypt. MOBINIL: Mobile operator which has just beat consensus 3Q08 earnings. It pays a generous dividend and sweats the equity. Interest rate and lev- erage risk should be declining and has ongoing cost efficiency program. We think there is some rotation back to Telcos, which should benefit from stimulated consumer. EZZ STEEL: Virtual monopoly position in Egypt, with controlled margins, cheaper than foreign competition. Benefit from any rally in commodity prices, and more fundamentally from the continued (non-housing) con- struction investment we think will continue in Egypt. 10
    • November 11, 2008 EGYPT | ECONOMY DEMAND & INVESTMENT: A DARING CHALLENGE POTENTIALS Populous economy with inherent sizable From the beginning of 2008 emerging economies watched demand. the global tornado from afar. Now with a vanishing confi- Domestic investments represent the bulk – dence, foreign capital has fled compelling the waning of around 60% - of implemented investments. many emerging economies stock markets. Yet, we deem Well capitalized, under leveraged Banking Egypt's economy will reveal distinguished resilience sector flushed with liquidity. amidst the headwinds from the developed economies. Re- Solid BOP position even with the weaken- inforced by its diversified GDP, liquid banking system, ing at the margins. and an under-leveraged economy; Egypt is expected to Favorable factors of production and benign maintain a modest GDP growth rate of 5% in FY08/09 – business environment that allows Egypt to based on the GoE's ability to promote local investments, act as an investment hub within the region. with a focus on SMEs. Underlying potential in a number of sectors including fertilizers, infrastructure, agribusi- ness and pharmaceutical. Consumer-led recovery “the guardian” for growth: Reap- ing the fruits of bold reforms implemented to date and a grow- ing investors’ confidence, Egypt's economy has leapfrogged RISKS both on its economic and fiscal management platforms. Thanks to the export-led strategy adopted, which led to the witnessed domestic demand boom, GDP jumped to a growth The current global challenges that is ex- rate of 7.2% in FY07/08. pected to negatively impact exports growth. Highly affected FX earning sectors, namely FDI, a perfect exhale: Given Egypt’s fertile business soil and tourism, Suez Canal and FDI. the increasing investors’ confidence in a reformist government, Inability to rely on fiscal pumping to pro- FDI soared reaching US$13.2 bn in FY07/08 up from US$3.9 mote growth with the prevailing fiscal defi- bn in FY04/05. Yet, it is expected to be hardly hit by the global cit. downturn and exacerbated by investors’ panic all over the globe. SELECTED MACRO INDICATORS Sustained high inflation jeopardy fading away: Like other open economies, Egypt was hit hard by the surge in interna- 2006/7 2007/8 2008/9F GDP (Current, LE bn) 744.8 896.5 1,002.8 tional oil and food prices with inflation recording a double-digit Real GDP GR (%) 7.1% 7.2% 5.0% growth of 11.7% in FY07/08. However, complying with the ex- GDP/Capita (Current, US$) 1,792 2,191 2,305 Inflation (CPI %) 10.9% 11.7% 17.0% pected decline in international markets, we believe inflation to FDI (US$ mn) 11,053 13,237 6,364 simmer down driving the wheel for strengthened domestic de- Investments (LE bn) 155.3 179.3 190.8 mand. ALIA MAMDOUH BOP surplus maintained while current account deterio- ALIA.MAMDOUH@CICH.COM.EG rates: Expenses of the robust domestic demand has been re- flected in a deteriorating current account reaching US$0.9 bn EGYPT’S ECONOMIC PERFORMANCE in FY07/08 and turning into a deficit of US$ 3.3 bn in FY08/09 given the widening trade deficit and the relatively static ser- Real GDP GR Investment GR 8.0% 25.0% vices growth. Yet, still BOP reflects low vulnerability given the performance of the capital and financial account outweighing 7.0% 20.0% such pitfalls. 6.0% 5.0% Fiscal deficit restructuring, right on track: Despite the huge 15.0% hike in expenditures due to increased subsidies, driven by the 4.0% spiraling rise of oil prices; fiscal deficit to GDP narrowed to 10.0% 3.0% 6.6% in FY07/08 down from 7.3% in FY06/07. This is mainly 2.0% 5.0% attributable to the revenues growth, powered by tax revenues' 1.0% increase as well as other revenues including proceeds from 0.0% 0.0% cement licenses worth of around LE 1.14 bn in FY07/08. 2003/4 2004/5 2005/6 2006/7 2007/8 2008/9 2009/10 2010/11 2011/12 11
    • November 11, 2008 EGYPT | ECONOMY REAL SECTOR Economic growth in recent years has been aggravated by a diversified output Fueled by an ex- strategy that was reflected in the strong growth in tourism, construction, real es- panded output strat- tate, communications, oil and gas and trade sectors. The inflow of foreign invest- egy, economic ments as DAMAC and Emaar helped flourishing the construction and real estate growth has been sectors that in turn fed the building materials industry. In addition, the entrance of maintained over the the third mobile operator, Etisalat Misr, lifted up the communications sector. Export past years volumes, despite the strengthening of the Egyptian pound against the US$ helped the manufacturing sectors to record a growth of 8% in FY07/08 up from 5.9% in FY05/06. GDP growth by sector Real GDP growth breakdown 2006/7 2007/8 Private consumption Government consumption 30.0% Gross Capital Formation Net Exports 100% 25.0% 90% 20.0% 80% 70% 15.0% 60% 10.0% 50% 5.0% 40% 30% 0.0% Construction Real Estate Financial Oil & Gas Industries Others Tourism Communications Wholesale & services 20% Trade 10% 0% 2004/5 2005/6 2006/7 2007/8 Source: CBE Source: CBE SMEs have been one of the pillars of the Egyptian private sector, compromising An economy with an the bulk - above 90% - of the operating private non-agricultural establishments. increasing say for Micro, small and medium enterprises contribute with around 80% of total value SME’s and the infor- added and attract 47% of total investments. Moreover, their input to the country’s mal sector exports reached around 20%; of which chemical products represent the lion’s share of 38%. SME’s contribution to Industrial GDP 2006E 2000 Small, 12% Small, 14% Large, 38% Large, 48% Medium, 40% Medium, 50% Source: CICR database 12
    • November 11, 2008 EGYPT | ECONOMY As SMEs provide affordable goods and services that suits the lower and lower- High level of infor- middle income groups - which represents 57% of the population - they are highly mality is the main im- interrelated to the informal economy. Such high level of informality limits SMEs pediment facing access to a wide range of formal services, most importantly credit facilities. Rec- SMEs. Yet, they enjoy ognizing their vital role, GoE launched an Exchange market for growing medium increasing GoE sup- and small companies, Nilex, to facilitate access to capital as well as exposure to port foreign investors. We highly believe that increasing SMEs support is crucial to sus- tain high growth levels by promoting entrepreneurship, job creation and attracting domestic investments. INVESTMENTS The package of bold reforms implemented on all fronts, namely (1) reducing the Vibrant investment minimum capital requirement of incorporation to LE 1,000, (2) corporate tax cut by appetite half reaching 20%, (3) reducing weighted average custom tariffs from 14% to 6.9%, (4) tariff bands streamlined and reduced from 27 to 6, and (5) customs on capital assets capped at 5% have created an attractive environment for invest- ment. Moreover, with the country's favorable factors of production and competitive energy prices, both investment and FDI recorded buoyant growth. Based on weighted growth, the services sectors accounted for the bulk of new Services sectors led investments. In FY07/08, investment in transportation and communication wit- investment growth nessed the highest flow of 7.8%; followed by hydrocarbon investments, namely in the upstream activities which recorded a weighted growth of 7.1%. Infrastructure investments come next with a rate of 5% - especially in water and electricity sta- tions. Investment breakdown FY07/08 Investments weighted growth by sector 9.0% Others, Health, 8% Agriculture, 4% 2% 8.0% Education, 3% 7.0% Crude Oil & NG, 17% Real Estate, 7% 6.0% 5.0% Tourism, 3% 4.0% Financial 3.0% Intermediaries, 1% Manufacturing & Oil 2.0% Products, Wholesale & Retail 22% Trade, 1.0% 3% 0.0% Transp. & Com. Tourism Others Manuf.& Oil Suez Canal Real Estate Education Agriculture Crude Oil & NG Financial Sector Wholesale Trade Electricity & Water Construction Health Products Transp. & Com., 20% Construction & Electricity & Water, 8% Building, 2% Source: CBE Source: CBE Rising confidence in the country's economic performance loosened the wheel for Mounting FDI inflows FDI flows which maintained their high growth levels reaching US$13.2 bn in were reflected in a FY07/08 up from US$3.9 bn in FY04/05. FDI constitutes around 8.2% of the coun- strengthened cur- try's GDP in FY07/08. The petroleum sector held the major chunk of 38% of such rency and an ex- inflows, while the contribution of the real-estate still maintains a low level of 0.8% panded output in FY07/08, despite its strong growth reaching US$90.6 mn up from US$39 mn in FY06/07. Within the non-petroleum investments, the financial sector accounted for the lion’s share of 40% followed by industrial activities (32%) and the services sec- tors (15%). 13
    • November 11, 2008 EGYPT | ECONOMY Investment & FDI & Shares in GDP Non-Petroleum FDI Breakdown FY07/08 FDI Implemented Investments CIT, 0.3% US$ mn FDI % of GDP Investment % of GDP Real Estate, 1.8% Tourism, 2.2% 35,000 25.0% 30,000 Services, 15.3% 20.0% 25,000 15.0% Industry, 31.6% 20,000 15,000 10.0% Financial Sector, 10,000 40.1% Agriculture, 1.4% 5.0% 5,000 Construction, 7.3% 0 0.0% 2004/5 2005/6 2006/7 2007/8 Source: CBE Source: Ministry of Investment However, sustaining However, sustaining such strong FDI levels is doubtful, especially after the re- such strong FDI in- moval of tax exemptions from the free zones for energy-intensive industries cou- flows is of a concern pled with the increase in energy prices that were announced in May 2008. More- over, the current global financial turmoil is expected to have a negative impact on the inflow of FDI, as 70% of such inflows comes from the US and EU countries. Yet, with GCC surplus such decline is expected to be mitigated. We expect net FDI inflows to reach US$6.4 bn in FY08/09, followed by US$5.9 bn in FY09/10. On a different note, GoE expects FDI to reach around US$10 bn in FY08/09. Despite the global gloom, announcements of new projects are still in the head- A positive aspect is lines: Al Kharafi Group confirmed plans to pump US$2 bn in new investments in that announcements the steel industry; Schneider Electric will establish a new electricity plant with an of new foreign invest- investment cost of around US$ 45.5 mn; GlaxoSmithkline plans to buy the Egyp- ments are still in the tian mature products business of Bristol-Myers Squibb Co. for US$210 mn, and headlines Solvay SA, the world's largest soda- ash maker, bought Alexandria Sodium Car- bonate Co. in a deal worth US$137.5 mn. Moreover, the fertilizers sector is to wit- ness further investments including EBIC, Agrium and Egyphos. Key pipeline projects over 2008-12 Sector Project Investments Completion Date El-Swedy Cement US$350 mn 2010 North Sinai Cement LE 1,500 mn 2010 Cement LE 1,600 mn Al-Nahda Industries 2011 Al-Wady Cement LE 1,000 mn 2012 Four new steel raw materials factories; Ezz Steel (ES), Suez US$15 bn NA Steel Company, Tiba for Iron & Steel and the Egyptian Steel Company for Sponge Iron. Almaza City Center by Al-Futtaim US$0.5 bn 2008 Hyde Park by Damac US$5.5 bn 2011 Cairo Nile Corniche Towers project by Qatari Diar LE 5.75 bn Real Estate 2011 West Town Cairo, in Sheikh Zayed by SODIC US$2.4 bn 2011 East Town Cairo, in Katameya US$1.6 bn 2011 US$1.2 bn Port Ghalib by El-kharafi Group 2009 US$2.5 bn Serrenia resort by Shaheen Bus.& Inv, Group 2010 LE 1.5 bn Tourism Porto Sokhna by Amer Group 2010 US$1.74 bn Marassi by Emaar 2012 LE 2.56 bn Almaza Bay Resort by Travco 2012 US$432 mn Egyptian Basic Industries Co. (EBIC) 2008 US$250 - 300 mn Egyptian Fertilzers Co. (EFC) 2010 Fertilizers US$1400 mn Agrium 2010 US$680 mn Egyphos 2011 Source: CICR 14
    • November 11, 2008 EGYPT | ECONOMY As domestic investments represent the bulk of total implemented investments in Another positive as- Egypt, of which SMEs bears a considerable contribution, the GoE's commitment to pect is the GoE's support SMEs investments as well as providing them with export facilities – commitment to focus through tapping new potential markets – is expected to mitigate a reduced FDI on SMEs and con- inflows. Moreover, the GoE's decision of freezing any increase in energy prices till tinuing infrastructural the end of 2009 is another measure that can drive further investments. In addition development to the continued infrastructural development with US$8.9 bn worth of transport investments expected to pour into the country over the coming three years. We expect total implemented investments to reach LE 190.8 bn in FY08/09. Against this backdrop and given the purchasing power resilience of the upper and upper middle classes of the society and their influence on the informal sector domestic demand growth will likely maintain its levels. Thus, we believe Egypt to maintain a modest growth amidst such turbulence and negative sentiments with expected GDP growth rates of 5% and 4.4% in FY08/09 and FY09/10, respectively. Said moderate setback in growth is to be also supported by the country’s diversified GDP, liquid banking system with loans to deposits ratio of 53% and an under- leveraged economy. We highly believe a 5% GDP growth is still significantly higher than that witnessed during the slowdown early in the decade, reflecting a better-off economic structure with stronger spine and foundations. Overall, we believe economic slowdown will worsen in FY09/10 given the steep decline in oil prices and the maintained global slowdown affecting large emerging markets, including Russia and China. Our estimates are considered conservative, yet there might be upside surprises if the GoE succeeded to attract higher than expected FDI levels and support export- oriented industries. FDI & Investment Outlook LE bn Investment FDI US$ mn 300.0 14,000 12,000 250.0 10,000 200.0 8,000 150.0 6,000 100.0 4,000 50.0 2,000 0.0 - 2005/06 2006/07 2007/8 2008/9 2009/10 2010/11 Source: CICR forecast Public-private partnerships (PPP) are integral to investments, as well as sustained Public-private part- economic growth as it aims at lifting-off some of the burden on the government nership, another budget, particularly in terms of infrastructural investments. PPP is considered an mechanism for sup- important supporting tool for the private sector as well benefiting from the govern- porting investments ment endorsement in fast-tracking the projects permits. One of the main sectors that witnessed PPP projects is the transport sector with Cairo-Alexandria highway project that will be awarded to a private firm under the PPP model in January 2009 with an estimated investment cost of LE 1.9 bn. In addition to the Mediterranean Coastal highway with an investment cost of LE 1.5 bn. There are still a number of PPP opportunities in infrastructure development, including water facilities and sani- tation as well as electricity plants with Egyptian Contracting Co. (Mokhtar Ibrahim) winning a project for expanding a water utility in Obour City with an investment cost of LE 280 mn. We highly believe that endorsing PPP will enhance sustaining mod- erate economic growth levels without imperiling the existing fiscal deficit. 15
    • November 11, 2008 EGYPT | ECONOMY MONETARY SECTOR INFLATION Rising global oil prices as well as international commodities prices, namely food – High levels of infla- as Egypt is a net importer - lifted up local products' prices, leading CPI reading of tion imposed a threat 11.7% in FY07/08. Yet, the full impact should be reflected in FY08/09 by which to growth CPI reading is expected to reach 17%. In an effort to curb inflationary pressure, the GoE raised up interest rates; reduced imports tariff to 6.9% from 9%; and im- posed tariffs on certain export commodities (steel, cement, rice), yet, inflation maintained its increase – with CPI reading reaching the peak of 23.6% in August 2008. Bearing the highest weight in CPI (44%), food & non-alcoholic beverages drove up the hike being highly influenced by changes in oil prices. In an attempt to alleviate inflationary pressures on the public, as Egyptians spend around 45% of their income on food items expanding to 60% for the lowest income groups, GoE increased wages by 30% in May 2008. Yet, sustained high levels of inflation out- weighed such efforts and eroded the Egyptian's purchasing power and real in- comes. CPI, food & oil prices CPI Food prices Oil prices US$/barrel 35.0% 160.0 140.0 30.0% 120.0 25.0% 100.0 20.0% 80.0 15.0% 60.0 10.0% 40.0 5.0% 20.0 0.0% 0.0 May-07 May-08 Mar-07 Mar-08 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Apr-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Apr-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Source: CAPMAS & Bloomberg Yet, inflation started The decline in global oil prices witnessed since July 2008 was filtered down to cooling-off food commodities' prices which started to cool-off since September 2008, bringing down the CPI reading to 20.2% in October 2008. We believe inflation will not re- cord its 2008 skyrocketing readings, not only due to the cool-off in international prices but also due to the absence of the low base of the consumer price index effect. We expect inflation to start exhibiting lower levels in FY09/10, enhancing the purchasing power and driving up domestic demand. As a measure to counteract inflation, the Central Bank of Egypt (CBE) raised inter- Monetary tightening est rates for six consecutive times starting February 2008. The overnight deposits was the first re- and lending rates rose from 8.75% and 10.75% in December 2007 reaching sponse 11.5% and 13.5%, respectively in September 2008. Consequently, broad money supply and liquidity (M2) witnessed slower growth of 15.7% in FY07/08 down from 18.2% in FY06/07. We do not believe that the monetary tightening have been to- tally effective in curbing inflation mainly due to the slow pass of changes in corri- dor interest rates to general interest rates in the banking system. In addition to, the relatively low loan-to-deposits ratio of 53% that flushed the banks with excess li- quidity, along with the nature of the Egyptian economy – which bears a significant contribution from the informal sector. 16
    • November 11, 2008 EGYPT | ECONOMY With easing inflation readings coupled with expected risk of a downturn, the tight- Policy rates is a tool ening monetary cycle seems to come to an end. The pressing need to support the to support growth economy in facing the impact of the global economic downturn should be through driving up local investments. Therefore, monetary policy is expected to be loos- ened with lending rates to decline to 12% in FY09/10. CPI & interest rate Money supply growth & lending rates LE bn Domestic Liquidity (M2) Lending Rates Deposits Lending CPI 900.0 14.0% 16.00% 25.0% 800.0 12.0% 14.00% 700.0 20.0% 10.0% 12.00% 600.0 10.00% 8.0% 15.0% 500.0 8.00% 400.0 6.0% 10.0% 6.00% 300.0 4.0% 200.0 4.00% 5.0% 2.0% 100.0 2.00% 0.0 0.0% 0.00% 0.0% May-07 May-08 Nov-06 Mar-07 Nov-07 Mar-08 Jul-06 Aug-06 Sep-06 Oct-06 Dec-07 Jan-07 Feb-07 Apr-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Dec-07 Jan-08 Feb-08 Apr-08 Jun-08 May-07 May-08 Nov-06 Mar-07 Nov-07 Mar-08 Jul-06 Aug-06 Sep-06 Oct-06 Dec-06 Jan-07 Feb-07 Apr-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Dec-07 Jan-08 Feb-08 Apr-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Source: CBE Source: CAPMAS & CBE EXTERNAL SECTOR The extensive growth in capital flows, exports revenues as well as FDI inflows, Strong Egyptian contributed to the rebound in the Egyptian pound’s confidence leading to the pound, yet, not pound’s appreciation to an average of 5.503 LE/US$ in FY07/08 up from 5.710 for long LE/US$ in FY06/07. We believe such appreciation will not likely to continue with the strength gained by the US$ against the EUR and the declining oil prices. In addition to the decline in FDI flows and the expected current account deficit that will exert more pressure on the Egyptian pound. We expect the LE to depreciate reaching an average of 5.735 LE/US$ in FY08/09, followed by further depreciation in FY09/10 reaching an average of 5.819 LE/US. Exchange rates EUR/USD LE/USD US$ LE 1.60 6.40 1.40 6.20 1.20 6.00 1.00 5.80 0.80 5.60 0.60 5.40 0.40 5.20 0.20 0.00 5.00 2003/4 2004/5 2005/6 2006/7 2007/8 2008/9 2009/10 2010/11 2011/12 Source: Bloomberg & CICR forecasts 17
    • November 11, 2008 EGYPT | ECONOMY Egypt's Balance of Payment (BoP) ran an overall surplus of US$5.4 bn in FY07/08 Consumption boom supported by the combined effect of a net inflow of US$7.1 bn on the capital and led to a higher trade financial account, and a current account surplus of US$0.9 bn. On the other hand, deficit Egypt’s trade balance reflected an increasing trade deficit despite exports’ growth recording 19% in FY06/07 and 33% in FY07/08 - mainly led by the 43% increase in oil exports. But, the hike in domestic consumption pushed imports growth higher recording 26% and 38% in FY06/07 and FY07/08, respectively. Imports growth was mainly attributed to petroleum payments registering the highest growth of 131% in FY07/08 due to the rising international oil prices. Yet, the services bal- ance surmounted such deficit led by the strong growth of tourism revenues, which resulted in a current account surplus of US$888 mn in FY07/08. It is worth high- lighting that the current account is experiencing a shrinking surplus with a declin- ing share in GDP of 0.5% in FY07/08 down from 1.7% in FY06/07 exacerbated by the growing trade deficit. Current account inflows Current account & trade balance Oil Exports Suez canal Tourism Remittances Trade Balacne Current account balance LE bn US$ mn US$ mn Consumption 16,000 30,000.0 700.0 14,000 600.0 20,000.0 12,000 500.0 10,000.0 10,000 400.0 8,000 0.0 300.0 6,000 (10,000.0) 4,000 200.0 2,000 (20,000.0) 100.0 0 (30,000.0) 0.0 2004/5 2005/6 2006/7 2007/8 2004/5 2005/6 2006/7 2007/8 Source: CBE Source: CBE Even before we consider the impact of the global slowdown, trade balance has Trade balance, the been on the edge with expectations of a growing deficit, given the extensive pitfall of the current growth in imports driven, as previously mentioned, by the buoyant domestic de- account mand. Looking ahead, the global shrinking demand, particularly hitting developed economies, especially the US and EU, our main trade partners, are expected to force exports to witness a notable setback in its previous strong growth levels. We believe exports to exhibit a growth of 14% in FY08/09 supported by the weaker pound, and the already signed contracts; while imports are expected to grow with 18% in the same year. As imports' growth is expected to continue exceeding that of exports, a growing trade deficit will remain a major drawback for the current ac- count as it is not expected to be outweighed in the medium-term given the static services growth. Trade Deficit & Current account US$ bn Imports Exports Current Account US$ bn 80.0 4.0 2.9 2.3 60.0 2.0 0.9 1.8 40.0 0.0 20.0 -2.0 0.0 (3.3) -4.0 -20.0 -6.0 -40.0 -8.0 (8.5) -60.0 -10.0 -80.0 (11.0) -12.0 -100.0 -14.0 -120.0 (13.7) -140.0 -16.0 2004/5 2005/6 2006/7 2007/8 2008/9 2009/10 2010/11 2011/12 Source: CBE & CICR forecasts 18
    • November 11, 2008 EGYPT | ECONOMY Tourism, one of the main FX earnings pillars, witnessed dramatic growth over the Tourism receipts is past two years. Both, international tourist arrivals (ITA) and international tourism the first to be hit receipts (ITR) recorded significant respective growth of 18.3% and 32.3% in FY07/08. Such buoyancy has been mainly supported by the weakness of the Egyptian pound against the euro and GCC currencies, where Europe accounts for the bulk of ITA representing 69%, followed by the Middle East 18.8%. Yet, such exceptional tourism performance is expected to be at risk, being faced by the an- ticipated slowdown in the global economy with ITR expected to reach US$11.1 mn and US$11.8 mn in FY08/09 and FY09/10, respectively. Boosted by the rising global trade and high oil prices; Suez Canal receipts re- With expectation of a corded magnificent growth of 17.2% and 23.6% in FY06/07 and FY07/08, reaching declining global US$5.2 bn. Yet, the anticipated slowdown in global trade is expected to impact trade, Suez canal re- Suez Canal receipts leading to a lower growth levels reaching US$5.6 bn. ceipts will be nega- tively impacted Suez Canal Receipts & Traffic International tourists arrivals & receipts US$ mn Number US$ mn Visitor Tourism Reciepts Tourists Arrivals No. of Vessels Oil Tankers Suez Canal Receipts 2,000.0 600.0 12,000.0 14,000.0 1,800.0 500.0 12,000.0 10,000.0 1,600.0 1,400.0 10,000.0 400.0 8,000.0 1,200.0 8,000.0 1,000.0 300.0 6,000.0 800.0 6,000.0 200.0 600.0 4,000.0 4,000.0 400.0 100.0 2,000.0 200.0 2,000.0 0.0 0.0 May- May- May- Mar-06 Mar-07 Mar-08 Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Apr-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Apr-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Apr-08 Jun-08 0.0 0.0 2004/5 2005/6 2006/7 2007/8 Source: IDSC & CBE Source: CBE Remittances remains Remittances of Egyptian workers have been one of the main drivers to the current an important source account surplus, through an extensive growth of 25.6% and 35.4% in FY06/07 and for Egypt’s BOP FY07/08, respectively. Growth in remittances has been mainly driven by inflows from GCC – the major contributor to remittances with 51% - which recorded a 42% growth in FY07/08 up from 19% in FY06/07. Given that GCC countries will main- tain current account surplus, yet at lower levels due to lower oil prices, we expect that it will mitigate the risk of the anticipated decline of remittances from the US. Remittances US$ mn GCC US Europe 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2004/5 2005/6 2006/7 2007/8 Source: CBE 19
    • November 11, 2008 EGYPT | ECONOMY Provoked by the widening trade deficit and the declining growth in net services, Current account ex- the current account is expected to leave its surplus era, which has been prevail- hibiting high vulner- ing since FY01/02, heading towards a growing deficit reaching US$3.3 bn in ability to growing FY08/09 deteriorating further to US$8.5 bn in FY09/10. We believe current ac- trade deficit count deficit will reach 1.9% of GDP in FY08/09 shifting from a surplus of 0.5% of GDP in FY07/08. . FISCAL SECTOR With a committed government embarking on a restructuring scheme for revenues Despite fiscal restruc- and expenditures targeting a fiscal deficit of 3% of GDP by FY10/11, it managed turing, subsidies is to ease fiscal deficit from a GDP share of 9.6% in FY04/05 to 6.6% in FY07/08. still a heavy burden Backed by maintained economic growth and enhanced tax payers’ compliance, tax revenues witnessed strong growth of 16.9% and 20% in FY06/07 and FY07/08, respectively, pushing revenues to LE 218.5 bn in FY07/08. However, the surge in oil and food commodities prices exerted more pressure on subsides, besides the 30% increase in wages, putting more pressures on the expenditures side which grew by 25% in FY07/08. Even with the subsidies restructuring scheme (an average energy price increase of 27% July 2006 and 40% in May 2008) that was outlined to alleviate the increasing burden; expenditures reflected signs of rigidity with the oil subsidies accounting for around 48% of the total subsidies. Revenues & Expenditure Expenditure Breakdown FY07/08 Revenues Expenditures Fiscal Deficit/ GDP LE mn 300,000 12.0% Others 8% Wages & Salaries 250,000 10.0% Purchase of Non- 22% Financial Assets 12% 200,000 8.0% Purchase of Goods 150,000 6.0% & Services 6% 100,000 4.0% Interest Payments Subsidies 18% 34% 50,000 2.0% 0 0.0% 2004/5 2005/6 2006/7 2007/8 Source: MOF Source: MOF Tax buoyancy has been improving and is expected to progress further with Declining interna- planned reforms in sales tax and the introduction of value-added tax, the newly tional oil prices trim- introduced real estate tax law, and the new traffic law. We believe revenues will ming fiscal deficit continue to grow reaching LE 269.9 bn in FY08/09. Bearing in mind, the decline in share in GDP international oil prices that will simmer down subsidies’ growth and the new indus- trial energy policy that reduces fuel subsidies for energy-intensive industries as well as the reduction in imports payments, we believe expenditure will grow at a slower pace. We believe the GoE’s economy rescue package of increasing sup- port for exports; offering financing and export-related facilities for SMEs; and ex- panding infrastructure investments could be implemented from expenditures' sav- ings. We believe this will help reduce the fiscal deficit to 6.5% of GDP in FY08/09 and 5.3% in FY11/12. It is unlikely to hit the target of 3% of GDP unless more re- structuring on the expenditures side takes place, which is unlikely to be attainable in the mean time. 20
    • November 11, 2008 EGYPT | ECONOMY Reforms also improved Egypt’s debt position with net domestic debt to GDP fal- A downsized public ling to 43.2% in FY07/08 down from 52.3% in FY04/05. Moreover, net budget debt sector debt declined reaching 53.4% in FY07/08 from 67.4% in FY04/05. Interest payment as well recorded significant improvement recording a growth of 5.6% in FY07/08 well down from its high levels of 29.6% in FY06/07. Debt Growth & Debt-to-GDP Gross Domestic Public Debt Net Domestic Public Debt LE mn Net Domestic Debt % GDP 600,000 60.0% 500,000 50.0% 400,000 40.0% 300,000 30.0% 200,000 20.0% 100,000 10.0% 0 0.0% 2004/5 2005/6 2006/7 2007/8 Source: MOF Egypt’s economic outlook Actual Forecasts 2005/6 2006/7 2007/8 2008/9 2009/10 2010/11 2011/12 Real Sector GDP, Current (LE bn) 632.8 744.8 896.5 1,002.8 1,105.1 1,243.2 1,412.1 GDP, Current (US$ bn) 108.9 130.4 162.9 174.8 189.9 212.9 243.6 Real GDP Growth (%) 6.8% 7.1% 7.2% 5.0% 4.4% 5.7% 6.3% Population (000) 71,347 72,798 74,357 75,844 77,361 78,908 80,486 GDP/Capita, Current (US$) 1,527 1,792 2,191 2,305 2,455 2,698 3,026 Investments (LE bn) 85.0 155.3 179.3 190.8 205.3 223.9 251.6 External Sector Balance of Goods & Services (US$ bn) (3.80) (4.79) (8.45) (13.27) (18.77) (22.24) (26.13) Tourism Revenues (US$ bn) 7.23 8.18 10.83 11.12 11.84 13.34 14.81 Suez Canal Revenues (US$ bn) 3.56 4.17 5.16 5.61 6.00 6.93 8.02 Transfers (US$ bn) 5.55 7.06 9.34 10.02 10.25 11.20 12.40 Current Account (US$ bn) 1.8 2.3 0.9 (3.3) (8.5) (11.0) (13.7) Current Account % GDP 1.6% 1.7% 0.5% -1.8% -4.3% -4.9% -5.3% Exports % GDP 31.8% 33.0% 32.6% 34.7% 34.4% 34.6% 36.8% FDI (US$ mn) 6,111 11,053 13,237 6,364 5,865 7,496 10,118 FDI % GDP 5.6% 8.5% 8.1% 3.6% 3.1% 3.5% 4.2% LE/USD Exchange Rate (Period Avg) 5.810 5.710 5.503 5.735 5.819 5.840 5.798 Monetary Sector Inflation (CPI %) 4.2% 10.9% 11.7% 17.0% 11.7% 12.9% 14.19% Lending Rate (%) 12.71% 12.64% 12.22% 12.75% 12.00% 11.75% 11.50% Credit Growth 5.3% 9.1% 13.4% 10.5% 9.0% 12.3% 14.00% Fiscal Sector Expenditure % GDP 32.8% 29.8% 30.9% 33.4% 32.7% 32.7% 32.6% Revenues % GDP 23.9% 24.2% 24.4% 26.9% 26.8% 27.2% 27.5% Fiscal Deficit (LE mn) 50,385 54,697 59,234 65,215 66,455 70,563 74,299 Fiscal Deficit % GDP 8.0% 7.3% 6.6% 6.5% 6.0% 5.7% 5.3% Source: CBE, MOF & CICR forecasts 21
    • November 11, 2008 EGYPT | BANKING RISING UP TO THE CHALLENGE DRIVERS A highly profitable sector. Given the global financial crises and amid concerns of a Under-penetrated market with huge growth po- global recession, the Egyptian banking sector is well- tential. positioned with its balanced loans/deposits ratio of 53% A balanced total loans/deposits ratio at 53% implying both high liquidity and funding surplus, vs. fund- implies a funding surplus and readily available ing gaps in some credit crunch economies. Next to the liquidity. mounting banking losses related to bad assets in the A real and non-inflated balance sheet. global market, Egypt has no significant exposure to sub- Improved asset quality through reforms and consolidations. prime assets. Sitting in an under-penetrated emerging mar- No significant exposure to sub-prime crises ket like Egypt with inherent growth potential and achiev- places the sector at an advantage vs. others. able high profitability levels with a ROAE of 16% for the sector, and leveraging on the readily available liquidity RISKS suggested by the said level of loans/deposits, success is not far. A large global recession and the risk of other Banking sector outperformed the economy since 2001: exogenous factors that might impact the sector. Banking assets outperformed the nominal GDP growth since A wider than expected GDP slowdown due to wider exports and FDI deceleration can trigger 2001, with a total banking assets/GDP ratio reaching a multiple lower deposits’ growth and eventually weak of 1.2x as at June 2008. loans’ growth. Lower GDP and GDP per capita could heighten corporate and retail default rates, negatively A real & non-inflated balance sheet: Lending and other as- affecting asset quality. sets in the banking system are funded by existing core depos- Increased liquidity pressures on foreign currency its, with minimal dependence on foreign inter-bank. could create an FX squeeze. Currency depreciation could trigger some FX losses. Not highly exposed in an under-penetrated market: At a Interest rate risks related to increased pricing pressures of funds. loans/deposits ratio of just 53%, the banking sector is not highly exposed and able to withstand expansions leveraging KEY PERFORMANCE INDICATORS on only the readily available liquidity, in a market that is eager for growth and under-penetrated (15% penetration) . Banking assets CAGR (02/3-07/8,%) 13.4 Deposits CAGR (02/3-07/8, %) 13.3 Faster deposits’ growth, yet high NIMs and ROAEs: De- Loans CAGR (02/3-07/8, %) 7.1 spite that deposits had been growing faster than loans for long, Loans/deposits ratio (2007/8, %) 52.9 still, banks particularly major ones record high NIMs and Equity/assets (2007/8,%) 5.3 ROAEs, as evidenced by an average NIM and ROAE of 3.2% ROAE (2007/8, %) 16 and 33.4% for the 3 covered banks, respectively. BANKS COVERED PAGE # Improving credit quality & a much stronger sector: With the termination of the CBE’s first phase of reforms that had CIB 111 started in 2003, including enhancing capitalization, provisional CAE 113 accumulation and consolidations, the banking sector now is much stronger. NSGB 137 Opportunities include potential capital that used to mi- ALIA ABDOUN ALIA.ABDOUN@CICH.COM.EG grate to distressed economies: If the banking sector working with the local investors rise up to the challenge, potential capi- SECTOR PERFORMANCE | 2002/3 - 2007/8 tal that previously targeted the currently distressed economies could be diverted to Egypt thereby generating further growth. Nominal GDP Banking Assets Banking Assets/GDP In LE bn Assets/GDP multiple 1,200 1.4x 1.4x 1.4x 1,000 1.3x 1.2x 1.3x 1.3x 1.3x 1.2x 800 1.3x 1.3x 600 1.2x 1.2x 400 1.2x 200 1.1x - 1.1x 2000/1 2001/2 2002/3 2003/4 2004/5 2005/6 2006/7 2007/8 22
    • November 11, 2008 EGYPT | BANKING BANKING SECTOR STRUCTURE ASSETS Looking back since 2001, Egypt’s banking assets had been growing at an aver- The Egyptian banking age of 14.3%, outperforming the nominal GDP growth by an average of 27% over sector outperformed the same period, with a total banking assets/GDP ratio standing at a multiple of the economy since 1.2x as at June 2008. 2001 Banking assets to GDP Trend of Assets/GDP ratio Nominal GDP Banking Assets Banking Assets/GDP Assets/GDP In LE bn Assets/GDP multiple 1.4x 1.4x 1,200 1.4x 1.4x 1.4x 1.4x 1,000 1.3x 1.2x 1.3x 1.3x 1.3x 1.3x 1.3x 1.3x 1.2x 1.3x 800 1.3x 1.3x 1.3x 1.3x 600 1.2x 1.2x 1.2x 1.2x 1.2x 1.2x 400 1.2x 1.2x 200 1.1x 1.1x 1.1x - 1.1x 2000/1 2001/2 2002/3 2003/4 2004/5 2005/6 2006/7 2007/8 2000/1 2001/2 2002/3 2003/4 2004/5 2005/6 2006/7 2007/8 Source: CICR & CBE Source: CICR & CBE Figures of June 2008 confirm the rich liquidity of the Egyptian banking system, Loans represent the with a loans/assets ratio of only 37.1%, followed by domestic inter-bank assets at main investment; at 25.7%. It is noteworthy that trading securities & T- Bills represent 18.6% of total only 37% of assets… assets, of which 73% representing 13% of total assets are in T-Bills, while foreign inter-bank represented only 11.3% of the total. Banking assets by type, June 2008 Funding by type, June 2008 Reserves Capital Provisions Cash Securities & TBs Domestic Interbank Other liabilities Obligations to banks in Egypt Total deposits Balances banks abroad Loans & discounts Other assets Obligations to banks abroad Long term loans&Bonds 100% 2.1% 100% 6.3% 1.2% 90% 90% 37.1% 80% 80% 70% 70% 69.0% 60% 60% 50% 11.3% 50% 40% 40% 25.7% 30% 30% 9.1% 20% 20% 7.9% 10% 18.6% 5.8% 10% 3.4% 0% 1.5% 0.9% 0% Liabilities Assets Source: CICR & CBE Source: CICR & CBE 23
    • November 11, 2008 EGYPT | BANKING Not only does the banking system benefit from liquidity, but also its liquidity stems ….while core deposits from internal core deposits which capture 69% of total funding, whereas domestic generate the main and foreign inter-bank liabilities barely represent 9.1% and 1.2% of financing, re- funding at 69% spectively. Core internal deposit financing represents a safety haven against ex- ternal shocks. DEPOSITS Total banking sector deposits having been growing at an average of 13% for the Steady deposits growth, composing an past 5 years, an average multiple of 0.9x of GDP. average of 90% of GDP Household sector as From the deposit breakdown by type, it is apparent that the household sector has major depositor, fol- long been the major depositor, the second place has shifted from the government lowed by a strength- deposits to private business sector starting 2006/7, indicating the wider role the ened private business private sector has been taking up, thanks to all the reform efforts taking place in sector Egypt during the last three decades including deregulation and privatization of the economy and the sector. Total deposits growth relative to GDP Deposits breakdown by depositors Total Deposits Nominal GDP Deposits/GDP Government deposits Private sector business deposits Public sector business deposits In LE bn Household sector Non-resident (external sector) 100% 0.1% 0.1% 1,000 1.0x 0.5% 0.4% 0.6% 0.7% 897 90% 900 1.0x 1.0x 80% 800 1.0x 756 0.9x 745 70% 700 59.3% 658 63.9% 63.8% 65.3% 65.1% 633 66.5% 571 60% 600 0.9x 551 0.9x 522 0.9x 485 500 50% 464 405 418 0.8x 400 0.9x 40% 5.1% 4.1% 4.6% 4.1% 4.0% 4.6% 300 30% 14.0% 13.6% 13.6% 23.4% 14.1% 19.2% 200 0.8x 20% 100 10% 17.9% 16.7% 16.8% 14.4% 11.7% 11.6% - 0.8x 0% 2002/3 2003/4 2004/5 2005/6 2006/7 2007/8 2002/3 2003/4 2004/5 2005/6 2006/7 2007/8 Source: CICR & CBE Source: CICR & CBE Deposits dollarization had been easing in the aftermath of the complete currency Local currency domi- floatation that took place in 2003, standing at only 25.8% of total deposits as at nates the deposits base June 2008. Household sector as Although the constitution of deposits is mainly captured by time and saving de- major depositor, fol- posits, still, demand deposits and blocked deposits hold a significant 16%, offer- lowed by a strength- ing an advantage for the banks to benefit from either interest free or low interest ened private business bearing deposits, partially cushioning against funding pricing pressures. sector 24
    • November 11, 2008 EGYPT | BANKING Deposits breakdown by currency Breakdown by types of deposits LCY FCY Demand deposits Time & Saving deposits Blocked or retained deposits 100% 100% 4% 90% 90% 25.8% 28.4% 28.8% 29.4% 30.8% 32.5% 80% 80% 70% 70% 60% 60% 84% 50% 50% 40% 40% 74.2% 71.6% 71.2% 70.6% 69.2% 67.5% 30% 30% 20% 20% 10% 10% 12% 0% 0% 2002/3 2003/4 2004/5 2005/6 2006/7 2007/8 Total Deposits Source: CICR & CBE Source: CICR & CBE LOANS Lending remained at an Total loans hovered around 50% of GDP during the last 5 years, with the indus- average of 50% of GDP, trial sector capturing the lion’s share, followed by the services sector. Loans dol- with the industry sector larization rate reached 33.3% as at June 2008. Further, FCY loans/deposits ratio as main lender has started to exceed LCY loans/deposits ratio since 2006/7, indicating an in- creased activity on the foreign currency side. Loans growth relative to GDP Loans breakdown by lender Loans Nominal GDP Loans/GDP Government Agriculture Industry Trade Services Household & external sector In LE bn 100% 1000 0.8x 12.8% 13.1% 14.1% 0.4x 17.2% 18.0% 90% 897 21.4% 900 0.7x 0.7x 0.5x 80% 800 745 25.6% 25.2% 24.7% 0.6x 0.6x 0.5x 70% 25.5% 26.9% 700 0.6x 25.5% 633 0.5x 60% 600 551 18.7% 20.3% 20.7% 485 50% 500 0.4x 17.7% 13.9% 14.4% 418 399 40% 400 352 0.3x 323 307 295 283 30% 300 33.3% 31.4% 0.2x 34.0% 29.4% 31.4% 34.4% 200 20% 0.1x 100 10% 2.2% 1.5% 2.1% 1.8% 1.9% 1.7% 7.8% 7.6% 7.2% 6.5% 5.5% 4.7% 0 0.0x 0% 2002/3 2003/4 2004/5 2005/6 2006/7 2007/8 2002/3 2003/4 2004/5 2005/6 2006/7 2007/8 Source: CICR & CBE Source: CICR & CBE 25
    • November 11, 2008 EGYPT | BANKING Loans breakdown by currency Loans/deposits ratio by currency LCY FCY LCY FCY 100% 90.0% 90% 77.8% 80.0% 22.9% 23.1% 24.3% 26.2% 29.7% 72.7% 33.3% 80% 68.2% 70.0% 62.5% 70% 59.0% 60.0% 56.0% 52.6% 52.4% 60% 50.5% 49.6% 47.5% 50.0% 44.9% 50% 40.0% 40% 77.1% 76.9% 75.7% 73.8% 70.3% 30.0% 66.7% 30% 20.0% 20% 10.0% 10% 0% 0.0% 2002/3 2003/4 2004/5 2005/6 2006/7 2007/8 2002/3 2003/4 2004/5 2005/6 2006/7 2007/8 Source: CICR & CBE Source: CICR & CBE With the commencement of the reform program around 2003, total loans/deposits Loans to deposits ratio ratio has declined from 70% to 52.9% in 2007/2008. Even at the current deposits at a favorably reason- level and without expanding the deposits base, the readily available liquidity level able 53%, implies both liquidity and room for suggested by the system’s total loans/deposits ratio of just 52.9% as at June growth… 2008, indicating that the sector can withstand further loan growth without jeopard- izing a reasonable liquidity position. Total loans/deposits of the system Egypt’s loans/deposits vs. others 140.0% 75.0% 121.3% 120.0% 70.0% 70.0% 99.9% 100.0% 94% 91% 65.0% 85% 63.6% 80.0% 60.0% 58.8% 60.0% 52.9% 56.5% 55.0% 40.0% 32.8% 53.5% 52.9% 20.0% 50.0% 0.0% 45.0% Lebanon Egypt Turkey Saudi UAE U.S.A U.K Arabia 2002/3 2003/4 2004/5 2005/6 2006/7 2007/8 Source: CICR, Central Banks& Bloomberg Source: CICR & CBE With the system’s LCY loans/deposits ratio of 47.5% and FCY loans/deposits ra- Better position; no tio of 68.2% as at June 2008, it can be argued that in both cases funding is gener- funding gap in Egypt ated from actual core deposits; meaning, demand is still below supply, implying a and insignificant expo- funding surplus vs. a funding gap in some countries; according to the Bank of sure to distressed England, the UK for example had a funding gap worth around GBP740 bn as at economies June 2008, the same case as some other credit crunch economies. Egypt also is in a healthier position with no significant exposure to sub-prime mar- kets and without a high exposure to real-estate; where real-estate represented 6.5% of total implemented investments in 2007/8, vs. many gulf countries that are relatively more exposed to global markets and some highly exposed to real- 26
    • November 11, 2008 EGYPT | BANKING estate, additional to having much higher loans/deposits ratios indicating lower liquidity - not a favorable situation concurrent with the easing of oil prices. Following the reforms through banking law no. 88/2003 and its amendments, the Over the last 5 years, CBE had implemented strict supervision over banks including enhancing their improving credit qual- provisioning base to hedge against low asset quality, to the extent of forcing some ity in Egypt & a much banks to book their entire returns in provisions and record nil profits. Reforms also stronger sector included increasing capitalization, cleaning bad loan portfolios and consolidations, the banking sector now is considered much stronger. Unlike the private sector banks, non-performing loans are particularly concentrated in the public banks - less the privatized Bank of Alexandria (BoA) which had gone through a strong clean up and restructure before its sale. The government is still considering the sale of Banque du Caire, but waiting for the right time. PROFITABILITY Being in an emerging market, Egyptian banks enjoy decent interest spreads, es- Deposits had been pecially the leading banks with superior asset liability management which enables growing faster than them to efficiently manage their spreads in both rising and declining interest rates loans, yet, Egyptian environments. banks generate high NIMs & high ROAEs Profitability of leading banks Leading 2009 multiples NIM ROAE P/E 2009P P/BV 2009P 50.0% 6.0x 45.0% 4.9x 5.0x 40.0% 4.3x 35.0% 4.0x 3.7x 30.0% 25.0% ROAE, 42.6% 3.0x 20.0% ROAE, 32.0% 2.0x ROAE, 25.6% 15.0% 1.5x 1.3x 10.0% 0.9x 1.0x 5.0% NIM, 3.7% NIM, 3.3% NIM, 2.7% 0.0% 0.0x CIB NSGB CAE CIB NSGB CAE Source: CICR & Banks’ financials as at June 2008 Source: CICR projections *NSGB’s ROAE is ex-goodwill *NSGB’s P/E is ex-goodwll In June 2008 our analysis, using the maximum 3M USD deposit rate and the 1M Widening FCY spread LIBOR reveals an increased spread vs. June 2007. Since then there has been until June 2008, par- some reversal due to the international scene, and the increased demand on USD. tially narrowing in Sep- However, this may not truly reflect the experience of the private banks, as our tember 2008... discussions with them indicate that especially in the case of fixed lending rates (unlike floating) related to long-term loans that were booked previously but not re- valued, benefiting from larger spreads. Domestically, banks are still considered liquid in both currencies, so there are no liquidity pressures on the FCY yet. Meanwhile, the LCY side benefits from high spreads, despite funding pricing pres- …Significant LCY sures resulting from the consecutive CBE hikes the in the corridor rates totaling spread 2.75% since early 2008. Said rise in rates did not seem to filter with a large mag- nitude in the price of funds as evidenced from the 1H08 of the covered banks, particularly CIB and NSGB. Fortunately, Egyptian banks rely more on core de- 27
    • November 11, 2008 EGYPT | BANKING posit financing rather than inter-bank, therefore enjoy a cost advantage interval; as deposit rates’ rates’ adjustment to rises in interest rates lag behind inter-bank rates. Meanwhile, banks benefit from rate increases with regards to lending port- folios that are benchmarked to the discount rate. We expect the CBE to start re- ducing rates to boost economic activity starting 2009. LCY interest spread FCY indicator of spread USD 3M average deposit rate USD 1M libor rate Lending rate LCY less 1-year deposit rate LCY less 1-year lending rate 8.0% 14.0% 7.33% 12.6% 12% 7.0% 12.0% 12.0% 6.06% 6.0% 5.33% 10.0% 5.1% 4.93% 5.0% 8.0% 4.06% 7.2% 7.1% 6.9% 4.0% 3.06% 6.0% 2.93% 3.0% 2.7% 4.0% 2.0% 1.0% 2.0% 0.0% 0.0% 2006/7 2007/8 Sep-08 2006/7 2007/8 Jul-08 Source: CICR & CBE (July is the latest available) Source: CICR, CBE, British Banking Association *Assumed lending rate as USD 1M libor plus 2% BALANCE SHEET OUTLOOK In line with our internal forecast entailing the softening of nominal GDP growth Total loans/deposits to rates in the coming two years, followed by a slight pick up over the subsequent remain stable for the years, we project slower deposits’ and banking assets’ growth in said years, fol- next two years followed lowed by a smooth pick up. Starting 2010/11 as the consequences of the global by a slight rise… crises on the local market become quantifiable, we project lending to slightly pick up leveraging on the already available liquidity, in view of the fact that it had origi- nally fallen from the 70%-level in 2002/3. Balance Sheet outlook for the sector In LE bn 2006/7 2007/8 2008/9P 2009/10P 2010/11P 2011/12P Assets 938 1,083 1,197 1,305 1,455 1,651 23.2% 15.5% 10.5% 9.0% 11.5% 13.5% Deposits 658 756 835 910 1,015 1,152 15.2% 14.8% 10.5% 9.0% 11.5% 13.5% Loans 352 399 441 481 540 616 9.1% 13.4% 10.5% 9.0% 12.3% 14.0% Loans/Deposits 53.5% 52.9% 52.9% 52.9% 53.3% 53.5% -298 bps -67 bps 0 bps 0 bps 38 bps 25 bps Source: CBE & CICR projections We expect the 3 covered private banks to outperform the sector thereby win mar- Comparative forecasts ket share starting 2009, then to continue steady growth in the following years. for the 3 covered banks 28
    • November 11, 2008 EGYPT | BANKING Deposits growth of the 3 banks Deposits Forecast 2008P 2009P 2010P 2011P 2012P CIB 27% 13% 13% 12% 12% NSGB* 5% 13% 13% 12% 11% CAE 14% 16% 16% 16% 14% Average 15% 14% 14% 13% 12% Source: CICR projections *NSGB 2008 deposits’ growth is low due to the decline in 2Q08 partially related to the withdrawal of Asset Manager deposits. Loans growth of the 3 banks Loans Forecast 2008P 2009P 2010P 2011P 2012P CIB 26.6% 17.0% 15.9% 13.6% 12.6% NSGB 21.7% 18.1% 15.9% 12.6% 12.6% CAE* 60.2% 26.2% 22.7% 20.6% 18.1% Average 36% 20% 18% 16% 14% Source: CICR projections *CAE 2008 loans’ growth is 2008 is high due to strong growth in 1H08 29
    • November 11, 2008 EGYPT | CEMENT DRIVERS SURVIVAL ON THE BACKLOG Removal of export duties & export ban. Given the current fears from the negative impact of the Abundance of raw materials. expected global recession, maybe the picture for the High margins compared to regional peers. Egyptian cement industry is not that gloomy—supported New capacities on stream. by the massive backlog of real-estate projects which will Outstanding real-estate projects secure de- secure cement consumption despite of some expected mand for cement. delays in these projects. Against the backdrop of an im- The expanding existence of foreign compa- proved mortgage scheme, the middle-income group may nies in the local market allows for efficient exert some demand pressures for real-estate—especially operation and signals market potential. that the mortgage loans almost doubled reaching LE 3 bn in October 2008 up from LE 1.4 bn in June 2007. In addi- RISKS tion to the GoE’s commitment to push further local invest- ments through building commercial and industrial zones in many governorates which will increase the demand for Anticipated slowdown in construction activi- the retail segment. On the exports front, the GoE’s re- ties. moval of the export ban and duties will give the local ce- Rising cost on inputs. ment producers more competitive edge—namely that the Sudden governmental decisions as imposing exports bans and duties. Egyptian cement exports prices is considered one of the Massive regional capacity additions which cheapest in the region. Most notably, the expanded for- intensifies rivalry. eign ownership reaching 79% in 2008, highlights the mar- ket’s growth potential. We believe that the industry with its current concentration level—3 cement groups control- ling 62.1% of the local market—is capable of weathering KEY PERFORMANCE INDICATORS the coming challenges, yet the market still sustains fur- ther consolidations. Cement production CAGR (04-07,%) 10.2 Cement consumption CAGR (04-07,%) 13.5 Availability & proximity to high-grade limestone: The abundant raw materials in Egypt, gives the industry a cost Cement exports CAGR (04-06,%) 20.9 advantage compared to some of its regional peers that relies on imported clinker. Average surplus (04-07,mn tons) 5.1 Average utilization rate (04-07,%) 86.1 The expanding potential of utilizing natural gas gives an COMPANIES COVERED PAGE # edge to further reduce cost: The growing natural gas re- serves expands the industry’s potential to utilize a relatively Misr Beni Suef Cement 129 cheaper energy source and hence, enhance the margins of the companies utilizing natural gas. Moreover, it is an environ- Misr Cement (Qena) 131 mental friendly energy source compared to mazot. Sinai Cement 153 The industry enjoys higher margins: The local cement play- ers enjoy higher margins averaging a gross profit margin of BASMA SHEBETA 54.6% in 1H08 versus a regional average of 36.3%. BASMA.SHEBETA@CICH.COM.EG SECTOR PERFORMANCE | 2004-2008 Cement demand is to be secured by the backlog: In light of the expected slowdown in real-estate demand cement con- Production Demand mn tons Supply Growth Demand Growth 45 25% sumption is to be secured by the backlog of the developers 40 projects. Yet, with the anticipated pick-up in the economy 20% 35 which will trigger the inflow of projects the demand for cement 15% 30 will regain its strength. 10% 25 20 5% 15 0% 10 -5% 5 0 -10% 2004 2005 2006 2007 8M08 30
    • November 11, 2008 EGYPT | CEMENT CEMENT MARKET IN EGYPT Consumption outpaced Over the first eight months in 2008, Egypt's cement market reached 26 mn tons, production growth up by 12.7% from the same period a year earlier. Yet, production growth lagged behind with a 3.5% increase reaching 26.8 mn tons. MARKET STRUCTURE Designed capacity Currently, the designed grinding capacity is 46.1 mn tons, with foreign compa- reached 46 mn tons nies holding the bulk of 74%. The total companies operating in the cement sec- with foreign companies tor is 13; 8 of which are foreign companies, 4 are private; and one is a public bearing the bulk company. Moreover, total grinding capacity reached 46.1 mn tons split between gray cement (97.1%) and white cement (2.9%). It is worth highlighting that Ara- bian Cement company which started operations in 2008 is currently producing clinker only till its own grinding mills are up and running. Cement capacity by product in 2008 Cement capacity by ownership in 2008 White Public 2.9% 7.6% Private 18.4% Foreign Gray 74.0% 97.1% Source: CICR Database Source: CICR Database KEY MARKET FACTS The wave of acquisitions activity by foreign companies to local cement compa- An expanding foreign nies started since 1999 with Lafarge & Cemex acquiring 76% & 96%, respec- ownership confirms the tively of Beni Suef Cement and Assiut Cement companies and ending with La- market's potential farge acquiring 100% of OCI Cement Group namely, Egypt Cement Company (ECC). The deal became effective by the end of January 2008, moving up for- eign ownership share – in terms of local sales- from 20.8% in 1999 to 78.9% in 2008 - hence, emphasizing the market's potential. Local cement market shares in 1999 & 8M08 1999 2008E 7.8% Public 12.9% 13.3% Private 66.3% 78.9% Foreign 20.8% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Source: Ministry of Investment 31
    • November 11, 2008 EGYPT | CEMENT The consolidation wave within Egypt's cement market increased the concentration Increasing market level of the largest three players from 47.3% in 1999 to 62.1% in 2008.* concentration 8M08 Local cement market shares 1999 Local cement market shares Misr Beni Suef ECC Torah 3.8% Misr Cement Qena 7.4% 15.6% Italicementi 4.0% Sinai (Torah, Helwan & Suez 5.5% Suez) 16.5% 29.4% National Helwan 7.8% 11.4% Beni Suef 5.7% Alexandria Lafarge (ECC) 4.3% 19.6% Amereyah Cemex (Assiut) National 11.0% 13.1% 12.9% Titan (Beni-Suef Cimpor Cemex & Alexandria) (Ameriyah) 15.2% 8.1% 8.6% Source: Ministry of Investment Source: Ministry of Investment A shrinking surplus Boosted by the construction & real-estate boom within Egypt, cement market re- versed its growth pattern with demand growth exceeding that of supply (14% vs. 6.2%, respectively) in 2007 and (12.7% vs. 3.5%) during the first eight months of 2008, hence depressing market surplus to 0.74 mn tons. Cement market development pattern (2004-8M08) Cement market surplus pattern (2004-8M08) Production Demand mn tons mn tons Production Growth Demand Growth 7 45 25% 5.99 40 6 20% 5.21 35 5.05 5 15% 30 4.01 4 10% 25 20 5% 3 15 0% 2 10 -5% 0.74 1 5 0 -10% 0 2004 2005 2006 2007 8M08 2004 2005 2006 2007 8M08 Source: Ministry of Investment Source: Ministry of Investment As demand has been following a higher growth pattern than that of supply, hence … and tighter tighter utilization rates were achieved, reaching its peak of 92.2% in 2007. utilization rates * In terms of local sales 32
    • November 11, 2008 EGYPT | CEMENT Added capacity, demand & utilization rate Added capacity, demand & utilization rate (2004- (8M06-08) 2007) Added Capacity Added Demand Utilization Rate mn tons mn tons Added Capacity Added Demand Utilization Rate 3.5 63.0% 6 95% 62.6% 62.5% 5 92.2% 3.0 62.2% 62.0% 90% 4 87.0% 61.5% 2.5 3 61.0% 86.8% 2.0 85% 60.5% 2 60.0% 1.5 1 78.3% 59.5% 80% 59.5% 1.0 0 59.0% 2004 2005 2006 2007 58.5% -1 0.5 75% 58.0% -2 0.0 57.5% 8M06 8M07 8M08 -3 70% Source: Ministry of Investment Source: Ministry of Investment As demand has been boosted, triggered by the real-estate boom, cement prices Prices are following have been following a rising trend. Cement ex-factory prices reached an average higher levels of LE 435/ton over the first eight months of 2008 up from an average price of LE 362/ton in 2007. Cement prices by month* (Jan 2006-Aug 08) LE/ton Second increase Imposing a ban of 470 in energy prices 6-month period on 460 cement exports Increasing the 450 levied duties on 440 cement exports to 430 LE 85/ton 420 410 400 imposing fees on 390 LE 65/ton levied duties clay amounting to on cement exports 380 LE 35.1 per 1 ton of 370 cement produced First increase in 360 energy prices 350 340 330 320 310 300 Ju -06 Ju -07 Ju -08 Fe -06 M -06 Ap -06 Ju 0 6 Se -06 O 06 D -06 Ja -06 Fe -07 M -07 Ap -07 Ju 07 Se -07 O 07 D -07 Ja -07 Fe -08 M 08 Ap -08 Ju 0 8 08 M r-06 Au l-06 N t-06 M r-07 Au l-07 N t-07 M r-08 Au l-08 n- n- n- p- p- b- g- ay ay ay ar ar ar n b g n b g n ov ec ov ec c c Ja Source: Ministry of Investment Energy accounted for the highest share in cement production costs, yet, varying Energy is the major based on the type of feedstock used. Energy contribution during 3Q08 registered contributor to cost a lower share of 51.2% in the cost structure of the companies using natural gas against 53.9% for those using mazot such as Misr Cement (Qena). * Ex-factory including transportation cost 33
    • November 11, 2008 EGYPT | CEMENT 3Q08E Cost structure for companies using natural 3Q08E Cost structure for the company using ma- gas as feedstock zot Raw Materials Transportation Others 8.2% Raw materials Maintenance 1.5% 1.1% 8.7% 18.8% Packaging 13.7% Resource Dev. Packaging Fees 19.1% 10.2% Asec 13.6% Energy Energy 53.9% 51.2% Source: CICR estimates Source: CICR estimates MARKET DYNAMICS Domestic Market Governmental Demand Measures Driver Supply-Related Factors - Construction boom - Removal of export duties & export ban - Raw materials availability - Modifying anti-monopoly law - Rising cost of inputs - Raising energy prices - Higher margins - Raising raw materials prices - Observed tight supply - New licenses - Impact from export ban & duties - Impact of strict conditions on new capacities - Electricity availability GOVERNMENTAL MEASURES Ever since the beginning of 2007, the government has taken several actions and decisions to regulate the cement industry's trading activity as well as new capaci- ties. Recent governmental measures Measure Date Description Impact POSITIVE Revoking the export ban & export 19-Oct-08 Calling-off the 6-month export ban previously imposed by the duties Ministry of Trade & Industry on cement exports starting from March 29, 2008. Soon after, the GoE decided to remove the LE 85/ton duties imposed on cement exports. NEGATIVE Modifying Anti Monopoly Law Jul-08 By raising the minimum level of fines charged per violator from LE 30k to LE 100k and the maximum level from LE 10 mn/violator to LE 300 mn. NEGATIVE Raising energy prices Sep-07 Raising natural gas & electricity prices by 37.3% & 20.1% respectively. NEGATIVE Jan-08 Increasing mazot prices in early January 2008 by 100% to record LE 1000/ton. Source: CICR Database 34
    • November 11, 2008 EGYPT | CEMENT Measure Date Description Impact NEGATIVE Increasing clay prices 6-May-08 Imposing on cement companies a resource development fees on the clay amounting to LE 35.1/ton of cement produced. POSITIVE New licenses Oct-07 Offering 7 licenses through a public auction: 5 licenses for Greenfield operations, and 2 licenses for expansion purposes of existing companies. In addtion, a license was offered for free to a Greenfield company namely, New Valley as it was the only bidder for New Valley license NEGATIVE Raising duties on cement exports Aug-07 Raising the duties previousely levied on cement exports by 31% to reach LE 85/ton NEGATIVE Imposing duties on cement exports Mar-07 Imposing an export duty of LE 65/ton on cement exports Source: CICR Database According to the GoE plan, planned capacity additions will be complete by 2012; raising local gray cement capacity to 62.5 mn tons up from its current level of 42.9 mn tons. The following table illustrates the details of the gray cement capacity additions over 2009-2011: Gray cement capacity additions over 2009-2011 Greenfield Licenses Governorate License Cost Capacity in (LE mn) 000 tons Wadi Al Nile Cement Co. (WNCC) Beni Suef 251 1500 Al-Swedy Cement Suez 201 1500 Arab National Cement Co. (ANCC) El Meniah 200 1500 Al-Nahda Industries Qena 83 1500 North Sinai Cement North Sinai 44 1500 Building Materials Industries Assuit 22 1500 Al-Wadi Cement New Valley Free 1500 Expansion Fees Governorate License Cost Capacity in (LE mn) 000 tons Assiut Cement Company Assuit 202 1500 Beni Suef Cement Company Beni Suef 135 1500 Reconciliation Fees Governorate Fees Charged Capacity in (LE mn) 000 tons Arabian Cement Suez NA 1500 Sinai Cement Sinai 44 1500 Medcom Aswan Aswan NA 1000 Misr Beni Suef Cement Beni Suef 251 1500 South Valley Cement Beni Suef 251 1500 Source: CICR Database and IDA SUPPLY-RELATED FACTORS Despite the minimal share of raw materials in the production cost of cement – an Raw materials average of 8.45% in 3Q08E, their availability, proximity and quality are crucial to availability expanding cement production. The fact that Egypt has abundance of limestone, gypsum, and slag in moderate and high quality pushed the cement industry to expand and grow, and will even drive its potential further in the future. Since cement is an energy-intensive industry – with energy estimated to consti- Rising cost of in- tute an average of 52.5% of total production cost in 3Q08– raising natural gas & puts electricity prices by 37.3% & 20.1% effective September 2007, followed by a 100% increase in mazot prices effective January 2008 have negatively impacted the industry's margin. Consequently, the average EBITDA margin for gray cement producers declined from 50.8% in 2006 to 46% in 2007; and from 50% in 1H07 to 47% in 1H08. It is worth noting that the impact of the LE 35.1/ton of resource de- velopment fees for clay imposed on May 6, 2008 was not yet significantly re- flected on the 1H08 margins, however, it should be mirrored in 3Q08 margins. 35
    • November 11, 2008 EGYPT | CEMENT Average EBITDA margins for the cement industry (2006-2008) 52% 50.8% 51% 50.0% 50% 49% 48% 47.0% 47% 46.0% 46% 45% 44% 43% 2006 2007 1H07 1H08 Annual Semi-Annual Source: Company’s Reports The high gross profit margins for the Egyptian cement industry compared with Yet, local produc- their regional peers played a key role in boosting the industry's expansions, in ad- ers enjoy higher dition to encouraging a wave of acquisitions by foreign companies. margins compared Regional gross profit margins in 1H08 80% 67.3% 70% 66.1% 63.1% 57.9% 60% 50.2% 49.0% 50% 45.8% 40.1% 40% 32.7% 30% 22.8% 20% 14.0% 10% 0% Arabian Yamama Gulf Fujairah Ras Al- Sinai Misr Beni Misr Helwan Suez Torah Cement Cement Cement Cement Khaimah Cement Suef Cement Cement Cement cement Cement Cement (Qena) KSA UAE Egypt Source: Company’s Reports Despite witnessed capacity additions over 2004-2007 averaging 1.7 mn tons per Despite capacity annum, expanding cement consumption maintained the industry’s utilization rate additions, still at high levels - with an average of 86%. Over the aforementioned period, cement supply is tight capacity increased by a CAGR of 4% to reach 42 mn tons in 2007 vs. a CAGR of 13.5% for demand recording 34.5 mn tons. It is worth highlighting that such tight market status led to further capacity additions in order to satisfy the market needs. 36
    • November 11, 2008 EGYPT | CEMENT Cement supply status (2004-2007) Cement utilization rates (2004-2007) Capacity Production Demand mn tons 95% 45 92.2% 40 90% 35 87.0% 30 86.8% 85% 25 20 80% 15 78.3% 75% 10 5 70% 0 2004 2005 2006 2007 2004 2005 2006 2007 Source: Ministry of Investment Source: Ministry of Investment Imposing tariffs on cement in 2007, followed by a 6-month export ban which Imposing the export started by the end March 2008, led to a 28% drop in 2007, followed by a further ban and duties led decline of 73.2% in 8M08 versus 8M07. Yet, to mitigate the negative impact of the to a huge drop in anticipated global economic slowdown the GoE decided to call off the export ban exports and the export duties on cement exports. Cement exports pattern (2004-8M08) mn tons 7 5.9 6 5.2 5 4.7 4.2 4 3.2 3 2 0.7 1 0 2004 2005 2006 2007 8M07 8M08 Source: Ministry of Investment The GoE set strict standards for investors in order to participate in the Greenfield Strict conditions in & expansions auctions. In addition, new licenses include strict terms in order to new licenses to pre- grant that new capacities start on schedule such as, the founder can not sell the vent any delay in Greenfield license until the production starts, yet the GoE allowed the investor to the new capacities sell a stake, which may open the door for another wave of consolidation in the entrance local market. One of the major constraints facing any capacity additions is the electricity avail- Electricity availabil- ability. It is worth mentioning that in order to implement the declared new capaci- ity ties, companies will be required either to establish their own power stations to secure their needs from electricity or to pay the investment cost of the power sta- tion to the GoE which will handle its establishment. It is worth mentioning that the investment cost for establishing a power station may reach LE 125 mn. 37
    • November 11, 2008 EGYPT | CEMENT CONSTRUCTION DRIVER The massive construction activity witnessed in Egypt has triggered demand for cement. Over 2004-2007, the construction sector grew with a CAGR of 7.4%, pushing further cement consumption from 23.6 mn tons in 2004 to 34.5 mn tons in 2007 – reflecting the strong ties between both variables which is emphasized by the high coefficient correlation of 0.910. Construction activity vs. cement consumption (2004-2008) Construction Cement Consumption LE bn mn tons 40 40 35 35 30 30 25 25 20 20 15 15 10 10 5 5 0 0 2004 2005 2006 2007 2008E Source: CBE, Ministry of Investment & CICR estimates FUTURE OUTLOOK Outstanding real- Against the backdrop of the global economic turmoil and the expected slow down estate projects will in construction and real-estate activities worldwide and in Egypt, the demand for secure cement cement is expected to grow at a slower pace, an AAGR of 1.36% over 2009 and consumption over 2010. Nevertheless, cement consumption is expected to gain back its momentum 2009 and 2010, with by 2011 with the anticipated pick-up in the economy and the expected inflow of an anticipated pick- new projects, concurrently cement consumption will grow by a AAGR of 9.4% up afterwards over 2011-2012 reaching 47.9 mn tons by 2012. It is worth mentioning that de- mand for cement over 2009 & 2010 will be mainly secured by the outstanding real-estate contracts, as the existing contractors are expected to continue their construction works, yet at a slower pace. Future cement outlook mn tons 50 45 40 35 30 25 20 15 10 5 0 2006 2007 2008E 2009F 2010F 2011F 2012F Source: CICR Database and estimates 38
    • November 11, 2008 EGYPT | CEMENT Planned grinding capacity additions is expected to expand gray cement capaci- Huge capacity addi- ties to 62.53 mn tons by 2012 up from its current level of 42.86 mn; of which tions of 20 mn tons year 2011 will witness the highest capacity additions of 9 mn tons. Most notably, till 2012 Greenfield is to contribute with almost 51% of total additions, highlighting the market’s potential. Planned gray cement grinding capacities Company Name 2006 2007 2008E 2009F 2010F 2011F 2012F Torah Cement 3,330 3,330 3,330 3,330 3,330 3,330 3,330 Helwan Cement 4,500 4,500 4,500 4,500 4,500 4,500 4,500 National Cement 3,500 3,500 3,500 3,500 3,500 3,500 3,500 Cemex 5,000 5,000 5,000 5,000 5,375 6,500 6,500 Al-Amreyah+Cimpor 3,700 3,700 3,700 3,700 3,700 3,700 3,700 Titan 3,000 3,000 3,000 3,375 4,500 4,500 4,500 Suez Cement 4,200 4,200 4,200 4,200 4,200 4,200 4,200 Lafarge 10,000 10,000 10,000 10,300 10,300 10,300 10,300 Sinai Cement 1,500 1,500 1,750 3,000 3,000 3,000 3,000 Misr Cement Qena 1,500 1,500 1,500 1,500 1,500 1,500 1,500 Misr Beni Suef Cement 1,500 1,500 1,500 2,250 3,000 3,000 3,000 Arabian Cement - - - - 1,500 1,500 1,500 Madcom-Aswan - - - 750 1,000 1,000 1,000 Arab National Cement Co. (ANCC) - - - - - 1,125 1,500 Wadi Al Nile Cement Co. (WNCC) - - - - 1,375 1,500 1,500 El-Sweedy Cement - - - - 375 1,500 1,500 North Sinai Cement - - - - 125 1,500 1,500 South Valley Cement - - 875 1,500 1,500 1,500 1,500 Al-Nahda Industries - - - - - 1,500 1,500 Building Materials Industries - - - - - 1,125 1,500 Al-Wadi Cement - - - - - 1,500 1,500 Total Effective Capacities 41,730 41,730 42,855 46,905 52,780 61,780 62,530 Source: CICR Database and estimates Expected slowdown in construction activity over 2009-2010, coupled with around Utilization rate to 10 mn tons of capacity additions will ease utilization rates to 76% by 2010. De- strengthen by 2012 spite the expected pick-up in cement consumption starting 2011, utilization rate will further decline to 74% due to the huge capacity additions of 9 mn tons in that year. Yet, by 2012, utilization rate will rebound reaching 79%. Cement supply status (2006-2012) Market utilization rate (2006-2012) Cement Capacity Production Demand 100% mn tons 70 91.1% 90% 65 92.2% 84.8% 86.8% 60 80% 76.1% 78.7% 55 74.2% 70% 50 45 60% 40 50% 35 30 40% 25 30% 20 15 20% 10 10% 5 0 0% 2006 2007 2008E 2009F 2010F 2011F 2012F 2006 2007 2008E 2009F 2010F 2011F 2012F Source: CICR Database and estimates Source: CICR Database and estimates 39
    • November 11, 2008 EGYPT | CEMENT Local & export cement prices will continue increasing yet, at a decelerating rate Increased cement over 2009-2010 due to the weakened demand for cement in the local and export prices markets over the aforementioned years. However, with the expected recovery in local & international economies, local & export cement prices will start increasing at an accelerating rate over 2011-2012, yet, still below historical growth rates due to the rising competition from regional peers. Local & export cement prices* (2006-2012) Local Prices Exports Prices LE/ton US$/ton 700 120 600 100 500 80 400 60 300 40 200 20 100 0 0 2006 2007 2008E 2009F 2010F 2011F 2012F Source: CICR estimates * Local prices include transportation cost, while exports prices are ex-factory prices 40
    • November 11, 2008 EGYPT | FERTILIZERS POUNCE AND ROAR DRIVERS Rising global food demand to support the increasing The abundance of cheap natural gas prices population, and the international move towards expand- in the range of US$1.72 - 3/MMBtu com- ing sources of clean energy renders the need for fertiliz- pared with an international price of US$6.3/ ers as a key supportive industry. With the developed re- MMBtu – based on Henry Hub – as well as gion, namely Europe, restricting further set-up of environ- phosphate rocks support magnified local mental-polluting production units as fertilizers, invest- companies' margins. ments are to shift to the developing regions. With Egypt Phosphate fertilizers enjoy no government being in central geographical location, and China's slash- interventions, whether in terms of export ban ing of 30% of global fertilizers trade with its levied export or price caps; which allows for cost passing tariff, Egypt's fertilizers exports are highly valued. On the ability. local front, strong fertilizers demand is to be maintained Egypt enjoys a strategic location for export- as the GoE plans to expand the agricultural land and re- ing to different regions and strong local dis- claim an additional 150k feddans/annum. Moreover, given tribution network. the country's cheap cost of production coupled with the abundance of natural gas and phosphate rocks gives RISKS Egypt an edge in nitrogen and phosphate segments. Most notably the higher margins that the fertilizers industry enjoys compared to its global peers adds to the country's Phosphate mines are state owned, which investment potential. reflects the monopolistic stance of the gov- ernment. Good prospects in the local and export markets: Against The GoE intervenes in the nitrogen fertilizers the backdrop of the growing global food needs, and increas- sector (mainly companies located outside ing bio-fuels demand the global fertilizers consumption is ex- the free zones) in the form of export ban and pected to maintain its strength. In the local scene, a sustained price caps. strong demand growth is anticipated driven by the expanding Sulfur - a basic raw material for sulfuric acid agricultural land. production - is imported which subjects the industry to FX risk. Cheap factors of production and availability of raw mate- rials are key strengths: With significant price differential that KEY PERFORMANCE INDICATORS Egypt offers to investors, as natural gas prices being main- tained at US$1.25 – 3/MMBtu against the international prices Fertilizers production CAGR (05-08,%) 10 of US$6-7/MMBtu, and the cheap abundant phosphate rocks at LE250/ton (less than US$46/ton) in 1Q08 versus N production CAGR (05-08,%) 11 c.US$200/ton – based on Casablanca benchmark –total fertil- Fertilizers exports CAGR (05-08,%) 26 izers production reached 15.8 mn tons in FY07/08 (of which 7.5 mn tons targeted the export markets) up from 11.2 in Added annual capacities (2010,mn tons) 2.5 FY05/06 (of which 2.8 mn tons targeted the export markets). Such growth was namely due to the Greenfield capacity of 3.9 mn tons/year from both, Helwan and Alexandria fertilizers COMPANY COVERED PAGE # companies. EFIC 119 Still more investment to come on stream: Egyptian Basic fertilizers Industries (EBIC) will launch its operations in 4Q08, MUHAMMAD EL EBRASHI with its full potential in 2009 with an annual ammonia produc- MUHAMMAD.ELEBRASHI@CICH.COM.EG tion capacity of 750k. In addition the Canadian fertilizers com- pany, Agrium is expected to start production by 2010 with a SECTOR PERFORMANCE | FY04/05-07/08 total annual capacity of 2.2 mn tons for urea and ammonia combined. Moreover, Egypt's fertilizers portfolio will include Production Exports Imports Consumption Sales k tons 18,000 DAP/MAP production as the result of the growing global need 16,000 and the availability of the required feed stock. 14,000 12,000 To capitalize on higher margins: With EBITDA margins reg- istering higher levels than its global peers in both, nitrogen 10,000 and phosphate fertilizers, Egypt has an edge in supporting 8,000 future investments. As for nitrogen, free zone companies' 6,000 EBITDA margin average 80% versus an average of 30% for 4,000 the global margin; while phosphate fertilizers bear a local in- 2,000 dustry average EBITDA margin of 30% compared with 20% - 2004/05 2007/08 for the global margin in 2007. 41
    • November 11, 2008 EGYPT | FERTILIZERS MARKET STRUCTURE Egypt represented 7.5% of the global fertilizers market and 4% of the phosphate A dominating nitrogen fertilizers segment. Total fertilizers market in Egypt reached 12.4 mn tons in market FY06/07, up 13% over FY05/06, of which phosphate fertilizers consumption con- tributed 1.6 mn tons. It is worth noting that the recommended NPK ratio is 1:1/3:1/6 ton for nitrogen (N)*, phosphate (P)**, and potassium (K), respectively. Egypt's fertilizers market structure Source: Higher Council for Fertilizers There are currently 10 fertilizers-producing companies; of which 8 are nitrogen- A concentrated mar- based, while 2 are phosphate-based entities. Concerning the former, 3 compa- ket structure in both, nies are located in the free-zone – by which their production is mostly targeting nitrogen and phos- the international market – while the remaining 5 companies are directing their phate fertilizers sales to the local market. It is worth noting that the nitrogen-based market is con- centrated with the production of the top five companies (Abu Qir, Delta, EFC, Alexandria, Helwan) dominate 97% of total production in FY07/08. As for phos- phate fertilizers, EFIC Group leads the market with 64% market share of total local sales of phosphate fertilizers in FY07/08, including its subsidiary SCFP. It is worth noting that EFIC's stand-alone market share amounted to 47%. Egyptian phosphate fertilizers producers Company Ownership Production Establishment Year Nitrogen Helwan Fertilizers Private Ammonia and urea 2004 Alexfert Private Ammonia and urea 2003 El Delta Fertilizers Company Public Ammonium nitrates and urea fertilizers 1999 Egyptian Fertilizers Company Private (100% owned by OCI in 2008) Ammonia and granular urea fertilizers 1998 Abu Qir Fertilizers & Chemical Industries Public Ammonia, urea, ammonium nitrate fertilizers 1976 Ammoniom nitrate, coal tar, and metallurgical El Nasr Coke and Chemicals Company Public 1964 coke Egyptian Chemical Industries (Kima) Public Ammonium nitrate and urea fertilizers 1956 El Nasr Fertilizer and Chemicals (SEMADCO) Public Ammonium nitrates and urea 1946 Phosphate Suez Company for Fertilizers Production Public - (99.8% owned by EFIC) Soft and granulated SSP and TSP 2007 Polyserve for Fertilizers and Chemicals Private Soft and granulated SSP and TSP fertilizers 1990 Soft and granulated SSP and TSP fertilizers, Private- (99.03% owned by Polyserve for fertilizers and Abu Zaabal Fertilizers and Chemicals phosphate rock, phosphoric acid and sulfuric 1947 Chemicals) acid Egyptian Financial & Industrial (EFIC) Public Soft and granulated SSP fertilizers 1929 Source: CICR database * All nitrogen fertilizers weights are based on a (15.5%) basis. To translate urea to 15.5%, its weights had to be multiplied by a factor of (3). As for ammonium nitrate and ammonium sulphate, their factors are (2.16) and (1.33), respectively. ** All phosphate fertilizers weights are based on SSP (15%) basis. To translate TSP to SSP, its weights have to be multiplied by a fac- tor of 2.46. 42
    • November 11, 2008 EGYPT | FERTILIZERS MARKET KEY DEVELOPMENTS SUPPLY & DEMAND PATTERN Over FY04/05–07/08, local market production outpaced local consumption. Over Nitrogen fertilizers' the same period, nitrogen fertilizers production increased by an AAGR of 11.9% production covers recording 14.3 mn tons in FY07/08 versus 11.7 mn tons of consumption which consumption, yet due increased by an AAGR of 5.8%. Yet, due to the price cap set by the GoE to price capping a (excluding companies in free zones), local fertilizers manufacturers endeavored considerable volume to increase their exports at the expense of their local sales. In FY07/08, exports is directed to the in- amounted to 49% of nitrogen fertilizers production. As a result of the excessive ternational market fertilizers export activities, manufacturers persistently did not meet local demand. Thus, the nitrogen fertilizers market was characterized with deficits, which grew by a CAGR of 37% during FY04/05–07/08, reaching a total deficit of c. 4.3 mn tons in FY07/08. Egypt's nitrogen fertilizers market Production Exports Imports Consumption Sales k tons 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 - 2004/05 2007/08 Source: Higher Council for Fertilizers Phosphate fertilizers Over FY04/05-07/08 phosphate fertilizers consumption outpaced production in enjoy higher contribu- terms of growth, with 4-year AAGRs of 11.9% and 7.9%, respectively. Yet, local tion in local sales ver- production covered 1.2x of consumption with local sales contributing 72% to the sus total production, local phosphate fertilizers market in FY07/08. Such tendency towards satisfying since no price cap- local market needs is confirmed through the declining imports by a CAGR of 4% ping is applied and increased exports levels by 5% over FY04/05-07/08. Egypt's phosphate fertilizers market Production Exports Imports Consumption Sales k tons 1,600 1,400 1,200 1,000 800 600 400 200 - 2004/05 2007/08 Source: Higher Council for Fertilizers 43
    • November 11, 2008 EGYPT | FERTILIZERS MARKET DYNAMICS DEMAND DRIVERS Rising fertilizers consumption is fueled by population growth - which followed an Population growth annual rate of 2% over FY03/04-07/08 - creating a growing need for food. The strong link between fertilizers consumption and population growth is illustrated in the high correlation coefficient of 0.731 over the same time span. To cope with the increasing need for food, agricultural land has been witnessing Expanding agricul- a rising pattern reaching 8.37 mn feddans in FY06/07. Consequently, demand for tural land fertilizers expanded by a 3-year CAGR of 4.1%, with phosphate fertilizers grow- ing by 6.4% over the same time span (FY03/04-06/07), surpassing the industry's growth rate. It is worth mentioning that phosphate fertilizers are highly associ- ated with preparing the soil in reclaimed areas, especially those plots located in the desert areas. (The GoE's plan is to reclaim 150k feddans p.a.) In addition, phosphate fertilizers are utilized during the plant development phases and in plant cells division. Also, agricultural land and fertilizers demand exhibited a strong correlation coefficient of 0.717 over FY03/04-06/07. Demand for all fertilizers is seasonal. Crops are cultivated in three agriculture Demand seasonality seasons: (1) Winter crops extend from November to May; (2) Summer crops extend from March to September; and Nile crops extend from May to October. Although Summer and Winter cropping zones are almost equal in terms of area (6.4 mn feddans for Summer and 6.6 mn feddans for Winter), the former are characterized by their heavy consumption of nitrogen fertilizers. Yet, the case is different for phosphate fertilizers, with consumption being heavier during Septem- ber-December. Moreover, phosphate fertilizers are required during the early stages of treating and preparing alkaline soils in Upper Egypt (East Owaynat) and North Sinai. 44
    • November 11, 2008 EGYPT | FERTILIZERS SUPPLY DRIVERS Feedstock availability: Natural gas: The potential for growth in the nitrogen fertilizers industry is heavily an increasing pool of dependent on the availability of feedstock, namely natural gas. Egypt enjoys an natural gas reserves increasing level of proven natural gas reserves which reached 2,060 bn cu.m in and a broad base of 2007. phosphate rocks, yet Phosphate rock: Phosphate rock and sulfuric acid are the basic raw materials sulfur is imported for phosphate fertilizers production. In terms of volume, the former contributes 62-66% and the latter 34-38% of total inputs in SSP production – the main phos- phate fertilizer produced in Egypt. Phosphate rock is extracted from the Red Sea coast with the government-owned El-Nasr Mining Co. controlling 80% of the mar- ket and Red Sea Co. and National Phosphate Co. (both private sector) producing 20%* collectively. It is worth noting that Egypt's phosphate rocks production ca- pacity was close to 2.4 mn tons in FY06/07, of which 1.6 mn tons were P1. It was reported that around 80% of P1 phosphate rock grade is exported, while the remaining is used by the local fertilizers industry**. Sulfuric acid: Sulfuric acid is a key input for phosphate fertilizers production, of which sulfur (the main raw material for its production) is imported. Starting 2004, sulfuric acid demand by other industries (such as water desalination projects, petrochemicals, glass, and pharmaceuticals) began to pick up. Hence, to achieve greater diversification, integration, and to meet the rising local needs, EFIC ex- panded its sulfuric acid production line in SCFP with an added annual capacity of 425k tons, which commenced its operations in the second half of December 2007***. In order to meet up with mounting demand, both, expansions and green-field de- Added capacities velopments took place in the fertilizers industry. Helwan fertilizers and Alexandria boosts supply further Fertilizers companies were established in 2006/07 adding 2.4 mn/year of produc- tion increasing to 3.9 mn tons/year after the Helwan's plant came to its full poten- tial. EFIC increased its PSSP production capacity by 33% in 2005 to reach 1,200k tons/year. Moreover, the new SCFP ammonium sulphate production line started operation in 2007 with an annual capacity of 150k tons. COST-RELATED DRIVERS Although the GoE scaled feed stock prices up to US$3/MMBtu, Egyptian compa- Price capping for ni- nies are paying US$1.25 – 3/MMBtu, which is still less than there international trogen fertilizers pre- peers paying US$6 – 7/MMBtu. Accordingly, natural gas cost Egyptian fertilizers vents cost passing plants 40 – 60% of total production costs compared with the international range of 75 – 90%. It is worth mentioning that an increase of US$1 MMBtu should re- sult in a US$32.5 increase in ammonia per ton cost; thus emphasizing the cost advantage the Egyptian market offers to global investors. Although the GoE's decision to increase the natural gas prices starting September 2007 was applica- ble on local companies, excluding some companies in the free zones, affected their margins. This is because some of them have price caps by the GoE and/or prevented from exporting as highlighted later. However, some companies negoti- ated some export contracts to catch the hike in fertilizers prices. * An interview with Eng. Yehia Kotb, Chairman, EFIC. ** An interview with Eng. Samir Abdul Naby, Production Manager, Abu Zaabal Fertilizers. *** Al-Alam Al-Youm newspaper, December 25, 2007. 45
    • November 11, 2008 EGYPT | FERTILIZERS Nitrogen fertilizers financial highlights Sales - L Gross Profit - L EBIDTA - L NI - L US$ Gross Margin - R EBIDTA Margin - R Net Margin - R 450,000 70% 400,000 60% 350,000 50% 300,000 40% 250,000 200,000 30% 150,000 20% 100,000 10% 50,000 - 0% 2006 2007 Source: Abu Qir Fertilizers Company financials …Energy prices are On a different note by Minister Rachid Mohamed on October 16, 2008, the GoE put on quot;holdquot; will temporarily freeze prices some industries pay for energy to help Egypt's economy withstand a global financial crisis. Phosphate rocks and sulfuric acid, combined, represent the bulk of total cost of On the other hand, phosphate fertilizers production. Despite the c. 50% increase in local phosphate phosphate fertilizers rock prices in 2007 vs. 2006, it is still lower than international prices (based on enjoys cost passing North Africa FOB export price). In 1H08, phosphate rocks were in the vicinity of ability, since no price LE 300/ton. As for sulfuric acid, it depends on the cost of imported sulfur, which capping is imposed increased by around 75% in 2007 vs. 2006. In 1H08, sulfur prices were in the range of US$700/ton. Such price hikes were driven by the rapid growth of the military industry, which created heavy international demand for sulfuric acid. In contrary to nitrogen fertilizers, phosphate fertilizers enjoy no price caps levied by the GoE, which allows producers to pass the cost to end customers. Indeed, EFIC's margins have expanded in 2007 versus 2006. Phosphate fertilizers financial highlights Sales Gross Profit EBITDA NI Gross Margin EBITDA MArgin Net Margin 600,000 40% 35% 500,000 30% 400,000 25% 300,000 20% 15% 200,000 10% 100,000 5% 0 0% 2006 2007 Source: Egyptian Financial and Industrial Company financials (consolidated) 46
    • November 11, 2008 EGYPT | FERTILIZERS REGULATORY DRIVERS The government’s spree to unify domestic and international prices has come to An increased nitrogen impact the fertilizers industry. Prime Minister, Dr. Ahmed Nazif, approved a 100% fertilizers prices increase in nitrogen fertilizers prices effective March 1, 2008. Accordingly, the GoE will save LE 800 – 850/ton from the new price scheme, which will be used to subsidize imported nitrogen fertilizers, which we reckon will be partially sourced from companies located in Egypt's free zones. The GoE is moving with steadfast steps towards the deregulation of the nitrogen PBDAC restructuring fertilizers market. The Principal Bank for Development & Agriculture Credit (PBDAC) will increase its capital from LE 1.8 bn to LE 3 bn following the new Parliamentary cycle approval for changing the bank's name to the Egyptian Agri- culture Bank, as a public specialized bank. Following the bank's regulatory law, the bank can establish agricultural projects including fertilizers. It is worth men- tioning that the bank has finalized a study to establish a new nitrogen fertilizers project with expected investment cost of US$500 mn in Upper Egypt and with annual production capacity of 2.2 mn tons. It is believed that changing the bank's bylaws is one step towards diminishing its monopolistic distribution role in the local fertilizers market. Moreover, involving the bank in fertilizers manufacturing projects will increase the available capacities for the local market. Consequently, the export ban might be unleashed soon. This will give chance for local compa- nies banned from exporting. Nitrogen local market prices post 100% price Nitrogen fertilizer price mechanism (LE/ton) ex factory price Pre GoE decision Additions to ex factory price Post GoE decision Customer price - Post GoE decision LE/ton Factory 1,800 1,600 Pre-Government Post-Government 1,400 Decision Decision 1,200 LE 550-650 LE 700-800 1,000 800 PBDAC 600 400 200 Pre-Government Post-Government Decision Decision 0 Prilled Urea Granulated Urea Zinc Urea Ammonium Ammonium Urea Magnesium Nitrate Sulphate LE 1,500 - 1,650 LE 700 - 800 Consumer Source: High Council of Fertilizers, CICR Source: CICR database 47
    • November 11, 2008 EGYPT | FERTILIZERS FUTURE OUTLOOK GROWING DEMAND Against the backdrop of the growing need for food coupled with the GoE's plan to reclaim an additional 150k feddans p.a. – which requires the utilization of fertiliz- ers, namely phosphate – the demand for fertilizers is expected to follow a strong growth pattern of 5-year CAGR of 4.1% and that of phosphate to follow an even higher growth of 12.7% over FY06/07-11/12. Future local fertilizers demand Nitrogen fertilizers demand Phosphate fertilizers demand mn tons 20 20 5-year CAGR 18 18 15.80 16 16 5.2% 2.17 14 14 12.36 7.0% 12 12 1.56 10 10 8 8 13.63 5.0% 6 6 10.80 4 4 2 2 0 - 2006/07 2011/12 Source: CICR estimates CAPACITIES Within the framework of the GoE's strategy to expand the phosphate fertilizers New capacities on industry, fresh investments are expected to come on stream confirmed by the stream for the final approval granted by the Minister of Trade & Industry to establish a phosphate products as well as fertilizers industrial zone in Aswan, including phosphate rock mines and 12 new raw materials to en- phosphate fertilizers plants. The first phase includes 5 plants with an annual ca- sure vertical integra- pacity of 3 mn tons and an investment cost of LE 1 bn.* It is worth highlighting tion that vertical integration with ensure a cost-efficient operation. For example, Indo- Egyptian Fertilizers Company is building a phosphoric acid solution plant and sulfuric acid facility in Edfu with respective capacities of 1.5k/day and 4.5k/day to commence operations by 2010.** Future local fertilizers Ammonia Urea Other N Fertilizers PSSP Other P Fertilizers tons 18,000,000 16,000,000 1,055k 14,000,000 1,800k Phosphate 1,055k fertilizers 12,000,000 1,440k 1,800k 10,000,000 1,440k 6,040k 8,000,000 4,610k Nitrogen 6,000,000 fertilizers 4,000,000 5,257k 4,145k 2,000,000 - 2008 2010 Source: CICR database 48
    • November 11, 2008 EGYPT | FERTILIZERS It is worth mentioning that a DAP/MAP project is expected to be launched on two phases, the first is due in 2010, while the second is due in 2013. Thus increasing the production capacity for phosphate fertilizers starting the respective years. PRICES Starting 2008, sustained high demand for phosphate fertilizers (driven by the strong demand for bio-fuels due to the flaring-up of oil prices) coupled with up- beat sulfur consumption (triggered by the tension in the Middle East) pushed prices to enormously high levels. According to EFIC, GSSP export prices reached a current level of c. US$400/ton, while PSSP local prices recorded LE 1,800/ton, hence driving up prices to much higher levels of US$299/ton and LE 1,101/ton on average for 2008 vs. US$91/ton and LE 512/ton in 2007, respec- tively. Prices are expected to reach their peak by 2010 and cool off starting 2011 when new capacities come on stream. Against the backdrop of an anticipated slowdown in oil prices growth pattern; a reduced pace of growth for bio-fuels de- mand; and the expected expansions in phosphate fertilizers capacities, phos- phate fertilizers prices are to maintain their high level, yet growth is to follow a slower pace over 2009-2012. On the nitrogen fertilizers side, the local ex-factory prices will be locked for a 2- year period to align with GoE's directions to maintain energy prices; however, once the situation is clearer, we expect ex-factory fertilizers prices to follow the implementation of the previously announced energy plan, with a possible in- crease in energy prices by 2010. Urea price forecast PSSP and GSSP price forecast – based on EFIC prices Urea Middle East FoB price Local Urea Caped price Local Urea selling price LE/ton US$/ton PSSP local prices GSSP export prices US$/ton 1,200 200 600 180 1,000 160 500 140 800 400 120 600 100 300 80 400 60 200 40 200 100 20 - 0 0 2007 2008 2009 2010 2011 2012 2007 2008 2009 2010 2011 2012 Source: Egyptian Financial and industrial Company, IFA Source: Bloomberg and CI Capital Research estimates and CICR estimates *. Al-Ahram newspaper, January 1, 2008. ** IFC website and Higher Council for Fertilizers. 49
    • November 11, 2008 EGYPT | POULTRY CHEK-INS TO THE POULTRY INDUSTRY DRIVERS The rising consumer health awareness, ris- Poultry is considered a real support to the Egyptian Econ- ing per capita income and growing popula- omy, through providing a healthy, cheap and self-sufficient tion will further expand poultry consumption kind of protein. As Europe and Asia restrict the establish- levels. ment of poultry farms, future expansions will be shifted to GoE’s plan to locally cultivate yellow corn to South America and Africa. Egypt’s poultry industry has minimize the effect of international price witnessed a remarkable increase in production reaching fluctuations. 700k tons in 2007 up from 195k tons in 1990. Yet, still po- New International law preventing the estab- tential exists as the country’s 2007 per capita consumption lishment of poultry farms in Europe and of poultry reached 10.2 kg/annum versus a global average Asia, will direct poultry production to South America and African countries. of 12.5 kg/annum. With the country’s population growth, rising GDP/capita, and the diversification of diets the de- RISKS mand for poultry is expected to reach a per capita level of 13.4 kg/annum by 2012. As for poultry producers, the shift is towards vertical integration as to ensure a hygienic cy- The dependence on imported fodder ex- cle and a cost-efficient operation. poses producer to international price fluctua- tions. Rising Consumption/capita in developing countries: While Entrance of small-scale producers during per capita consumption in high income countries increases only peak prices disrupts the market balance, marginally, rising incomes and the subsequent diversification of and leads to price decline. diets led to a shift towards significantly higher white meat con- Disease breakout, as Avian Influenza (AI), sumption in developing countries. impacts supply and demand for poultry. Tariffs reduction on Imported frozen chicken Poultry is still threatened by AI outbreak, yet is becoming intensifies competition. more immune: The advent of the Avian Influenza (AI) at the KEY PERFORMANCE INDICATORS end of 2006 heavily impacted poultry consumption and resulted in huge losses for poultry producers and the farms’ owners. Poultry production (2007, k tons) 700 Industry experts expect that it will not be before 2010 when the occurrence of such disease will end, yet the industry’s devel- Local consumption/capita (2007,kg 10.2 oped immune system should alleviate the impact of the AI dis- p.a.) ease. Global consumption/capita (2007,kg 12.5 p.a.) As fodder is a key contributor to cost, the witnessed de- cline in its prices is an advantage to poultry suppliers: As Current fodder prices (LE/ton) 1,200 prices of yellow corn (the main component in poultry fodder) is strongly linked to the global oil prices—as factories shift to yel- MARY MILAD MARY.MILAD@CICH.COM.EG low corn for bio-fuel products as a cheap substitute for oil as oil prices kept rising—the current decline in oil prices decreased fodder prices reaching around LE 1,200/ton. The anticipated low levels of oil prices is expected to maintain fodder prices at reasonable levels, thus, enhancing the companies margins. SECTOR PERFORMANCE | 2004-2007 Moreover, the GoE’s plan to locally cultivate yellow corn will Consumption/capita Growth rate minimize the effect of international price fluctuations. Kg/annum 14 10% 8.9% 12 10.2 8% 9.8 The industry’s shift towards vertical integration: To ensure 9.0 10 8.5 6% 8 the implementation of a more hygienic poultry cycle in order to 5.9% 6 4% avoid the outbreak of the AI disease, poultry companies are 2.4% 4.1% 4 2% targeting vertical integration. Moreover, such integrated busi- 2 ness model ensures a more cost-efficient operation. Thus, in- 0 0% 2004 2005 2006 2007 vestment in slaughterhouses started to kick-off with “Al Wa- taneya Poultry” planning to establish 5 slaughterhouses with a capacity of 500K chicken/day. 50
    • November 11, 2008 EGYPT | POULTRY MARKET HIGHLIGHTS Expanding produc- Since 1990, the poultry industry has witnessed a remarkable increase in pro- tion levels duction on the local level, as poultry companies increased their production by almost 301%, reaching 700K tons up from 195K tons over 1990-2007, following a CAGR of 7%. Yet, still Egypt’s production represents a minor share of 1% of global poultry production. Local consumption followed the same increasing trend as that of Global Mar- Growing consump- ket. Consumption per capita reached around 10.2 Kg/annum in 2007 up from tion, yet, still 7.9 Kg in 2000; reflecting the fact that the increase in poultry meat consumption untapped potential mainly depends on the increase in income and not only related to population. Yet, still the country's per capita consumption is below the global average of 12.5 kg/annum. RECENT DEVELOPMENTS Though local production is currently sufficient to cover local consumption, how- Slashing import ever, around 25-30K tons of frozen chickens are imported from Europe and tariffs as a tool to Brazil. Following the protection of the GoE to the industry, over 1986-2007, reduce monopolistic through the ban it imposed on imports, in July 1997 the ban was lifted up and power of suppliers imports were allowed with an 80% tariff (plus an additional charge of 4%) on imported frozen poultry and poultry products. Moreover, in September 2004 tariffs slashed to 32%, and then further reduced to 30%. Said act, is a govern- ment tool to control monopoly imposed by local producers on poultry prices. Hence, profit margins attract traders, who were unable to neither invest in poul- try business nor bear the losses encountered in case of any disease outbreak; consequently trade is the optimum option to enter the poultry business. Such practice created an over supply, leading to a drop in selling prices. Ex-farm prices LE/KG 7.0 6.0 5.0 Slashing import tariff from 80% to 32% in 4.0 3.0 2.0 1.0 0.0 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source: Poultry Industry Experts 51
    • November 11, 2008 EGYPT | POULTRY Poultry is considered a strategic industry – as the income of many families in The advent of the AI Egypt depends on this industry – in addition to its importance as a source of disease heavily hit protein to the Egyptian families. However, the advent of the Avian Influenza the industry (AI) heavily impacted consumption and resulted in huge losses for poultry pro- ducers and the farms’ owners. It is worth noting that losses encountered by AI disease during the end of 2006 and the beginning of 2007 due to the AI dis- ease reached around LE 3-4 bn (hitting 50% of parent chickens flocks and around 70% in layers flocks). Moreover, consumers started to shift to substi- tutes as fish and meat, as a safe meal to ensure their required protein intake. The impact of AI, which occurred during end 2006, was remarkable later in 2007, as consumption per capita growth dropped drastically from 9% to 4%. Local consumption/capita Kg/annum Consumption/capita Growth rate 10.5 10% 10.2 8.9% 9% 10.0 8% 9.8 7% 9.5 5.9% 6% 9.0 9.0 5% 4% 4.1% 8.5 8.5 3% 2.4% 2% 8.0 1% 7.5 0% 2004 2005 2006 2007 Source: Poultry Industry Experts MARKET STRUCTURE The poultry industry in Egypt is subdivided into 3 main segments: (1) commercial Commercial and Chickens; (2) Balady Chickens; and (3) other poultry. Both commercial & balady Balady Chickens are chickens are, in turn, subdivided into broilers & Layers leading to the following the main segments four sub-segments: Commercial Broilers: This segment concerns chickens (specifically interna- tional breeds) which are reared for the production of white meat. Commercial Chicken Layers: This segment concerns chickens (specifically in- ternational breeds) which are reared for the production of eggs for consumption. It partially contributes to the production of white meat. Balady Chicken Broilers & Layers: This segment concerns local breeds reared by individuals in their backyards. Other Poultry: This segment concerns birds, other than chickens, raised for meat production and it includes; ducks, geese, turkeys and pigeons. It is further subdivided into commercial and backyard operations 52
    • November 11, 2008 EGYPT | POULTRY There are many players in the market; varying from small-scale producers and A fragmented market, farmers to well established companies. Moreover, poultry business consists of yet, five key players several production phases; companies’ contribution to the market vary from control the field one stage to another; accordingly, the contribution of market players, on aver- age, can be summarized in the below pie chart. Poultry market players Other Cairo Players Poultry 38% 30% Wataneya Poultry Misr Arab Wadi 4% Poultry Holdings 19% Dakahleya 4% Poultry 5% Source: Poultry Industry Experts MARKET DYNAMICS MARKET DYNAMICS Socio-economic Market-related Fodder-related Drivers Factors Factors Income/Capita Seasonality Fodder Availability Population Diseases Fodder Prices Substitutes 53
    • November 11, 2008 EGYPT | POULTRY SOCIO-ECONOMIC DRIVERS As the level of income increases, new social levels enter into the poultry con- Income/capita suming population, hence expand consumption. Income/capita vs. consumption/capita LE Kg/annum Income per Capita Consumption per Capita 6,000 12.0 5,000 10.0 4,000 8.0 3,000 6.0 2,000 4.0 1,000 2.0 0 0.0 2003 2004 2005 2006 2007 Source: Poultry Industry Experts It has been witnessed that consumption of poultry increased over years with Population the growing population, as demand for poultry and population illustrate high correlation co-efficient of 0.94. Population vs. consumption mn ton Consumption Population 900,000 76 74 800,000 72 700,000 70 600,000 68 500,000 66 400,000 64 300,000 62 200,000 60 100,000 58 - 56 20 20 20 20 20 20 20 20 00 01 02 03 04 05 06 07 Source: CICR Estimates 54
    • November 11, 2008 EGYPT | POULTRY MARKET-RELATED DRIVERS Poultry consumption is seasonal, as increased consumption levels are wit- Seasonality of nessed during religious occasions and summer vacations. On the supply level, demand and Sup- the global production of fodder, which is the main input in poultry industry, vary ply according to climate conditions under which seeds (yellow corn and soybean) are cultivated. The emergence of diseases, such as Avian Influenza, impacts both supply and Diseases impact demand for poultry, evidenced by the decline in global production and consump- both demand and tion which occurred during 2003 and 2006 as a natural result of the discovery of supply AI cases. It is worth highlighting that the outbreak of the disease was witnessed late in 2006, thus, impacting 2007 levels. Global demand vs. supply Demand Supply Demand Growth Supply Growth 000' Tons 100,000 5.00% 80,000 4.00% 60,000 3.00% 40,000 2.00% 20,000 1.00% - 0.00% 2000 2001 2002 2003 2004 2005 2006 2007 Source: FAO STAT Database Substitutes The rising consumer health awareness and the discovery of FMD (Foot and Mouth Disease) and BSE (Bovine Spongiform Encephalopathy, commonly known as Mad Cow Disease (MCD)) cases negatively affect red meat consump- tion, yet, boost the demand for poultry and fish – as they represent perfect sub- stitutes for meat in terms of protein intake. Nevertheless, the occurrence of AI disease impacts the demand for poultry and expands consumption of substitutes – as meat and fish. FODDER-RELATED DRIVERS Fodder constitutes the bulk of poultry production cost; the production of fodder relies, in turn, on yellow corn and soybean, the importation of which depends on the availability of seeds in the Global commodities market. Moreover, fodder prices are determined by commodities’ global prices. It is worth noting that yel- low corn prices is strongly linked to oil global prices as factories shift to yellow corn for bio-fuel products as a cheap substitute for oil, which justifies the tremen- dous increase in fodder prices in the first half of 2008. However, with the de- crease witnessed in oil prices, fodder prices declined reaching a current level of LE 1,200/ton; with an expectation of further decrease. 55
    • November 11, 2008 EGYPT | POULTRY Oil vs. fodder prices Oil prices Fodder prices 160 3500 140 3000 120 2500 100 2000 80 1500 60 1000 40 500 20 0 0 ec 7 Ju -07 08 A r-07 A r-08 u7 ep 7 N t-07 Ju -07 Ju -08 b- 7 b8 M 07 M -08 O -07 Ja -07 ay 7 ay 8 D -0 S g-0 A l-0 Fe -0 Fe -0 M r-0 M -0 n- n ov n n pr c a a p Ja Source: CICR Estimates & Poultry Industry Experts Most notably, as fodder constitutes around 65% of poultry total production cost, volatility of fodder prices is consequently reflected in poultry selling prices as illustrated in the graph below. Fodder vs. poultry selling prices LE/ton LE/Kg Fodder prices Selling prices 3500 12.00 3000 10.00 2500 8.00 2000 6.00 1500 4.00 1000 2.00 500 0 - n- 8 n7 ec 7 c7 7 7 pr 8 7 Ju -07 p7 8 08 ar 7 ay 7 a8 ay 8 ov 7 7 Ju -0 Ju -0 D -0 A r-0 Ap -0 Fen-0 O -0 Ja -0 Fen-0 M b-0 M b-0 M r-0 Seg-0 M -0 N t-0 Au l-0 Ja Source: Poultry Industry Experts 56
    • November 11, 2008 EGYPT | POULTRY FUTURE OUTLOOK Poultry is considered a real support to the Egyptian Economy, through providing a Anticipated decline healthy, cheap and self-sufficient kind of protein. The anticipated decline in oil in yellow corn prices will be reflected on a reduced demand for yellow corn as a bio-fuel substi- prices is a plus tute, hence a downward slope for its prices which will be mirrored on the fodder prices. Moreover, the GoE plan to cultivate yellow corn will alleviate the exposure of poultry suppliers to the volatility of international prices, enhance their margins, and attract new market players. Still the outbreak of AI represents a threat to the industry's supply and demand Still fears from the sides. As per industry specialists, the occurrence of the disease is still a risk until outbreak of AI as a 2010. Therefore, we anticipated demand to be depressed during 2009 and 2010, threat, yet it is an- yet, it will resume higher growth levels throughout the remaining period of our fore- ticipated to end by cast. Given the growing population rate and increasing income per capita, poultry 2010 consumption is expected to grow over 2008-2012 by an average of 7.8% annually to reach a per capita consumption of 13.4 Kg/annum by 2012 Future Consumption 000 ton Consumption Growth rate 1,200 12.0% 1,000 10.0% 800 8.0% 600 6.0% 400 4.0% 200 2.0% 0 0.0% 2006 2007 2008 2009 2010 2011 2012 Source: CICR Estimates More integration is To ensure the implementation of a more hygienic poultry cycle in order to avoid the anticipated outbreak of the AI disease, poultry companies are targeting vertical integration. Moreover, such integrated business model ensures a more cost-efficient operation. Hence, investment in slaughterhouses started to kick-off with “Al Wataneya Poul- try” planning to establish 5 slaughterhouses with a capacity of 500K chicken/day. 57
    • November 11, 2008 EGYPT | REAL ESTATE & MORTGAGE FINANCE DRIVERS SHELTERS ARE A MUST Given the strong ties linking the real estate market with Growing population, namely urban, coupled the economy, the anticipated economic slowdown will be with growth in marriages are key engines to the expanding residential demand. reflected on real estate prospects, which owes much of Rising real GDP/Capita enriches wealth ac- its boom to the boost in high-end segment demand. Yet, cumulation activities, which acts as a poten- the cool-off in raw materials prices along with an ex- tial for real estate demand. pected decline in mortgage lending rates will shape up an The availability of land for projects develop- affordable product to the middle-income group; thus, ment. help materialize its unmet demand, and alleviate the ex- The unmet demand, namely in the medium pected simmering down of the high-end demand which is to lower income classes represents an op- on the brink of saturation. Retail, is another key segment portunity for developers in these categories. driven by the GoE's commitment to support local invest- Foreign ownership is allowed. ments – namely SMEs – and building commercial and Declining raw materials prices will increase industrial zones in many governorates, thus, highlighting affordability of real estate units for middle the positive prospects of office and commercial seg- and lower income classes, hence will ex- pand their demand potential. ments – which are still undersized. Moreover, the highly competitive property prices in Egypt versus its regional peers may foster foreign investments. RISKS Developers are to weather the storm with a solid ground: The underdeveloped infrastructure and trans- Developers are expected to withstand the anticipated slow- portation facilities act as a limitation for po- down in the real estate market with a much solid ground than tential real estate investments. earlier in the decade, capitalizing on their sell-off plan model. The undeveloped mortgage finance scheme limits its full application. Other drivers may expand the added supply units beyond Lower oil prices might affect the liquidity flow- the completion of outstanding projects: The completion of ing into the real estate from the GCC. outstanding projects is expected to ensure growth in supply. KEY PERFORMANCE INDICATORS Yet, the negative sentiments for the financial market, may act as a potential for liquidity transfer from equity markets to the Av. annual added residential urban demand 508 perceived safe real-estate market. Moreover, the expected (04-07,k units) growth in real GDP/capita leads to wealth accumulation and Av. annual added residential urban supply 134 expands demand for real estate. (04-07,k units) Added urban supply units 442 Mortgage scheme development enhances affordability: (2010,k units) The anticipated improvements in the mortgage scheme and Cairo average residential selling prices 1,006 the expected decline in mortgage lending rates along with the (US$/sqm) cooling off in raw materials prices are expected to create af- MENA average residential selling prices 3,068 fordable residential units for the middle-income group. Hence, (US$/sqm) alleviate the expected cool off in high-end demand. COMPANIES COVERED PAGE # A bright side for retail: The GoE's commitment to support Nasr City H&D 135 local investments – namely SMEs – and building commercial Palm Hills Developments 149 and industrial zones in many governorates highlights the po- tential for office and commercial segments, which are still TMG Holding 157 undersized. MUHAMMAD EL EBRASHI MUHAMMAD.ELEBRASHI@CICH.COM.EG Highly competitive prices: The recent reforms that helped SECTOR PERFORMANCE | RESIDENTIAL SUPPLY streamlining the process of property purchase in Egypt, facili- tating the purchases for overseas buyers, may render the Luxury Medium Lower Cost country's highly competitive real estate prices, compared to its Additional Units 140,000 regional peers, as a base to foster foreign investments. 120,000 100,000 80,000 60,000 40,000 20,000 - 2004/05 2005/06 2006/07 2007/08 58
    • November 11, 2008 EGYPT | REAL ESTATE & MORTGAGE FINANCE KEY MARKET FACTS The strong ties between real estate and economic performance drove up real Real estate bears estate investments by 77% over FY03/04-07/08 – the period when the economy strong ties with the was booming. Egypt's strengthening economy prompted investors to undertake economy residential, office, and retail developments, with total real estate investments reaching LE 13 bn in FY07/08, with Gulf investors being at the forefront of a con- siderable number of developments. Real estate investments versus economic growth Real Estate Investment Real Estate Growth GDP Growth 14,000 40% 35% 12,000 30% 10,000 25% 8,000 20% 6,000 15% 4,000 10% 2,000 5% - 0% 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 Source: Central Bank of Egypt bulletin Despite the dramatic increase in real estate prices, they are still much lower com- Highly competitive pared to regional peers, hence adding to the sector's potential. prices Average selling prices US$/sqm during 2008 Cairo MENA average US$ per s.qm 6,000 5,175 5,000 4,000 3,068 2,960 3,000 2,000 1,006 1,000 - Average office sales price Average residential sales price Source: Bank Audi 59
    • November 11, 2008 EGYPT | REAL ESTATE & MORTGAGE FINANCE MARKET DEVELOPMENTS Sliding Phase Recovery Phase An Uptrend 2000 - 2003 2004 - 2005 2006 - Current * The real estate market entered a * Real Estate started its recovery. * Launch of the Real Estate tax law downward phase. * High-end supply outweighed demand. * Intense development of new urban * Growing real estate market. communities. * Depreciated real estate prices. * Appreciated real estate prices. * Influx of international developers. * Weak real estate demand. * Strong real estate demand. * Appreciating land and property prices. * The initiation of the mortgage scheme * Mortgage law was put into effect. * Increasing rental yields. concept. * Strict foreign ownership regulations. * The first two mortgage companies started * Demand maintained its strength. operation. * Banks started to offer household credit to * Banks started to offer seven to ten years loans. finance residential ownership. * Laxed foreign ownership regulations. * The establishment of the Egyptian Company for Mortgage Refinancing. * Reduction in property tax from 46% to 10%. * Reduction of property registration fees from 12% of property value to a max of LE 2000 per property. * Increasing number of financing institutions. * Structural gap. Source: CI Capital Research Positive sentiments The buoyant sentiment surrounding Egypt’s real-estate market growth coupled coupled with a with a strengthened economy laid solid grounds for further expanded real-estate strengthened econ- investments. With the announcement of billion of dollars worth of emergent pro- omy encouraged for- jects including residential, offices, commercial and touristic projects that were eign investments in- introduced to the market through local and foreign investors, Egypt is introduced flow to a new era of intense activity designed to propel it to the global spot light. Led by GCC invest- High oil prices have resulted in a dramatic increase in the wealth of the major oil ment inflows which producers. The GCC in particular are generating huge current account surplus were further fostered reaching US$210 bn in 2007; which finds their way through local and overseas by the boosted sur- investments. With the downturn in the US and some European housing markets, plus from high oil which has already dented their economic performance through declines in resi- prices dential investment and construction activities, along with Egypt undertaking an extensive development program, several Gulf investors have directed much of their appetite towards Egypt, developing several mega projects. Key foreign real estate developers Developer Project Investment (bn) Delivery Year Emaar New Cairo City - Cairo Gate - EGP 42.67 Master planned - 2013 Marassi - Up town Cairo Kharafi Group Port Ghalib EGP 9.20 2013 Barwa Qatamiyya EGP 7.50 2013 Qatari Diar Cairo Nile Corniche Towers project - EGP 7.65 2012 Tourist Development Al Futtaim Group Cairo festival city EGP 20.10 2011 Damac Gamsha bay - Park Avenue - Hyde EGP 107.00 2011 - 2018 Park Total EGP 194.12 Master planned - 2018 Source: CICR 60
    • November 11, 2008 EGYPT | REAL ESTATE & MORTGAGE FINANCE New Cairo communities galloped ahead on their competitive tracks and experi- The advent of the inte- enced a dramatic increase in residential property supply especially in the con- grated project con- struction of high-end properties. Commercial activity also picked up lately; how- cept and new housing ever, the office market remains untapped. Moreover, the rising flow of tourist arri- convention… vals attracted investments not only in hotels but also in integrated touristic devel- opments. Egypt's buoyant economic performance stimulated investors to set up retail developments illustrated by the inflow of hypermarkets as well as super- markets, by both international and local chains. It is worth noting that there are about c. 26 shopping malls in Greater Cairo; by which the advent of professional retailing and mall construction started in 2005 through the development of the US$1-bn City Stars investment, including a shopping mall, two hotels, cinemas, as well as residential and commercial units according to internationally accepted standards. Such witnessed investment inflow increased the number of added units; by which Residential and com- the yearly additional residential units averaged 195k units over 2004-08 com- mercial additions pared to an average of 159k units over 2000-03. Commercial activity witnessed were lifted up growth as well, however, the office market remains untapped. Estimated Urban additions for Residential Units additional Units 900,000 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 - 1995-99 2000-03 2004-08 Source: CAPMAS & CICR estimates Yet, a structural gap The bulk of inflows were concentrated in the high-end property segment whose exists spiraling development dominates headlines in the sector, while the added hous- ing units to medium and low-income inhabitants who constitute the vast majority of Egyptians are limited. As supply failed to keep apace with the rising demand of the medium and low- income housing units, the real-estate market is faced by a structural gap between the high-end property market and that of the medium to low-end segment. Estimated Urban Supply/Demand additions for Residential Units (by sector) Luxury Medium Lower Cost Additional Units 140,000 120,000 100,000 80,000 60,000 40,000 20,000 - 2004/05 2005/06 2006/07 2007/08 Source: CAPMAS & CICR estimates 61
    • November 11, 2008 EGYPT | REAL ESTATE & MORTGAGE FINANCE MARKET DYNAMICS Source: CICR SOCIO-ECONOMIC FACTORS Population growth coupled with rural urban migration is key engine for residential Population Growth demand. Egypt's population reached 74 mn inhabitants by 2007; growing with with significant urban 1.9% on average. Rural-urban migration coupled with the normal growth of urban share inhabitants pushed urban population to contribute with a share of 42.9% of total inhabitants. With the current age distribution, 50% of the population is below the age of 20, Population structure while c. 30% of the country's population lies within the age bracket of 20-39 years adds further to de- – this represents the marriage group that stimulates demand for new residential mand potential units. As for the 45-year and older age bracket, which represents around 16% of the population, it creates demand for new properties through relocating, or by buying a secondary property. Moreover, huge demand potential still lies ahead, fostered by the fact that 50% of the population is below 20 years, signaling future real-estate demand. Marriages have reached an estimated level of 669k contracts in 2007/08, and Marriages & Divorces grew at an average annual rate of 5.6% over 2002/03-2007/08. Moreover, cases of divorce have recorded 73.1k cases in 2007/08. Both, marriages and divorces create demand for residential units. Demand for property is closely tied to growth in per capita income. The rise in Per Capita Income real GDP/capita averaging 5% annually throughout FY05/06-07/08, allowed for the accumulation of wealth, hence drove up the real-estate market by an annual average of 10%. 62
    • November 11, 2008 EGYPT | REAL ESTATE & MORTGAGE FINANCE REGAULATORY FRAMEWORK Currently, the property tax law is being amended, by which all unfinished units Property tax law within the cities or in new urban areas will be subject to the property tax law. This will encourage the developers to accelerate the delivery of units to buyers. Pass- ing this law will force owners to sell their properties to avoid paying property tax. It is believed that such law will increase the property sale turnover in Egypt; thus, residential property liquidity will surge, bringing prices to more competitive levels, and accordingly expands affordability. Moreover, a tax of 2.5% is charged on money earned from a property sale. In addition to taxes of 20% on rental income with a basis threshold for taxation of LE 10,800 per annum. Recent reforms helped streamlining the process of property purchase in Egypt, Enhancing registra- facilitating the purchases for overseas buyers, and focusing investors' attention tion scheme on Egypt as a prime location for real-estate buyers as well as developers. In an effort to boost the real-estate market and expand its base, in April 2005, Allowing foreign own- Egypt revamped the property ownership law to extend identical ownership rights ership and privileges to foreigners as those enjoyed by native Egyptians. Ownership follows a freehold model with the only exception being in Sinai, where the owner- ship is based on a 99-year long lease system, usufruct system.* Although the mortgage finance scheme was initiated in 2000, it was not put in Mortgage law effect until 2004. Compared to the deferred installment system, a developed mortgage finance system makes purchasing a house more affordable for more people through longer amortization terms and lower prices, which ultimately stimulates and develops the property market. It is worth mentioning that total mortgage loans exceeded LE 2 bn in December 2007 compared with LE 1 bn in December 2006, fueling further the purchase of properties. The launch in the mortgage law was to catch the segment of population with annual salary ranging from LE 1.5 k to LE 6.2 k (22% of the population) and thus can afford to pay the 40% monthly installments of LE 0.6k to LE 2.5k. further improvements in the law could allow the mortgage finance companies and banks to address a further 20% of the population with wages in the range of LE 1 – 1.2 k month. MORTGAGE FINANCE Despite the introduction of the mortgage finance system to the market, it is still Limited application of faced with some obstacles. Red tape; the limited number of mortgage finance mortgage finance providers; and the low amount of finance offered – a ceiling of LE 5 mn - hinder scheme the efficient application of the mortgage finance scheme. Although mortgage loans experienced a two fold increase reaching LE 2.8 bn in 3Q08 vs. LE 1.9 bn in 3Q07, still it represents less than 1% of the country's GDP versus 8.1% in the UAE in December 2007. Mortgage Finance Market MFC Banks Mortgage loans as percentage of GDP (current) LE mn 4,500 1.40% 4,000 1.20% 3,500 1.00% 3,000 0.80% 2,500 2,130 2,054 1,906 2,000 0.60% 1,369 1,500 0.40% 1,067 1,000 871 1,000 714 502 0.20% 500 193 208 0 0.00% 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 Source: Ministry of Finance and Euromoney Conferences * Usufruct system: It is the right to use and exploit property belonging to another person. 63
    • November 11, 2008 EGYPT | REAL ESTATE & MORTGAGE FINANCE Currently there are 10 key major players (banks and companies) in the mortgage Rising number of finance market up from 9 in 2007. In addition, several investors, both local and players regional, showed their interest to enter Egypt's mortgage market by setting their mortgage companies. For instance, Naeem Holding is preparing to submit a re- quest to acquire a license to establish a mortgage finance company with an au- thorized and paid-in capital of LE 1 bn and LE 100 mn, respectively - pending finalization of license procedures with the Mortgage Finance Authority (MFA). In addition, Tamweel PJSC, the largest provider of real estate finance in the UAE, has announced that it has received a mortgage finance license from Egypt’s Mortgage Finance Authority (MFA) during March 2008 to launch operations in the Arab world’s most populous nation, with an authorized capital of LE 500 mn and a paid-in capital of LE 100 mn. Figure 15 Key operating Mortgage Finance Institutions Provider Available to Type of Unit Mortgage Tenor Interest Rate Max. Loan Amount Min Salary (LE) Charges Buy-To-Let Amlak Egyptians, Residential A maximum monthly 13.5%-decreasing 90% of property Min monthly salary LE 150 for application form, LE Requires Expatriates, installment of 20 value (up to LE 5 LE1,000 1000 for the appraiser, and Financer and non- years/maximum age of 65 mn) - monthly 2% administrative fee are paid Approval Egyptians years. installment can not once. exceed 40% of Egyptians, Commercial A maximum monthly 14%-decreasing 80% of property Min monthly salary LE 150 for application form, LE Requires Expatriates, installment of 20 value (up to LE 5 LE2,000 1000 for the appraiser, and Financer and non- years/maximum age of 65 mn) - monthly 2% administrative fee are paid Approval Egyptians years. installment can not once. exceed 40% of EHFC Egyptians, Residential A maximum monthly 9.3% Fixed 80% of property Min monthly salary LE150 for application form and Requires Expatriates, installment of 15 value (up to LE 2.5 LE2,000 LE1000 for the appraiser. Financer and non- years/maximum age of 65 mn) Approval Egyptians years. Taamir Egyptians, Residential A maximum monthly 10% Fixed 85% of property Single person: min 2% administrative fee from Requires Mortgage Expatriates, installment of 20 value LE18,000 annually; Total whole loan balance are paid Financer company and non- years/maximum age of 65 family income: LE24,000 once. Approval Egyptians years. Bank of Egyptians, Residential A maximum monthly 12.4% declining for 90% of property Min monthly salary 1.5% administrative fee from Requires Alexandria Expatriates, installment of 15 2 years 13% value (up to LE 5 LE2,000 & max loan whole loan balance are paid Financer and non- years/maximum age of 65 declining for 13 mn) installement is 40% of once. Approval Egyptians years. years monthly salary. Bloom Bank Egyptians, Residential Monthly installment 12.5% declining for 70% of property Min monthly salary 1% administrative fee from yes Expatriates, ranging from 5-15 3 and 5 years and value in Cairo and LE1,000 & max loan whole loan balance are paid and non- years/maximum age of 60 13% declining for other governorate, installement 40% of once (min LE 500 and max of Egyptians years. 10 and 15 years 75% of property monthly salary. LE 25K). value in new Cairo, 80% construction activities, and 45% finishing activites. CIB Egyptians, Residential Monthly installment 11.5% fixed for five 75% of property Min monthly salary LE1,000 is paid for apartments yes Expatriates, ranging from 5-15 years. 12% value (min LE 120k LE4,000. and LE2,000 for villas. In and non- years/maximum age of 60 declining for the up to LE 5 mn) addition to 0.25% is paid Egyptians years. next 10 years annually on the remaining balance of the loan & 1.5% of loan amount is paid once (max LE 30,000) at the begining of the loan and deducted from the loan balance. Egyptian Egyptians Residential A maximum monthly 8.2% 90% of property Min monthly salary LE 500 and insurance 2.5% of Requires Saudi Finance installment of 10 value LE1000 & max loan loan Financer Bank years/maximum age of 60 installement 40% of Approval years. monthly salary. Egyptian Arab Egyptians Residential A maximum monthly 9% fixed for Cairo - 85% of property Min monthly salary NA Requires Land Bank installment of 15 years for 9.6% fixed for new value LE1000 & max loan Financer cairo and 20 years for new cities installement 40% of Approval cities/maximum age of 65 monthly salary. Housing & Egyptians, A maximum monthly 13 - 14% 75% of property Max loan installement 0.1% Administrative fees. yes Development Expatriates, installment of 10 value 40% of monthly salary. Bank and non- years/maximum age of 60 Egyptians years. NSGB Egyptians Residential Monthly installment 12.5% declining for 80% of property Min monthly salary one time administrative fee Requires ranging from 5-15 5 years - 13% value (min 50k - up LE2,000 which is 1% of total loan. Financer years/maximum age of 60 declining for 10 to LE 5 mn) - Approval years. years - 13.5% monthly installment declining for 15 can not exceed years 40% of gross salary Source: CICR database 64
    • November 11, 2008 EGYPT | REAL ESTATE & MORTGAGE FINANCE Cost is now by far the most important selection criteria for the bulk of the resident The anticipated lower workforce in Egypt. The witnessed inflationary pressures within 2008 had placed inflationary levels is increasing emphasis on affordability, as rising interest rates limits an expanded to have its positive application of the mortgage finance scheme. Given the decline in CPI readings impact on the mort- starting September 2008 along with the anticipated lower inflationary levels going gage finance scheme forward, interest rates are expected to adjust to the downside, thus, would bring down with it mortgage lending rates. A fact that is expected to enhance the af- fordability of such scheme and ensures an expanded utilization. OIL PRICES The witnessed strengthening of oil prices reflected growing surpluses in oil ex- Peaking oil prices en- porting countries, namely those of the GCC region, which registered a current forced an upbeat for account surplus of US$210 bn in 2007. Oil windfall pushed upward the private the real-estate market, wealth which further boosted the recycling of the petrodollars in value added op- yet their anticipated portunities as the real-estate market of prospective destinations, including Egypt, drop is expected to thus, stretching further the demand potential as well as expanding the develop- depress such growth ers' capacities to invest in the real-estate sector. Moreover, the attractive real- estate prices compared to those in traditional markets created demand for a sec- ond-home within Egypt. However, with the anticipated decline in oil prices, GCC surplus will be depressed, and will impact their investments inflow to Egypt. Yet, FDIs in real-estate remains untapped with a minimal share of less than 1% of total FDIs inflows to the country, and a contribution of around 4% to total real- estate investments in FY07/08. Hence, we believe the impact will be limited. RAW MATERIALS The strong real-estate demand witnessed despite the hiking raw materials prices Strong demand de- – reaching a peak of LE 6,600/ton in 2008 for steel and a high of LE 462/ton in spite the hiking raw 2008 for cement – proved the strong belief of the positive prospects of such sec- materials prices, yet, tor by investors – local and international – and the outweighing of the demand with the cooling off in drivers over those of supply, resembled in the dramatic increase in real estate steel and cement prices caused by the rising steel and cement prices. Yet, the anticipated global prices still demand is economic slowdown which will be reflected on the Egyptian economy is expected expected to be de- to outweigh the anticipated decline in raw materials prices - leaving the real es- pressed tate market cushioned by the outstanding projects. DEVELOPERS' SELF-FINANCING MODEL Capitalizing on their self financing model (sell-off plan), developers are to With the de-leveraged weather the slowdown in demand on a more solid ground than during the down- standing of develop- turn that occurred earlier in the decade. Hence, reversing the previous high work- ers, they are to ing capital needs with developers’ financial leverage averaging 0.9x in 2007. weather the storm with a solid ground FUTURE OUTLOOK Depressed demand The coming two years are expected to witness a depressed demand with the for residential units, pace of growth being based upon the completion of outstanding projects. Yet, a yet, with expected more developed mortgage scheme with expected lower interest rates – following lower mortgage lend- the expected decline in lending rates as a measure to expand investments – cou- ing rates units to the pled with the cool-off in raw materials prices could allow for the entry of the mid- middle-income class dle-income class, as residential units can become more affordable. We have ac- could be affordable counted for a more conservative picture for demand on real estate to incorporate the impact of such economic slowdown. Real estate residential demand is ex- pected to grow at a decelerated rate over 2009 and 2010, and a pick-up is to fol- low afterwards. 65
    • November 11, 2008 EGYPT | REAL ESTATE & MORTGAGE FINANCE As supply mainly targets the high-end, its growth is expected to be based upon Middle-income group; completing the outstanding projects. However, the unsatisfied demand that is “every cloud has a expected to stem from the middle-income class is likely to alleviate the expected silver lining” cool-off in the high-end demand. Future additional demand and supply Additional Urban Supply Additional Urban Demand 600,000 500,000 400,000 300,000 200,000 100,000 0 2006 2007 2008 2009 2010 2011 2012 A bright side for the The GoE's commitment to support local investments – namely SMEs - and build- retail segment ing commercial and industrial zones in many governorates highlights the poten- tial for office and commercial segments, which are still undersized. 66
    • November 11, 2008 EGYPT | STEEL REBARS IS MORE LIKELY TO WITHSTAND THE DRIVERS STORM THAN FLAT STEEL Outstanding real estate projects secure Against the backdrop of anticipated downturn in the demand. global economy and a slowdown in trade activities, flat Strengthened margins. steel is expected to be more affected than rebars, as the Declining raw materials prices, coupled with former is highly involved in the export markets with 56% declining freight costs. of its sales is directed internationally in 2007. On the Removal of export ban. other hand, the demand for rebars will be secured by the Foreign companies' entry is expected to massive backlog of real-estate projects. In addition to the improve the industry's efficiency. GoE’s commitment to push further local investments through building commercial and industrial zones in RISKS many governorates which will increase the demand for the retail segment. In an effort to give local steel products a competitive edge against competition in the global mar- Heavy reliance on imported raw materials. ket, the GoE removed the LE 160/ton export tariffs on Sudden governmental decisions as impos- steel exports. Another forward move is the vertical inte- ing duties on steel exports. gration enforcement through the GoE issuance of license Anticipated slowdown in the global and lo- cal economies. for the production of billets, sponge iron and direct re- duced iron (DRI), key raw materials in steel production. KEY PERFORMANCE INDICATORS Such move should alleviate the impact of the volatile steel raw materials prices on the local product, as Egypt’s Rebars production CAGR (04-07,%) 10.8 steel industry heavily relies on imported raw materials. Rebars consumption CAGR (04-07,%) 11.6 Flat steel is expected to be highly affected: As 56% of flat Flat production CAGR (04-07,%) 6.2 steel sales is directed to the export markets, the anticipated Flat consumption CAGR (04-07,%) 10.7 global downturn is expected to highly affect the flat steel com- panies’ sales. COMPANIES COVERED PAGE # Removal of export tariffs will give steel products a com- Ezz Al-Dekheila Steel-Alex. 123 petitive edge: In mid-October 2008, the levied LE 160/ton Ezz Steel 125 export tariff on steel exports was removed, in an effort to make steel prices more competitive in the international mar- kets – against the backdrop of an anticipated global recession BASMA SHEBETA spurred by the financial turmoil. BASMA.SHEBETA@CICH.COM.EG SECTOR PERFORMANCE|REBARS2003-2008 Local industry is moving towards more integration: Egypt's heavy reliance on imported raw materials drove the mn tons Local Sales Exports Share of exports/ total sales 5.0 21% GoE to issue in 2007 four licenses for the production of billets 4.5 and sponge iron with a combined annual production capacity 18% 4.0 of 8 mn tons, and an investment cost of US$15 bn. The four 15% 3.5 winners are Ezz Steel (ES), Suez Steel Company, Tiba for 3.0 12% Iron & Steel and the Egyptian Company for Sponge Iron. 2.5 Most notably, two licenses were offered to two foreign inves- 9% 2.0 tors for the first time. With investments flowing to steel feeding 1.5 6% industry, margins are expected to improve. 1.0 3% 0.5 0.0 0% Rebars demand is to be secured by the backlog: In light of 2003 2004 2005 2006 2007 2008E the expected slowdown in real-estate demand rebars con- SECTOR PERFORMANCE|FLAT 2003-2008 sumption is to be secured by the backlog of the developers Local Sales consumption Imports mn tons mn tons projects. Yet, with the anticipated pick-up in the economy 1.2 0.25 which will trigger the inflow of projects the demand for rebars 1.0 0.20 will regain its strength. 0.8 0.15 0.6 0.10 0.4 0.05 0.2 0.0 0.00 2003 2004 2005 2006 2007 2008E 67
    • November 11, 2008 EGYPT | STEEL STEEL GLOBAL DYNAMICS CRUDE STEEL Both sides of crude steel market – supply and demand – witnessed strong Strong growth on growth; with the former increasing by a CAGR of 7.6% and the latter growing by both, demand and a CAGR of 7.4% over 2001-2008, reaching the respective levels of 1,420 mn supply sides tons and 1,279 mn tons in 2008. Global crude steel demand & production (2001- Global added capacity, demand & operating rates 2008) (2002-2008) Added capacity Added demand Production Demand mn tons mn tons Utilization Rate 1,600 140 87.0% 1,400 86.5% 120 86.0% 1,200 100 85.5% 1,000 85.0% 80 800 84.5% 60 84.0% 600 83.5% 40 400 83.0% 20 200 82.5% 0 0 82.0% 2001 2002 2003 2004 2005 2006 2007 2008E 2002 2003 2004 2005 2006 2007 2008E Source: www.worldsteel.org & CICR Database Source: www.worldsteel.org, Tata & CICR Database Developing regions Over 2001-2007, Asia and the Middle East recorded the highest production are the industry's growth rates with respective CAGRs of 13.4% & 5.8%. Moreover, in terms of growth engine consumption, both regions recorded the highest CAGRs of 11.2% and 10.3%, respectively, during the same time span. Asia was ranked as the largest steel producing & consuming region with respective shares of 56.1% & 56.7% of global steel production & consumption in 2007. CAGRs of regional crude steel production & con- Regional share in global steel production & con- sumption (2001-2007) sumption in 2007 CAGR of Production CAGR of Consumption Share in Global Steel Production Share in Global Steel Consumption 16% Oceania 14% Africa 12% 10% Middle East 8% South America 6% North America 4% Europe 2% Asia 0% Asia Middle South Africa Europe Oceania North World 0% 10% 20% 30% 40% 50% 60% East America America Source: www.worldsteel.org Source: www.worldsteel.org Asia's prominence in the world's steel industry was mainly attributable to the With China leading presence of China; which witnessed an outstanding growth in its steel produc- such growth tion & consumption levels over 2001-2007 with the former growing by a CAGR of 21.6% and the latter enjoying a CAGR of 17.1%, thus, contributing with 36.4% & 33.8% respectively in global steel production & consumption in 2007. It is worth noting that steel is a considered a concentrated market, with the top 4 countries representing 54% of the global steel consumption. 68
    • November 11, 2008 EGYPT | STEEL World's largest steel producing countries in World's largest steel consuming countries in 2007 2007 Others Others 28.4% 22.8% China China 36.3% 33.8% Italy 2.4% Turkey Brazil 2.0% 2.5% Spain Ukraine 2.0% 3.2% Italy United States Germany 3.1% 9.0% 3.6% Germany Japan Japan India 3.2% 8.9% Russia 6.6% 3.8% South Korea South Korea India United States 3.3% Russia 3.8% 4.5% 4.2% 7.3% 5.4% Source: www.worldsteel.org Source: www.worldsteel.org Towards the end of 2008, steel prices shifted their hiking trend that was witnessed A shift in steel throughout the first eight months of 2008, mimicking the pattern of the raw materi- prices hiking trend als prices. It is worth noting that such declining pattern is namely due to the slow- down in global demand. International steel prices vs. raw materials prices (Feb 2006-Oct 2008) US Hot Rolled Coils US Import Rebar Price US$/ton Scrap Pig Iron 1,200 1,100 1,000 900 800 700 600 500 400 300 200 100 0 Ju -06 Ju -07 Ju -08 ep 6 O -06 ec 6 Ja -06 ep 7 O -07 ec 7 Ja -07 ep 8 O -08 ar 6 A -06 ay 6 Ju -06 o6 7 ar 7 A7 ay 7 Ju 07 o7 8 ar 8 A -08 ay 8 Ju -08 8 ug 6 ug 7 ug 8 S -0 D v-0 S -0 D v-0 S -0 M b-0 M b-0 -0 M b-0 M r-0 N t-0 Fe -0 M r-0 N t-0 Fe -0 M r-0 -0 A l-0 A l-0 A l-0 n- n n n n ct c c p p p Fe Source: Bloomberg STEEL MARKET IN EGYPT MARKET STRUCTURE At present, there are 20 steel producers in the local market with a total capacity of Rebars segment 9.60 mn tons split between rebars and flat steel products, with the former holding bears the lion's a share of 72.9% of local steel capacity in 2008 and the latter had a share of share in local steel 27.1%. capacity 69
    • November 11, 2008 EGYPT | STEEL Local steel capacity by product type in 2008 Flat 27.1% Rebars 72.9% Source: ES After acquiring a stake in Al Ezz Dekheila Steel Company-Alexandria (EDZK) and Ezz Steel has the up- establishing a new steel company in Al-Sokhna free zone area namely Al Ezz Flat per hand in local Steel (EFS), Al Ezz Steel (ES) -previously known as Al Ezz Steel Rebars (ESR) – steel market became the largest player in the domestic market with respective shares of 65% & 60% of rebars & flat steel local sales during 9M08. Currently, ES owns 90.73% of Al Ezz Steel Mills (ESM); 75.15% of EFS and 53.24% of EDZK. It is worth men- tioning that the Egyptian Iron & Steel Company (EISCO) is the only public sector player in the flat steel market, while Delta Steel Mills is the only state-owned com- pany in the rebars steel market. 9M08 Local rebars market shares* 9M08 Local flat steel market shares* Imports Others 18% 14.0% Kouta 1.9% El Bourieni 2.1% Al Attal 5.0% El EZZ Steel EISCO 60% 22% El EZZ Steel Beshay 65.0% 12.0% Source: ES Source: ES Raw materials account for the highest contribution to the total production cost, yet Raw materials, a key their shares vary depending upon the producer's level of integration. Raw materi- contributor to pro- als accounted for the respective shares of 68% & 75% in EZDK & in ES of the duction cost total production cost in 1H08. The variance in feedstock's share in the cost struc- ture between EZDK & ES is due to the variances between feedstock mixes used by EZDK and ESR & EFS, as the former uses a DRI/scrap mix of 80/20 while ESR & EFS use a DRI/scrap mix of 15/85 and 25/75, respectively. Worthy to mention is that local manufacturers fully import their raw materials either in the form of iron ore, scrap or billets exemplifying Egypt's heavy reliance on imported raw materials. * market shares are in terms of local sales. 70
    • November 11, 2008 EGYPT | STEEL ES* –consolidated - cost structure in 1H08 EZDK cost structure in 1H08 Salaries Salaries Depreciation 3% Depreciation 2% 6% 8% Energy 7% Energy 10% Overhead 10% Overhead 11% Raw Materials Raw Materiald 68% 75% Source: ES Source: ES REBARS SEGMENT Demand growth Rebars demand grew at a higher pace than that of capacity over 2003-2008 re- cording respective CAGRs of 7.6% and 1.6%. Hence, reaching 4.40 mn tons for exceeded that of the former & 7 mn tons in 2008 for the latter. Capacity expansion was due to the capacity entrance of new players, such as Al Attal, Sarhan Steel, Al Megharbel, Fair Trade and Al Marakbi; in addition to the upgrading of one of the existing facilities namely, Beshay Steel raising its capacity from 400k tons in 2000 to 1.4 mn tons in 2002. In 2005, utilization rates started witnessing an up-trend triggered by an un- matched added demand. Rebars capacity & demand (2003-2008) Rebars added capacity, demand & utilization rate (2003-2008) Capacity Demand Added Capacity Added Demand Utilization Rate % mn tons mn tons 8 1.0 80% 72.0% 7 67.1% 0.8 70% 70.3% 6 62.8% 0.6 60% 5 0.4 50% 53.8% 50.7% 4 0.2 40% 3 0.0 30% 2003 2004 2005 2006 2007 2008E 2 -0.2 20% 1 -0.4 10% 0 2003 2004 2005 2006 2007 2008E -0.6 0% Source: ES & CICR estimates Source: ES & CICR estimates About 85% on average approximately of steel rebars sales were directed to the The majority of re- local market over the period 2003-2006. Yet in 2007 & 2008, local sales share bars production is increased reaching 87% & 91% due to the flourishing of the real-estate activity sold in the local over these two years. As for rebars exports, they reached their peak in 2006 with market 950k tons, representing 20.7% of total market sales. However, exports' share de- creased to 12.9% in 2007 and is estimated to reach 9% only in 2008, due the ro- bust local demand on steel, and to the imposition of duties on steel exports in 2007 –which lasted from February 2007 until October 19, 2008. *Al Ezz Steel is the consolidation of Al Ezz Dekheila, Al Ezz Steel Rebars & Al Ezz Flat Steel 71
    • November 11, 2008 EGYPT | STEEL Rebars local sales & exports (2003-2008) mn tons Local Sales Exports Share of exports/ total sales 5.0 21% 4.5 18% 4.0 15% 3.5 3.0 12% 2.5 9% 2.0 1.5 6% 1.0 3% 0.5 0.0 0% 2003 2004 2005 2006 2007 2008E Source: ES & CICR estimates FLAT STEEL SEGMENT Exports represented a considerable share – an average of 59%- in total Flat steel Exports dominate sales over 2003-2007. Such high exports contribution is mainly attributed to the flat steel sales, yet fact that flat steel is used in the advanced industries, besides EFS- the largest flat potential growth ap- steel producer in the local market- is located in Al-Sokhna free zone directed pears locally around 82% of its sales to the international markets in 1H08. Yet since 2004, flat steel consumption have showed growth potentials growing by a CAGR of 10.7% over 2004-2007 compared with a CAGR of 5.2% over 2001-2004, thus increasing local sales from 0.49 mn tons in 2001 to 0.88 mn tons in 2007. Flat steel exports and its contribution to total Flat steel production vs. local sales (2003-2008) sales (2003-2008) Production Local Sales Exports Share of Exports/Total sales mn tons mn tons 2.7 1.4 66% 2.4 64% 1.2 2.1 62% 1.0 1.8 60% 0.8 1.5 58% 1.2 56% 0.6 0.9 54% 0.4 0.6 52% 0.2 0.3 50% 0.0 0.0 48% 2003 2004 2005 2006 2007 2008E 2003 2004 2005 2006 2007 2008E Source: ES & CICR estimates Source: ES & CICR estimates Flat steel supply Despite growing flat steel production, the gap between local sales & demand wid- shortfall is widening ened from 33k tons in 2003 to 167k tons in 2007, and an estimated gap of 193K tons in 2008. The widened gap is mainly attributed to the expanded demand in the local market by a CAGR of 13.3% over 2003-2007, in addition to an esti- mated growth of 2.5% in 2008. It is worth noting that such growth in local de- mand is driven by the country's strengthening economy, resulting in an increas- ing imports reaching 167k tons in 2007. 72
    • November 11, 2008 EGYPT | STEEL Flat steel consumption vs. local sales & imports Flat steel utilization rates (2003-2008) (2003-2008) Local Sales consumption Imports 100% mn tons mn tons 1.2 0.25 90% 89.2% 85.4% 80% 1.0 80.5% 0.20 75.8% 70% 0.8 67.2% 60% 0.15 57.0% 50% 0.6 40% 0.10 0.4 30% 20% 0.05 0.2 10% 0% 0.0 0.00 2003 2004 2005 2006 2007 2008E 2003 2004 2005 2006 2007 2008E Source: ES & CICR estimates Source: ES & CICR estimates RECENT DEVELOPMENTS On October 19, 2008, the levied LE 160/ton tariff on steel exports was removed, Lifting up duties in an effort to make steel prices more competitive in the international markets – imposed on exports against the backdrop of the anticipated global recession spurred by the financial turmoil. Egypt's heavy reliance on imported raw materials drove the GoE to issue in 2007 Investment inflow four licenses for the production of billets and sponge iron with a combined annual in the feeding in- production capacity of 8 mn tons, and an investment cost of US$15 bn. The four dustry with a for- winners are Ezz Steel (ES), Suez Steel Company, Tiba for Iron & Steel and the eign tint, for the Egyptian Company for Sponge Iron. Most notably, by the beginning of 2008, an- first time other two licenses were offered to two foreign investors for the first time. The first was awarded by Arcelor Mittal – the world's largest steel producer – won the bid in February 2008 with planned annual capacity of 3 mn tons in direct reduced iron (DRI) and billets. The former's capacity is set at 1.6 mn tons, while that of the lat- ter is planned to reach 1.4 mn tons. The second license was awarded by MAC Holding for Industries; a subsidiary of the Kuwaiti-based Al Kharafi Group, for the production of direct reduced iron with planned capacity of 1.6 mn tons and at the same price at which Arcelor Mittal won the tender Through its license acquisition, ES will establish, at EFS, an electric furnace to A move towards produce DRI with an annual capacity of 1.7 mn tons and a melt shop to produce integration 1.35 mn tons of molten steel distributed as follows: 0.8 mn tons for flat steel at EFS, and 0.55 mn tons for billets which will be directed to ESR to replace its im- ported billets. It is worth mentioning that said expansion is expected to commence operation by the beginning of 2011 and is expected to positively impact ESR rela- tive margins. Local steel prices are closely tied with international raw materials trends, as The decline in inter- around 85-90% of it are imported. The slowdown in global demand reversed the national raw materi- up-trend followed by international steel prices since July 2008; by which a drop of als prices reversed 56% & 42% respectively in scrap & pig iron prices was witnessed over the past the steel prices' up- three months. Consequently, a sharp decline of 41% occurred in local rebars trend prices during the same period, reaching LE 3,900/ton by the end of October 73
    • November 11, 2008 EGYPT | STEEL Local rebars prices vs. international pig iron Local rebars prices vs. international scrap prices (Mar 08-Oct 08) prices (Mar 08-Oct 08) Local Rebar Price Pig Iron Local Rebar Price Scrap LE/ton US$/ton LE/ton US$/ton 7,000 1,100 7,000 700 1,000 6,000 6,000 600 900 800 5,000 500 5,000 700 4,000 400 4,000 600 500 3,000 300 3,000 400 2,000 200 2,000 300 200 1,000 100 1,000 100 0 0 0 0 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 24-Oct- 25-Oct- Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 24-Oct- 25-Oct- 08 08 08 08 Source: ES & Bloomberg Source: ES & Bloomberg MARKET DYNAMICS Domestic Market Governmental Demand Measures Driver Supply-Related Factors - Removal of export duties - Construction boom - Modifying anti-monopoly law - Solid growth in dependant industries - Strengthening EBITDA - Offering licenses for steel feeding industries - New capacities for steel feeding industries on stream - Impact from export tariffs GOVERNMENTAL MEASURES Since 2007, the government has been taking several actions and decisions to regulate the steel industry's expansions & trading activity which greatly influ- enced the steel industry. The following table summarized the recent actions taken by the GoE: Recent governmental measures Measure Date Description Impact Revoking the export duties 19-Oct-08 Calling-off the LE 160/ ton duties previously imposed POSITIVE by the Ministry of Trade & Industry on steel exports. Modifying Anti Monopoly Law Jul-08 Raising fines the minimum level of fines charged per POSITIVE violator from LE 30k to LE 100k and the maximum level from LE 10 mn/violator to LE 300 mn. Offering 2 licenses for steel Feb-08 the first to Arcelor Mittal and the second to MAC POSITIVE feeding industries to foreign Holding for Industries in order to produce direct investors for the first time reduced iron & billets. Source: CICR Database 74
    • November 11, 2008 EGYPT | STEEL Measure Date Description Impact Offering 4 licenses for steel Oct-07 Lienses were offered to local producers for the POSITIVE feeding industries production of billets and sponge iron. Imposing duties on steel Feb-07 Imposing an export duty of LE 160/ton on steel NEGATIVE exports exports. Source: CICR database SUPPLY-RELATED FACTORS Strengthening The monopolistic status of the steel industry, as ES currently controls 44.3% EBITDA and 84.6% of rebars and flat steel capacities, respectively, enables the industry players to pass the increased production cost to the consumer. Despite that raw materials prices hiked by 55.3% during 1Q08, ES EBITDA margin increased to 26.7% vs 24.1% in 2007. Yet, the company's EBITDA margin decreased to 23.7% in 2Q08 due to the 58.6% increase in raw materials prices over the same period. Nevertheless, in terms of absolute values, the company's Earnings be- fore Interest Taxes Depreciation & Amortization (EBITDA) grew by 32.7% and by 25% during 1Q08 and 2Q08 compared to the same period one year earlier, reaching the respective levels of LE 1.3 bn and LE 1.4 bn. ES EBITDA vs. raw materials prices by quarter ES EBITDA margin vs. imported raw materials (1H07-1H08) prices by quarter (1H07-1H08) Raw Materials Prices EBITDA Margin Raw Materials Prices EBITDA US$/ton LE bn US$/ton 800 1.6 800 28% 734 734 700 1.4 700 27% 1.4 27.3% 26.7% 1.3 600 1.2 26.3% 600 26% 1.1 500 1.0 463 500 463 1.0 25% 400 0.8 400 323 323 314 314 24% 300 0.6 300 23.7% 23% 200 0.4 200 22% 100 0.2 100 0 0.0 0 21% 1Q07 2Q07 1Q08 2Q08 1Q07 2Q07 1Q08 2Q08 Source: ES & Bloomberg Source: ES & Bloomberg The LE 160/ton export tariff which was levied on steel producers by the end of Imposing the export February 2007, led to a 34.6% drop in Egypt's rebars exports during 2007 reach- duties led to a huge ing 0.62 mn tons. Similarly, after imposing said tariffs, the share of exports in ES drop in exports total sales decreased from 47.4% in 1H07 to 26.4% by the end of 2007, followed by a further decline to 22.9% in 1H08. Yet, to mitigate the negative impact of the anticipated global economic slowdown the GoE decided to call off the export duties on steel exports on October 19, 2008. 75
    • November 11, 2008 EGYPT | STEEL Egyptian rebars export pattern (2006-1H08) ES rebars export pattern (2006-1H08) 50% mn tons 0.95 47.4% 1.0 45% 0.9 40% 0.8 35% 0.7 30.8% 0.62 30% 26.4% 0.6 25% 22.9% 0.5 0.45 20% 0.4 15% 0.3 10% 0.2 5% 0.1 0% 0.0 2006 2007 1H07 1H08 2005 2006 2007 Source: ES & CAPMAS Source: ES DEMAND-PULL FORCES Steel consumption is closely tied to the mushrooming construction activity evi- Construction boom denced in the correlation co-efficient of 0.871 between both factors. Construction activity in Egypt grew by a CAGR of 7.4% over 2004-2007, triggering rebars con- sumption to grow by a CAGR of 15.9% over the same time span Construction activity vs. rebars consumption (2004-2008) Construction Activity Rebars Consumption mn tons LE bn 40 5.0 4.5 35 4.0 30 3.5 25 3.0 2.5 20 2.0 15 1.5 10 1.0 5 0.5 0 0.0 2004 2005 2006 2007 2008E Source: ES & CAPMAS Flat steel is Consumer goods and the locally assembled vehicles (Completely Knock down – closely tied with CKD) are key consumers of flat steel, hence, exhibiting strong co-efficient correla- manufacturing tion of 0.952 and 0.961, respectively. Growing production levels in both industries industries drove up the demand for flat steel which enjoyed a CAGR of 13.3% over 2004- 2007. 76
    • November 11, 2008 EGYPT | STEEL Flat steel consumption vs. consumer goods Flat steel consumption vs. completely knock- production (2004-2008) down (CKD) vehicles (2004-2008) Consumer goods production Flat Steel Consumption Locally Assembled Vehicles Flat Steel Consumption mn units mn tons 000 units mn tons 9.9 1.2 45 1.2 40 9.6 1.0 1.0 35 9.3 0.8 30 0.8 9.0 25 8.7 0.6 0.6 20 8.4 0.4 15 0.4 8.1 10 0.2 0.2 7.8 5 7.5 0.0 0 0.0 2004 2005 2006 2007 2008E 2004 2005 2006 2007 2008E Source: ES & CICR estimates Source: ES & CICR estimates FUTURE OUTLOOK With an anticipated slow down in economic activities over the coming two years, Rebars market the real-estate market, the main driver for steel rebars, will witness depressed will be mainly tar- growth, as it will mainly depend on existing projects. Hence, the demand for steel geting existing rebars is expected to grow with an AAGR of % over 2009 and 2010. Yet, after- projects, as the wards the market will resume higher growth levels of 9.7% over 2011 and 2012, economy slows as the economy regains its strength. It is worth noting, that as there is no stated down over the capacity additions in the rebars segment, utilization rates are expected to strongly coming two years decline over 2009 & 2010, yet as the economy regains its strength utilization rates will record high levels. Rebars consumption, production & utilization rate (2006-2012) Rebars Production Rebars Consumption Utilization Rate mn tons 7 90% 83.8% 80% 6 72.0% 76.2% 69.8% 70% 70.3% 66.9% 5 67.1% 60% 4 50% 40% 3 30% 2 20% 1 10% 0 0% 2006 2007 2008E 2009F 2010F 2011F 2012F Source: ES & CICR estimates The coming two years will have much of an impact on flat steel rather than on re- The country's an- bars steel, as the former is extensively involved in the export market (around 56% ticipated economic of its sales is directed to the international markets in 2007) besides its sales to the slowdown coupled local market. As the economy slows down, growth in manufacturing industries – with an expected namely consumer goods and CKD – will follow a depressed pace. Local flat steel decelerated global market and exports are expected to decline by an average of 157k tons tons over trade will have a 2009 and 2010, yet with an expected recovery in both, local and international mar- dual impact on flat kets, demand for flat steel is to gain its strength, with demand & exports growing steel over the com- by a CAGR of 13.5% & 17.4% respectively over 2011 and 2012. It is worth men- ing two years tioning that the decrease in capacity utilization rate in 2011 is mainly due to the start of the commercial production of the added 0.8 mn tons of flat steel at EFS by the beginning of 2011. 77
    • November 11, 2008 EGYPT | STEEL Flat steel consumption, production & utilization rates (2006-2012) mn tons Flat Production Flat Consumption Utilization Rate % 2.5 100% 89.2% 90% 85.4% 2.0 80% 80.5% 71.7% 70% 61.6% 62.3% 1.5 60% 59.6% 50% 1.0 40% 30% 0.5 20% 10% 0.0 0% 2006 2007 2008E 2009F 2010F 2011F 2012F Source: ES & CICR estimates As it has been the case in historical trends, local & export rebars and flat steel Local & export prices are expected to follow the same pattern as the international raw materials rebars and flat prices over 2008-2012. It is worth mentioning that international raw materials prices will follow prices are expected to continue declining in 2009 due to the slow down in global international raw demand, yet starting from 2010; their prices will pick up to grow by a CAGR of materials prices 15.5% with the global economy gaining back its momentum. Local & export rebars prices are expected to decline in 2009, then to grow by a CAGR of 10.8% & 8.7% respectively over 2010-2012. As for flat steel, its local & export prices are ex- pected to decline in 2009, then to grow by a CAGR of 8.7% & 9.9% respectively over the same time span. Rebars local prices vs. international raw materials Rebars exports prices vs. international raw mate- prices (2006-2012) rials prices (2006-2012) Raw Materials Prices Rebars Exports LE/ton US/ton US$/ton Rebars Local Raw Materials Prices 6,000 1,000 1,200 900 1,000 5,000 800 700 800 4,000 600 600 3,000 500 400 400 2,000 300 200 200 1,000 100 0 0 0 2006 2007 2008E 2009F 2010F 2011F 2012F 2006 2007 2008E 2009F 2010F 2011F 2012F Source: ES & CICR estimates Source: ES & CICR estimates 78
    • November 11, 2008 EGYPT | STEEL Flat local prices vs. international raw materials Flat exports prices vs. international raw materials prices (2006-2012) prices (2006-2012) Flat Local Raw Materials Prices Flat Exports Raw Materials Prices US$/ton LE/ton US$/ton 7,000 1,000 1,200 900 6,000 1,000 800 5,000 700 800 600 4,000 500 600 3,000 400 400 300 2,000 200 200 1,000 100 0 0 0 2006 2007 2008E 2009F 2010F 2011F 2012F 2006 2007 2008E 2009F 2010F 2011F 2012F Source: ES & CICR estimates Source: ES & CICR estimates 79
    • November 11, 2008 EGYPT | SUGAR UPBEAT FOR BEET DRIVERS GoE’s plan to expand beet cultivated area Despite the looming fear of global recession and the an- (horizontal) and enhance beet productivity ticipated slowdown in the country’s economic perform- (vertical). ance, the demand for a strategic commodity as sugar The planned increase in automated beet planting counts as a safe bet. The GoE’s promotion for beet culti- will ensure higher yield. vation over cane as a means of mitigating the challenges The growing sales of dependant-industries will posed by the scarce water resources and land; coupled ensure strong sugar demand. Growing population and GDP/Capita will main- with the former’s high tolerance to salinity and ability to tain a strong demand for sugar. produce high yields under saline soil, the focus has been As sugar producers can shift to refining, it acts directed to sugar beet. Hence, uplifting its share of total as a hedge in case the amount of crops supplied sugar production from 13% to 39% over 1998-2007. With declines. the country’s growing population and expanding GDP/ RISKS capita, and the increasing demand for bio-fuels, further room for growth is anticipated—especially that around 42% of the country’s sugar demand is imported. Most no- The ease of shifting to wheat cultivation forces tably, the current decline in wheat procurement prices add producers to increase their beet procurement price, which impacts their margins, as procure- to the beet’s growth potential. It is worth noting that the ment cost constitutes the bulk of sugar beet local beet industry enjoys higher margins than its peers. production cost. As beet seeds are imported, exposure to FX risk A defensive industry with Strong demand drivers: Egypt’s exists. growing population and strengthening GDP/capita ensures a Exogenous factors as bad weather and crop diseases can impact the amount of supplied crop strong demand for sugar. to producers. Good prospects for beet: Against the backdrop of a highly The expected decline in shipping cost might supportive government towards an expanded beet cultivation intensify competition from imported sugar. The anticipated decline in sugar by-products areas and higher productivity levels, beet cultivated areas prices may impact the overall margin. grew with a CAGR of 12.7% over 2004-2008 reaching 228k KEY PERFORMANCE INDICATORS feddans versus a declining trend in cane cultivated areas re- cording 310k feddans in 2008 down from 322k feddans in Total sugar production CAGR (04-07) 5.7 2004. Sugar beet production CAGR (04-07) 19.5 Enhanced yield and supply shortfall support an inflow of investments: Besides the government support to expand beet Beet procurement price (2008,LE/ton) 225 cultivation areas, higher yields are targeted. Moreover, supply Added annual capacities (2010,k tons) 245 shortfall—with imports covering almost 42% of sugar de- Self-sufficiency ratio (2007,%) 67 mand— encouraged fresh investments. A new license was granted to Nile Company for sugar beet production which will COMPANY COVERED PAGE # be located at Nubareya. The company's annual production capacity is 125k tons and is expected to commence operations Delta Sugar 115 by 2009, starting off with refining activities and then followed by sugar beet production by 2010. Another line is expected to come on-stream in 2010 by Dakahlia Sugar Co. with an annual BASMA SHEBETA capacity of 120K tons. BASMA.SHEBETA@CICH.COM.EG FADWA HOSSAM ISSA Wheat is a key competing crop, yet beet’s increasing yield FADWA.HOSSAM@CICH.COM.EG gives it a more competitive stance: The increase in wheat procurement price, definitely, has its negative impact on ex- SECTOR PERFORMANCE | 2004-2008 panding beet cultivated areas. The rise in wheat procurement price in 2008 to LE 380/ardab versus LE 225/ton for beet pro- Sugar Cane Production Sugar Beet Production curement price dropped the beet cultivated areas by around Growth in beet Growth in cane 8%. Yet, the current decline in wheat procurement prices of LE 000 tons 1,200 40% 180/ardab versus an announced beet procurement price for 35% 1,000 30% 2009 of LE 335/ton adds to the beet’s potential. Moreover, the 25% enhanced beet productivity by 8% throughout 2004-2007 com- 800 20% pared with a declining pattern of 1.4% for wheat, fosters the 15% 600 10% beet’s future growth. 5% 400 0% Higher margins than peers: EBITDA margin for the beet in- -5% 200 dustry in Egypt enjoyed a strong average of 37% in 2007, reg- -10% 0 -15% istering a higher margin than that of its international peers that 2004 2005 2006 2007 2008E recorded 28% during the same year. 80
    • November 11, 2008 EGYPT | SUGAR EGYPT SUGAR INDUSTRY IN EGYPT AN ADVANCED GLOBAL RANKING Ranked 2nd in terms Egypt's cane yield per feddan recorded 50.8 tons in 2007/08 - about 1.5 times as high as that of the world's cane yield-placing the country at the second rank of cane yield after Peru, which achieved a yield of 51.1 tons per feddan Top 20 countries in cane yield per feddan in FY07/08 World 29.8 Swaziland 39.6 Ethiopia 41.5 Burkina Faso 42.0 Sudan 43.8 Zambia 43.8 45.7 Malawi 48.8 Senegal 50.2 Tanzania 50.8 Egypt 51.1 Peru 0 10 20 30 40 50 60 Tons/Feddan Source: USDA & CICR estimates Egypt is ranked 15th worldwide, in terms of sugar per-capita consumption which Ranked 15th in terms recorded 36.1 Kg in FY07/08 - about 1.6 times as high as the worldwide's per of per capita con- capita consumption during the same year. Such manifested jump (from a rank sumption of 21 in FY1997/98) of per capita consumption pushed Egypt to be among the world's top 20 sugar producing countries in FY07/08, with a total sugar produc- tion of 1.66 mn tons - representing a share of 1% in global sugar production. On the regional level, Egypt enjoys the highest contribution of 24.1% in terms of consumption, while is ranked 2nd with its 31.9% share in terms of sugar pro- duction, following Turkey Top 20 countries in sugar per capita consump- Top 20 countries in sugar production in FY07/08 tion in FY07/08 Kg 000 tons 70 35,000 60 30,000 50 25,000 40 20,000 30 15,000 20 10,000 10 5,000 0 0 Mexico Malaysia Morocco Brazil Venezuela Cuba Australia Canada Argentina Russia & Ukraine Algeria South Africa Peru Thailand Indonesia South Korea Mexico USA Guatemala Colombia Egypt Brazil Turkey India China Thailand Australia Pakistan South Africa Indonesia Iran Russia & Uraine Cuba Japan USA Colombia Guatemala Philippines Egypt Argentina World Source: USDA & CICR estimates Source: USDA & CICR estimates 81
    • November 11, 2008 EGYPT | SUGAR MARKET STRUCTURE At present, the market consists of five public companies with a combined pro- Cane holds the lion's duction capacity of 1.64 mn tons divided between cane & beet companies with share the former holding a share of 61% and the latter a share of 39%. There is only a sole sugar cane producer in the local market namely, Sugar Integrated Indus- tries Company (SIIC) which controls 62.83% of total sugar capacity, 61% through its sugar cane facility and 1.83% through its sugar beet facility. The remaining four companies in the market use beet in producing sugar and hold a combined share of 37.2% of total sugar capacities. It is worth mentioning that Delta sugar is the largest Egyptian sugar beet producer with a share of 38.3% in local sugar beet capacities. Local sugar beet capacity in 2008 Local sugar capacity in 2008 SIIC Nubareyya 4.69% Sugar Dakahlia Sugar 19.53% 7.33% Sugar cane Fayyoum Sugar SIIC 7.33% Delta Sugar Sugar beet 61% 38.28% 39% Fayyoum Sugar 18.75% Nubareyya Sugar 7.57% SIIC Delta Sugar 1.83% Dakahlia Sugar 14.94% 18.75% Source: CICR Database Source: CICR Database MARKET DEVELOPMENTS Beet cultivated areas Cane and beet cultivated areas grew by a CAGR of 3.8% during 2004-2008, were on the rise, yet a triggered by the rise in beet cultivated areas which recorded a CAGR of 12.7% drop was witnessed reaching approximately 228k feddans in 2008 up from 141k feddans in 2004, in 2008 whereas cane cultivated areas decreased from 322k feddans to 310k feddans over the same time span primarily due to its low procurement price amounting to LE 182/ton, in addition to the continuous decline in the amount of water per capita in Egypt reaching 850cu.m in 2008 down from 927cu.m in 1995. Such growth pattern contributed in raising beet's share in both, cane and beet culti- vated areas combined to 42.3% in 2008 up from 30.4% in 2004 and reducing cane's share from 69.6% in 2004 to 57.7% in 2008. Yet, in 2008 beet cultivated areas declined by 8.3% versus 2007 due to the significant rise in wheat pro- curement prices -the major competitor crop to beet- reaching LE 380/ardab (where 1 ton = 6.7 ardab) surpassing that of beet which amounted to LE 225/ ton. Therefore, farmers were more inclined to grow wheat than beet during that season 82
    • November 11, 2008 EGYPT | SUGAR Beet and cane cultivated areas (2004-2008) Share of beet & cane in the combined (cane & beet) cultivated areas (2004-2008) Beet Cultivated Area Cane Cultivated Area Cane Share Beet Share 000 feddans Growth in Beet Cultivated Areas Growth in Cane Cultivated Areas 400,000 40% 2008E 35% 350,000 30% 300,000 2007 25% 20% 250,000 15% 2006 200,000 10% 150,000 5% 2005 0% 100,000 -5% 2004 50,000 -10% 0 -15% 0% 10% 20% 30% 40% 50% 60% 70% 80% 2004 2005 2006 2007 2008E Source: Ministry of Agriculture & CICR estimates Source: Ministry of Agriculture & CICR estimates Over 2004-2007 sugar production grew by a CAGR of 5.7% over 2004-2007 to Rising sugar beet reach 1,757k tons in 2007, driven by the rising sugar beet production which production drives up increased by a CAGR of 19.5% over the same period to reach 682k tons in sugar production 2007; while sugar cane production declined by 0.4% reaching 1,075k tons in 2007, production is thus expected to record a decline of 5.5% in 2008 reaching 1,660K tons down from 1,757K tons in 2007. Said growth pattern of sugar beet & sugar cane over 2004-2008 contributed in raising the former's share from total sugar production to 37.8% in 2008 up from 26.9% in 2004 on the account of the latter's share in total sugar production which decreased from 73.1% to 62.2% over the same period Sugar beet & sugar cane production growth Share of sugar beet & sugar cane production pattern (2004-2008 in total sugar production (2004-2008) Sugar Beet Share Sugar Cane Share Sugar Cane Production Sugar Beet Production 000 tons Growth in beet Growth in cane 1,200 40% 2008E 35% 1,000 30% 2007 25% 800 20% 15% 2006 600 10% 5% 400 2005 0% -5% 200 2004 -10% 0 -15% 0% 10% 20% 30% 40% 50% 60% 70% 80% 2004 2005 2006 2007 2008E Source: Bloomberg, Al Ahram El Ektesady & CICR estimates Source: Bloomberg, Al Ahram El Ektesady & CICR estimates 83
    • November 11, 2008 EGYPT | SUGAR Sugar consumption is not expected to follow suit production in 2008, growing Rising production by 2.5% to reach 2,682k tons vs. a 5.5% decline in sugar production to reach coverage, with a drop 1,660k tons; thus reducing local production coverage from sugar to 61.9% in in 2008 2008 down from 67.2% in 2007. It is worth noting that ever since 2005 produc- tion growth has been outstripping that of consumption with the former recording an AAGR of 5.8% vs. 2.3% for the latter. Concurrently, local production cover- age from sugar has been on the rise reaching its peak of 67.2% in 2007 Sugar production & consumption growth pat- Local sugar production coverage ratio tern (2004-2008) (2004-2008) Sugar Production Sugar Consumption 000 tons Sugar Production Growth Rate Sugar Consumption Growth Rate 2008E 61.9% 3,000 14% 12% 2,500 10% 2007 67.2% 8% 2,000 6% 4% 2006 61.6% 1,500 2% 0% 1,000 61.1% 2005 -2% -4% 500 -6% 2004 60.9% 0 -8% 2004 2005 2006 2007 2008E 56% 58% 60% 62% 64% 66% 68% Source: Bloomberg, Al Ahram El Ektesady & CICR estimates Source: Bloomberg , Al Ahram El Ektesady & CICR estimates In an attempt to meet up with rising demand, most sugar companies engage in Beet companies en- sugar refining activities during the beet off season which starts from July till De- gage in refining cember amounting to a total capacity of 2 mn tons. It is worth mentioning that in activity during off early 2008, a new company specialized in sugar refining began operations namely season the Saudi based Savola at Ain El Sokhna with an annual capacity of 750K tons Egypt has been a major importer of sugar due to the widening gap between local Imports cover ap- production and consumption, which pushed the country to rely on imported raw & proximately 42% of refined sugar to cover approximately 42% of its needs. Moreover, raw sugar used Egypt's sugar re- to hold the lion's share 75% of total sugar imports with the remaining 25% directed quirements to refined sugar. Yet, 2008 witnessed a significant rise in refined imports reaching a share of 56% of total imported sugar, mainly due to the arrival of the heavily sub- sidized refined sugar from India which was sold locally at a cheaper price of LE 2,200/ton versus that of LE 2,500/ton for the Egyptian sugar Share of refined & raw sugar imports in total Sugar imports pattern (2004-2008) sugar imports (2004-2008 000 tons Share of Raw Sugar Imports Share of Refined Sugar Imports Sugar Imports Imports Growth Rate 1,400 25% 2008E 20% 1,200 15% 1,000 2007 10% 800 5% 2006 0% 600 -5% 2005 400 -10% 200 -15% 2004 0 -20% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 2004 2005 2006 2007 2008E Source:USDA & CICR estimates Source: CAPMAS, Delta Sugar & CICR estimates 84
    • November 11, 2008 EGYPT | SUGAR Market Dynamics Sugar Market Cost-Related Government Supply Factors Demand Factors Factors Initiatives Facilities to Beet Population Promoting Beet Procurement Growth Farmers over Cane Price Wheat Cost of Beet GDP per Capita High Seeds Procurement Competition Prices Prices of Sugar Sugar Horizontal & By-products Dependant Vertical Industries Expansion Supply-Push Forces Sugar beet production is closely tied to beet yield, evidenced in the correlation co- Facilities offered by efficient of 0.997 between both factors. Beet yield has been on the rise recording a sugar beet compa- CAGR of 2.7% during 2004-2007 to record 21.98 tons/feddan in 2007; thus boosting nies triggered in- sugar beet production to grow by a CAGR of 19.5% over the same period reaching crease in beet yield 682k tons in 2007. It is worth mentioning that sugar beet companies offer farmers several facilities to lure them to expand beet cultivation and prevent them from shift- ing into its main competing crops, namely wheat. Facilities offered include: providing farmers with beet seeds on credit to be repaid when the crop is har- vested; supplying farmers with the needed pesticides and fertilizers' usage guide; and Beet yield vs. sugar beet production (2004- Beet yield development pattern (2004-2007) 2007) Tons/Feddan 000 tons Sugar Beet Production Beet Yield Tons/Feddan 800 22.5 22.5 700 22.0 22.0 600 21.5 21.5 CAGR 2.7% 500 21.0 21.0 400 20.5 20.5 300 20.0 20.0 200 19.5 19.5 100 19.0 0 19.0 2004 2005 2006 2007 2004 2005 2006 2007 Source: Ministry of Agriculture Source: Ministry of Agriculture & Al Ahram El Ektesady 85
    • November 11, 2008 EGYPT | SUGAR Over the last few years, wheat has become a major competitor to beet as they Wheat competes are both winter crops and farmers can easily shift between them. The relation heavily with sugar between both crops is reflected in strong inverse correlation co-efficient of - beet, especially in 0.9997, implying that the increase in the former's cultivated areas lead to a de- 2008 crease in the latter's cultivated areas. In 2008, the decline in beet cultivated ar- eas is mainly due to the significant rise in wheat procurement price by almost 73% over 2007 reaching LE 380/ardab compared with LE 225/ton for beet. A pat- tern that occurred before in 2006 when beet procurement price reached LE 188/ ton compared with LE 169/ardab for wheat, as such the former's cultivated areas recorded a growth of 11.4% vs a mere 2.6% growth for the latter. It is worth men- tioning that in an attempt to enhance beet cultivation, sugar beet companies de- cided as of 2009 to increase beet procurement price by 49% to reach LE 335/ton. Sugar beet production vs. wheat production Growth in beet cultivated area vs. growth in (2006-2008) wheat cultivated areas (2006-2008) 000 tons 000 tons Sugar Beet Production wheat production Growth in Beet Cultivated Area Growth in Wheat Cultivated Area 800 9,000 40% 35% 700 30% 8,500 600 Beet procurement 25% price LE 191/ton Wheat procurement Beet procurement 500 price LE 380/ardab 20% 8,000 price LE 188/ton 15% 400 10% 7,500 300 Wheat procurement 5% price LE 169/ardab 200 0% 7,000 2006 2007 2008E -5% 100 Wheat procurement price LE 220/ardab -10% Beet procurement price 0 6,500 LE 225/ton 2006 2007 2008E -15% Source: Ministry of Agriculture, FAPRI & CICR estimates Source: Al Ahram El Ektesady, Ministry of Agriculture, FAPRI & CICR estimates COST-RELATED FACTORS The rising costs of imported beet seeds, farmers cultivating beet witnessed an in- Beet procurement creasing cost of beet seeds/feddan over the period 2004-2007 recording a CAGR of price bears a key 8% reaching LE 285/feddan in 2007 compared with LE 226/feddan in 2004. More- contribution over, the cost of beet seeds per feddan coupled with the procurement price are the major factors farmers take into consideration while determining beet cultivation, thus exposing sugar beet companies to the consistent pressure of raising beet procure- ment price following the increase in the seeds' cost. Such link was illustrated in the strong correlation co-efficient of 0.723 between the change in beet procurement price and the cost of beet seed/feddan. As such beet procurement price holds the lion share in total sugar beet production cost amounting to 71% followed by industrial costs (which includes fuel cost and spare parts) holding a share of 10.6% while the remaining 18.4% falls to wages, transportation, subsidies, packaging and depreciation costs. 86
    • November 11, 2008 EGYPT | SUGAR Growth pattern of beet procurement price vs. Delta Sugar production cost breakdown seed cost/feddan (2003-2007) (2007) Change in Cost/feddan Change in Procurment Price/feddan Depreciation, 4.9% 160% 45% Packaging material, 2.4% 140% 40% Wages, 5.4% 120% 35% Industrial costs 100% (fuel+spare parts), 30% 10.6% 80% 25% 60% Beet related cost 20% (subsidy+transportat 40% Beet procurement ion), 5.6% price & bonus for 15% early harvesting, 20% 71.0% 10% 0% 2003 2004 2005 2006 2007 5% -20% -40% 0% Source: CAPMAS & Ministry of Agriculture Source: Delta Sugar Co The rising prices of sugar beet by products-molasses and fodder- which took place Increasing prices of in 2007 helped sugar beet companies mitigate the squeeze in their margins resulting sugar beet by- from the sugar beet production rise. Delta's gross profit from sugar declined from products 43% in 2006 to an expected 23% in 2008 yet, the company's overall gross profit margin (including molasses and fodder in addition to sugar) did not witness the same decline reaching 40% in 2008 down from 42% in 2006. It is worth mentioning that both molasses & fodder are directed mainly to the export market since the for- mer is mainly used in the manufacturing of alcoholic beverages as well as in the manufacturing of bio-fuels namely, ethanol, while the latter is used in feeding live- stock. Furthermore, the local industry's EBITDA margin scored an average of 37% over 2007, compared with an average of 28% for international peers. Sugar beet gross profit margins vs overall Sugar beet margins vs. International Peers 2007 gross profit margins (2006-2008) Overall Gross Profit Margin Sugar Beet Gross Profit Margin 45% 40% 42.0% 42.8% 37% 41.3% 40% 40% 35% 35% 30% 28% 30% 25% 26.4% 25% 23% 20% 20% 15% 15% 10% 10% 5% 5% 0% 0% Local Margins International Peers 2006 2007 2008E Source: Delta Sugar Co Source: Delta Sugar Co & Bloomberg DEMAND-PULL FORCES Rising sugar consumption has long been fueled by rising population and GDP per Population growth capita registering a strong correlation of 0.998 with the former and 0.984 with the along with evolving later. Over the period 2005-2008, population increased to reach 75 mn in 2008 fol- GDP per Capita spur lowed by a rising level of income reaching US$2,247 up from US$1,412 in 2005 sugar consumption stimulating sugar per capita consumption from 35 kg/annum to 36 kg/ annum over the same time span. 87
    • November 11, 2008 EGYPT | SUGAR Population vs. sugar consumption (2005-2008) GDP per capita vs. sugar consumption (2005- 2008) 000 Inhabitants 000 tons US$ 000 tons Population Sugar Consumption GDP Per Capita Sugar Consumption 76,000 2,700 2,500 2,700 75,000 2,650 2,650 2,000 74,000 2,600 2,600 73,000 2,550 2,550 1,500 72,000 2,500 2,500 1,000 71,000 2,450 2,450 70,000 2,400 2,400 500 69,000 2,350 2,350 68,000 2,300 0 2,300 2005 2006 2007 2008E 2005 2006 2007 2008E Source: IDSC, Bloomberg & CICR estimates Source: CBE, Bloomberg & CICR estimates Said increase in per capita income is mostly accompanied with a rise in the aver- Expanded demand by age consumer spending, thus boosting sales of confectionary products & soft sugar-dependant in- drinks i.e. expanding sugar consumption. Correlation co-efficient between sugar dustries consumption and the former is 0.993 while with the latter is 0.986. Confectionary sales vs. sugar consumption Soft drinks sales vs. sugar consumption (2005- (2005-2008) 2008) Soft Drink sales Sugar Consumption 000 tons 000 tons US$ mn 000 tons Confectionary Sales Sugar Consumption 800 2,700 87.5 2,700 700 2,650 2,650 87.0 600 2,600 2,600 86.5 500 2,550 2,550 400 2,500 86.0 2,500 300 2,450 2,450 85.5 200 2,400 2,400 85.0 100 2,350 2,350 84.5 2,300 0 2,300 2005 2006 2007 2008E 2005 2006 2007 2008E Source: BMI , Bloomberg & CICR estimates Source: BMI, Bloomberg & CICR estimates GOVERNMENT-INITIATIVES Despite that Egypt's cane yield is ranked among the highest worldwide, the Promoting beet GoE's policy has been recently promoting beet cultivation, in an attempt to miti- cultivation over that gate the challenges posed by scarce water and land resources. The GoE is pro- of cane moting beet cultivation through vertical (yield) and horizontal (acreage) expan- sions. Although beet crop is relatively new as it was first introduced in 1981; it has gained wide importance due to its tolerance to salinity along with its ability to produce high yields under saline soil compared with most other traditional winter crops In order to endorse farmers to cultivate beet and to control cane cultivation, the …through higher government increased the former's procurement price from LE 191/ton in 2007 to procurement prices LE 225/ton in 2008 whereas it increased the latter's procurement price by LE 17/ ton to LE 182/ton in 2008. 88
    • November 11, 2008 EGYPT | SUGAR It is worth mentioning that beet cultivated in newly reclaimed lands grew by a …horizontal CAGR of 74.8% over the period 2004-2007 reaching 14.6k feddans, whereas expansion cane cultivated areas in newly reclaimed land witnessed a CAGR of 5.7% over the same time span. Beet cultivated areas in newly reclaimed lands Cane cultivated areas in newly reclaimed lands (2004-2007) (2004-2007) Feddans Feddans 25,000 40,000 39,000 38,000 20,000 37,000 CAGR 74.8% CAGR 5.7% 36,000 15,000 35,000 34,000 10,000 33,000 32,000 5,000 31,000 30,000 0 2004 2005 2006 2007 2004 2005 2006 2007 Source: Ministry of Agriculture Source: Ministry of Agriculture FUTURE OUTLOOK To meet unsatisfied demand plans are underway to establish new sugar beet Beet drives future production plants . By 2010 Dakahlia Sugar Company will begin operating its capacity expansions second production line with a capacity of 120K tons, while Nile Company (Sawiris) will start operating its 125K ton production line raising total sugar beet production capacities from 1,390K tons in 2008 to 1,635K tons in 2010 including the 750K tons of Savola's sugar beet refinning plant which began operation early 2008. Following the government plan to promote beet area over cane, no sugar cane capacity expansions are expected in the future thus total sugar capacities are expected to reach 2,635K tons by 2010 up from 2,390K tons in 2008 driven only by expansions in sugar beet The existence of a production-consumption gap amounting to 1,022K tons in Growth potential 2008 being satisfied by imports, represents potential for further investments in resides in sustainable the sugar industry – not only to meet up with the rising sugar consumption but sugar demand also to eat up from the imports bulk. Given the GoE plans to expand beet culti- vated areas, it is expected that over 2008-2012 beet cultivated areas will grow by a CAGR of 10.7% - pushing production to reach around 2 mn tons by 2012 89
    • November 11, 2008 EGYPT | SUGAR Sugar consumption vs. sugar imports (2006- Sugar production vs sugar deficit (2006-2012) 2012) 000 Tons 000 Tons Sugar Production Production-Consumption Deficit Sugar Consumption Sugar Imports 3,500 2,500 3,000 2,000 2,500 1,500 2,000 1,500 1,000 1,000 500 500 - - 2006 2007 2008 2009 2010 2011 2012 2006 2007 2008 2009 2010 2011 2012 Source: CICR estimates Source: CICR estimates Sugar beet ex-factory prices are expected to record an upward trend over the Beet procurement coming five years recording a CAGR of 10.3% over 2008-2012 reaching LE prices drive future 3,862/ton in 2012 up from LE 2,606/ton in 2008 driven by the increase in beet sugar beet ex-factory procurement prices recording an expected CAGR of 18.6% over the same period prices Beet procurement prices vs sugar beet ex-factory prices (2008-2012) Beet Procurment Prices Sugar Beet Ex-Factory Prices 500 4,500 450 4,000 400 3,500 350 3,000 300 2,500 250 2,000 200 1,500 150 1,000 100 500 50 0 0 2008 2009 2010 2011 2012 Source: CICR estimates 90
    • November 11, 2008 EGYPT | TELECOM MOBILE, A RISING RING AMID AN ECONOMIC DRIVERS SWING Egypt youth-based population secures a The global telecom segment has been generating colossal sustainable market for telecom services. revenues, which grew by a CAGR of 9% over 2004-2007 Relatively low mobile penetration, compared reaching US$1.8 trillion in 2007. Nevertheless, the outbreak to other regional peers, provides room for of the global credit crunch and the subsequent regional growth. economic slowdown are expected to derail the sector from Narrow broadband penetration rate provides its accelerating pace. However, the Egyptian telecom sec- significant growth potential. tor growth is expected to deviate from such path exhibiting Acquisitions of 3G licenses by three opera- resilience to the upcoming storm; driven by its competitive tors will open door for the provision of new burgeoning mobile segment – registering a CAGR of 51% services. over 2003-2007 - which is expected to stimulate a spillover RISKS effect in the other segments; primarily growth in the inter- net segment, driven by the recent application of 3G tech- nologies which enabled mobile operators to provide high Global credit crunch are likely to limit the speed internet services in new guise. Secondly, competi- inflow of investments. tion in the fixed-line segment which, despite its monopolis- Fluctuating GDP per capita is expected to tic status and delayed liberalization, has been witnessing decelerate growth in internet subscribers. successive promotions by its incumbent operator to The delayed introduction of competition to counter the flow of fixed-mobile substitution (FMS). Subse- the fixed-line market will sustain the dimin- quently, the sector's growth potential mainly resides in the ishing growth rate of fixed-line subscribers. mobile segment whose services are still not yet accessible to half of the population, and the under penetrated internet KEY PERFORMANCE INDICATORS market, with its registered 13% penetration rate in 2Q08. Mobile subscribers CAGR (03-07,%) 51 Defensive demand sustained by socio-economic drivers: Escalating GDP per capita coupled with the expanding youth Internet Users CAGR (03-07,%) 30 population have been generating sustainable demand for tele- Fixed-line subscribers CAGR (03-07,%) 7 com services. Mobile penetration rate (3Q08,%) 54.4 Intensifying competition fuels growth in the mobile: The introduction of competition following the entrance of the third Internet penetration rate (2Q08,%) 13 mobile operator, Etisalat Misr (EM), have triggered exceptional COMPANIES COVERED PAGE# mobile subscribers growth registering a Y-o-Y growth of 47% - reaching 41 mn subscribers and 54.4% penetration rate in Mobinil 133 3Q08. Orascom Telecom (OT) 143 3G technology opens new battlegrounds for mobile opera- Telecom Egypt (TE) 155 tors: The acquisition of 3G license, which entails the transfer of non-voice data in addition to voice data, allowed mobile opera- tors to enter the internet market and compete over the provi- NORAN ALI sion of high speed connection in new guise—via mobile inter- NORAN.ALI@CICH.COM.EG net and portable USB modems. Accordingly, Vodafone Egypt MAYAN EL MENSHAWY (VFE) revealed that around 12% of its mobile subscribers had MAYAN.ELMENSHAWY@CICH.COM.EG used mobile internet in October 2008. SECTOR PERFORMANCE | 2004-2Q2008 Broadband stimulates internet growth: High-speed internet connections (broadband) have been the primary driver behind Telecom subs Mobile GR Fixed-line GR Internet users GR mn subs 60 80% the growth in internet users registering a CAGR of 206% com- pared to 36% recorded by free users, over 2003-2007. 70% 50 60% Mobile mania sweeps fixed-line: The exceptional growth in 40 mobile came at the expense of a contracting fixed-line market 50% triggered by fixed to mobile substitution wave. Hence, TE has 30 40% been launching a number of promotional campaigns to counter such trend. 30% 20 20% 10 10% - 0% 2004 2005 2006 2007 2Q08 91
    • November 11, 2008 EGYPT | TELECOM GLOBAL TELECOMMUNICATIONS INDUSTRY Telecommunications have played a vital role in spurring economic development Telecom: a key role through the generation of substantial revenues which grew by a CAGR of 9% in in the economy, yet only three years time, reaching US$1.8 trillion in 2007 compared to US$1.4 trillion such growth may be in 2004. Looming global recession started to impose some obstacles on the ac- hindered by ex- celerating path of the telecom industry, most notably investments - given the capi- pected global reces- tal-intensive nature of such industry. This was manifested in cases of major com- sion panies that started to reconsider expanding their activities in other area, such as Vodafone which decided to delay its service initiation in Qatar to 1Q09, due to lack of liquidity. The telecommunications market has been driven by mobile and internet users; Mobile and internet, which scored above average growth records, registering a CAGR of 24% and the engine for tele- 19%, respectively over 2000-2007. Fixed lines lagged way behind with its 4% com growth CAGR during the same time span. CAGRs of the global telecom market segments by number of subscribers over (2000-2007) 30% 24% 25% 19% 20% 16% 15% 10% 4% 5% 0% World Total subs. Fixed line subs. Mobile subs. Internet subs. Source: ITU Despite the fact that the developed countries are the most penetrated region in Developing region is mobile services with a rate of 95% in 2007, developing countries have been driving mobile and achieving a faster growth with subscribers base growing by a CAGR of 36.6% internet growth during 2000-2007 compared to 12.1% recorded by developed countries over the same time span. The same applies for the internet segment; by which developing region enjoyed a CAGR of 32% during 2000-2007, compared with 12% for devel- oped countries. EGYPT TELECOM MARKET PROFILE Over FY05/06-07/08, the exceptional telecommunications growth has been a key An engine for driving force to the Egyptian economy registering a CAGR of 51% - outpacing the growth 19% CAGR witnessed by the country's GDP, during the same period. Accord- ingly, telecom revenues surged by 42% reaching LE 27.2 bn in FY07/08 up from LE 11.9 bn in FY05/06 ; thus enlarging its share of GDP from 1.9% to 3 %, over the same time span 92
    • November 11, 2008 EGYPT | TELECOM In line with the global developments, mobile expansions led telecommunications Mobile, the flagship growth with a CAGR of 51% over 2003-2007, followed by internet users. for telecom growth Growth of telecom market segments' subscribers (CAGR 2003-2007) Mobile subs. 51% Internet users 30% Fixed line subs. 7% 0% 10% 20% 30% 40% 50% 60% Source: ITU; Telecom Operators, MCIT KEY RECENT DEVELOPMENTS : THE MOBILE SEGMENT The entrance of the May 2007 witnessed the entrance of the third mobile operator - EM - following its third mobile operator license acquisition a year earlier for LE16.7 mn; entailing the provision of 2G/3G with its 3G technology technologies. Such act triggered VFE to acquire the 3G license in January 2007 yet, operation started following EM. Eventually, Mobinil which launched its 3G service by September 2008. It is worth mentioning that the entrance of EM has eaten up the market shares of both operators with VFE incurring the largest drop of 5% compared to 3% in Mobinil’s share in 3Q08 compared to the same period a year earlier. Yet, Mobinil continues to dominate 46% of the market with 18.9 mn subscriber’s base, followed by VFE with 41% market share and a total of 16.6 mn subs, and then EM with its 13% market share and a total of 5.3 mn subs. Progressive market shares of mobile operators’ (2006-3Q08) EM VFE Mobinil 3Q08 2007 2006 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% Source: Telecom Operators 93
    • November 11, 2008 EGYPT | TELECOM The last obstacle on the path of free competition was removed in April 2008 with MNP paves the road the launch of Mobile Number Portability (MNP) service by the National Telecom for free competition Regulatory Authority (NTRA) for LE 75 service charge for subscribers who have at least one year subscription with a mobile operator, thus excluding EM subscrib- ers*. Subsequently, MNP intensified subscribers transfer to the new operator, re- flected in the growth in EM subscribers which registered an exceptional Q-o-Q growth of 110% in 3Q08, reaching 5.3 mn subscribers. Thus, nearly doubling its market share to 13% in 3Q08 compared to 7% a quarter earlier, in addition to the escalating churn rates borne by other operators, most notably Mobinil whose rate surged to 9.5% in 3Q08 up from 5.8% in 2Q08.** On the whole, subscribers re- corded a 16% Q-o-Q growth reaching 40.8 mn subscribers, over the same time span. QoQ Mobile Subscribers by operator Mobinil VFE EM mn Subs. 45 40 35 30 25 20 15 10 5 0 4Q07 1Q08 2Q08 3Q08 Source: Telecom Operators MARKET DYNAMCIS Internet Basic Drivers Drivers Expanding youth Growing IT clubs & ISPs GPD per capita Broadband growth Telecom Drivers Mobile Drivers Pre-paid growth Intensified competition Technological advancement * Mobile Number Portability (MNP) is a newly-developed telecom service that enables the mobile subscriber to change his operator without changing his own number. The MNP gives the subscriber all freedom to port his number to another operator without forcing him to lose his number. ** Al Gomhuria, 30 October 2008 94
    • November 11, 2008 EGYPT | TELECOM Egypt's favorable demographics acts as a driving force for mobile and internet Expanding youth- services, especially that the country's innate demographic structure entails a denominated significant share of youth within the age bracket of 15-45 years accounting for population 50% of the total population. Powerful links exist between mobile subscribers, internet users and population growth, exhibited in strong co-efficient correlations of 0.88 and 0.98, respectively. In addition, the significant share of 21% held by the age group of 5-15 years lays solid potential for expanding demand. Rising per capita income, namely following the cut in income tax to a flat rate of Growing GDP per 20% in July 2006, fostered the affordability of telecom services. Accordingly capita GDP per capita has been strongly correlated with mobile subscribers' and inter- net users with a coefficient correlation of 0.99 for both factors. Mobile subscribers & internet users vs. GDP per capita Mob subs Internet users GDP per capita US$ mn 35 2,000 1,800 30 1,600 25 1,400 1,200 20 1,000 15 800 600 10 400 5 200 - - 2005 2006 2007 Source: IMF, Mobile Operators MOBILE-RELATED DRIVERS The pre-paid segment is the key driving force behind increasing mobile subscrib- Pre-paid driven ers, which recorded an extraordinary Y-o-Y growth of 74%, compared to 17% re- market corded by post-paid in 2007. Consequently, pre-paid segment held the lion’s share of 95% of the total mobile subscribers' base compared to 5% held by post- paid segment in 3Q08.* Pre-paid dominance is attributed to Egypt's low income level; in addition to the intensified competition initiated by EM’s price war on the pre-paid front by removing 15% sales taxes on recharge cards. Thereafter, the other two operators pursued the same price cuts on pre-paid cards to secure their wide pre-paid base. Mobile market subscribers quarterly market mix over 4Q07-3Q08 Prepaid Post-paid mn 40 35 30 25 20 15 10 5 0 4Q07 1Q08 2Q08 3Q08 Source: IMF, Mobile Operators * Etisalat Misr subscribers mix is estimated from actual 3Q08 subscribers' figures. 95
    • November 11, 2008 EGYPT | TELECOM Intensified Intensified competition characterizes the mobile market, namely in the pre-paid competition segment – offering lower per minute tariff and additional benefits in the form of extends to the free minutes, SMS and cheaper handsets; thus, fostering mobile affordability international and widening the addressable mobile market. Yet, competition was extended to market the international call market when the NTRA offered the license to operators in October 2007 for a payment of LE 100 for each existing subscriber and LE 20 for each additional subscriber in addition to revenue sharing fees at a maximum of 6%. EM was the only operator to acquire the license for LE 200 mn, while the other operators continued providing the services through Telecom Egypt (TE). Quarterly growth in mobile subscribers 20% EM combined VFE Free Bouquet VFE on-net Options offer LE 0.3/min+free mins promotion 18% controlled Mobinil Star & LE 0.20 Mobinil monthly bill+ Business offer mobile-to- Alohat per LE0.32 /min LE0.22/min+free mobile 16% sec. bill & rate+free sms mins Mobinil & VFE removal of Life time validity Mobinil on-net admin fees promotion LE 0.20 14% VFE Super mobile-to-mobile EM on-net EM Ahlan LE promotion LE 0.15 0.39/min+removal of 12% mobile-to-mobile pre-paid card sales taxes VFE Easy 10% Mobinil Ahsan nas LE0.20/min for selected nos. 8% 6% 4% 2% 0% 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 Source: Newspapers; Telecom operators Opting for The adoption of advanced technology—namely the 3G - is another front through technological which mobile market growth was boosted. 3G technology is a key for upgrading edge operators’ capacities and the provision of data services such as mobile TV, video calling and high internet speed. EM initiated competition in technology adoption through adopting its 3.5G technology in May 2007, followed by its 3.75G adop- tion in November 2007. Launch date of 3G technologies in Egypt Operator EM VFE EM Mobinil Technology 3.5G 3G 3.75G 3G Operation Date May 07 May 07 Nov 07 Sept 08 Source: CICR 96
    • November 11, 2008 EGYPT | TELECOM Invest to grow To accommodate the rapid technological advancement, mobile operators have been keen to allocate considerable investments. For instance, to expand its net- work that currently covers 95% of Egypt, EM is expected to pump LE 2.5 bn by * 2009. INTERNET DRIVERS A growing IT Over 2003-2007, internet users grew by a 30% CAGR. 2007 witnessed a pick up clubs and ISPs, in users' growth which surged by a 43% Y-o-Y growth to 8.6 mn subscribers and the backbone 12% penetration rate. Such growth was triggered by the rise in free users which for internet grew by 52% in 2007 compared to 24% a year earlier, as a result of regained rise growth in the number of IT clubs that grew by 30% in 2007 compared to 14% a year ear- lier.** In 2Q08, internet users reached 9.7 mn and a 13% penetration rate. The growth in internet users was supported by increasing Internet Service Providers (ISPs) which reached 222 providers in 2007 up from 214 providers in 2004 and an expanding international internet bandwidth which grew by eight folds reaching 14866 Mb/s in 2007 up from 1595 Mb/s, over the same time span. Despite growth in numbers, internet adoption is still growing at a slow rate reflected in the drop in Egypt's e-readiness rank from the 55th rank in 2006, out of a total of 69 countries, with an index score of 4.30 to the 58th rank in 2007 with a score of 4.26.*** Limited adoption was attributed to low PC penetration rate estimated to be currently around 7% of the families****; the concentration of government initiative such as the PC for Every home and IT clubs initiatives in large metropolitans, Cairo and Alexandria; language barrier and the unavailability of enough Arabic content and the relatively expensive access fees. Internet users' growth pattern and penetration rate (2003-2007) Internet Users Internet Users GR mn subs P t ti t 10 70% 9 60% 8 50% 7 6 40% 5 30% 4 3 20% 2 10% 1 0 0% 2003 2004 2005 2006 2007 Source: MCIT, ITU * Al-Gomhuria, October 30th 2008 ** IT Clubs are units established by MCIT, in collaboration with the private sector, to offer access to computers and the Internet at nominal fees, as well as IT training programs and electronic libraries. The purpose of the initiative is to offer communal solution to the problems of IT accessibility and awareness. *** E-readiness index is a ranking composed annually by the Economist Intelligence Unit EIU which measures the country’s information and communications technology (ICT) infrastructure and the ability of its consumers, busi- nesses and governments to use ICT to their benefits. The e-readiness rankings are a weighted collection of nearly 100 quantitative and qualitative criteria, organized into six distinct categories measuring the various com- ponents of a country’s social, political, economic and of course technological development. **** BMI, quot;Egypt Telecommunications Report Q32008.quot; 97
    • November 11, 2008 EGYPT | TELECOM High speed Over 2003-2007, the growth in internet users have been fueled by broadband internet generates subscribers which recorded the highest growth rate of a CAGR of 206%, replac- high growth ing dial-up users which grew by 36% CAGR. Broadband growth was stimulated by a number of government-led tariff restructuring initiatives. Recently, TE al- lowed customers to jointly apply for a fixed-line and broadband line through its partnership with TEData. * Broadband subscribers vs. internet users (2003-2007 ) mn Users 000 subs Internet users Broadband subs 10 600 53% drop in 9 monthly charge to LE 45 500 8 7 400 37% drop in monthly charge Broadband initiative 6 to LE 95 50% drop in monthly charge to 5 300 LE 150 4 200 3 2 100 1 0 0 2003 2004 2005 2006 2007 Mar-08 Source: MCIT, ITU, NTRA Mobile operators, Mobile operators have recently entered the internet services market via the 3G new comers to the technology, which entails the transfer of both voice data (a telephone call) and internet market non-voice data (such as downloading information, exchanging email, and instant messaging). Accordingly, mobile operators started a wave of buying stakes in op- erating ISPs, mainly Class A **, exemplified in EM’s acquisition of leading stakes in Nile Online (NOL) and the Egyptian Company for Networks (EgyNet) in 2008; VFE's acquisition of 69.9% in Raya Telecommunications 2007; and Mobinil's strong affiliation to LINKdotNET through their common parent company, Orascom. Since May 2007, mobile operators have been racing in providing advanced ser- vices at competitive prices such as mobile internet, currently for LE1/day, USB modems and associated bundle services such as EM's offer which entails paying 6 or 12 months subscription fees and getting the USB for free; recent Mobinil's offer providing a laptop and USB modem for an average price of LE 1,600.*** Cus- tomers started to gravitate towards these services, in October 2008 VFE reported that almost 12% of its 17 mn customer base had used mobile internet service. * Al-Gomhuria, 30 October 2008 ** Three categories of license are granted to those ISPs as follows: Class A are entitled to points of presence (POPs) in TE’s exchanges and the right to lease ports to other ISPs; Class B data carriers are given the same rights as Class A except for the leasing rights of ports to other ISPs; Class C provide Internet services to custom- ers. *** Richard Daly, CEO Vodafone Egypt , Euro-money conference 98
    • November 11, 2008 EGYPT | TELECOM FIXED LINE MARKET A diminishing Fixed-line subscribers have been growing at a diminishing annual rate which sig- growth due to FMS nificantly slumped to 3.8% in 2006 compared to 9.5% a year earlier. Such drop trend was fueled by the intensified competition between mobile operators which had taken its toll on Telecom Egypt (TE)'s retail revenues which witnessed escalating drops from 2% in 2007 to 3% in 2Q08. Contraction in fixed-line growth can be also attributed to low rural penetration reaching 7% in 2006, despite the concen- tration of the majority of 57% of the population in these areas. TE has launched a number of promotional campaigns to reduce the fixed-mobile substitution (FMS) trend ending with its recent offer to remove the installation and administrative fees for new residential and commercial fixed lines till end of November 2008. Previous offers had negligible impact on subscribers' growth, illustrated in its 70% discount on installation fees promotion offered till December 2007, after which subscribers grew by declining Y-o-Y rate of 3.7% compared to 3.8% a year earlier. Fixed line pattern (2001-2007) Fixed-line subs Available lines Penetration rate mn subs 16 16% 14 14% 12 12% 10 10% 8 8% 6 6% 4 4% 2 2% 0 0% 2001 2002 2003 2004 2005 2006 2007 Jan-08 Source: Telecom Egypt (TE) New tariff In July 2008, TE adopted a new fixed-line tariff rebalance that aimed to stimulate rebalance and a added fixed-lines by slashing installation fees by 50% for both residential and mild growth in commercial lines to LE 250 and LE 500 respectively; cutting fixed-to-mobile min- fixed-line ute tariff by 33% in peak times and 14% in off-peak times to LE 0.30/min lower subscribers than the average LE 0.40/min charged by the mobile operators on mobile-to-fixed calls; in addition to reducing long distance call per minute rate by 20% to reach LE 0.16 (for more than 60 km) and LE 0.08 ( for less than 60 km). Such tariff is ex- pected to marginally lift up the number of added lines which was reflected in 1% growth recorded in September 2008 compared to July, two months after new tar- iffs implementation. In September 2008, the National Telecommunication Regulatory Authority Delayed (NTRA) decided to finally postpone the auction for the second fixed-line license, competition due to after several delays, for a year due to uprising inflation in addition to the recent credit crunch financial turmoil which made lending more difficult, especially in sectors requiring huge investments as the telecom sector (initial investments reach around US$1 bn for fixed-line network). The delay is expected to be extended for a period of two years until the next upturn in the global economy which is projected to occur by 2010. 99
    • November 11, 2008 EGYPT | TELECOM FUTURE OUTLOOK The recent entrance of the new operator and the subsequent aggressive com- Mobile growth on petition has recently boosted mobile proliferation with penetration rate reaching the peak for the 54.4% in 3Q08. Over 2008-2009, mobile subscribers are projected to strongly short-run rise by an average of 33% , due to the rolling-out of 3G network and services coupled with the existence of a considerable addressable market. Such trend will be reversed by 2010, as the market reaches its saturation stage; accord- ingly mobile growth is projected to grow by a diminishing rate. By 2012, mobile subscribers will approach the addressable market level estimated to reach 84% of the population, due to existence of inaccessible impoverished segment; thus, reaching 66.2 mn subscribers and an 82% penetration rate. Mobile outlook ( 2008-2012) Population Addressable subs Mobile Subs. Thousands 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 - 2008 2009 2010 2011 2012 Source: CICR Internet growth :an Growth in internet users will be driven by the broadband segment, projected upward trend stifled to grow by a CAGR of 34% compared to 15% by free users during the period by short downturn of 2008-2012. Internet users' growth rate is expected to level off during 2008- 2010, due to anticipated economic slowdown, growing by a projected annual growth rate of 18% compared to 31% recorded over 2005-2007; with internet users projected to reach 14.2 mn users and 18% penetration rate by 2010. Such trend will be reversed in 2011, driven by the anticipated pick-up in GDP per capita. Accordingly, internet penetration is expected to reach 24%, and that of broadband to reach 2.5% by 2012, given the existence of internet barri- ers manifested in high illiteracy rates and low income. Internet outlook ( 2008-2012) Internet users Broadband subs mn Users mn Subs 25 2.50 20 2.00 15 1.50 10 1.00 5 0.50 0 - 2008 2009 2010 2011 2012 Source: CICR 100
    • November 11, 2008 EGYPT | WHITE CONSUMER GOODS (WCG) EGYPT | WHITE CONSUMER GOODS (WCG) LIMITED EXPORTS IS A BLESSING POTENTIALS Growing population with favorable demo- Until recently, limited export potential has been one of the graphic structure, as 48% of the population main deficiencies of the WCG industry and a key chal- is below the age of 45, thus expanding mar- lenge. Yet, nowadays given the anticipated global down- riage rates prospects. turn which is expected to reflect negatively on trade activi- Limited exposure to international markets. ties, limited exports seems to be the industry's life-jacket Well established base of feeding industries amid the global storm. The white consumer goods industry (components and packaging). (WCG) is a defensive industry, gaining particular strength Various products targeting different social with Egypt's growing population and the developed base classes. of feeding industries. However, driven by its strong corre- Despite the rising cost of energy it is still lation with GDP per capita and interrelation with the real- lower than the global average. estate market that are expected to witness lower growth GoE's plan to pump LE 300 mn new invest- ments in stoves production. levels; WCG demand is expected to continue growing yet with a slower pace registering 3% in 2009. RISKS Limited exports: Despite of the increasing WCG exports still they represent a minimal contribution averaging 6% of total Economic slowdown. local production over 2004-2007. Growing competition with a minimal cost passing ability. Resilience stemming from targeting different social Decrease in propensity to purchase with classes: The WCG market features a wide range of products the overall slowdown in the economy. with varying prices that suit the different social income classes, whereas imports - due to its relatively high price scheme - tar- get mainly the high end consumers constituting class A that KEY PERFORMANCE INDICATORS represents only 2% of the population. WCG production CAGR (04-07,%) 4.6 Real-estate boom pushed demand higher: The real-estate WCG consumption CAGR (04-07,%) 4.5 boom witnessed in the past couple of years along with the Imports CAGR (04-07,%) 24 strengthened GDP per capita and increasing marriage con- tracts exerted a pull towards WCG demand that registered a Coverage ratio (2007,%) 104 CAGR of 4.5% over 2004-07. COMPANY COVERED PAGE # Electric water heaters, a star performer: The move to the Olympic Group 139 outskirt destinations as 6th of October and New Cairo and the absence of natural gas distribution networks in these destina- tions diverted the demand from gas to electric water heaters that was ranked the first in terms of growth registering a CAGR ALIA MAMDOUH of 12.4% over 2004-07. ALIA.MAMDOUH@CICH.COM.EG SECTOR PERFORMANCE | 2004-2008 WCG Demand WCG Production 2008E 2007 2006 2005 2004 0 2,000 4,000 6,000 8,000 10,000 K Units 101
    • November 11, 2008 EGYPT | WHITE CONSUMER GOODS (WCG) The White Consumer Goods (WCG) market bears a number of special A special industry en- characteristics: joying a strong con- sumer leverage A high level of seasonality by nature where the summer usually witnesses strong levels of demand due to the high marriage rates; the increasing demand for touristic real estate units. Moreover, the time span of religious feasts witness high levels of marriages. A relatively strong consumers' bargaining power due to the variety of products matching different income levels. On the other hand, the well-established feeding industries with various suppliers tend to give suppliers a low bargaining power before consumer goods manufacturers. A cyclical industry, driven by the health of the economy in general and activity in the real estate and housing sector in particular Strong demand led by Starting 2006 the WCG market leapfrogged by 5.1% versus a growth of 3.4% in electric water heaters 2005 – fueled namely by the jump in GDP/capita growth rate which recorded 8.2% in 2006 compared to 5.8% in 2005. 2007 followed through with an increase of 4.8% reaching 8.4 mn units. Electric water heaters led such growth with 18.9% in 2007— attributed to the move to the outskirt destinations as 6th of October and New Cairo and the absence of natural gas distribution networks in these destinations which diverted the demand from gas to electric water heaters. WCG Market Demand Growth by segment Washing machines Refrigerators K Units WCG Production WCG Demand Stoves Electric Water Heaters 9,000 Gas Water Heaters Total Market 20% 18% 8,500 16% 14% 8,000 12% 10% 7,500 8% 6% 7,000 4% 2% 6,500 0% 2004 2005 2006 2007 2006 2007 Source: IDA & CAPMAS Source: IDA & CAPMAS Due to the necessity of after-sales services and the need to have an easy access Demand is mostly to maintenance centers, production coverage maintained its high level of 1.04x. covered by local pro- duction 2007 imports registered higher growth rate of 52% - representing 83.5k of the 2007 witnessed a added units – compared to an increase of 36% in 2006. Yet, imports still hold a higher growth in im- minimal share of 3% from the total WCG market. It is worth noting that the major- ports ity of imported products target the high-end consumers. Despite the minimal share of 8% in the total imports, stoves registered the highest growth of 108% in 2007 – driven by the modern hi-tech stoves. On the other hand, exports wit- nessed slower growth of 3.9% than that of 2006 (14%), led by the electric water heaters accounting for 38% of total exports. Generally, WCG market features a limited number of companies that bear a large A private sector ori- size as it is the case in Olympic Group and El-Araby; followed by a second tier of ented industry with companies as Kiriazi, Electrostar, Alaska, Universal and Fresh. Olympic Group different concentra- and Kiriazi dominate the washing machines and refrigerators segments, while tion levels throughout Olympic Group and Fresh dominate the electric water heaters segment. How- each segment ever, when it comes to stoves, the market is very fragmented giving consumers a relatively strong bargaining power due to the presence of a number of producers with products addressing different segments of the society. 102
    • November 11, 2008 EGYPT | WHITE CONSUMER GOODS (WCG) WCG main players Refrigerators Stoves Water Heaters One-door Universal Electric Olympic Group Olympic Group Olympic Group Alaska Kiriazi Fresh Toshiba Fresh GMC Two-door Washing Machines Gas Kiriazi Olympic Group El Masanaa Olympic Group Kiriazi Universal Electro Star Zanussi Olympic Group Alaska GMC Fresh National Source: Kompass GROWTH DRIVERS Urban housing de- Urban housing demand—marriage contracts and the demand for 2nd housing mand affects the de- units — highly affects WCG consumption . Urban demand has been witnessing a mand for WCG CAGR of 3.1% over 2004-07 which contributed to the growth in WCG market. It is worth highlighting that the expanding demand for second housing units – namely in the outskirt destinations – coupled with the demand for touristic real- estate units in the coastal areas act as driver to the rising WCG consumption. Urban Demand vs. WCG Demand units WCG Demand Total Urban Demand K units 8,600 560,000 8,400 550,000 8,200 540,000 8,000 530,000 7,800 520,000 7,600 510,000 7,400 500,000 7,200 490,000 7,000 480,000 6,800 470,000 2004 2005 2006 2007 Source: IDA& IDSC Strong ties exist between WCG demand and levels of GDP/capita bearing a cor- High GDP/capita relation coefficient of 0.997. Over 2004-07, levels of GDP/capita registered ro- strengthened the pur- bust growth of 7% (CAGR) peaking in 2006 with a y-o-y growth of 8.2% - hence, chasing power strengthening consumer purchasing power where private consumption/head wit- nessed a CAGR of 15.4% over 2004-07. GDP/capita vs. WCG consumption US$ K units GDP per Capita WCG Demand 6,000 8,600 8,400 5,000 8,200 4,000 8,000 7,800 3,000 7,600 2,000 7,400 7,200 1,000 7,000 0 6,800 2004 2005 2006 2007 Source: IDA& CAPMAS 103
    • November 11, 2008 EGYPT | WHITE CONSUMER GOODS (WCG) KEY CHALLENGES Steel prices, one of the main components of the WCG cost of production, Risk lies in rising raw skyrocketed over 2003-07 where flat steel prices grew at a CAGR of 16% materials prices, yet, recording a high level in 2007, reaching LE 3,601/ton with a y-o-y growth of 19% not for long driven by the increase in its raw materials prices (iron ore, scrap and billets). Over and above, WCG production utilizes a more fine tuned type of flat steel that is relatively more expensive. Combined with the increasing plastic prices, another raw material used in the production process, moving in line with the increase in polyethylene price level driven by the recent surge in oil prices, WCG producers face immense risk with respect to their margins. However, with the current decline in oil and commodities prices, production costs challenges should fade away. Flat steel prices LE 3,700 Increase of 19% 3,600 due to the hike Decline of 3% in raw materials due to the prices (iron ore, transformation 3,500 billets, ect..) of China from net importer to 3,400 net exporter 3,300 3,200 3,100 3,000 2,900 2,800 2,700 2004 2005 2006 2007 Source: Bloomberg Increasing competition is another threat facing both the concentrated and the Growing competition fragmented segments of the WCG market. Within the concentrated segments of and the minimal cost the market - washing machines, refrigerators and electric water heaters – the passing ability main players face competition from foreign producers in terms of high tech im- ported products. Nevertheless, stoves - one of the highly fragmented segments in the market - are relatively competitive as well due to the presence of a number of local producers offering different categories that match the varying income lev- els. Such expanding competition is the main reason behind the industry’s partial cost passing ability, where main players could not pass on the entire increase in production costs over the past year in order to ensure maintaining their market shares. Despite the slight improvement in the factors that hindered export contribution in Limited export now the past years represented mainly in the inactive trade agreements, the market is acts as the only res- still faced by a number of challenges within this respect. One of the main defi- cue ciencies within the produced goods is the limited designs within each segment along with the appreciating Egyptian pound versus the US$ which might exert more pressure on the industry's export potential. Yet, nowadays this pitfall turned out to be this industry’s life-jacket amidst the expected decline in exports driven by the global slowdown and shrinking external demand. 104
    • November 11, 2008 EGYPT | WHITE CONSUMER GOODS (WCG) FUTURE OUTLOOK Affected by the slowdown in urban housing units demand; the expected slow A growing industry growth in GDP/capita shedding its reflections on marriages rate, demand on serving domestic de- WCG is expected to continue growing, yet at a slower pace of 3% in 2009. mand Demand outlook Washing Machines Refrigerators Stoves Elec Water Heat. Gas Water Heat. K units 3,500 3,000 2,500 2,000 1,500 1,000 500 0 2007 2008 2009 2010 2011 Source: IDA, CAPMAS, CICR Forecasts 105
    • November 11, 2008 THIS PAGE IS INTENTIONALLY LEFT BLANK 106
    • November 11, 2008 EGYPT | FURNISHING 12M FAIR VALUE | LE 7.59 AL-EZZ CERAMICS & PORCELAIN (GEMMA) BUY | MODERATE RISK Al-Ezz Ceramics & Porcelain (GEMMA) is a well-known brand of tiles in Egypt. Its main activities include produc- SHARE DATA ing ceramics and porcelain tiles in addition to trading sani- Reuters; Bloomberg ECAP.CA , ECAP EY tary ware. GEMMA targets the replacement market, with a Recent price as of 6-Nov-08 LE 4.98 6% market share, so any expected slowdown in the real No. of O/S shares 51.1 mn Market cap LE 0,254.2 mn estate sector should have no effect on GEMMA's sales. 52-wk high / low LE 19.62/ LE 3.2 Expansion of the company’s 6-mn sqm p.a. is underway Avg. daily volume / turnover 0.46 mn / LE 6.62 mn and expected to start production early 2009. We believe said expansion will boost GEMMA's sales in both the local and international markets. Our DCF-led valuation indi- COMPANY SYNOPSIS cates a 52% upside to LE 7.59, warranting a BUY with a Al-Ezz Porcelain (GEMMA) was established in 1981 MODERATE RISK rating. under Law No. 159/1981 for the purpose of manufacturing, trading and distributing ceramics, porcelain, sanitary ware, taps and its related contracting works. New factory expansion expected to start in 2009 with LE Currently, it is specialized in the production and 270 mn in capex: A 50% capacity increase from 12 mn sqm to trade of high-quality ceramics and porcelain tiles. 18 mn sqm is in process in order to meet expected local and In 1998, Al-Ezz Porcelain bought a 97.82% stake in Al-Ezz Ceramics and, accordingly, its name was international growth in demand for ceramic and porcelain prod- changed into Al-Ezz Ceramics & Porcelain ucts. Having reached the maximum production capacity with a (GEMMA). utilization rate of around 91%, GEMMA was in need for expan- In 2004, Al-Ezz Ceramics was merged in Al-Ezz sion - as we noted in our report dated May 3, 2007. Ceramics & Porcelain (GEMMA). On the operational front, GEMMA has a 6% market share with a total Exports are a strategic target: GEMMA’s strategic target is production capacity of 12 mn sqm per annum. to penetrate new markets, such as the US - the largest im- Currently, GEMMA has an authorized capital of LE porter of tiles all over the world, to benefit off higher selling 1.8 bn and an issued capital of LE 255.2 mn, distributed over 51.05 mn fully paid shares at a par prices in addition to maintain existing markets in Greece, Saudi value of LE 5/share. Arabia, and the Middle East. Similar to other local companies, GEMMA has a comparative advantage of low manufacturing cost, especially labor. We believe said advantage will be a positive catalyst for GEMMA to penetrate these markets, espe- cially the US which has a higher labor cost. SHAREHOLDER STRUCTURE Distribution channels: GEMMA’s sales are generated Al-Ezz Holding 63.9% through four channels: showrooms, projects (such as hospitals, Financial Holding Int'l Limited 5.7% hotels, and touristic villages), agents, and exports. In 2007, Others 0.1% said projects and showrooms accounted for around 14% of Free Float 30.3% Total 100.0% GEMMA's total sales. Has been a tax payer since 2007: GEMMA has historically benefited off a 10-year tax exemption (for its factory located in Al-Sadat City) which ended in December 2006. Starting 2007, GEMMA began paying income taxes. Growth drivers: While demand for tiles should be driven in AHMED ABDEL-GHANI part by growth in the real estate sector, GEMMA mainly targets AHMED.ABDELGHANI@CICH.COM.EG the replacement market. We believe that GEMMA's effective distribution channels, targeting exports, in addition to its capac- STOCK PERFORMANCE | 52 WEEKS ity increase should all reflect positively on its sales growth. Volume ECAP CASE 30 - rebased Valuation and recommendation: On a DCF basis, we reached a 12-month target fair value of LE 7.59/share for GEM- mn shares LE 20 4.5 MMA, implying a 52% upside potential. Traded at 12.6x 2009 18 4.0 16 3.5 expected earnings. Accordingly we rate this stock at BUY at 14 3.0 MODERATE RISK. 12 2.5 10 2.0 8 1.5 6 1.0 4 0.5 2 0 - Nov-07 Jan-08 Jun-08 Jul-08 Dec-07 Feb-08 Mar-08 Apr-08 May-08 Aug-08 Sep-08 Oct-08 107
    • November 11, 2008 EGYPT | FURNISHING | GEMMA Balance Sheet (LE mn) 2007A 2008F 2009F 2010F Cash Flow 2007A 2008F 2009F 2010F Assets NOPAT 45.4 50.4 71.2 84.0 Cash & Cash Equivalent 12.3 14.1 19.6 24.3 Dep. & Amor. 19.1 19.3 26.8 34.4 Net Receivables 149.3 122.6 178.7 226.9 COPAT 64.5 69.7 98.0 118.4 Total Inventory 118.5 131.0 182.5 226.9 WI Change 29.0 16.4 (82.3) (70.8) Advance Payments 7.2 8.2 11.4 14.2 Other Current Items 0.1 0.0 0.0 0.0 Other Trading Assets 0.0 0.0 0.0 0.0 CF After Current Oper. 93.5 86.1 15.7 47.6 Other Current Assets 0.0 0.0 0.0 0.0 Financing Payments (65.1) (78.2) (92.6) (95.6) Total Current Assets 287.4 276.0 392.3 492.4 Cash Before LT. Use 28.4 7.9 (76.9) (48.1) Net Plant 257.6 435.5 465.5 442.9 Net Plant Change (40.7) (197.1) (56.8) (11.9) Long-Term Investments 1.1 1.1 1.1 1.1 FCFF 52.7 (111.0) (41.1) 35.7 Other Trading Non-Current Assets 2.9 2.9 2.9 2.9 Others (2.0) 0.0 0.0 0.0 Other Non-Current Assets 2.3 2.3 2.3 2.3 CF Before Financing (14.3) (189.2) (133.7) (59.9) Intangibles 0.0 0.0 0.0 0.0 Short-Term Debt (5.1) 9.2 137.9 37.5 Total Assets 551.3 717.7 864.0 941.6 Long-Term Debt 19.2 107.6 0.0 25.8 Net-worth 0.0 72.9 (0.0) 0.0 Liabilities & Shareholders' Equity Grey Area 1.3 1.3 1.3 1.3 Short-Term Debt 72.2 81.4 219.2 256.7 Dividends 0.0 0.0 0.0 0.0 Current Portion Of LTD 46.7 41.6 47.2 45.0 Change in Cash 1.1 1.8 5.5 4.7 Accounts Payable 50.3 50.0 69.7 86.6 Accrued Expenses 3.9 5.3 7.4 9.2 Fact Sheet 2007A 2008F 2009F 2010F Down Payments 15.2 17.3 24.1 29.9 ROE 4.3% 6.0% 6.0% 9.6% Taxes Payable 5.5 5.5 5.5 5.5 ROS 3.1% 5.3% 4.1% 5.8% Dividends Payable 0.0 0.0 0.0 0.0 ROA 1.8% 2.6% 2.3% 3.8% Other Spontaneous Finance 2.4 2.4 2.4 2.4 ROIC 9.6% 7.9% 9.5% 10.4% Other Current Liabilities 1.8 1.8 1.8 1.8 Total Current Liabilities 198.1 205.3 377.4 437.2 Total Long-Term Debt 117.7 183.7 136.5 117.3 Other Non-Current Liab. 0.0 0.0 0.0 0.0 EBITDA Margin 21.1% 21.2% 21.0% 20.9% LTerm Spontaneous Fin. 0.0 0.0 0.0 0.0 ATO 0.6 0.5 0.6 0.7 Total Liabilities 315.8 389.0 513.9 554.5 WI/ Sales 65.8% 53.1% 54.8% 55.7% Deferred Taxes 9.6 10.8 12.1 13.4 ALEV 2.5 2.3 2.6 2.5 Other Provisions 1.4 1.4 1.4 1.4 Minority Interest 0.0 0.0 0.0 0.0 Debt/ Tangible Networth 1.4 1.2 1.5 1.5 Shareholders' Equity 224.6 316.5 336.7 372.3 Current Ratio 1.5 1.3 1.0 1.1 Total Liabilities & Net worth 551.3 717.7 864.0 941.6 Per Share Ratios 2007A 2008F 2009F 2010F Income Statement (LE mn) 2007A 2008F 2009F 2010F Share Price 4.98 4.98 4.98 4.98 Capacity '000 Units 12,000 12,000 18,000 18,000 No. Of Shares '000 51,045 51,045 51,045 51,045 Units Sold '000 10,659 11,326 14,820 17,496 EPS 0.19 0.37 0.40 0.70 Revenues 313.2 357.5 495.9 615.6 Div/Share 0.00 0.00 0.00 0.00 COGS (201.0) (228.8) (317.9) (395.2) Revenues/Share 6.13 7.00 9.71 12.06 Gross Profits 112.2 128.7 178.0 220.4 BV/Share 4.40 6.20 6.60 7.29 SG&A (46.2) (53.0) (73.7) (91.8) 65.9 75.7 104.3 128.5 EBITDA Gross Cash Flow/Share 1.26 1.37 1.92 2.32 Dep. & Amort. (19.1) (19.3) (26.8) (34.4) FCFF/Share 1.03 -2.17 -0.81 0.70 EBIT 46.8 56.4 77.5 94.1 EBITDA/Share 1.29 1.48 2.04 2.52 Interest Expense (32.1) (31.5) (51.0) (48.4) EV/Share 9.37 10.71 12.49 12.71 Provisions 0.0 0.0 0.0 0.0 Interest Income 0.0 0.0 0.0 0.0 Investment Income 0.0 0.0 0.0 0.0 Other Non-Operating Inc. (0.6) 0.0 0.0 0.0 Multiples 2007A 2008F 2009F 2010F Other Non-Operating Exp. (3.2) 0.0 0.0 0.0 P/E 26.3 13.4 12.6 7.1 EBT 10.9 25.0 26.5 45.7 Div Yield % 0.0% 0.0% 0.0% 0.0% Taxes (including deferred taxes) (1.3) (6.0) (6.3) (10.2) P/ Revenue 0.8 0.7 0.5 0.4 NPAT 9.7 19.0 20.2 35.6 EV/ Revenues 1.5 1.5 1.3 1.1 Minority Interest 0.0 0.0 0.0 0.0 P/ COPAT 3.9 3.6 2.6 2.1 Extraordinary Items 0.0 0.0 0.0 0.0 EV/ COPAT 7.4 7.8 6.5 5.5 Attributable Profits 9.7 19.0 20.2 35.6 P/ FCFF 4.8 -2.3 -6.2 7.1 EV/ FCFF 9.1 -4.9 -15.5 18.2 P/ EBITDA 3.9 3.4 2.4 2.0 EV/ EBITDA 7.3 7.2 6.1 5.0 P/ BV 1.1 0.8 0.8 0.7 Source: Company reports and CICR estimates. 108
    • November 11, 2008 EGYPT | TEXTILES 12M FAIR VALUE | LE 10.1 ARAB COTTON GINNING CO. (ACGC) BUY | MODERATE RISK DNA change SHARE DATA Reuters; Bloomberg ACGC.CA; ACGC EY Recent price as of 6-Nov-08 LE 4.10 Unlike other ginning companies, Arab Cotton Ginning Co. No. of O/S shares 251.7 mn (ACGC) is now recognizing business opportunities that Market cap LE 1,032.0 mn would be better achieved through a holding company. 52-wk high / low LE 14.44/ LE 3.17 Avg. daily volume / turnover 4.15 mn / LE 40.15 mn Indeed, ACGC revealed its intention to establish a holding company with ginning being one of the new entity's activi- COMPANY SYNOPSIS ties. We believe this “DNA changequot; will positively affect ACGC's share allocation in investors' portfolios. To press Arab Cotton Ginning Company is a shareholding service ahead, the company retained most of its 2007 profits for company established in 1977 according to ministerial decree #411/1963. The company’s main activities are future planned expansions including c. 16% (direct and cotton ginning, pressing, trading & marketing, exporting & indirect) stakes in Upper Egypt Flour Mills (UEFM), which importing, in addition to spinning synthetics, silk, and polyester. has a large base of unutilized assets. After a series of changes and capital increases, ACGC Excess liquidity: ACGC formed a consortium to acquire current authorized capital is LE 5,000 mn and the paid-in capital is LE 1,258.7 mn distributed over 251.7 mn shares UEFM, which has unutilized assets - cash, land bank, ware- with a par value of LE 5/share. houses, and cargo fleet. The latter allows UEFM to have a According to its AGM dated October 8, 2008, the company sizable market share in the shipping business in Upper Egypt. announced its intent to establish a holding company by Also, ACGC is studying several other investment opportuni- which ACGC’s management is considering changing its main activities from a pure ginning company to a holding ties , including real estate, according to which the company company with ginning being one of its activities. It is will diversify its operations and to press ahead with its holding expected that a share swap will be offered to existing company concept. company’s shareholders in the “will be” new formed holding company. Simple company structure: ACGC acquired 56.75% of Am- wal Al-Arabia through a share swap with Amwal El-Khaleej, bringing its total ownership in Amwal Al-Arabia to 100%. In SHAREHOLDER STRUCTURE addition, Amwal Al-Arabia acquired 39.64% of El-Nasr Clothes & Textiles (KABO) in June 2008 from its fully-owned subsidi- ACGC BoD 2.4% ary Modern Nile Cotton (MNC). Thus, ACGC had grouped its Public sector 3.9% operations under two main subsidiaries: Amwal Al-Arabia and Companies 20.7% Egypt Cotton Ginning. Such a strategic move should further Employees shareholders 5.0% Association simplify the group's structure and management. Free Float 68.0% Total 100.0% Vertical integration: Investment in Amwal Al-Arabia will facili- tate ACGC’s both backward and forward integrations through its newly-restructured group of companies within the textiles and clothes industry. With this vertical integration, ACGC will be operating throughout the cotton value chain from ginning, exporting raw cotton, to spinning and weaving and textiles. Financial summary: Separate revenues grew by 58% to LE MUHAMMAD EL EBRASHI MUHAMMAD.ELEBRASHI@CICH.COM.EG 62.4 mn in FY07/08 ended June 30, 2008 vs. LE 39.5 mn in FY06/07. Said increase was driven by a 50% increase in the STOCK PERFORMANCE | 52 WEEKS quantity ginned and pressed in addition to price increases. On a consolidated basis, the company’s financial results were not Volume ACGC CASE 30 - rebased comparable to those of previous years’ as ACGC has under- mn shares LE 16 35.0 gone major restructuring. 14 30.0 12 25.0 Valuation and recommendation: Based on our DCF valua- 10 20.0 tion on a consolidated level, we reached a 12-month fair value 8 15.0 of LE 10.1/share, hence we rate the stock a BUY. Said price 6 10.0 4 implies an upside potential of 146%. Our DCF valuation in- 5.0 2 cludes consolidated operations, company’s investments, and 0 - land values. We believe the company’s land makes up over Nov-07 Jan-08 Jun-08 Jul-08 Dec-07 Feb-08 Mar-08 Apr-08 May-08 Aug-08 Sep-08 Oct-08 50% of the stock’s value, which explains management’s inten- sion to set-up its own real-estate company. 109
    • November 11, 2008 EGYPT | TEXTILES | ACGC Balance Sheet (LE mn) Fact Sheet Jun-08 Jun-09 Jun-10 Jun-11 Jun-08 Jun-09 Jun-10 Jun-11 ROE 14.5% 6.0% 6.3% 6.8% Assets ROS 25.4% 10.1% 10.2% 10.9% Cash & Cash Equivalent 786.4 902.0 1,031.5 1,157.7 ROA 9.2% 3.9% 4.1% 4.5% Net Receivables 168.6 211.1 268.2 326.0 ROIC 0.1% 3.8% 4.3% 4.1% Total Inventory 398.5 395.8 475.6 527.0 EBITDA Margin 16.8% 20.8% 20.5% 20.1% Advance Payments to Suppliers 8.7 2.4 13.6 14.5 Other Trading Assets 36.6 36.6 36.6 36.6 ATO 0.4 0.4 0.4 0.4 Other Current Assets 24.0 24.0 24.0 24.0 WI/ Sales 52.5% 50.1% 56.9% 61.0% Total Current Assets 1,422.8 1,571.9 1,849.5 2,085.8 Net Plant 1,115.7 1,040.8 914.8 779.8 ALEV 2.1 2.0 2.0 1.9 Long-Term Investments 87.2 87.2 87.2 87.2 Debt/ Tangible Networth 0.4 0.3 0.3 0.3 Other Trading Non-Current Assets 40.1 38.2 38.2 38.2 Current Ratio 2.8 3.3 3.7 4.5 Other Non-Current Assets 0.8 0.8 0.8 0.8 Intangibles 511.3 511.3 511.3 511.3 Total Assets 3,177.9 3,250.1 3,401.6 3,503.0 Cash Flow (LE mn) Jun-08 Jun-09 Jun-10 Jun-11 Liabilities & Shareholders' Equity NOPAT 1.7 97.9 117.1 115.1 Short-Term Debt 317.3 307.4 331.3 293.9 Depreciation & Amortization 116.2 117.9 128.8 138.0 Current Portion Of Long-Term Debt 25.8 18.9 21.3 18.9 Gross Cash Flow (COPAT) 117.8 215.7 245.9 253.0 Accounts Payable 45.8 47.9 52.0 55.4 WI Change (497.4) (31.5) (143.9) (106.8) Accrued Expenses 0.0 0.0 0.0 0.0 Other Current Items 55.8 2.0 0.0 0.0 Down Payments to Customers 0.1 0.1 0.1 0.1 Taxes Payable 17.0 0.0 0.0 0.0 Cash After Current Operations (323.8) 186.2 102.0 146.3 Dividends Payable 13.0 13.0 13.0 13.0 Financing Payments (52.7) (78.2) (72.8) (67.8) Other Spontaneous Finance 0.0 0.0 0.0 0.0 Cash Before Long-Term Use (376.5) 108.0 29.2 78.5 Other Current Liabilities 85.2 85.2 85.2 85.2 Net Plant Change (1,014.6) (42.9) (2.8) (3.0) Total Current Liabilities 504.3 472.5 502.9 466.4 FCFF (1,394.1) 141.3 99.2 143.2 Total Long-Term Debt 91.0 73.3 52.3 33.5 Others 182.6 91.2 113.9 127.6 Other Non-Current Liabilities 9.7 1.2 1.2 0.0 Cash Before Financing (1,208.5) 156.3 140.3 203.0 Long-Term Spontaneous Finance 0.0 0.0 0.0 0.0 Short-Term Debt 315.6 (10.0) 24.0 (37.4) Total Liabilities 605.0 547.0 556.4 499.9 Long-Term Debt 116.4 1.2 0.2 0.1 Deferred Taxes 15.1 15.1 15.1 15.1 Net-worth 1,215.8 6.4 7.0 7.9 Other Provisions 56.3 90.8 128.0 167.5 Grey Area 35.9 0.0 0.0 0.0 Minority Interest 482.9 482.9 482.9 482.9 Dividends (194.4) (38.3) (42.0) (47.4) Shareholders' Equity 2,018.5 2,114.3 2,219.2 2,337.7 Change in Cash 280.8 115.6 129.5 126.2 Total Liabilities & Equity 3,177.8 3,250.1 3,401.6 3,502.9 Income Statement (LE mn) Jun-08 Jun-09 Jun-10 Jun-11 Per Share Ratios Jun-08 Jun-09 Jun-10 Jun-11 Revenues 1,154.5 1,269.9 1,371.5 1,453.8 Share Price 4.10 4.10 4.10 4.10 COGS (879.6) (916.8) (995.1) (1,060.1) Actual No. Of Shares '000 251,744 251,744 251,744 251,744 Gross Profits New No. Of Shares '000 251,744 251,744 251,744 251,744 274.9 353.1 376.4 393.7 EPS 1.16 0.51 0.56 0.63 SG&A (80.4) (88.4) (95.5) (101.3) Diluted EPS 1.16 0.51 0.56 0.63 EBITDA 194.4 264.7 280.9 292.5 Div/Share 0.30 0.15 0.17 0.19 Depreciation & Amortization (116.2) (117.9) (128.8) (138.0) Revenues/Share 4.59 5.04 5.45 5.78 EBIT 78.3 146.8 152.1 154.5 Units Sold/Share 2.4 2.2 2.2 2.0 Interest Expense (52.7) (52.4) (53.9) (46.5) BV/Share 8.02 8.40 8.82 9.29 Provisions (31.3) (34.5) (37.2) (39.5) Gross Cash Flow/Share 0.47 0.86 0.98 1.01 Interest Income 64.1 86.3 98.9 112.2 FCFF/Share (5.54) 0.56 0.39 0.57 Investment Income 260.5 15.6 17.1 18.8 EBITDA/Share 0.77 1.05 1.12 1.16 Other Non-Operating Income 9.7 9.7 9.7 9.7 EV/Share 1.22 1.22 1.22 1.22 Other Non-Operating Expenses (11.9) (11.9) (11.9) (11.9) EBT 316.7 159.6 174.9 197.4 Taxes (22.4) (31.9) (35.0) (39.5) NPAT 294.3 127.7 139.9 157.9 Multiples Jun-08 Jun-09 Jun-10 Jun-11 Minority Interest (7.5) 0.0 0.0 0.0 P/E 3.5 8.1 7.4 6.5 Extraordinary Items 6.2 0.0 0.0 0.0 Diluted P/E 3.5 8.1 7.4 6.5 Attributable Profits 292.9 127.7 139.9 157.9 Div Yield % 7.3% 3.7% 4.1% 4.6% P/ Revenue 0.9 0.8 0.8 0.7 EV/ Revenues [ EV/ Rev] 0.3 0.2 0.2 0.2 P/ COPAT 8.8 4.8 4.2 4.1 EV/ COPAT 2.6 1.4 1.2 1.2 P/ FCFF (0.7) 7.3 10.4 7.2 EV/ FCFF (0.2) 2.2 3.1 2.1 P/ EBITDA 5.3 3.9 3.7 3.5 EV/ EBITDA 1.6 1.2 1.1 1.0 P/ BV 0.5 0.5 0.5 0.4 Note: A = Actual; F = Forecasted Source: ACGC and CICR forecasts 110
    • November 11, 2008 EGYPT | BANKS 12M FAIR VALUE | NA* COMMERCIAL INTERNATIONAL BANK (CIB) Re-asserting leadership SHARE DATA Reuters; Bloomberg COMI.CA/ COMIQ.L; COMI EY Commercial International Bank (CIB) has successfully Recent price as of 6-Nov-08 LE 30.73 maintained its position as Egypt’s largest and most profit- No. of O/S shares 292.5 mn Market cap LE 8,988.5 mn able private bank. Despite strong inflationary pressures, 52-wk high / low LE 65.99/ LE 23.87 CIB has maintained a cost-to-income ratio of 31.9%. Avg. daily volume / turnover 0.88 mn / LE 46.5 mn Amidst the global financial crisis, CIB is a bank that deliv- COMPANY SYNOPSIS ers double-digit growth with an ROAE of 42.6% vs. an in- dustry average of around 16%. Against the looming Commercial International Bank (CIB) was founded by global liquidity, CIB is highly liquid with a loans-to- National Bank of Egypt (NBE) and Chase Manhattan Bank deposits ratio of 53%, holding the leading market share in (CMB) in 1975 under the Open Door Policy. CIB became the leading private-sector bank in Egypt, providing both amongst private banks. The stock trades at 2009 diversified services to multinationals along with private- PER and PBV of only 4.3x and 1.3x, respectively. sector industrial companies. Since its successful IPO in September 1993, the bank’s stock had represented one of the blue chips in the Egyptian stock market. CIB offers a high quality exposure to a full-fledged Growth across the board with an eye on the capital mar- business varying among corporate and retail banking, ket: Following a stellar performance in 1H08 where the bal- investment banking, securities brokerage, mutual funds, asset management, and insurance. ance sheet revealed an 18% expansion in assets to in excess of LE 56 bn and bottom-line growth of 45% to LE 962 mn, CIB Global finance magazine recently accredited CIB with 3 increased its stake in CI Capital Holding (CICH) from 50.09% awards namely “Best Bank in Egypt”, “Best Trade Finance Provider in Egypt” and “Best Foreign Exchange Provider in to 100%. CICH is a full-fledged investment bank with broker- Egypt” for 2008. age, asset management, investment banking, and research CIB is currently present with 147 branches and units and arms. targets 155 by year-end 2008. Efficient cost-to-income ratio despite slight upward pres- sures filtered through 1H08: In spite of pressures related to headcount increase, benefits adjustments, and inflation, the cost-to-income ratio still settled at a reasonable level of 31.9%. Loan growth potential, high asset quality: With a CAR ratio SHAREHOLDER STRUCTURE of 12.8% (excluding interim profits), 1H08 showed a net loans- to-deposits ratio of 53% - indicative of liquidity - next to a su- Ripplewood Consortium 18.7% perb asset quality as evident in a 2.8% NPLs/loans ratio and a Free Float 81.3% 167% provisions coverage ratio. As we expect a risk- Total 100.0% conscious growth in Egypt as inflationary pressures start eas- ing, CIB is poised to benefit from its strict risk assessment pol- icy which qualifies it for corner-to-corner loan growth including corporate, private, SMEs, retail, and mortgage loans. It is worth highlighting that CIB has neither sub-prime exposure nor any positions in banks currently under duress. Regional agenda: CIB’s regional expansion plans include ALIA ABDOUN ALIA.ABDOUN@CICH.COM.EG Algeria through two phases: (1) filing for the license which had been done and (2) start of operations pending the Algerian STOCK PERFORMANCE | 52 WEEKS approval. Low multiples despite strong performance: CIB currently Volume COMI CASE 30 - rebased trades at 2009 PER and P/BV of 4.3x and 1.3x versus a mn shares LE 80 5.0 MENA average of 10.6x and 2.2x, respectively. 4.5 70 4.0 60 We forecast YoY earnings growth of 37% for 2008: In line 3.5 50 3.0 with strong 1H08 performance, we expect 2008 to exhibit a 40 2.5 37% growth to LE 1,759.3 mn. We project a 5-year CAGR of 2.0 30 1.5 25% for both net banking income (NBI) and earnings. 20 1.0 10 0.5 0 - Nov-07 Jan-08 Jun-08 Jul-08 Dec-07 Feb-08 Mar-08 Apr-08 May-08 Aug-08 Sep-08 Oct-08 *We have discontinued making a recommendation or target price on CIB since CIB now owns 100% of CI Capital. 111
    • November 11, 2008 EGYPT | BANKS | CIB Balance Sheet (In LE mn) Profitability & Efficiency Ratios Dec-07 Dec-08 Dec-09 Dec-10 Dec-07 Dec-08 Dec-09 Dec-10 Assets Net Interest Margin (NIM) 3.23% 3.53% 3.81% 4.23% Cash & Due from Banks 4,953.2 7,665.0 8,177.8 8,979.0 RoAA 3.01% 3.27% 3.26% 3.66% Interbank Assets 13,883.2 14,401.7 14,562.9 15,054.7 RoAE 34.62% 37.54% 34.20% 33.86% T-Bills & Government Securities 2,951.6 3,784.5 4,737.3 5,999.8 Cost/Income 31.11% 34.23% 32.80% 31.54% Net Trading Investments 683.8 892.8 1,004.9 1,131.0 Earning Assets / Total Assets 85.46% 82.37% 82.45% 82.53% Available for Sale Investments 2,286.2 3,674.0 4,216.1 4,838.0 Brokers-Debit Balances 122.9 227.1 255.9 289.9 Productivity & Asset Quality Ratios Dec-07 Dec-08 Dec-09 Dec-10 Reconcilation Accounts 21.1 5.8 6.5 7.4 Net Loans & Advances 20,478.6 25,919.7 30,322.4 35,133.1 Net Loans / Customer Deposits 51.88% 51.90% 53.70% 55.25% Held-to-Maturity Investments 443.9 494.7 557.3 631.6 Interbank Ratio 5.8 6.0 8.5 11.5 Investments in Subsidiaries 90.7 70.2 70.2 70.2 Accrued Income & Other Assets 1,035.2 1,442.5 1,616.0 1,820.9 Liquid Assets / Total Deposits 62.72% 60.91% 57.91% 56.62% Deferred Tax 51.9 25.8 28.9 32.6 Assets Utilization 10.03% 10.28% 10.29% 10.80% Net Fixed Assets 620.2 909.7 1,459.6 1,913.5 Capitalization Ratio 8.48% 8.91% 10.11% 11.42% Good Will 140.6 260.4 260.4 260.4 NPLs / Total Loans 3.00% 2.80% 2.80% 2.80% Total Assets 47,763.2 59,774.0 67,276.2 76,162.0 Provision Coverage Ratio 166.3% 176.7% 176.5% 175.3% Liabilities and Shareholders' Equity Growth & Market Ratios Dec-07 Dec-08 Dec-09 Dec-10 Interbank Liabilities 2,378.6 2,400.3 1,713.3 1,309.1 Customer Deposits 39,476.1 49,941.7 56,466.3 63,589.3 Net Loans Growth 17.3% 26.6% 17.0% 15.9% Accrued Expenses & Other Liabilities 798.4 827.3 832.3 889.4 Customer Deposits Growth 25.1% 26.5% 13.1% 12.6% Brokers-Credit Balances 162.4 234.3 260.2 290.3 EPS (LE) * 6.59 6.01 7.09 8.97 Reconcilation Accounts 1.3 0.0 0.0 0.0 P/E 7.0x 5.1x 4.3x 3.4x Dividends Payable 336.7 486.4 594.2 728.0 DPS (LE) 1.00 1.00 1.25 1.50 Provisions 397.9 441.0 499.0 559.2 Dividend Yield 2% 3% 4% 5% Medium-/Long-Term Loans 161.4 119.7 108.2 97.7 Debt Securities 0.0 0.0 0.0 0.0 Retroactive BV/Share (LE) 13.85 18.20 23.26 29.74 Total Liabilities 43,712.7 54,450.6 60,473.4 67,463.0 P/BV 2.2x 1.7x 1.3x 1.0x Paid-in Capital 1,950.0 2,925.0 2,925.0 2,925.0 * EPS based on NPAUI Reserves 2,095.2 2,389.7 3,859.5 5,745.2 ** Cost/Income is based on Total non interest expense/ Total interest & non-interest income Retained Earnings 0.0 0.0 0.0 0.0 Source: CIB and CICR forecasts Minority Interest 5.3 8.7 18.2 28.7 Tier I Capital 4,045.2 5,314.7 6,784.5 8,670.2 Tier II Capital 0.0 0.0 0.0 0.0 Total Shareholders' Equity 4,050.5 5,323.4 6,802.8 8,699.0 Total Liabilities & Shareholders' Equity 47,763.2 59,774.0 67,276.2 76,162.0 Contingent Liabilities 11,529.0 13,664.4 15,985.4 18,700.6 Total Footing 59,292.2 73,438.3 83,261.5 94,862.6 Income Statement (In LE mn) Dec-07 Dec-08 Dec-09 Dec-10 Total Interest Income 2,998.4 3,574.9 4,320.4 5,105.4 Interest Paid to Clients & Banks 1,797.8 1,938.1 2,258.6 2,520.5 Net Interest Income (NII) 1,200.5 1,636.7 2,061.8 2,584.9 Provisions 251.0 317.0 357.2 377.6 Net Interest Income AP 949.5 1,319.8 1,704.6 2,207.3 Fees and Commissions Income 665.2 883.1 1,071.8 1,289.0 Investment Income 71.5 274.5 355.1 444.2 Foreign Exchange Income 167.8 384.2 518.9 615.5 Other Incomes 374.6 410.4 273.4 293.6 Ownership profits from subidiary company 0.0 0.0 0.0 0.0 Non-Interest Income 1,279.2 1,952.2 2,219.2 2,642.4 Operating Income (BP) 2,479.7 3,589.0 4,281.0 5,227.2 Operating Income (AP) 2,228.7 3,272.0 3,923.8 4,849.7 G&A Expenses and Depreciation 697.7 973.7 1,171.3 1,393.1 Other Expenses 73.6 254.9 232.7 255.7 Non-Interest Expense 771.4 1,228.7 1,404.0 1,648.8 Net Operating Income 1,457.4 2,043.3 2,519.8 3,200.9 Taxation 170.1 282.9 436.7 566.2 NPAT 1,287.3 1,760.5 2,083.1 2,634.7 Unusual Items 1.3 5.0 0.0 0.0 Net Profit Before Minority Interest 1,288.5 1,765.5 2,083.1 2,634.7 Minority Interest -2.7 -6.3 -9.5 -10.5 Net Profit After Minority Interest 1,285.8 1,759.3 2,073.6 2,624.2 Less: Non-Appropriation Items 0.0 193.9 228.5 289.2 Net Attributable Income (NAI) 1,285.8 1,565.4 1,845.0 2,335.0 112
    • November 11, 2008 EGYPT | BANKS 12M FAIR VALUE | LE 15.32 CREDIT AGRICOLE EGYPT (CAE) BUY | MODERATE RISK Cheap rating as growth re-ignites SHARE DATA Reuters; Bloomberg [CIEB.CA; CIEB EY] Recent price as of 6-Nov-08 LE 10.31 Crédit Agricole Egypt (CAE) is a successful medium sized No. of O/S shares 287.0 mn Egyptian bank with an asset base of LE 22 bn and a NIM Market cap LE 2,959.0 mn of 2.7%, generating a ROAE of 26% vs. a market average 52-wk high / low LE 28.48/ LE 8.94 Avg. daily volume / turnover 0.29 mn / LE 6.7 mn of 16%, amid concerns of a global recession. Despite global liquidity issues, CAE is highly liquid with a loans- COMPANY SYNOPSIS to-deposits ratio of only 35% which it plans to expand in an under-penetrated and profitable market. The bank’s stock trades at projected 2009 PER and PBV of 4.9x and Crédit Agricole Indosuez-Egypt started operations in 2001 when it acquired, along with El Mansour & El Maghraby for 1.5x, respectively. Our DCF-based 12-month fair value im- Investment & Development (MMID) 93.3% of Crédit plies a 49% upside potential, therefore we rate it BUY with International d’Egypte (CIE), previously owned by Crédit MODERATE RISK. Commercial de France (CCF) and the National Bank of Egypt (NBE). Gifted good; capturing the fundamentals: 1H08 witnessed In 2005, Crédit Agricole Indosuez-Egypt merged with Crédit Lyonnais (Egypt Branch), thus jointly founding tapering growth largely due to a one-off expense related to the CALYON Bank-Egypt, this came after France’s Crédit restructuring cost of an interest rate SWAP transaction worth Agricole acquired France’s Crédit Lyonnais. In February 2006, Crédit Agricole Group along with MMID acquired LE 48 mn. Yet, we believe CAE enjoys the necessary funda- 74.6% of Egyptian American Bank (EAB). mentals to have a growth story. Apart from its high profitability ratios, CAE enjoys a reasonable asset quality including an Based on the decision of the EGM held on June 2006, the merge of the operations of EAB and CALYON Bank-Egypt NPLs/loans ratio of 6.5%, a provisions coverage ratio of 91%, under the name of Crédit Agricole Egypt (CAE) took place and a CAR of 19.3% as of 1H08. With one-off costs behind, in September 2006. we believe CAE will start showing an improvement in 2009. CAE currently operates a network of 56 branches. Loan growth opportunities for a highly liquid bank: CAE is well positioned for loan growth leveraging on a high CAR ratio of 19.3% and a strong liquidity position through a loans-to- deposits ratio of only 35%. Its loans portfolio exhibited a strong expansion of 45% in 1H08. CAE targets full-fledged SHAREHOLDER STRUCTURE loan growth across all LoBs. Crédit Agricole S. A. 59.4% MMID 17.1% Significant cost-to-income ratio, but benefited from provi- Local institutions 7.0% Retail 16.6% sion reversals & tax losses carried forward: 1H08 Total 100.0% unraveled a cost-to-income ratio of 58.8% (or 48.6% excluding one-off charges) vs. 48.2% in 1H07. We expect the ratio to start improving starting 2009 onwards. Counteracting this, CAE had been benefiting from some positive surprises in its P&L during 2H07 including provision reversals and nil tax charges triggered by tax losses carried forward. ALIA ABDOUN Cheap multiples as growth reignites: CAE trades at 2009 ALIA.ABDOUN@CICH.COM.EG PER and P/BV of 4.9x and 1.5x compared to a MENA average of 10.6x and 2.2x, respectively. STOCK PERFORMANCE | 52 WEEKS Valuation and recommendation: We lowered our 12M target Volume CIEB CASE 30 - rebased to LE 15.3/share mainly due to (1) a higher risk-free rate on mn shares LE 30 6.0 the back recent hikes in benchmark rates by the Central Bank of Egypt (CBE) and (2) a higher risk premium to reflect the 25 5.0 ongoing global financial crisis and potential consequences on 20 4.0 Egypt. Still, the stock offers a 49% upside potential, urging us 15 3.0 to maintain our BUY recommendation with its MODEARATE 10 2.0 RISK rating. 5 1.0 0 - Nov-07 Jan-08 Jun-08 Jul-08 Dec-07 Feb-08 Mar-08 Apr-08 May-08 Aug-08 Sep-08 Oct-08 113
    • November 11, 2008 EGYPT | BANKS | CAE Balance Sheet (In LE mn) Profitability & Efficiency Ratios Dec-07 Dec-08 Dec-09 Dec-10 Dec-07 Dec-08 Dec-09 Dec-10 Net Interest Margin (NIM) 2.99% 2.90% 3.05% 3.12% Assets RoAA 2.81% 2.30% 2.29% 2.30% Cash & Due from Banks 1,703.9 2,691.4 3,076.0 3,523.0 RoAE 35.18% 31.67% 32.53% 34.13% Interbank Assets 10,700.1 10,722.5 11,191.1 12,053.9 Cost/Income 49.25% 50.20% 44.09% 43.04% T-Bills & Government Securities 3,421.1 2,438.5 3,155.7 3,850.0 Earning Assets / Total Assets 89.84% 86.86% 86.94% 87.02% Net Trading Investments 223.8 301.7 339.6 382.2 Available for Sale Investments 46.1 88.0 107.0 130.0 Productivity & Asset Quality Ratios Dec-07 Dec-08 Dec-09 Dec-10 Net Loans & Advances 4,662.3 7,471.1 9,432.2 11,574.4 Net Loans / Customer Deposits 24.89% 34.95% 38.10% 40.30% Held-to-Maturity Investments 232.6 263.6 321.2 371.0 Interbank Ratio 37.6 30.2 30.2 30.2 Investments in Subsidiaries 25.3 25.7 25.7 25.7 Liquid Assets / Total Deposits 85.91% 75.98% 72.18% 69.42% Accrued Income & Other Assets 334.7 364.7 417.6 479.0 Assets Utilization 9.29% 8.82% 8.98% 8.93% Net Fixed Assets 145.7 166.8 196.5 230.9 Capitalization Ratio 7.32% 7.19% 6.91% 6.61% Good Will 0.0 0.0 0.0 0.0 NPLs / Total Loans 9.00% 6.16% 4.76% 3.96% Total Assets 21,495.6 24,534.1 28,262.4 32,620.2 Provision Coverage Ratio 101.0% 94.6% 97.2% 99.0% Liabilities and Shareholders' Equity Growth & Market Ratios Dec-07 Dec-08 Dec-09 Dec-10 Interbank Liabilities 284.9 355.0 370.5 399.1 Net Loans Growth 27.9% 60.2% 26.2% 22.7% Customer Deposits 18,735.2 21,376.7 24,756.3 28,720.6 Customer Deposits Growth 36.5% 14.1% 15.8% 16.0% Accrued Expenses & Other Liabilities 434.7 562.5 618.9 689.1 EPS (LE) * 1.83 1.84 2.11 2.44 Dividends Payable 336.8 337.2 416.2 497.1 P/E 5.6x 5.6x 4.9x 4.2x Provisions 130.8 138.3 147.7 157.4 DPS (LE) 1.00 1.00 1.25 1.50 Medium-/Long-Term Loans 0.0 0.0 0.0 0.0 Dividend Yield 10% 10% 12% 15% Debt Securities 0.0 0.0 0.0 0.0 Retroactive BV/Share (LE) 5.48 6.15 6.80 7.52 Total Liabilities 19,922.4 22,769.7 26,309.6 30,463.3 P/BV 1.9x 1.7x 1.5x 1.4x Paid-in Capital 1,148.0 1,148.0 1,148.0 1,148.0 * EPS based on NPAUI Reserves 162.2 353.5 541.9 746.0 ** Cost/Income is based on Total non interest expense/ Total interest & non-interest income Retained Earnings 262.9 262.9 262.9 262.9 Source: CAE and CICR forecasts Tier I Capital 1,573.2 1,764.4 1,952.8 2,156.9 Tier II Capital 0.0 0.0 0.0 0.0 Total Shareholders' Equity 1,573.2 1,764.4 1,952.8 2,156.9 Total Liabilities & Shareholders' Equity 21,495.6 24,534.1 28,262.4 32,620.2 Contingent Liabilities 16,363.6 10,581.6 12,862.0 15,633.9 Total Footing 37,859.2 35,115.7 41,124.5 48,254.1 Income Statement (In LE mn) Dec-07 Dec-08 Dec-09 Dec-10 Total Interest Income 1,320.7 1,572.6 1,820.5 2,093.5 Interest Paid to Clients & Banks 811.7 971.4 1,102.7 1,245.3 Net Interest Income (NII) 509.1 601.2 717.8 848.3 Provisions -57.4 -3.2 23.0 40.3 Net Interest Income AP 566.5 604.4 694.8 808.0 Fees and Commissions Income 196.1 229.3 266.5 306.5 Investment Income 50.2 9.2 10.1 11.1 Foreign Exchange Income 77.1 144.0 173.2 199.2 Other Incomes 85.7 74.9 100.5 107.1 Non-Interest Income 409.0 457.3 550.3 623.9 Operating Income (BP) 918.1 1,058.5 1,268.2 1,472.2 Operating Income (AP) 975.6 1,061.7 1,245.1 1,431.9 G&A Expenses and Depreciation 449.0 494.5 556.4 630.7 Other Expenses 3.2 36.9 2.7 2.9 Non-Interest Expense 452.2 531.4 559.2 633.6 Net Operating Income 523.4 530.4 686.0 798.3 Taxation 0.0 2.0 81.4 97.1 NPAT 523.4 528.4 604.6 701.2 Unusual Items 0.5 0.1 0.0 0.0 NPAUI 523.9 528.4 604.6 701.2 Less: Non-Appropriation Items 0.0 50.2 57.4 66.6 Net Attributable Income (NAI) 523.9 478.2 547.1 634.6 114
    • November 11, 2008 EGYPT | FOOD & BEVERAGES 12M FAIR VALUE | LE 32.8 DELTA SUGAR BUY | LOW RISK Sugar beet leader taps the bio-fuel market SHARE DATA Reuters; Bloomberg SUGR.CA; SUGR EY Recent price as of 6-Nov-08 LE 22.00 Delta Sugar (SUGR) is the local market leader in sugar No. of O/S shares 98.7 mn beet manufacturing. The company managed over the last Market cap LE 2,170.3 mn three years to operate above 100% utilization rate, while 52-wk high / low LE 64.7/ LE 13.11 Avg. daily volume / turnover 0.18 mn / LE 7.08 mn maintaining a low finished goods inventory level at year- ends. With a global market that started to use agricultural COMPANY SYNOPSIS crops for the production of bio-fuel, SUGR is conducting feasibility studies for the establishment of an ethanol unit Delta Sugar was established in 1978 as an Egyptian joint to start operations in 2010. We estimate said new revenue stock company under the provision of investment law No. 230 of 1989 amended by Investment Guarantees and stream directed to exports will add 3% increase to our Incentives Law No. 8 of 1997 for the manufacturing of DCF 12-month fair value to LE 32.8/share, which implies a sugar beet and its byproducts namely molasses and 49% upside potential, hence we rate it a BUY at LOW fodder. SUGR contracts with farmers during the last quarter of the year for the quantity supplied of beet as it RISK. does not own cultivated lands and starts production from February to June, During its off-season period extending from July to December, SUGR refines raw sugar for others An ongoing study for the establishment of an ethanol in exchange of a fee. SUGR operates one factory located in Kafr El-Sheikh comprising of two production lines with a unit with an initial capex of US$15 mn, a new revenue combined annual production capacity of 245K tons of stream directed to the export market. With rising oil prices sugar beet, 100K tons of molasses and 100K tons of fodder. and the global trend towards bio-fuel usage, SUGR is con- ducting feasibility studies for the establishment of an ethanol The company is the second key player in the Egyptian sugar market occupying 19% market share in 2007 unit located in its current factory. According to its recent study, following Sugar and Integrated Industries Co. (SIIC) - the the unit will start operations by 2010 with an initial production sole sugar cane producer-while occupying the lion's share capacity of 10k tons of ethanol manufactured from molasses in sugar beet manufacturing with a market share of 48% in 2007. and an initial investment cost of US$15 mn, entirely financed from the shareholders' equity. SUGR's authorized capital is LE 1 bn and an issued and paid-in capital of LE 493,252,500 distributed over 98,650,500 shares at a par value LE 5/share. Investment update: SUGR has currently frozen its expansion for the establishment of a new sugar beet factory in Sharkia as SHAREHOLDER STRUCTURE the company did not obtain the regulatory approvals for the Sugar & Integrated Industries C 55.7% required land. Said freeze will jeopardize SUGR's market Misr Insurance Company 13.0% Public Banks 9.6% share in view of the entry of new capacities, namely Nubaria 6.4% Egyptian Endowment Auth. Sugar - 30% owned by SUGR - which started operations in 6.3% KIMA 2008, Dakahlia Sugar's expansion of a second production line, Free Float 9.1% Total 100.0% and the Greenfield Nile Sugar starting in 2010. Growth drivers: As sugar is a strategic commodity with an inelastic demand, SUGR's revenues will grow at a 4-year CAGR of 14% over 2008-2012 with sugar beet sales leading the lion's share contributing with an average 72% of the sales mix. MIRETTE MOHAMED GHOZZI Risks: SUGR has encountered a harsh 2008 season due to MIRETTE.GHOZZI@CICH.COM.EG the shortage of beet crop as farmers converted to wheat culti- vation, enjoying a higher procurement price. Hence, sugar STOCK PERFORMANCE | 52 WEEKS beet companies raised the beet procurement price for the fol- lowing season, implying a 38% increase in beet costs per 1 Volume SUGR CASE 30 - rebased ton of sugar. Said increase will be partially passed on through mn shares LE 70 1.8 selling prices with the other part absorbed by the company, 1.6 60 pressuring SUGR's margins downward. 1.4 50 1.2 Valuation and recommendation: SUGR stock is traded at 40 1.0 0.8 8.9x expected 2009 earnings compared to a peer average of 30 0.6 10.2x. In our DCF, we used a WACC of 14.5%, suggesting a 20 0.4 10 49% upside potential to LE 32.8/share. This valuation takes 0.2 0 - into account the establishment of the ethanol unit which would Nov-07 Jan-08 Jun-08 Jul-08 Dec-07 Feb-08 Mar-08 Apr-08 May-08 Aug-08 Sep-08 Oct-08 add 3% upside potential to our valuation. Accordingly, we initi- ate coverage on the stock with a BUY at LOW RISK. 115
    • November 11, 2008 EGYPT | FOOD & BEVERAGES | DELTA SUGAR Balance Sheet (LE mn) Dec-07 A Dec-08 F Dec-09 F Dec-10 F Cash Flow (LE mn) Dec-07 A Dec-08 F Dec-09 F Dec-10 F NOPAT 312.9 248.4 223.8 248.7 Assets Dep. & Amor. 33.1 33.9 35.4 36.7 Cash & Cash Equivalent 310.0 427.1 443.5 520.7 COPAT 346.0 282.3 259.2 285.4 Net Receivables 3.1 3.1 4.2 4.4 WI Change (4.3) (2.7) (9.6) (3.5) Total Inventory 143.1 147.6 178.3 187.7 Other Current Items 16.6 0.0 0.0 0.0 Advance Payments 3.6 10.4 17.1 18.0 CF After Current Oper. 358.3 279.6 249.5 281.8 Other Trading Assets 0.0 0.0 0.0 0.0 Financing Payments (36.2) (4.3) (4.3) (4.3) Other Current Assets 41.4 41.4 41.4 41.4 Cash Before LT. Use 322.1 275.3 245.3 277.6 Total Current Assets 501.2 629.5 684.5 772.2 Net Plant Change (17.9) (17.1) (80.1) (53.3) Net Plant 481.6 466.1 510.8 527.4 FCFF 323.8 262.5 169.4 228.6 Long-Term Investments 235.4 240.4 240.4 240.4 Others (16.1) (9.7) 24.6 26.8 Other Trading Non-Current Assets 0.0 0.0 0.0 0.0 CF Before Financing 288.0 248.5 189.8 251.1 Other Non-Current Assets 0.0 0.0 0.0 0.0 Short-Term Debt 0.0 (0.0) 0.0 0.0 Intangibles 0.0 0.0 0.0 0.0 Long-Term Debt (22.7) 0.0 0.0 0.0 Net-worth (37.9) 0.0 0.0 0.0 Total Assets 1,218.1 1,335.9 1,435.6 1,539.9 Grey Area 14.9 39.8 7.2 9.1 Dividends (69.5) (171.1) (180.5) (183.1) Liabilities & Shareholders' Equity Short-Term Debt 0.0 0.0 0.0 0.0 Change in Cash 172.9 117.1 16.4 77.2 Current Portion of LT Debt 0.0 0.0 0.0 0.0 Accounts Payable 4.0 4.4 7.2 7.6 Fact Sheet Dec-07 A Dec-08 F Dec-09 F Dec-10 F Accrued Expenses 0.0 0.0 0.0 0.0 ROE 38.3% 26.8% 25.5% 26.4% Down Payments 64.0 72.1 98.2 104.8 ROS 29.8% 26.5% 19.7% 20.5% Taxes Payable 0.0 0.0 0.0 0.0 ROA 26.3% 18.0% 17.0% 17.6% Dividends Payable 171.1 180.5 183.1 203.4 ROIC 35.3% 25.2% 21.2% 22.0% Other Current Liabilities 91.8 91.8 91.8 91.8 Gross Margin 41.3% 40.1% 27.8% 28.8% EBITDA Margin 40.1% 38.9% 26.6% 27.6% Total Current Liabilities 330.9 348.8 380.3 407.6 Total Long-Term Debt 0.0 0.0 0.0 0.0 ATO 0.9x 0.7x 0.9x 0.9x Other Non-Current Liab. 0.0 0.0 0.0 0.0 WI/ Sales 7.6% 9.3% 7.6% 7.4% Net Debt/EBITDA (0.7x) (1.2x) (1.3x) (1.4x) Total liabilities 330.9 348.8 380.3 407.6 Deferred Taxes 15.0 24.8 31.5 40.2 Debt/ Tangible Equity 0.4x 0.4x 0.4x 0.4x Other Provisions 35.5 65.5 65.9 66.4 Current Ratio 1.5x 1.8x 1.8x 1.9x Minority Interest 0.0 0.0 0.0 0.0 Shareholders' Equity 836.7 896.9 957.9 1,025.7 Per-Share Ratios (LE) Dec-07 A Dec-08 F Dec-09 F Dec-10 F Total Liabilities & Equity 1,218.1 1,335.9 1,435.6 1,539.9 Share Price 22.00 22.00 22.00 22.00 Recent no. of shares (000) 98,651 98,651 98,651 98,651 EPS 3.25 2.44 2.47 2.75 DPS 1.35 1.37 1.39 1.55 Income Statement (LE mn) Dec-07 A Dec-08 F Dec-09 F Dec-10 F Revenues/Share 10.90 9.22 12.53 13.38 Revenues 1,075.5 909.9 1,236.5 1,320.2 BV/Share 8.48 9.09 9.71 10.40 COGS (630.8) (544.6) (892.9) (940.1) Gross Cash Flow/Share 3.51 2.86 2.63 2.89 FCFF/Share 3.28 2.66 1.72 2.32 Gross Profits 444.7 365.3 343.6 380.0 SG&A (13.2) (11.0) (15.0) (16.0) EBITDA/Share 4.37 3.59 3.33 3.69 431.5 354.4 328.6 364.0 EV/Share 18.86 17.67 17.50 16.72 EBITDA Dep. & Amort. (33.1) (33.9) (35.4) (36.7) EBIT 398.4 320.5 293.3 327.4 Interest Expense (10.4) (4.3) (4.3) (4.3) Multiples Dec-07 A Dec-08 F Dec-09 F Dec-10 F Provisions (0.4) (30.0) (0.4) (0.5) P/E 6.8x 9.0x 8.9x 8.0x Interest Income 5.7 12.0 12.3 14.6 Div Yield % 6.1% 6.2% 6.3% 7.0% Investment Income 4.0 4.0 4.0 4.0 P/ Revenue 2.0x 2.4x 1.8x 1.6x Net Other Non-Operating Inc./(Exp.) 8.7 8.7 8.7 8.7 EV/ Revenues 1.7x 1.9x 1.4x 1.2x P/ COPAT 6.3x 7.7x 8.4x 7.6x EBT 406.0 310.9 313.6 349.9 Taxes (85.5) (72.0) (69.5) (78.7) EV/ COPAT 5.4x 6.2x 6.7x 5.8x P/ FCFF 6.7x 8.3x 12.8x 9.5x NPAT 320.5 238.9 244.1 271.2 Minority Interest 0.0 0.0 0.0 0.0 EV/ FCFF 5.7x 6.6x 10.2x 7.2x Extraordinary Items 0.3 1.8 0.0 0.0 P/ EBITDA 5.0x 6.1x 6.6x 6.0x Attributable Profits 320.8 240.7 244.1 271.2 EV/ EBITDA 4.3x 4.9x 5.3x 4.5x P/ BV 2.6x 2.4x 2.3x 2.1x Source: Company reports and CICR estimates. 116
    • November 11, 2008 EGYPT | FOOD & BEVERAGES 12M FAIR VALUE | LE 306 EASTERN COMPANY (EC) BUY | LOW RISK Back to a defensive company SHARE DATA Reuters; Bloomberg EAST.CA; ESTC EY Recent price as of 5-Nov-08 LE 217.99 No. of O/S shares 25.0 mn Eastern Company (EC) is a state monopoly tobacco pro- Market cap LE 5,449.8 mn ducer in Egypt, producing its own brands with an 83% 52-wk high / low LE 530/ LE 177.91 market share. The remaining balance is covered by for- Avg. daily volume / turnover 0.02 mn / LE 5.8 mn eign brands also produced in EC through toll manufactur- ing for international producers. Owing to the non-cyclical nature of its goods, demand is expected to be maintained COMPANY SYNOPSIS in the future. Yet, importing tobacco leaves remains the Eastern Company (EC) is a state monopoly tobacco pro- company's main concern. EC is expected to grow its net ducer with an 83% local market share for its own branded income at a 5-year CAGR of 11%. Trading at 7x 2008/09 portfolio and the balance also catered through EC's toll manufacturing for foreign producers like Philip Morris (PM), earnings vs. a peer average of 12.6x, EC is trading at a British American Tobacco (BAT) and International Tobacco 45% discount. We reached a 12-month DCF fair value of and Cigarette Company (ITCC) of Jordan. Its product range includes cigarettes, water pipe tobacco, cigars and LE 306, implying a 40% upside potential, hence we reiter- minced tobacco. EC operates 20 factories in Giza, Tal- ate our BUY recommendation at LOW RISK. beya, Alexandria, Monouf, Tanta, and Assuit. Currently, EC is establishing a new integrated industrial complex in the Sixth of October City over a land with a size of 357 acres. Total estimated investment cost of the said complex A defensive producer of a strategic commodity: Ciga- is LE 3.2 bn. EC's major raw material is imported tobacco leaf, which represents about 60% of EC's total cost. For- rettes (a cheap source of pleasure) are considered a strategic bidden by law from growing tobacco in Egypt, EC imports commodity in Egypt where a healthy growth potential for the all its needs of tobacco leaves from Zimbabwe, Malawi, China, India, Europe and Brazil. Lately when the COMESA tobacco business is provided even if the economy slows. agreement became effective, EC started importing 35% of Given the inelastic demand for its products, we expect top-line its leaf requirements from the COMESA region. EC is to maintain its growth post the recently-announced September subject to the volatility in the cultivation environment, price fluctuations of the imported tobacco leaf, in addition to the price increase of LE 0.25/pack on eight local brands. How- intensifying exposure to FX risk. ever, a slight shift from foreign to local brands is anticipated this year in the wake of May 5 measures which applied an average of 22% sales tax on the former versus only 11% on the latter. Relocation to a new complex late 2010: Currently, EC is SHAREHOLDER STRUCTURE establishing a new industrial complex in the Sixth of October 52.8% Holding Co. for Chemical Ind. City with an estimated capex of LE 3.2 bn. New production 5.3% Empl. Shareholders' Assoc. techniques will be fully implemented once the factories are 4.7% Public sector Free Float 37.2% relocated, resulting in higher cost savings. Going forward, we believe demand for tobacco will be sustained, driven mostly by a low health awareness, a growing population, and in- creasing smoking habits among youth in the 15-35 age bracket, 34% of Egypt’s population. An acquisition target? British American Tobacco (BAT), an international tobacco manufacturer, was said to be interested INGY EL-DIWANY INGY.ELDIWANY@CICH.COM.EG in Egyptian and Algerian cigarette monopolies as reported early 2008. BAT has effected a few M&A deals in 2008 for Turkish and Scandinavian tobacco companies, executed at an STOCK PERFORMANCE | 52 WEEKS average of 11.3x 2007 EBITDA. We believe there is no inten- tion to sell EC in the short- to medium-term having postponed Volume EAST CASE 30 - rebased the establishment of its real estate company - prerequisite to mn shares LE 600 0.8 privatization - to manage the sale of its LE 2 bn-worth land 0.7 500 plots till relocation is completed. 0.6 400 0.5 Valuation and recommendation: We lowered our DCF 300 0.4 valuation by 40% to LE 306/share vs. our previous 12-month 0.3 200 fair value of LE 508/share dated November 28, 2007. This 0.2 100 mainly came as a result of the 300-bps increase in risk-free 0.1 rate and market risk premium apiece used in our DCF model 0 - Nov-07 Jan-08 Jun-08 Jul-08 Dec-07 Feb-08 Mar-08 Apr-08 Sep-08 Oct-08 in addition to the inclusion of debt and lease needed to fi- nance the expansions. Our 12 month value under the sale of land scenario is LE 386/share. EC is traded at 7x 2008/09 earnings vs. a peer average of 12.6x, a 45% discount. 117
    • November 11, 2008 EGYPT | FOOD & BEVERAGES | EASTERN COMPANY Balance Sheet (LE mn) Jun-08 A Jun-09 P Jun-10 P Jun-11 P Cash Flow (LE mn) Jun-08 A Jun-09 P Jun-10 P Jun-11 P Assets NOPAT 1,314 803 834 930 Cash & Cash Equivalent 224 726 746 1,080 Depreciation & Amortization 161 161 164 167 Net Receivables 36 33 35 37 Gross Cash Flow (COPAT) 1,475 964 998 1,097 Total Inventory 2,043 2,054 2,085 2,151 WI Change (351) 7 (13) (56) Advance Payments to Suppliers 0 0 0 0 Other Current Items 18 27 25 27 Other Trading Assets 0 0 0 0 Cash After Current Operations 1,142 999 1,011 1,068 Other Current Assets 0 0 0 0 Financing Payments (28) (48) (192) (178) Total Current Assets 2,304 2,814 2,866 3,268 Cash Before Long-Term Use 1,113 951 819 891 Net Plant 3,288 3,679 4,010 4,085 Net Plant Change (1,406) (553) (495) (242) Long-Term Investments 53 53 53 53 FCFF (282) 419 491 799 Other Trading Non-Current Assets 0 0 0 0 Others 4 27 28 29 Other Non-Current Assets 49 52 55 58 Cash Before Financing (288) 425 353 678 Intangibles 0 0 0 0 Short-Term Debt 538.4 (538.4) 0.0 0.0 Total Assets 5,694 6,598 6,984 7,463 Long-Term Debt 0 600 0 0 Net-worth 328 39 40 45 Liabilities & Shareholders' Equity Grey Area (24) 0 0 0 Short-Term Debt 538 0 0 0 Dividends (710) (24) (372) (389) Current Portion Of Long-Term Deb 0 120 120 120 Change in Cash (156) 502 20 334 Accounts Payable 208 220 234 242 Accrued Expenses 90 92 98 101 Fact Sheet Jun-08 A Jun-09 P Jun-10 P Jun-11 P Down Payments to Customers 9 10 10 11 ROE 28.2% 25.1% 22.2% 22.2% Taxes Payable 1,086 1,086 1,086 1,086 ROS 19.7% 19.4% 18.6% 20.2% Dividends Payable 24 372 389 443 ROA 13.2% 11.9% 11.3% 12.1% Other Spontaneous Finance 0 0 0 0 ROIC 34.5% 18.6% 18.0% 18.5% Other Current Liabilities 467 494 520 547 Gross Profit Margin 31.1% 30.7% 30.1% 31.6% Total Current Liabilities 2,423 2,395 2,457 2,550 EBITDA Margin 29.1% 28.7% 28.2% 29.6% Total Long-Term Debt 0 480 360 240 ATO 0.7 0.6 0.6 0.6 Other Non-Current Liabilities 0 0 0 0 WI/ Sales 46.4% 43.7% 41.8% 41.0% Long-Term Spontaneous Finance 0 0 0 0 ALEV 2.1 2.1 2.0 1.8 Total Liabilities 2,423 2,875 2,817 2,790 Debt/ Tangible Networth 0.9 0.9 0.8 0.7 Deferred Taxes 241 244 246 248 Current Ratio 1.0 1.2 1.2 1.3 Other Provisions 363 363 363 363 Minority Interest 0 0 0 0 Per Share Ratios Jun-08 A Jun-09 P Jun-10 P Jun-11 P Shareholders' Equity 2,667 3,117 3,559 4,062 Share Price 217.99 217.99 217.99 217.99 Total Liabilities & Equity 5,694 6,598 6,984 7,463 Actual No. Of Shares '000 25,000 25,000 25,000 25,000 EPS 30.1 31.3 31.6 36.1 Diluted EPS 30.1 31.3 31.6 36.1 Income Statement (LE mn) Jun-08 A Jun-09 P Jun-10 P Jun-11 P Div/Share 14.0 14.9 15.5 17.7 Revenues/Share 152.8 161.7 170.0 178.9 Net Sales 3,819 4,041 4,249 4,473 BV/Share 106.7 124.7 142.3 162.5 COGS (2,633) (2,802) (2,969) (3,062) Gross Cash Flow/Share 59.0 38.6 39.9 43.9 Gross Profits 1,186 1,240 1,280 1,411 FCFF/Share -11.3 16.7 19.6 32.0 SG&A (76) (80) (84) (89) EBITDA/Share 44.4 46.4 47.8 52.9 EBITDA 1,110 1,160 1,196 1,323 EV/Share 230.6 212.9 207.3 189.2 Depreciation & Amortization (161) (161) (164) (167) EBIT 949 999 1,032 1,155 Multiples Jun-08 A Jun-09 P Jun-10 P Jun-11 P Interest Expense (28) (48) (72) (58) P/E 7.3 7.0 6.9 6.0 Provisions (2) (2) (2) (2) Diluted P/E 7.3 7.0 6.9 6.0 Interest Income 13 13 14 14 Div Yield % 6.4% 6.8% 7.1% 8.1% Investment Income 1 1 1 1 P/ Revenue 1.4 1.3 1.3 1.2 Other Non-Operating Income 44 44 44 44 EV/ Revenues [ EV/ Rev] 1.5 1.3 1.2 1.1 Other Non-Operating Expenses (44) (27) (27) (27) P/ COPAT 3.7 5.7 5.5 5.0 EBT 932 978 989 1,127 EV/ COPAT 3.9 5.5 5.2 4.3 Taxes (181) (196) (198) (225) P/ FCFF -19.3 13.0 11.1 6.8 NPAT 751 783 791 901 EV/ FCFF -20.4 12.7 10.6 5.9 Minority Interest 0 0 0 0 P/ EBITDA 4.9 4.7 4.6 4.1 Extraordinary Items 0 0 0 0 EV/ EBITDA 5.2 4.6 4.3 3.6 Attributable Profits 751 783 791 901 P/ BV 2.0 1.7 1.5 1.3 Note: A = Actual; P = Projected Source: EC and CICR forecasts 118
    • November 11, 2008 EGYPT | CHEMICALS 12M FAIR VALUE | LE 50.10 EGYPTIAN FINANCIA & INDUSTRIAL CO. (EFIC) BUY | LOW RISK Leading the way through expansion SHARE DATA Reuters; Bloomberg EFIC.CA; EFIC EY Recent price as of 6-Nov-08 LE 29.79 No. of O/S shares 69.3 mn EFIC is a successful fertilizers company, specialized Market cap LE 2,064.4 mn mainly in the production of phosphate fertilizers with a 52-wk high / low LE 75/ LE 21.08 70% local market share in SSP. In view of concerns over Avg. daily volume / turnover 0.5 mn / LE 23.29 mn global recession, we believe slower sales growth would mostly be driven by selling prices rather than volumes, COMPANY SYNOPSIS thanks to demand inelasticity of fertilizers. Moreover, Egypt is the largest country in the Middle East producing Egyptian Financial & Industrial Company (EFIC) is a high-quality SSP, unlike other countries in the region joint-stock company founded in 1929. EFIC's main activities are producing and trading phosphate which produce mainly other types of phosphate fertilizers. fertilizers and chemicals. It produces two main Hence, we do not expect demand for EFIC’s products to products: falter. Our DCF-based 12-month fair value indicates a 68% i. Single super phosphate (SSP) in two forms upside potential to LE 50.1, hence we rate the stock a BUY powdered (PSSP) and granulated (GSSP) with LOW RISK. ii. Sulfuric acid. Locking sulfur cost: Global sulfur prices have decreased by EFIC is the largest producer of phosphate fertilizers 24.7% to US$550/ton in September 2008 vs. US$730 in July in Egypt, dominating around 70% of SSP local market sales volume in 2007. Such a market share 2008. However , EFIC will not benefit from said decline having takes into account sales from Suez Co. for locked its sulfur requirements till June 2009 at US$700/ton. Fertilizers Production (SCFP), EFIC's 99.88%- We believe that EFIC exports’ sales (around 30% of sales) will owned subsidiary. be slightly affected. On the local front, such a decrease in sul- EFIC has an authorized capital of LE 700 mn and an fur prices will not affect EFIC’s local sales, thanks to its 70% issued capital of LE 693 mn, distributed over 69.3 market share of SSP and no price caps levied by the govern- mn shares at a par value of LE 10/share. ment on phosphate fertilizers. Thus, we believe that local EBITDA margin will balance the export EBITDA decrease. New factory expansion: In order to increase its capacity, EFIC acquired a 256k-sqm land plot in Ain Al-Sokhna through its wholly-owned subsidiary Suez Company for Fertilizers SHAREHOLDER STRUCTURE Production (SCFP) for LE 38.4 mn. Holding Company 25.3% Banks 12.8% Diversifying the product mix: EFIC will start the production Insurance Companies 0.9% of di-calcium phosphate in November 2008 with a total capac- Others 12.0% ity of 20k tpa, split evenly between the local and export mar- Free Float 49.0% Total 100.0% kets. A new fertilizers project: With six other companies, EFIC signed a memorandum of understanding (MoU) to establish a new plant - Egyphos - to produce phosphate fertilizers in Egypt. The new plant will be established in the city of Edfu in AHMED ABDEL-GHANI two phases, the first of which has a total investment cost of AHMED.ABDELGHANI@CICH.COM.EG US$680 mn (split US$300 mn and US$380 mn in equity and debt, respectively) and an authorized capital of US$1.5 bn. STOCK PERFORMANCE | 52 WEEKS Growth drivers: While fertilizers consumption should be driven in part by population growth, EFIC's revenue growth Volume EFIC CASE 30 - rebased should be positively affected by its diversified product mix and mn shares LE the Government of Egypt's plan to increase arable land over 80 3.0 the coming few years. Moreover, growing demand for bio-fuels 70 2.5 60 will drive demand for fertilizers as farmers look to improve land 2.0 50 productivity and yield. In our opinion, this will be an opportu- 40 1.5 nity for EFIC to take an advantage of, as the company em- 30 1.0 barks on a strategic plan to grow its exports. 20 0.5 10 Valuation and recommendation: Our DCF-based model 0 - Nov-07 Jan-08 Jun-08 Jul-08 yielded a 12-month fair value of LE 50.1/share, implying a Dec-07 Feb-08 Mar-08 Apr-08 May-08 Aug-08 Sep-08 Oct-08 68% upside potential. EFIC’s stock is currently traded at 4.5x 2009 expected earnings, a 41% discount to regional peers. Accordingly, we rate the stock a BUY with LOW RISK. 119
    • November 11, 2008 EGYPT | CHEMICALS | EFIC Balance Sheet (LE mn) Dec-07A Dec-08F Dec-09F Dec-10F Cash Flow Dec-07A Dec-08F Dec-09F Dec-10F Assets NOPAT 129.2 250.8 488.3 569.3 Cash & Cash Equivalent 69.1 127.3 216.2 246.1 Dep. & Amor. 15.9 21.5 44.3 66.8 Net Receivables 48.0 107.2 183.6 209.2 COPAT 145.1 272.3 532.6 636.1 Total Inventory 110.5 262.7 436.6 489.2 WI Change 14.5 (113.1) (138.0) (44.2) Advance Payments 3.1 7.5 12.4 13.9 Other Current Items 3.0 0.0 0.0 0.0 Other Current Assets 56.2 56.2 56.2 56.2 CF After Current Oper. 162.6 159.2 394.7 591.9 Financing Payments (63.5) (118.9) (100.0) (83.5) Total Current Assets 286.9 560.8 905.0 1,014.5 Cash Before LT. Use 99.0 40.3 294.7 508.3 Net Plant 923.4 1,025.4 1,036.8 1,045.4 Net Plant Change (93.5) (123.5) (55.7) (75.4) Long-Term Investments 179.2 195.7 213.8 233.5 FCFF 66.1 35.7 338.9 516.5 Other Non-Current Assets 1.5 1.5 1.5 1.5 Others 0.1 4.1 6.7 8.5 Intangibles 0.0 0.0 0.0 0.0 CF Before Financing 5.7 (79.1) 245.6 441.4 Total Assets 1,390.9 1,783.4 2,157.1 2,294.9 Short-Term Debt (0.5) 219.4 (22.2) (126.1) Long-Term Debt 18.5 2.3 (2.5) 0.0 Liabilities & Shareholders' Equity Net-worth (19.3) (25.5) (55.2) (67.0) Short-Term Debt 295.6 515.1 492.9 366.7 Grey Area 0.2 0.0 0.0 0.0 Current Portion Of LTD 60.3 47.2 44.8 44.8 Dividends (52.9) (58.9) (76.8) (218.3) Accounts Payable 74.5 177.1 294.4 329.8 Change in Cash (48.3) 58.2 88.9 29.9 Dividends Payable 84.4 132.0 285.3 458.2 Other Current Liabilities 25.0 25.0 25.0 25.0 Fact Sheet Dec-07A Dec-08F Dec-09F Dec-10F Total Current Liabilities 539.8 896.3 1,142.4 1,224.5 ROE 18.5% 30.0% 52.0% 56.7% Total Long-Term Debt 175.7 130.9 83.5 38.7 ROS 22.1% 18.4% 23.4% 25.0% Other Non-Current Liab. 0.0 0.0 0.0 0.0 ROA 8.4% 11.9% 21.3% 24.3% Total Liabilities 715.5 1,027.2 1,225.9 1,263.2 ROIC 10.7% 17.3% 31.5% 38.4% Deferred Taxes 10.5 10.5 10.5 10.5 Gross margin 36.1% 30.8% 32.5% 33.6% Other Provisions 36.0 36.0 36.0 36.0 EBITDA Margin 31.3% 27.5% 30.1% 31.3% Minority Interest 0.1 0.1 0.1 0.1 ATO 0.4 0.6 0.9 1.0 Shareholders' Equity 628.7 709.6 884.5 985.1 WI/ Sales 16.6% 17.3% 17.2% 17.1% Total Liabilities & Net worth 1,390.9 1,783.4 2,157.1 2,294.9 ALEV 2.2 2.5 2.4 2.3 Debt/ Tangible Networth 1.1 1.4 1.4 1.3 Income Statement (LE mn) Dec-07A Dec-08F Dec-09F Dec-10F Current Ratio 0.5 0.6 0.8 0.8 Revenues 525.0 1,157.0 1,965.2 2,237.2 COGS (335.6) (800.2) (1,326.4) (1,486.1) Per-Share Ratios Dec-07A Dec-08F Dec-09F Dec-10F Gross Profits 189.4 356.8 638.8 751.1 Share Price 29.79 29.79 29.79 29.79 SG&A (25.1) (38.8) (46.9) (51.8) No. Of Shares '000 69,302 69,302 69,302 69,302 164.4 318.0 591.9 699.4 EBITDA EPS 1.68 3.07 6.64 8.06 Dep. & Amort. (15.9) (21.5) (44.3) (66.8) DPS 5.00 1.54 3.32 5.64 EBIT 148.4 296.5 547.6 632.6 Revenues/Share 7.58 16.69 28.36 32.28 Interest Expense (31.5) (58.6) (52.8) (38.7) BV/Share 9.07 10.24 12.76 14.21 Provisions 0.0 0.0 0.0 0.0 Interest & Investment Income 17.1 19.2 23.3 26.7 Gross Cash Flow/Share 2.09 3.93 7.69 9.18 Other Non-Operating Inc. 1.4 1.4 1.4 1.4 FCFF/Share 0.95 0.51 4.89 7.45 Other Non-Operating Exp. 0.0 0.0 0.0 0.0 EBITDA/Share 2.37 4.59 8.54 10.09 EBT 135.6 258.5 519.5 622.1 EV/Share 36.47 37.95 35.63 32.74 Taxes (19.3) (45.7) (59.3) (63.3) NPAT 116.3 212.9 460.2 558.7 Multiples Dec-07A Dec-08F Dec-09F Dec-10F Minority Interest (0.0) 0.0 0.0 0.0 P/E 17.7 9.7 4.5 3.7 Extraordinary Items 0.1 0.0 0.0 0.0 Dividend Yield 16.8% 5.2% 11.1% 18.9% Attributable Profits 116.4 212.9 460.2 558.7 P/ Revenue 3.9 1.8 1.1 0.9 EV/ Revenues 4.8 2.3 1.3 1.0 P/ COPAT 14.2 7.6 3.9 3.2 EV/ COPAT 17.4 9.7 4.6 3.6 P/ FCFF 31.2 57.9 6.1 4.0 EV/ FCFF 38.2 73.8 7.3 4.4 P/ EBITDA 12.6 6.5 3.5 3.0 EV/ EBITDA 15.4 8.3 4.2 3.2 P/ BV 3.3 2.9 2.3 2.1 Source: Company reports and CICR estimates. 120
    • November 11, 2008 EGYPT | PHARMACEUTICALS 12M FAIR VALUE | LE 43.68 EIPICO BUY | LOW RISK Expansion underway SHARE DATA Reuters; Bloomberg PHAR.CA;PHAR EY Recent price as of 6-Nov-08 LE 24.50 EIPICO is a successful generic pharmaceutical company. No. of O/S shares 72.1 mn It is a low-cost producer in a sector of insensitive price Market cap LE 1,766.5 mn demand, and is cash rich benefiting from high interest 52-wk high / low LE 40.95/ LE 18 Avg. daily volume / turnover 0.07 mn / LE 2.32 mn rates. In a highly volatile market amid concerns of a global recession, this company is capable of producing a COMPANY SYNOPSIS steady double-digit growth, and an unrevealed ROE of EIPICO was established in 1980 but started 23% versus a WACC of 17.10%. With a PER of just 6x production in 1985. Currently, the company's 2009 earnings it is undemanding to expect this to expand product mix is comprised of 247 products, with a generic/under-licensed mix of 80%/20%, to 8x. Our DCF led target price indicates some 78% up- respectively. The largest local private-sector side to LE 43.68, and our rating therefore is BUY at LOW pharmaceuticals producer, EIPICO’s market share RISK. hovers around 8%. It also exports to about 64 countries. Currently, EIPICO is in the process of expanding its factory. EIPICO has two subsidiaries: the first is the Egyptian International Ampoule Cash-rich, debt-free: EIPICO should benefit in a high inter- Manufacturing Company (EIACO), a 99.7% est environment. We also think that EIPICO's growth is robust ownership, and the second is Saudi Arabia-based Universal, a 30% ownership. even if the economy slows, thanks to the inelastic demand for its products. Hence, we do not expect demand for its products EIPICO has an authorized capital of LE 850 mn and an issued capital of LE 721 mn, distributed over to falter; not least that its products are already competitively 72.1 mn shares at a par value of LE 10/share. priced versus private sector peers. New factory expansion to start in 2010 with capex of only LE 80 mn – less than 10% of 2008 revenues: EIPICO's new expansion plans should require around LE 80 mn in capex with target start date in 2010. While management has not re- vealed which products will be produced in the new extension, we reckon that it will gradually add 30% of incremental reve- nues starting 2010. SHAREHOLDER STRUCTURE Investments update: EIPICO has discontinued its 98.6%- ACDIMA 43.1% owned subsidiary EIPICO Tech, which was mainly estab- Medical Union Investment 5.6% lished to develop research of incurable diseases (such as Banks & Insurance Companies 0.4% AIDS and cancer), due to its high investment cost required. Others 0.2% Free Float 50.7% Meanwhile, EIACO started production in July 2007 with an Total 100.0% authorized capital of LE 200 mn and a paid-in capital of LE 80 mn. EIACO's current capacity is 100 mn ampoules p.a. and is expected to reach 800 mn ampoules p.a. over the next 3-4 years Growth drivers: While drug consumption should be driven in part by population growth, an increasing health awareness AHMED ABDEL-GHANI and Egypt's new comprehensive medical insurance program AHMED.ABDELGHANI@CICH.COM.EG should reflect positively on EIPICO's revenues. Moreover , the inauguration of Technological Center for Pharmaceutical In- STOCK PERFORMANCE | 52 WEEKS dustries & Cosmetics (TCPIC), will enhance drug companies Volume PHAR CASE 30 - rebased to improve their research and development. mn shares LE Valuation and recommendation: The stock is traded at a 45 0.9 40 0.8 PER of 6x 2009 expected earnings with a current dividend 35 0.7 yield of 7%, which we think attractive for defensive 5-year 30 0.6 25 0.5 earnings CAGR of 14%. Shorter-term valuation techniques 20 0.4 imply it is undemanding to see the price rise 30% to a 8x 2009 15 0.3 expected earnings, and our DCF-based fair value indicates an 10 0.2 5 0.1 78% upside to LE 43.68/share. Both the shorter-term and 0 - longer-term valuations are significantly above the 17.10% Nov-07 Jan-08 Jun-08 Jul-08 Dec-07 Feb-08 Mar-08 Apr-08 May-08 Aug-08 Sep-08 Oct-08 WACC we use. This valuation does not take into account its 30%-owned Saudi operation, which could indicate further up- side potential when sufficient information is available. Accord- ingly we rate this stock a BUY at LOW RISK. 121
    • November 11, 2008 EGYPT | PHARMACEUTICALS | EIPICO Balance Sheet (LE Millions) Dec-07 A Dec-08 F Dec-09 F Dec-10 F Cash Flow (LE Millions) Dec-07 A Dec-08 F Dec-09 F Dec-10 F NOPAT 247.8 277.1 310.7 355.4 Assets Depreciation & Amortization 53.1 53.9 56.2 60.8 Cash & Cash Equivalent 416.9 483.3 582.8 709.0 Net Receivables 227.9 249.0 281.0 323.2 Gross Cash Flow (COPAT) 300.9 331.0 367.0 416.2 Total Inventory 338.8 354.1 395.1 449.2 Working Investments Change (93.6) (38.2) (70.5) (92.8) Advance Payment to Suppliers 0.0 0.0 0.0 0.0 Other Current Items (10.9) 0.0 0.0 0.0 Other Trading Assets 0.0 0.0 0.0 0.0 Cash After Current Operations 196.4 292.8 296.5 323.4 Other Current Assets 0.0 0.0 0.0 0.0 Financing Payments (2.2) (0.4) 3.0 6.1 Total Current Assets 983.5 1,086.4 1,259.0 1,481.3 Cash Before Long Term Use 194.2 292.4 299.5 329.5 Net Plant 339.4 413.9 436.8 437.7 Net Plant Change (68.3) (109.9) (60.6) (43.3) Long Term Investments 39.3 39.3 39.3 39.3 FCFF 139.0 182.9 235.9 280.2 Other Trading Non-Current Assets 0.0 0.0 0.0 0.0 Others 48.1 21.3 22.7 23.1 Other Non-Current Assets 27.5 27.5 27.5 27.5 Cash Before Financing 174.0 203.8 261.5 309.3 Intangibles 217.4 198.9 180.4 161.9 Short-Term Debt 0.0 0.0 0.0 0.0 Total Assets 1,607.1 1,765.9 1,942.9 2,147.7 Long-Term Debt 0.0 0.0 0.0 0.0 Networth (22.4) 0.0 0.0 0.0 Liabilities & Shareholders' Equity Grey Area (10.2) 0.0 0.0 0.0 Short-Term Debt 0.0 0.0 0.0 0.0 Dividends (100.7) (137.4) (162.0) (183.2) Current Portion of Long-Term Debt 0.0 0.0 0.0 0.0 Change in Cash 40.7 66.4 99.5 126.2 Accounts Payable 26.2 24.3 26.9 30.3 Accrued Expenses 0.0 0.0 0.0 0.0 Fact Sheet Dec-07 A Dec-08 F Dec-09 F Dec-10 F Down Payments to customers 0.0 0.0 0.0 0.0 ROE 21.7% 22.8% 23.1% 23.7% Taxes Payable 0.0 0.0 0.0 0.0 ROS 27.3% 28.7% 29.0% 29.1% Dividends Payable 137.4 162.0 183.2 209.7 ROA 14.4% 15.2% 15.4% 15.9% Other Current Liabilities 73.7 73.7 73.7 73.7 ROIC 21.5% 21.2% 21.0% 21.3% Total Current Liabilities 237.2 260.0 283.8 313.7 Gross Margin 45.4% 46.0% 46.2% 46.4% Total Long-Term Debt 0.0 0.0 0.0 0.0 EBITDA Margin 42.9% 43.3% 43.5% 43.7% Other Non-Current Liabilities 0.0 0.0 0.0 0.0 ATO 0.5 0.5 0.5 0.5 Long-Term Spontaneous Finance 0.0 0.0 0.0 0.0 WI/ Sales 63.6% 61.9% 62.7% 63.3% Total Liabilities 237.2 260.0 283.8 313.7 ALEV 1.9 1.8 1.7 1.7 Deferred Taxes 73.8 73.8 73.8 73.8 Liabilities/Tangible Networth 0.3 0.3 0.3 0.2 Other Provisions 227.4 255.5 286.6 321.7 Current Ratio 4.1 4.2 4.4 4.7 Minority Interest 0.2 0.2 0.2 0.2 Shareholders Equity 1,068.4 1,176.3 1,298.5 1,438.2 Per Share Ratios Dec-07 A Dec-08 F Dec-09 F Dec-10 F Total Liab. & Shareholders' Eq. 1,607.1 1,765.9 1,942.9 2,147.7 Share Price 24.50 24.50 24.50 24.50 No. Of Shares (mn) 72.1 72.1 72.1 72.1 Income Statement (LE Millions) Dec-07 A Dec-08 F Dec-09 F Dec-10 F EPS 3.22 3.72 4.16 4.73 Revenues 850.2 935.3 1,035.8 1,171.5 Div/Share 1.70 2.25 2.54 2.91 COGS (incl. marketing expenses) (464.1) (505.0) (557.3) (627.9) Revenues/Share 11.79 12.97 14.36 16.24 Gross Profit 386.1 430.2 478.5 543.6 BV/Share 14.81 16.31 18.00 19.94 G&A (21.6) (25.3) (28.0) (31.6) Gross Cash Flow/Share 4.17 4.59 5.09 5.77 364.4 405.0 450.6 511.9 FCFF/Share 1.93 2.54 3.27 3.88 EBITDA EBITDA/Share 5.05 5.61 6.25 7.10 Depreciation & Amortization (53.1) (53.9) (56.2) (60.8) EV/Share 18.72 17.80 16.42 14.67 EBIT 311.3 351.1 394.4 451.1 Interest Expense (2.2) (2.2) (2.2) (2.2) Multiples Dec-07 A Dec-08 F Dec-09 F Dec-10 F Provisions (25.2) (28.1) (31.1) (35.1) P/E 7.6 6.6 5.9 5.2 Interest Income 16.5 21.2 22.6 23.0 Div Yield % 7% 9% 10% 12% Investment Income 0.0 0.0 0.0 0.0 P/ Revenue 2.1 1.9 1.7 1.5 Other Non-Operating Income 0.0 0.0 0.0 0.0 EV/ Revenues 1.6 1.4 1.1 0.9 Other Non-Operating Expenses 0.0 0.0 0.0 0.0 EV/ FCFF 9.7 7.0 5.0 3.8 Previous year gain/loss (5.0) 0.0 0.0 0.0 P/ EBITDA 4.8 4.4 3.9 3.5 EBT 295.4 342.0 383.7 436.8 EV/ EBITDA 3.7 3.2 2.6 2.1 Taxes (63.5) (73.9) (83.6) (95.7) P/ BV 1.7 1.5 1.4 1.2 NPAT 231.9 268.1 300.1 341.1 Source: EIPICO and CICR estimates Minority Interest 0.2 0.0 0.0 0.0 Extraordinary Items (0.0) 0.0 0.0 0.0 Attributable Profits 232.2 268.1 300.1 341.1 122
    • November 11, 2008 EGYPT | STEEL 12M FAIR VALUE | LE 1,502 EZZ AL-DEKHEILA STEEL - ALEXANDRIA (EZDK) BUY | MODERATE RISK Company efficiency vs. market deficiency SHARE DATA Reuters; Bloomberg IRAX.CA; IRAX EY Recent price as of 6-Nov-08 LE 896.23 EZDK is the largest integrated steel plant in Egypt and the No. of O/S shares 13.7 mn lowest cost producer of steel in Egypt and the region, giv- Market cap LE 12,251.5 mn ing the company an edge with the current expected slow- 52-wk high / low LE 1579.99/ LE 706.02 Avg. daily volume / turnover 0.02 mn / LE 22.89 mn down in global economies. EZDK has a total capacity of 2.8 mtpa of long and flat steel, with no expansion plans. COMPANY SYNOPSIS With the current turmoil over the short- to medium-term, we expect EZDK to face a reduction in utilization rates, yet Al-Ezz Dekheila for Steel - Alexandria (EZDK), previ- a stable profit margin given the cost-price relationship of ously known as Alexandria National Iron & Steel Com- pany (ANSDK), was established in 1982 under the its business model. With a WACC of 18%, our DCF model provisions of law no. 43 as a joint venture between indicates a 68% upside to a 12-month fair value of LE Egyptian public sector companies, Nippon Kokan, Kobe Steel & Tomen, and the International Finance 1,502/share, thus retaining our BUY recommendation at a Corporation (IFC). EZDK currently operates under law MODERATE RISK. no. 8/1997. EZDK is the largest fully integrated steel factory in Competitive advantage: EZDK is considered the lowest cost Egypt that produces both long and flat products with a producer in Egypt with a gross, EBITDA, and net margins of total capacity of 2.8 mtpa, 64% of which is for long 40.2%, 37.8%, and 26%, respectively. Said cost advantage products with flat products making up the balance. comes on the back of: (1) utilizing iron ore as the main input in the production process, (2) a higher production per worker Ezz Steel owns a majority stake in EZDK amounting to (883 tpa vs. an international average of 588 tpa), and (3) a 53.24%, which provided synergies for the whole group, created a strong entity that is capable of competing both lower labor cost (US$13/ton in 2006 vs. an international aver- locally and internationally. age of US$76/ton). Synergies: EZDK is 53.24% owned by Ezz Steel (ES) in June 2008, resulting in synergies via increasing local market share, a better world ranking, strong product recognition, and a re- duction in operational and administrative costs that would en- hance financial position. SHAREHOLDER STRUCTURE Growth drivers: Given Egypt's demographics, local construc- Ezz Steel 53.2% tion activity will always be the main growth driver for EZDK. National Investment Bank 10.5% Yet, we expect the current slowdown in real-estate activity to Misr Insurance Co. 7.8% result in a mild slowdown in the construction activity which General Petro. Association 4.7% Banks, Ins Co. and Others 18.6% should take place over the coming years to fulfill the currently- Free Float 5.2% contracted real-estate projects. On the global front, we expect a slowdown in the industrialization process*, resulting in a lower rate of utilization. Industry dynamics: Because of international competition, the HANY MOHAMED SAMY, CFM expected reductions in inputs' costs* will result in lower selling HANY.SAMY@CICH.COM.EG prices; yet, margins are expected to be maintained but with lower bottom line figures. STOCK PERFORMANCE | 52 WEEKS Government intervention: The recent removal of steel export tariffs of LE 160/ton should have a positive impact on EZDK, Volume IRAX CASE 30 - rebased where 15% of production was exported in 1H08. mn shares LE 1,800 1.4 Valuation and recommendation: Our DCF model - using a 1,600 1.2 1,400 perpetual growth rate of 1% and a WACC of 18% - yielded a 1.0 1,200 12-month fair value of LE 1502/share, implying a 68% upside 0.8 1,000 potential. Commodity plays are currently out of favor, but 800 0.6 600 EZDK is part of the steel quasi-monopoly, and maintains a 0.4 400 stable margin. Lower steel prices should therefore stimulate 0.2 200 construction volumes, providing a catalyst. Hence, we reiter- 0 - Nov-07 Jan-08 Jun-08 Jul-08 Dec-07 Feb-08 Mar-08 Apr-08 May-08 Aug-08 Sep-08 Oct-08 ate our BUY recommendation on EZDK with a MODERATE RISK rating. * Please refer to our industry section. 123
    • November 11, 2008 EGYPT | STEEL | EZDK Balance Sheet (LE mn) 2007A 2008F 2009F 2010F Cash Flow (LE mn) 2007A 2008F 2009F 2010F NOPAT 2,431.8 2,671.4 2,413.3 2,710.8 Assets Depreciation & Amortization 431.7 440.2 452.4 477.2 Cash & Cash Equivalent 1,674.6 514.3 450.7 1,189.7 Gross Cash Flow (COPAT) 2,863.5 3,111.6 2,865.7 3,188.1 Net Receivables 326.8 455.2 397.8 433.5 Total Inventory 1,390.9 2,045.6 1,871.1 2,013.7 Working Investments Change (17.7) (561.0) 172.7 (129.9) Advance Payment 0.0 0.0 0.0 0.0 Other Current Items 168.1 0.0 0.0 0.0 Other Trading Assets 0.0 0.0 0.0 0.0 Cash After Current Operations 3,013.9 2,550.6 3,038.4 3,058.2 Other Current Assets 0.0 0.0 0.0 0.0 Financing Payments (789.3) (683.3) (635.6) (646.9) Total Current Assets 3,392 3,015 2,720 3,637 Cash Before Long Term Use 2,224.6 1,867.3 2,402.8 2,411.3 Net Plant 5,664 5,835 5,907 5,983 Net Plant Change (38.0) (611.9) (523.9) (553.8) Long-Term Investments 62.9 48.9 48.9 48.9 FCFF 2,975.9 1,938.7 2,514.5 2,504.4 Long-Term Loans Receivalbe 6.0 5.7 5.7 5.7 Others 419 (226) 51 136 Other Non-current Assets 0.0 0.0 0.0 0.0 Cash Before Financing 2,605.6 1,029.2 1,929.9 1,993.5 Intangibles 0.0 0.0 0.0 0.0 Short-Term Debt 691.1 (570.1) (58.9) 332.1 Total Assets 9,125 8,905 8,681 9,675 Long-Term Debt (214.5) (90.2) 0.0 0.0 Networth (816.2) 435.8 114.3 128.6 Liabilities & Shareholders' Equity Grey Area (156.4) 472.3 (524.2) 0.0 Short-Term Debt 1,353 783 724 1,056 Dividends (957.7) (2,437.3) (1,524.8) (1,715.1) Change in Cash 1,151,769 (1,160,300) (63,625) 739,079 CP of Long Term Debt 376.2 372.1 372.1 372.1 Accounts Payable 427.4 628.5 574.9 618.7 Accrued Expenses 44.7 65.8 60.2 64.8 Fact Sheet 2007A 2008F 2009F 2010F Down Payments 0.0 0.0 0.0 0.0 ROE 70.4% 62.8% 41.2% 39.4% Taxes Payable 579.9 140.7 140.7 140.7 ROS 26.0% 23.9% 21.2% 22.0% Dividends Payable 478.8 0.0 0.0 0.0 ROA 25.2% 33.0% 26.3% 26.6% Royalties Payables / Due to Sister Co. 5.4 5.4 5.4 5.4 ROIC 34.2% 33.6% 30.6% 30.7% Other Current Liabilities 22.5 22.5 22.5 22.5 Gross Profit Margin Total Current Liabilities 3,288 2,018 1,900 2,280 EBITDA Margin 37.8% 34.9% 31.9% 32.7% Total Long-Term Debt 2,064.7 1,602.4 1,230.3 858.3 ATO 1.0 1.4 1.2 1.2 Other Non-Current Liabilities 460.0 85.9 0.0 0.0 WI/ Sales 14.1% 14.7% 15.2% 15.1% Total Liabilities 5,813 3,706 3,130 3,139 ALEV 2.8 1.9 1.6 1.5 Deferred Taxes 0.0 472.6 0.0 0.0 Liabilities/Networth 1.8 0.8 0.6 0.5 Other Provisions 51.9 51.6 0.0 0.0 Current Ratio 1.0 1.5 1.4 1.6 Minority Interest 0.0 0.0 0.0 0.0 Shareholders' Equity 3,260 4,675 5,551 6,536 Per-Share Ratios 2007A 2008F 2009F 2010F Total Liab. & Equity 9,125 8,905 8,681 9,675 Share Price 896.23 896.23 896.23 896.23 No. Of Shares (000) 13,668 13,668 13,668 13,668 Income Statement (LE mn) 2007A 2008F 2009F 2010F EPS 22.96 29.37 22.87 25.72 Sales 8,826 12,295 10,774 11,708 DPS 14.25 19.58 15.25 17.15 Cost of Sales (5,279) (7,764) (7,121) (7,643) Revenues/Share 88.26 122.94 107.73 117.07 Gross Profit 3,547 4,531 3,653 4,065 Capacity/Share N/A N/A N/A N/A SG&A (208) (246) (215) (234) BV/Share 32.60 46.74 55.51 65.36 EBITDA 3,339 4,285 3,437 3,831 Gross Cash Flow/Share 28.63 31.11 28.66 31.88 Depreciation & Amortization (432) (440) (452) (477) FCFF/Share 29.76 19.39 25.14 25.04 EBIT 2,908 3,845 2,985 3,354 EBITDA/Share 33.39 42.85 34.37 38.31 Interest Expense (294) (307) (264) (275) EV/Share 143.7 144.9 141.2 133.5 Provisions 0 0 0 0 Interest Income 109 30 34 33 Multiples 2007A 2008F 2009F 2010F Investment Income 0 0 0 0 P/E 39.0 30.5 39.2 34.8 Other Non-Operating Income 216 103 103 103 Dividend Yield 2% 2% 2% 2% Other Non-Operating Expenses (6) 0 0 0 P/ Revenue 10.2 7.3 8.3 7.7 EBT 2,931 3,671 2,858 3,215 EV/ Revenues 1.6 1.2 1.3 1.1 Taxes (635) (734) (572) (643) P/ COPAT 31.3 28.8 31.3 28.1 NPAT 2,296 2,937 2,287 2,572 EV/ COPAT 5.0 4.7 4.9 4.2 Minority Interest 0 0 0 0 P/ FCFF 30.1 46.2 35.6 35.8 Extraordinary Items 0 0 0 0 EV/ FCFF 4.8 7.5 5.6 5.3 Attributable Profits 2,296 2,937 2,287 2,572 P/ EBITDA 26.8 20.9 26.1 23.4 EV/ EBITDA 4.3 3.4 4.1 3.5 P/ BV 27.5 19.2 16.1 13.7 Note: A = Actual; F = Forecasted Source: EZDK and CICR forecasts 124
    • November 11, 2008 EGYPT | STEEL 12M FAIR VALUE | LE 34.2 EZZ STEEL (ES) BUY | MODERATE RISK The long-term vision SHARE DATA Ezz Steel (ES) is a leading local and regional steel pro- Reuters; Bloomberg ESRS.CA; /AEZDq.L | ALES EY ducer with a 63% local market share. Even with the cur- Recent price as of 6-Nov-08 LE 10.95 rent global economic slowdown, ES is taking a longer- No. of O/S shares 543.3 mn term perspective by expanding its capacities from a cur- Market cap LE 5,948.7 mn 52-wk high / low LE 38.53/ LE 8.11 rent 5.3 mtpa to 8 mtpa over the coming five years. Over Avg. daily volume / turnover 1.34 mn / LE 35.29 mn the short- to medium-term, we expect ES to face a reduc- tion in utilization rates, yet a stable profit margin, given COMPANY SYNOPSIS the cost-price relationship of its business model. With a WACC of 18%, our DCF model indicates a 212% upside to Ezz Steel (ES) - previously known as Al-Ezz Steel Re- bars Co. (ESR) - is a joint stock company established in a 12-month fair value of LE 34.2/share, thus retaining our April 1994, to manufacture steel rebars in Sadat City. In BUY recommendation with a MODERATE RISK. 1995, ES acquired 90.7% of National Al-Baraka for Iron & Steel, - currently known as Al-Ezz Rolling Mills (ERM) - More acquisitions: Continuing its expansion strategy, ES which produces straight and coiled rebars in 10th of Ramadan. ES facilities in Sadat and 10th of Ramadan increased its stake in Ezz Al-Dekheila for Steel - Alexandria have a combined production capacity of 1.4 mn tpa. (EZDK) from 50.28% in December 2007 to 53.24% in June 2008 to increase its stake in EZDK's earnings, and to enhance Furthermore, ES owns 75.15% stake in Al-Ezz Flat Steel (EFS), which was established in July 1998 under the the decision making process. provisions of Law no. 8 (free zone systems), with a ca- pacity of 1.2 mn tpa of flat steel, most of which is directed More long-term expansions: From a longer term perspec- to the export markets. EFS is planning to increase capac- tive, ES is in the process of expanding capacities, both locally ity by an additional 0.8 mn tpa by 2011. and regionally. Local expansion is intended to: (1) increase flat ES owns a 53.24% stake in Al-Ezz Dekheila for Steel- steel production by 0.8 mtpa and (2) replace the 0.55 mtpa of Alexandria (EZDK), previously known as Alexandria imported billets with locally-produced ones to enhance profit National Iron & Steel Company (ANSDK). EZDK is the margins and reduce FX exposure. Regional expansion of 3 largest integrated steel plant in Egypt with a capacity of 1.78 mn tpa of long products and 1 mn tpa of flat prod- mtpa is intended to diversify markets to mitigate risks. Said ucts. expansions will take place over the coming five years, with a total estimated investment cost of US$3 bn. ES is expanding regionally in Algeria with an additional 3 mn tpa of steel rebars. Finally, ES is planning to produce Expansion financing: During 3Q08, ES increased its capital internally the imported billets as to enhance profitability margins. via a 2-to-1 rights issue, representing 11% of total expansion costs with internal financing and external debt making up the Said structure created a strong entity that is capable of competing both locally (63% market share for long and balance. As ES has an excellent credit history, local banks will flat products) and internationally (ranged within the top 60 not be reluctant to finance expansions. Additionally, cost of steel producers worldwide machinery will be financed by the supplier via selling to ES on SHAREHOLDER STRUCTURE installment bases. Al-Ezz Holding 38.1% Growth drivers: Given Egypt's demographics, local construc- Egy Int'l Com Invest Co. 11.2% Egy Int'l Ind Invest 7.4% tion activity will always be the main growth driver for ES. Yet, Dev Co For Metal Invest 7.4% we expect the current slowdown in real-estate activity to result Banks, Ins Co. and others 1.1% in a mild slowdown in the construction activity which should Free Float 34.8% take place over the coming years to fulfill the currently- contracted real-estate projects. On the global front, we expect a slowdown in the industrialization process,* resulting in a HANY MOHAMED SAMY, CFM lower rate of utilization. HANY.SAMY@CICH.COM.EG Industry dynamics: Because of international competition, the STOCK PERFORMANCE | 52 WEEKS expected reductions in inputs' costs* will result in lower selling prices; yet, margins are expected to be maintained but with Volume ESRS CASE 30 - rebased lower bottom line figures. mn shares LE 45 6.0 Government intervention: The recent removal of steel export 40 5.0 tariffs of LE 160/ton should have a positive impact on ES, 35 30 4.0 where 24% of production was exported in 1H08. 25 3.0 20 Valuation and recommendation: Our DCF model - using a 15 2.0 perpetual growth rate of 1% and a WACC of 18% - yielded a 10 1.0 5 12-month fair value of LE 34.2/share, implying a 146% upside 0 - potential. Commodity plays are currently out of favor, but ES is Nov-07 Jan-08 Jun-08 Jul-08 Dec-07 Feb-08 Mar-08 Apr-08 May-08 Aug-08 Sep-08 Oct-08 a quasi-monopoly steel producer, and maintains a stable mar- gin. Lower steel prices should therefore stimulate construction volumes, providing a catalyst. Hence, we reiterate our BUY recommendation on ES with a MODERATE RISK rating. * Please refer to our industry section 125
    • November 11, 2008 EGYPT | STEEL | EZZ STEEL Balance Sheet (LE mn) 2007A 2008F 2009F 2010F Cash Flow (LE mn) 2007A 2008F 2009F 2010F Assets NOPAT 2,715 3,712 2,739 3,462 Depreciation & Amortization 659 695 726 818 Cash & Cash Equivalent 1,891.8 2,477.8 1,777.8 1,777.8 Gross Cash Flow (COPAT) 3,374 4,407 3,465 4,280 Net Receivables 265.4 378.0 331.3 367.2 Total Inventory 2,547.6 3,644.2 3,271.7 3,514.7 Working Investments Change 215 (700) 215 (133) Advance Payment 125.3 184.1 165.2 177.5 Other Current Items (43) (264) 0 0 Other Trading Assets 0.6 18.8 18.8 18.8 Cash After Current Operations 3,546 3,442 3,680 4,147 Other Current Assets 157.2 367.6 367.6 367.6 Financing Payments (1,529) (2,409) (2,043) (1,706) Total Current Assets 4,988 7,070 5,932 6,224 Cash Before Long Term Use 2,016.93 1,033 1,636 2,441 Net Plant Change (18) (1,432) (2,930) (4,222) Net Plant 10,601 11,338 13,543 16,947 FCFF 3,528 2,010 749 (75) Long-Term Investments 63.0 55.9 55.9 55.9 Long-Term Loans Receivalbe 189.3 5.7 0.0 0.0 Others 346 (95) 185 174 Other Non-current Assets 6.3 0.4 0.4 0.4 Cash Before Financing 2,345 (494) (1,109) (1,607) Intangibles 0.0 315.2 315.2 315.2 Short-Term Debt (203) (1,271) 141 1,346 Long-Term Debt 891 1,549 325 325 Total Assets 15,848 18,786 19,847 23,542 Networth (1,292) (662) (1,061) (1,175) Grey Area (474) 1,435 1,129 1,267 Liabilities & Shareholders' Equity Dividends (58) 29 (125) (155) Short-Term Debt 1,370 99 240 1,586 Change in Cash 1,209 586 (700) 0 CP of Long Term Debt 1,901.1 1,616.4 1,167.3 1,167.3 Note: A = Actual; F = Forecasted Accounts Payable 701.3 954.0 856.5 920.1 Source: ES and CIBC forecasts Accrued Expenses 113.9 167.3 150.2 161.4 Fact Sheet 2007A 2008F 2009F 2010F Down Payments 616.3 877.9 769.3 852.8 ROE 31.4% 30.2% 18.6% 20.2% Taxes Payable 615.8 593.0 593.0 593.0 ROS 6.9% 7.9% 6.7% 8.2% Dividends Payable 137.2 328.5 328.5 328.5 ROA 7.1% 9.7% 6.9% 7.8% Royalties Payables / Due to Sister Co. 5.4 1.9 1.9 1.9 ROIC 21.2% 25.2% 17.1% 17.7% Other Current Liabilities 148.3 72.2 72.2 72.2 Gross Profit Margin 26.7% 24.4% 22.5% 24.9% Total Current Liabilities 5,609 4,711 4,179 5,683 EBITDA Margin 24.4% 22.1% 20.2% 22.6% Total Long-Term Debt 3,892.1 3,824.7 2,982.2 2,139.7 ATO 1.0 1.2 1.0 0.9 Other Non-Current Liabilities 708.9 754.7 754.7 754.7 WI/ Sales 10.5% 9.6% 9.9% 9.5% Total Liabilities 10,210 9,290 7,916 8,578 ALEV 4.4 3.1 2.7 2.6 Deferred Taxes 0.0 0.0 0.0 0.0 Liabilities/Networth 2.9 1.5 1.1 0.9 Other Provisions 91.7 91.7 91.7 91.7 Current Ratio 0.9 1.5 1.4 1.1 Minority Interest 1,970.9 3,405.7 4,534.9 5,801.8 Shareholders' Equity 3,575 5,998 7,304 9,071 Total Liab. & Equity 15,848 18,786 19,847 23,542 Per-Share Ratios 2007A 2008F 2009F 2010F Share Price 10.95 10.95 10.95 10.95 Income Statement (LE mn) 2007A 2008F 2009F 2010F No. Of Shares (000) 543,261 543,261 543,261 543,261 Sales 16,159 23,016 20,225 22,359 EPS 2.1 3.3 2.5 3.4 COGS x-dep (11,852) (17,410) (15,673) (16,792) DPS 0.3 0.3 0.2 0.3 Gross Profit 4,308 5,606 4,552 5,568 Revenues/Share 29.7 42.4 37.2 41.2 SG&A (371) (528) (464) (513) Capacity/Share N/A N/A N/A N/A EBITDA 3,937 5,078 4,088 5,055 BV/Share 6.6 11.0 13.4 16.7 Depreciation & Amortization (659) (695) (726) (818) Gross Cash Flow/Share 6.2 8.1 6.4 7.9 EBIT 3,278 4,383 3,362 4,236 FCFF/Share 6.5 3.7 1.4 -0.1 Interest Expense (710) (508) (427) (539) EBITDA/Share 7.2 9.3 7.5 9.3 Provisions (6) 0 0 0 EV/Share 20.7 16.6 15.8 16.7 Interest Income 67 37 32 27 Investment Income (0) 0 0 0 Multiples 2007A 2008F 2009F 2010F Other Non-Operating Income 246 147 147 147 P/E 5.3x 3.3x 4.4x 3.3x Other Non-Operating Expenses 0 0 0 0 Dividend Yield 3% 3% 2% 3% EBT 2,875 4,060 3,114 3,871 P/ Revenue 0.4 0.3 0.3 0.3 Taxes (653) (812) (623) (774) EV/ Revenues 0.7 0.4 0.4 0.4 NPAT 2,222 3,248 2,491 3,097 P/ COPAT 1.8 1.3 1.7 1.4 Minority Interest (1,100) (1,435) (1,129) (1,267) EV/ COPAT 3.3 2.0 2.5 2.1 Extraordinary Items 0 0 0 0 P/ FCFF 1.7 3.0 7.9 79.3- Attributable Profits 1,122 1,813 1,362 1,830 EV/ FCFF 3.2 4.5 11.4 (120.9) P/ EBITDA 1.5 1.2 1.5 1.2 EV/ EBITDA 2.8 1.8 2.1 1.8 P/ BV 1.7x 1.0x 0.8x 0.7x Source: Company reports and CICR estimates 126
    • November 11, 2008 EGYPT | OIL & GAS 12M FAIR VALUE | US$5.1 MARIDIVE & OIL SERVICES (MOS) BUY | MODERATE RISK Competitive global player SHARE DATA Maridive & Oil Services (MOS) sustained earnings growth Reuters; Bloomberg MOIL.CA; MOIL EY with its fleet size growing from 3 vessels and 4 mooring Recent price as of 6-Nov-08 US$ 2.57 boats in 1979 to 57 marine units in 2008. MOS continues No. of O/S shares 256.0 mn to grow its fleet, having contracted for 16 new marine Market cap US$ 0,657.9 mn 52-wk high / low US$ 7.3/ US$ 2.3 units, as well as upgrading its existing fleet to meet de- Avg. daily volume / turnover 0.73 mn / US$ 1.75 mn mand. MOS’s projects are global – with 80% of its reve- nues generated outside Egypt. Its share price, however, COMPANY SYNOPSIS seems to have been suffering from waning oil prices, a risk - therefore - of lower E&P demand. Yet, MOS is well Maridive & Oil Services Company (MOS) is a free-zone placed due to its relatively low-cost structure, offering joint stock company established in 1978. MOS operates under Investment Law No. 8/1997. The company is located competitive rates than its peers. As such it trades at 6.5x in Port Said with offices in Cairo, Alexandria, and Abu 2009e PER, and 99% below our SOTP 12-month fair value Dhabi. of US$5.1/share. We initiate coverage on the stock with a Maridive's major objective is to provide Offshore Support BUY and MODERATE RISK rating. Vessels (Marine services) and Offshore Construction Services (Project services) to oil exploration and production companies. The company's operations are executed through the mother company as well as its Global demand: Global demand for oil as a primary source of subsidiaries: Maritide Offshore Oil Services, Valentine Maritime, and Maridve Offshore Projects (MOP). energy triggered exploration and production (E&P) activities in untapped offshore oil and gas reserves. Accordingly, MOS Maridive, with an experience of over 30 years, is currently the largest Egyptian marine and offshore oil services contracted for 16 new marine units. company and one of the largest regional players in terms of fleet size owned. The company owns 57 marine units. Highly-integrated business model: MOS is a horizontally- The company contracted for 16 marine units (vessels and integrated company providing offshore construction and sup- barges) which will be gradually delivered by 2011. port to oil E&P companies. These services cover a wide range Maridive's operations have widely expanded. The group of both operational and production levels. won a number of contracts in the Gulf region, Persian Gulf, Caspian Sea, Gulf of Mexico as well as North, West, and Barriers to entry: There are high barriers prevailing against East Africa in addition to the Far East. the entrance of potential players into the market owing to the capital-intensive nature of the industry with high initial invest- ment and operational costs as well as strong technical capa- SHAREHOLDER STRUCTURE bilities required. Also, MOS has the edge to offer competitive Offshore Oil Projects 21.4% daily rates than its competitors owing to its ability to source Eleish Family 13.2% labor with lower packages compared to international markets. Zeid Family 13.2% Nadim Family 13.2% Risks - global financial crisis and lower oil prices: The CIB 7.1% global financial crisis may have an impact on MOS's require- Horus PE Fund III 2.9% Free Float 29.0% ments for financial facilities and foreign currencies to finance Total 100.0% its operations and expansion plans. Meanwhile, should oil prices continue in their downtrend, offshore operations could reduce their production. Thus, demand for oil services - pro- MOHAMED HAMDY vided by MOS - may feel the pinch. MOHAMED.HAMDY@CICH.COM.EG Difficult weather conditions: This industry can be affected by difficult weather conditions that could damage vessels and equipment and result in the suspension of operations. The STOCK PERFORMANCE | 52 WEEKS industry is seasonal depending on the storms that hit the re- Volume MOIL CASE 30 - rebased gions in different times. The monsoon hits India, where the US$ bulk of the Far East revenues are generated from, starting mn shares 8.0 25.0 June till end of September. However, this is mitigated by the 7.0 20.0 company's geographical diversification, such as Australia 6.0 where the monsoon hits from December till early March. It is 5.0 15.0 4.0 worth highlighting that one barge sank in June 2007 south of 10.0 3.0 Pakistan due to the monsoon. 2.0 5.0 1.0 Valuation and recommendation: We used sum-of-the-parts 0.0 - (SOTP) valuation to value MOS’s businesses. We reached a Nov-08 Jun-08 Jul-08 May-08 Aug-08 Sep-08 Oct-08 12-month fair value of US$5.1/share, implying a 99% upside potential and 45% above the IPO price. We initiate coverage on the stock with a BUY recommendation and MODERATE RISK. 127
    • November 11, 2008 EGYPT | OIL & GAS | MARIDIVE Balance Sheet (US$ mn) 2007A 2008F 2009F 2010F Cash Flow (US$ mn) 2007A 2008F 2009F 2010F Assets NOPAT 82.5 78.1 109.8 152.7 Cash 6.3 163.9 170.4 246.7 Depreciation & Amortization 11.6 16.0 21.8 28.1 Time Deposits 3.1 4.1 5.5 7.5 Gross Cash Flow (COPAT) 94.1 94.1 131.6 180.8 Net Receivables 98.9 81.9 113.6 158.3 WI Change (28.0) (0.3) (15.3) (18.1) Total Inventory 5.8 6.0 8.3 12.0 Other Current Items (1.1) 31.1 (3.7) (5.3) Advance Payments to Suppliers 0.3 0.4 0.5 0.7 Cash After Current Operations 65.0 124.9 112.6 157.4 Other Trading Assets 0.3 0.3 0.3 0.3 Financing Payments (13.4) (28.6) (17.9) (23.6) Other Current Assets 38.8 10.8 14.6 19.9 Cash Before Long-Term Use 51.6 96.3 94.6 133.7 Total Current Assets 153.6 267.4 313.2 445.4 Net Plant 192.3 326.1 404.0 451.8 Net Plant Change (91.4) (139.8) (99.8) (75.8) Long-Term Investments 0.0 0.0 0.0 0.0 FCFF (25.3) (46.0) 16.6 86.8 Other Trading Non-Current Assets 1.9 1.9 1.9 1.9 Others 2.4 (0.8) (1.7) (2.3) Other Non-Current Assets 0.1 0.8 0.8 0.8 Cash Before Financing (37.5) (44.2) (6.9) 55.6 Intangibles 9.8 9.8 9.8 9.8 Short-Term Debt 17.2 (24.5) 0.0 0.0 Total Assets 357.7 606.0 729.8 909.7 Long-Term Debt 49.6 79.3 38.3 13.9 Net-worth (33.5) 114.3 7.8 6.8 Liabilities & Equity Grey Area 0.2 0.3 0.0 0.0 Short-Term Debt 24.5 0.0 0.0 0.0 Current Portion of LT Debt 24.1 9.7 17.6 27.2 Dividends 0.3 32.4 (32.8) 0.0 Accounts Payable 40.8 11.3 15.6 21.2 Change in Cash (3.8) 157.6 6.5 76.3 Accrued Expenses 6.7 11.3 15.6 21.2 Down Payments to Customers 2.1 10.0 20.3 39.6 Fact Sheet 2007A 2008F 2009F 2010F Taxes Payable 0.0 0.0 0.0 0.0 OCS revenue growth 2.6% -13.4% 30.5% 41.2% Dividends Payable 0.3 32.8 0.0 63.7 OSV revenue growth 22.2% 58.0% 44.8% 25.0% Other Current Liabilities 4.2 7.4 7.4 7.4 Revenue growth 5.6% -0.6% 34.6% 36.2% Total Current Liabilities 102.8 82.4 76.4 180.2 Total Long-Term Debt 64.2 133.8 154.6 141.3 Other Non-Current Liabilities 0.0 0.0 0.0 0.0 OCS gross profit growth 20.8% -13.5% 22.1% 41.1% Total Liabilities 167.0 216.3 231.0 321.5 OSV gross profit growth 45.9% 57.3% 50.9% 28.3% Deferred Taxes 0.2 0.0 0.0 0.0 Gross profit growth 25.1% 0.8% 31.2% 36.4% Other Provisions 1.7 2.1 2.1 2.1 Minority Interest 22.5 33.9 41.7 48.5 OCS EBITDA growth 24.7% -15.6% 22.2% 43.3% Paid-in capital 85.0 102.4 102.4 102.4 OSV EBITDA growth 51.9% 60.9% 54.0% 29.4% Additional paid-in capital 0.0 85.5 85.5 85.5 EBITDA growth 29.1% -1.2% 32.0% 38.3% Treasury shares 0.0 0.0 0.0 0.0 Reserves 11.7 11.7 11.7 11.7 Retained earnings 69.6 154.1 255.3 338.0 Earnings growth 49.8% 5.5% 19.8% 44.6% Shareholders' Equity 166.3 353.7 454.9 537.6 Total Liab. & Equity 357.7 606.0 729.8 909.7 Revenue mix OCS 82.1% 71.5% 69.4% 71.9% Income Statement (US$ mn) 2007A 2008F 2009F 2010F OSV 17.9% 28.5% 30.6% 28.1% OCS 216.8 187.8 245.1 346.0 OSV 47.3 74.7 108.2 135.2 EBITDA mix Revenues 264.1 262.5 353.3 481.3 OCS 81.1% 69.2% 64.1% 66.4% OSV 18.9% 30.8% 35.9% 33.6% OCS (117.7) (102.1) (140.4) (198.4) OSV (22.3) (35.4) (48.8) (59.1) ROE 48.2% 23.9% 22.3% 27.2% Cost of Revenues (including provisions) (140.0) (137.5) (189.2) (257.5) ROA 22.4% 13.9% 13.9% 16.1% ROIC 27.4% 14.7% 16.4% 20.2% OCS 99.1 85.7 104.7 147.7 OCS gross margin 45.7% 45.6% 42.7% 42.7% ATO 0.7 0.4 0.5 0.5 OSV 25.0 39.3 59.4 76.1 WI/ Sales -10.6% -0.1% -4.3% -3.8% OSV gross margin 52.9% 52.7% 54.9% 56.3% ALEV 2.2 1.7 1.6 1.7 Gross Profit (including provisions) 124.1 125.0 164.0 223.8 Liabilities/Networth 1.0 0.6 0.5 0.6 Gross Margin 47.0% 47.6% 46.4% 46.5% Current Ratio 1.5 3.2 4.1 2.5 OCS (11.4) (11.7) (14.2) (18.1) Per-Share Ratios 2007A 2008F 2009F 2010F As a % of revenues 5.2% 6.2% 5.8% 5.2% Share Price $2.57 $2.57 $2.57 $2.57 OSV (4.6) (6.5) (8.7) (10.7) No. of Shares ('000) 256,000 256,000 256,000 256,000 As a % of revenues 9.7% 8.6% 8.1% 7.9% SG&A (16.0) (18.2) (23.0) (28.7) EPS 0.31 0.33 0.40 0.57 As a % of revenues 6.0% 6.9% 6.5% 6.0% DPS 0.00 0.00 0.00 0.25 DIV./NPAUI 0% 0% 0% 44% OCS 87.7 74.0 90.4 129.6 Revenues/Share 1.03 1.03 1.38 1.88 OCS EBITDA margin 40.5% 39.4% 36.9% 37.4% BV/Share 0.65 1.38 1.78 2.10 OSV 20.4 32.9 50.6 65.5 Gross Cash Flow/Share 0.37 0.37 0.51 0.71 OSV EBITDA margin 43.2% 44.0% 46.8% 48.4% 108.1 106.9 141.0 195.1 EBITDA (including provisions) FCFF/Share (0.10) (0.18) 0.06 0.34 EBITDA Margin 41.0% 40.7% 39.9% 40.5% EBITDA/Share 0.43 0.43 0.57 0.79 EV/Share 2.97 2.47 2.56 2.24 110.6 109.9 145.7 201.2 EBITDA (excluding provisions) EBITDA Margin 41.9% 41.9% 41.2% 41.8% Multiples 2007A 2008F 2009F 2010F P/E 8.2x 7.8x 6.5x 4.5x Depreciation & Amortization (11.6) (16.0) (21.8) (28.1) Dividend Yield 0.0% 0.0% 0.0% 9.7% EBIT 96.5 90.8 119.2 167.0 P/ Revenue 2.5x 2.5x 1.9x 1.4x Interest Expense (3.3) (6.1) (11.4) (10.7) EV/ Revenues 2.9x 2.4x 1.9x 1.2x Interest Income 0.2 1.8 3.4 4.9 P/ FCFF -26.0x -14.3x 39.7x 7.6x Investment Income 0.0 0.0 0.0 0.0 EV/ FCFF -30.1x -13.8x 39.5x 6.6x Other Non-Operating Income 0.5 1.3 0.0 0.0 P/ EBITDA 5.9x 6.0x 4.5x 3.3x Other Non-Operating Exp. (0.1) (0.5) (0.5) (0.5) EV/ EBITDA 6.9x 5.8x 4.5x 2.8x EBT 93.8 87.2 110.7 160.7 P/ BV 4.0x 1.9x 1.4x 1.2x Taxes (1.7) (1.4) (1.7) (2.3) Source: Maridive and CICR forecasts NPAT 92.2 85.9 109.0 158.3 Minority Interest (12.3) (11.4) (7.8) (12.0) Extraordinary Items 0.2 10.1 0.0 0.0 Net Profits 80.1 84.5 101.3 146.4 Net Margin 30.3% 32.2% 28.7% 30.4% 128
    • November 11, 2008 EGYPT | CEMENT 12M FAIR VALUE | LE 153 MISR BENI SUEF CEMENT (MBSC) BUY | MODERATE RISK Very cheaply rated versus peer group SHARE DATA Reuters; Bloomberg MBSC.CA; MBSC EY Misr Beni Suef Cement (MBSC), a grey cement producer Recent price as of 6-Nov-08 LE 46.79 No. of O/S shares 20.0 mn since 2003, comprises a mono-production line cement Market cap LE 935.8 mn factory of 1.5 mtpa capacity. In view of the imposed li- 52-wk high / low LE 141.49/ LE 45 cense fees of LE 251 mn for its new 1.5 mtpa production Avg. daily volume / turnover 0.03 mn / LE 3.63 mn line, MBSC booked a significant provision of LE 156 mn in 2007. Yet, MBSC did not pay that fee till date awaiting the COMPANY SYNOPSIS authorities' reply concerning its appeal stating that Beni Misr Beni Suef Cement (MBSC) was incorporated under Suef Cement (Titan Group) won at the auction held in Oc- Law no. 8/1997 in November 1997 as a shareholding tober 2008 an expansion license in the same governorate company, with the objective of producing all kinds of cement and all other associated products. In August 1999, for just LE 134.5 mn. The stock is traded at PER of 3.5x MBSC had its shares listed on the Egyptian Exchange 2009 earnings vs. a peer average of 7.5x, which may imply (EGX). acquisitive interest. Our DCF-based valuation of LE 152.5/ The company was established with a paid-in capital of LE share suggests a 226% upside potential with a BUY at 120 mn distributed over 12 mn shares at a par value of LE MODERATE RISK rating. 10/share. Currently, MBSC has an authorized capital of LE 500 mn with a paid-in capital of LE 200 mn distributed over 20 mn shares with a par value of LE 10/share. In December 2006, MBSC signed a supplying & installation New production line: Said new line is expected to release its contract with the French company Polysius to expand its initial production by H209, with a required investment cost esti- daily clinker production to 10k tpd. mated at LE 1.2 bn. MBSC reached 2% local market share in 2007, selling 837k tons and 4% in 8M08, selling 961k tons. Meanwhile, Overcapacity utilization to be hit by 2010: We expect 21% export market share in 2007, exporting 869k tons (c. MBSC to maintain the same trend, outpacing the market ca- 51% of production) and 23% in 8M08, exporting 169k tons (c. 15% of production). pacity utilization over 2008-12. Given the new capacities en- tering the cement market, we expect the 100%+ utilization rate by MBSC which registered 113% (the third highest rate) in 2007 to be hit gradually to 96% in 2012 - yet still higher than 79% for the market then. SHAREHOLDER STRUCTURE Competitive post ban export price: MBSC was one of the Top Management 20.5% first two companies permitted to export to Sudan during the 6- National Investment Bank 20.1% month export ban that ended in October 2008. MBSC had Individuals 6.3% acquired a 16% export market share during April-August 2008, Others 2.6% Free Float 50.5% failing to obtain a better share relative to others permitted by Total 100.0% the same time. We believe MBSC will be able to strengthen its export market share as exports resumed after the ban at US$75/ton - a competitive price compared to other local play- ers exporting at a minimum of US$85/ton. Temporary cost advantage: MBSC did not pay the LE 35.1/ GHADA REFKY cement ton produced clay resource development fees till date, GHADA.REFKY@CICH.COM.EG awaiting for the authorities to reply to its appeal stating that (1) clay usage rate used to calculate said fee is incorrect, (2) a contract with the governorate was established to deliver clay STOCK PERFORMANCE | 52 WEEKS at a fixed fee of LE 2.25/ton, and (3) several other industries use clay, such as the ceramics industry and - accordingly - Volume MBSC CASE 30 - rebased should be charged the same fee as well. mn shares LE 180 0.5 160 Valuation and recommendation: Based on a cost of equity 0.4 140 of 17.6%, our DCF model resulted in a 12-month fair value of 120 0.3 LE 152.5/share, implying a 226% upside potential. Accord- 100 80 ingly we rate this stock a BUY at MODERATE RISK. 0.2 60 40 0.1 20 0 - Nov-07 Jan-08 Jun-08 Jul-08 Dec-07 Feb-08 Mar-08 Apr-08 May-08 Aug-08 Sep-08 Oct-08 129
    • November 11, 2008 EGYPT | CEMENT | MBSC Balance Sheet (LE mn) Dec-07 Dec-08 Dec-09 Dec-10 Cash Flow (LE mn) Dec-07 Dec-08 Dec-09 Dec-10 Assets NOPAT 321.0 294.1 284.2 371.0 Depreciation & Amortization 63.3 64.7 157.1 190.8 Cash & Cash Equivalent 548.3 7.8 88.4 427.2 Gross Cash Flow (COPAT) 384.3 358.8 441.3 561.7 Net Receivables 0.2 0.2 0.4 0.5 Working Investment Change 14.4 130.6 0.8 (55.6) Total Inventory 30.9 14.8 45.2 119.7 Other Current Items 17.3 (57.5) (3.4) 0.0 Advance Payments 1.4 0.7 2.8 5.4 Cash After Current Operations 416.1 432.0 438.7 506.1 Other Trading Assets 0.0 0.0 0.0 0.0 Financing Payments (19.6) (11.6) (5.9) (5.1) Other Current Assets 0.0 0.0 0.0 0.0 Cash Before Long-Term Use 396.5 420.4 432.8 501.0 Total Current Assets 580.9 23.6 136.8 552.7 Net Plant Change (244.4) (765.8) (241.6) (50.5) Net Plant 776.3 1,477.5 1,562.0 1,421.8 FCFF 154.4 (276.4) 200.4 455.5 Long-Term Investments 10.0 0.0 0.0 0.0 Others (190.0) 567.1 (39.9) (188.0) Other Trading Non-Current Assets 0.0 0.0 0.0 0.0 Cash Before Financing (37.9) 221.7 151.3 262.5 Other Non-current Assets 12.5 0.0 0.0 0.0 Short-Term Debt 5.6 86.3 (45.4) (6.5) Intangibles 0.0 0.0 0.0 0.0 Long-Term Debt 104.7 (177.2) 0.0 0.0 Total Assets 1,379.7 1,501.1 1,698.9 1,974.5 Net Worth (7.7) (0.0) 0.0 0.0 Grey Area (3.2) (20.0) 0.0 0.0 Liabilities & Shareholders' Equity Dividends (54.3) (119.5) (93.3) (147.1) Short-Tem Debt 6.3 92.6 47.2 40.7 Change in Cash 7.2 (8.7) 12.6 108.9 CP Of Long-Term Debt 0.0 0.0 0.0 0.0 Accounts Payable 54.1 88.8 153.9 197.6 Accrued Expenses 6.7 29.6 40.9 18.1 Fact Sheet Dec-07 Dec-08 Dec-09 Dec-10 Down Payments 13.6 69.9 26.9 27.5 ROE 30.3% 30.6% 26.2% 29.7% Taxes Payable 0.0 0.0 0.0