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Egypt Equity Strategy Report, Sep. 2011 - Jazira capital

Egypt Equity Strategy Report, Sep. 2011 - Jazira capital



The report follows a top-down approach, starting with a brief on developed and emerging economies, then moving on to Egypt, covering Egypt’s political & macro-economic picture, stock market ...

The report follows a top-down approach, starting with a brief on developed and emerging economies, then moving on to Egypt, covering Egypt’s political & macro-economic picture, stock market assessment, comparable analysis with other emerging markets, sectorial analysis, and ultimately our favorite picks from stocks trading on the Egyptian stock market.



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    Egypt Equity Strategy Report, Sep. 2011 - Jazira capital Egypt Equity Strategy Report, Sep. 2011 - Jazira capital Document Transcript

    • JAZIRA SECURITIES BROKERAGE EGYPT Monday, September 05, 2011 Equity Strategy ReportWhen politics means businessThe US and most of the key European states are expected to see their economies begin to EGP/1US$ 5.96accelerate by early 2013, while the remaining European states, although will have lessdefault risk, austerity measures, to come at par with the EU requirements, will keep them Population (mn) 80from recovering at the same pace. Once both the US and EU economies start to pick-up,we expect emerging economies will begin growing at a faster pace. Nominal GDP (US$ bn) FY11e 225Egypt’s most critical challenge, since the toppling of Hosni Mubarak, in February 2011, GDP/Capita FY11 (US$) e 2,796will be the parliamentary elections, which is expected to be held in November 2011.Once the structure of the parliament is confirmed, the degree of uncertainty regarding the Real GDP Growth FY11e 1.6%shape of Egypt’s political future, will start to subside, and with us putting the odds at 4:1, Annual Inflation (Jun. 2011) 11.8%that it turn for the better, we expect the state of congestion in the economy and indi-vidual spending will start to unwind, at an accelerative pace, by early 2012. Unemployment Rate (Jun. 2011) 12%Egypt’s real GDP in 3Q FY11 ending March, declined by 4.2% on a yoy basis, as the Fiscal deficit % of GDP FY11e -10%hotels & restaurants sector income fell by 1/3. The manufacturing, construction,building materials, transport, wholesale & retail sectors, were also hit, but to a lesser Public Debt % of GDP FY11e 75%extent, by the state of instability Egypt witnessed during February and March 2011. External Debt % of GDP FY11e 12%We expect Egypt’s real GDP growth to culminate at 1.6% in FY11 ending June 2011, Trade Balance FY11 (US$ bn) e -24with expectations of GDP falling 1.2% yoy in 4Q. While we expect GDP to grow by3.6% in FY12, essentially driven by public spending, while the private sector will start to Net Service FY11 (US$ bn) e 8.3recover by end of 2011, once the parliamentary elections have been completed. Transfers FY11 (US$ bn) e 11.9BOP recorded a 3Q FY11 deficit of US$6.1 billion, against an 1H FY11 surplus ofUS$572 mn. The deficit came on the back of a US$5.5 bn portfolio investments outflow Current Acc. FY11 (US$ bn) e -3.7and tourism income falling 34% on a qoq basis. We expect the full year deficit to ex- Capital Acc. FY11 (US$ bn) e -3.4pand to US$8.6 bn, and FX reserves have already been reported to have dropped byUS$9.4 bn in 2H FY11, bringing Egypt’s FX - import coverage ratio to its lowest level BOP Balance FY11 (US$ bn) e -8.6in over a decade. We expect a milder BOP deficit in FY12, supported by donors injec-tions, while a pick-up in tourism and private capital inflows will begin by 2H FY12. FX reserves (US$ bn) Jul. 11 25.7The government has set an ambitious budget for FY12, it will certainly assist in calmingdown the level of discontent among Egypt’s large low-income public sector workforce, EGX Market Cap (US$ bn) 40but we expect its impact on the economy will be undermined by private consumers’ EGX30 PER 2011 e 9.5xspending contraction, which may start to unwind by the end of 2011. Furthermore, weexpect budget deficit in FY12 to reach 13.3% of GDP, while government expects an EGX30 DY 2011 e 4.9%8.6%, on the back of both higher expenditure and lower income expectations. EGX30 YTD Change -35%The EGX30 fell 35% YTD, while a selected 19 peer emerging markets have dropped 9%YTD. However, Egypt is only discounted by 19% compared to the peers’ 2011 PER. Im- EGX Avg. Daily Trading Value 780plying that on an equity pricing level, most of the EGX correction, was to adjust for 2011 (EGP mn)lower earnings and higher tax rates, rather than a straightforward political concern. 6.0 Exchange Rate (EGP/USD)Our favorite sectors on the EGX, are still those of defensive nature, such as food, oil 5.9and pharmaceuticals. However, some cyclical stocks have corrected to a degree, that 5.8accumulating exposure in them, from now to end of year, can prove rewarding once the 5.7market starts to pick-up, if all goes well. Our stock picks are: 5.6The most Favorite of our Picks 5.5 5.4 Sidi Kerir J-09 J-09 A-09 S-09 O-09 N-09 D-09 J-10 F-10 M-10 A-10 M-10 J-10 J-10 A-10 S-10 O-10 N-10 D-10 J-11 F-11 M-11 A-11 M-11 J-11 J-11 A-11 AMOC Juhayna NSGB OT Petrochemicals 8000 EGX30 Index Delta Sugar Maridive Aracemco CIB Telecom Egypt 7000 6000National Maize OCI EIPICO EFIC TMG 5000 Abu kier Glaxo Mobinil GB Auto Amer 4000 Fertilizers D-10 J-11 F-11 M-11A-11 A-11M-11 J-11 J-11 A-11 Alexandria Analyst: Mohamed Fahmy Pachin Minapharm SODIC Palm Hills Spinning Email : mfahmy@jaziracapital.com The least Favorite of our Picks Mobile: +2012 2157312 1
    • JAZIRA SECURITIES BROKERAGE EGYPT September 5, 2011 Equity Strategy ReportTable of ContentPage 3-4 Global EconomiesPage 5-6 Egyptian PoliticsPage 7-11 Egyptian Economy GDP p7 Inflation p8 BOP p8 Foreign Aid p9 Tourism p9 FX Reserves p10 State Budget p10-11Page 12 Egyptian Stock MarketPage 13 Comparable AnalysisPage 14-22 Sectorial Analysis Banks & Finance p15 Construction & Related p16 Durable Goods p17 Food & Fertilizers p18 Milling p19 Oil Related p19 Pharmaceutical p19 Real Estate p20 Telecom, Media & IT p21-22 Textiles & Related p22Page 23 Jazira Capital Focus Companies Price & Multiples SheetPage 24 Disclosure 2
    • JAZIRA SECURITIES BROKERAGE EGYPT September 5, 2011 Equity Strategy Report It seems the World won’t get out of the rat-hole until 2013 The developed world is stuck on first gear, there Real GDP Growth (%) may be some better economic figures coming out Greece Ireland here and there, but not with enough momentum Spain Italy to shift the developed economies forward. Portugal UK France US stuck until elections Denmark Euro (17) The US has been performing relatively well in Netherlands Belg iu mRepublicans will give Obama economic terms compared to 2008, but the re- USA Germanyhard time to do much for the publicans, with nearly half the seats on the con- Japaneconomy, with a year left on gress, won’t give Obama an easy time, a year ‐5 ‐3 ‐1 1 3the presidential elections ahead of the, upcoming November 2012, presi- Public Debt % of GDP (2010) dential elections, and the democrats just aren’t Japan fierce enough to subdue the republicans intent. Greece Ital y USA There are talks emerging in the US about con- Ireland sumer debt forgiveness or “write-offs”. A similar France Portugal action was taken in the great recession back inConsumers debt write-off may Germany the 1930s. There is just so much consumer debt, UKbe US’ way-out of the rate- Net herlands that it is choking any potential, for a real growthhole Spain in US consumer spending, which represents 0 50 100 150 200 250 around 71% of the US’ GDP and have grown by Source: WB, Eurostat & JC estimates only 0.2% over the past 14 months. From our stand point, if there will be more quantitative eas- ing measures, it would be better spent on consumers directly, by reducing their debt, rather than more injections of funds into the debt market.The US can’t really default on We disregard S&P’s US debt downgrade, the US will always be able to print more dollars, de-its debt, but more dollars go- fault is not an issue. However, more dollars around can cause further US dollar devaluation anding around, can initiate a new hikes in US inflation.wave of currency devaluation EU & Merkel’s efforts to bring German efficiency to remaining states Euro Zone issues are more significant, with a high contagion risk, as around half the debt ofGermany & France can’t af- states such as, Spain and Italy, are held by institutions from other countries.ford that any EU country de-fault on its debt, not for the The core issue with the EU debt enigma, is that although the Euro currency is the PIIGS’ nation-sake of the EU community al currency, it isn’t really theirs to print more of,health, but as not to expose and the large EU countries, Germany and B udget Def icit % of G DPtheir own financial systems, so France, aren’t making them forget that. Ireland Greeceeventually they must cave-in So, the only way out for the PIIGS, right now, is UK USA applying austerity measures, in hopes they prove Spain to Merkel and Sarkozy, that they won’t get into Portugal Japan more trouble, if bailed-out. France Euro (17) NetherlandsEU countries default risk lies Japan’s public sector debt is very high. Howev- Italyin the fact that all of these er, Japan has a high savings rate, which makes it Germany Denmarkcountries’ debt is effectively in easier for the government to finance the debt Swedena currency they can’t control with 90% of the Japanese debt is owned by Japa- 0 5 10 15 20 25 30 35or print more of based on their nese institutions and individuals, while in the Unemployment  % economies’ requirements case of the US savings rate is low and 25% of US debt is owned by foreigners. Spain Ireland While in the case of Spain, nearly half the debt is GreeceWe aren’t concerned that some owned by non-Spaniards, and with currency that Portugal Euro (17)EU states remain in recession, they can’t print more of on their own, com- Franceas long as they dont drag the pounded by a negative GDP growth, a sizable USA Italylarger economies with them real estate inventory, tightened mortgage policies Belgium UK and a high unemployment levels, all of which Denmark mean that austerity measures would be met by Germany Japan further public dismay, and may cause an extend- Netherlan… ed economic recession. 0 5 10 15 20 Source: WB, Eurostat & JC estimates 3
    • JAZIRA SECURITIES BROKERAGE EGYPT September 5, 2011 Equity Strategy Report It seems the World won’t get out of the rat-hole until 2013(Continued) China: All the bases covered Much of the Chinese government stimulus efforts, from 2008 to 2010, were left to the financialChina’s banks may have accu- institutions, the banks lent over US$1.5 trillion to investment vehicles, which then directed themulated bad-debt of around borrowed funds into infrastructure and real-estate ventures. But it is currently estimated thatUS$450 bn from 2008 to 2011 US$450 bn of these loans have went bad, threatening the balance-sheets of the banks that grant- ed the loans. However, it may all be resolved behind the red curtain, with China’s over US$3 trillion FX reserves, a central government public debt representing less than 20% GDP and since most of the lent funds were in Yuan. Commodity prices remain relatively highCommodities have not correct- Commodities have been correcting, but not at an enough rate, to release some of the pressuresed enough to support a new that are on both governments and individuals’ income, in order to create some much needed eco-positive economic wave nomic growth.World economic growth is The fundamental issue with the world’s economy, isn’t really financial, but is that the world haspeaking at the current produc- reached some kind of a peak in its prevailing productivity line, and requires a major technologi-tion technological level cal shift in the methods of production of commodities and energy, to create a new super econom- ic growth cycle. Until then, the world’s economic cycles will suffer longer and sharper reces- sions. Next expansionary cycle may start in early 2013 2010a 2011e 2012e Our analysis of the US, goes inline with the US World GDP Growth 3.8% 4.0% 3.6% Fed’s announcement in early August, that it High Income Countries 2.7% 2.2% 1.9% will keep key lending rates at zero percent to Developing Countries 7.3% 6.3% 6.0% mid 2013, implying the current economic slow- down may take longer than it had previously World GDP (US$ bn) 63,049 67,778 72,590We expect the developed expected. World GDP per Capita (US$) 9,197 9,789 10,380countries to clear their troubles Middle Income 3,980 4,338 4,663in 2012, and initiate a new So, with our expectations of the US will start Lower Middle Income 1,748 1,906 2,020expansionary economic cycle recovering by early 2013, and EU mainly bail-by early 2013 ing out Italy and Spain during 2012, we can see Source: WB & JC estimates headline risk decreasing in 2013, thereby infusing more confidence into producers and consum- ers’ spending on both sides of the Atlantic and gradually bringing the world out of its current slowdown toward a new expansionary economic cycle by mid 2013. Some developing countries are still delivering healthy economic growthTurkey’s recent robust eco-nomic growth is expected to Some countries are still performing well, such as Turkey, which delivered an 11% real GDPnormalize at between 5-6% growth in 1Q 11, although there are worries of the Turkish economy is overheating with a wid- ening trade deficit, low interest rates, and over 30% annual loans growth. China has delivered a 9.5% real GDP in 2Q 11. This was China’s lowest quarterly GDP growth since Q3 09. In addition to world economic slowdown, China has raised interest rates and clamped down on bank lending to ease inflation, which has certainly reduced domestic spending. Other emerging countries are, as seen in 12.0% Real GDP Growth 2011 the corresponding chart, still delivering some good economic growth figures. 10.0% However, the conditions in the US and 8.0% Europe are certainly holding back the po- 6.0% tential growth of emerging markets in gen- 4.0% eral. 2.0% On the medium term, following EuropeEU austerity measures can bailing its ailing economies over the com- 0.0% Indonesia China Hungary Poland Morocco Thailand Brazil Mexico Taiwan Peru Turkey South Africa Russia Korea Malaysia Chile India Philippines Czechactually benefit emerging mar- ing year, it will need to go into furtherkets to a degree austerity measures in order to curb future hikes in budgetary deficits, which is ex- Source: Reuters & JC estimates pected to bring the EU’s consumers’ dis- posable income lower, and can increase the demand on the cheaper emerging markets goods. 4
    • JAZIRA SECURITIES BROKERAGE EGYPT September 5, 2011 Equity Strategy Report Through the looking glass at Egypt’s Political FutureSCAF acting like a Zen master The Supreme Council of Armed Force - SCAF has been in command of Egypt since the topplingto control a fluid situation of former president, Mohamed Hosni Mubarak, in February 2011. SCAF has been acting like a Zen master since then, exerting a minimum level of action, in order to control the country’s in- ternal and external issues, considering the delicacy required in these troubled times. The SCAF wishes to bring an end to the current turbulent situation, and needs to remain aloof from every- one, since there are so many conflicting notions on the Egyptian political arena and street. Prime Minister, Essam Sharaf has been at the helm of the government since early March 2011, and had a cabinet reshuffle in July that introduced 12 new ministers to the cabinet’s lineup, in- cluding the replacement of finance minister Samir Radwan with Hazem El-Beblawi.Sharaf’s cabinet is operating Sharaf’s cabinet is essentially operating at a “damage control” mode, which is what is expectedon damage control mode from this cabinet, given the size of task at hand and the fact that it isn’t backed by any elected political structure that can give it the vindication, to apply proper reform.SCAF goal is to have a firm The goal of the SCAF, in our opinion, is to sterilize the heightened emotional state on the Egyp-security grip at the time of the tian street prior to the parliamentary elections. For the elections to go smoothly, it requires a highelections in order to avoid degree of restraint and security level, in order to avoid friction between opposing parties.friction between opposingparties At any rate, the real challenges for Egypt are yet to come, in what is promising to be a very stormy winter. The parliamentary elections are expected to be held in November, although as we mentioned, it will be very hard for the SCAF to give a go ahead for the elections, unless it feels the street will deal with it maturely.The real challenge for Egypt is The challenges in the elections, will include the campaigning phase, the elections itself, whichto cross the parliamentary will take around 45 day, as the SCAF proclaimed that the election for both the Peoples Assem-elections smoothly bly and the Shura Council will be held at the same time, on three rounds, with a 15-day intervals in-between each. But the real challenge is how the losers will accept the results. The SCAF has said, it will not permit foreign monitoring of the elections, since this would fringe the sovereignty of the Egyptian state. Although the argument is valid, foreign monitoring can provide a support against those whom will later claim the elections were rigged.There are nearly 35 parties The Egyptian citizens have been in a state of confusion since January 11, with so many variablesplanning to compete in the are in motion, in a pace, that they are not accustomed with. And will get even more confusedupcoming parliamentary elec- with around 35 parties are either registered or attempting to register, in time for the elections.tion Out of these parties at least 10 are non-secular parties. We think that Islamic based political parties will win in total a significant portion of the parlia-We expect non-secular parties ments seats, given their reach into the Egyptian community, the dismantling of the Nationalto capture a significant yet not Democratic Party, which was the sole Egyptian political group with more connections and tiescontrolling chunk of the up- specially in the communities outside the major cities than those of parties that branched out fromcoming parliament’s seats the Muslim Brotherhood. Furthermore, if parties programs fail to grab the interest of the non-politically oriented Egyp- tians, their options will be not to vote, seek the highest bidder on their voice, tribal connections or simply identify with those parties which are identified with similar religion. Islamic based parties are currently fragmented between at least around 5 parties that spun-off the Muslim Brotherhood, and nearly the same number out the more radical Salafi movement. What will happen during or after the elections? Would these parties align their goals or fail and drift further from each others? It can go either way... How the Egyptian public will vote in the first free parliamentary elections, is yet unknown. Even the level of participation may not fair well, given that in the constitutional amendments referen- dum, that were held in March, less than two months after the toppling of Mubarak, had a show rate of less than 41% of the eligible 45 million voters.Gallup’s survey tells that 38% Gallup’s, Abu Dhabi Center issued, in June 2011, the correspond- Egypt’s parliament 2011 outcomeof decided voters are leaning ing survey results, on the expected outcome of the 2011 parlia- survey by Gallup  toward voting for MB’s FJP mentary elections. It does give a hint that Islamic parties are some-   FJP (MB)  15% party how ahead of the other parties, since if we disregard those unde-   Wasat  5%  cided, Freedom & Justice Party has garnered 38% of those whom   Wafd   9%  have already decided on which party they will vote for.   NDP   10%    Undecided  61%  Source: Gallup, Abu Dhabi Center 5
    • JAZIRA SECURITIES BROKERAGE EGYPT September 5, 2011 Equity Strategy Report Through the looking glass at Egypt’s political future (Continued) More importantly, what will be the reaction of the secular parties, out of which the Tahrir Square youth are? Will their be more riots if Islamic groups do have a significant representation in par- liament? We expect that the SCAF and security forces will show heightened resolve with any- one, who would object to the elections outcome in any manner that will disrupt the peace.Secular parties may need to Another issue, is the fragmentation among secular parties, will they have a joint front that wouldwork better together to have an bring balance to the parliament against the Islamic parties? or will they have separate agendasimpact in the coming parlia- that would weaken their impact?ment The second hurdle is the drafting of the new constitution, which is expected to start following the formation of parliament and to take from three to six months to be finalized. The SCAF has issued its declaration of basic principles to guide the drafting of the upcomingThe basic principles can’t be constitution, in a bid to answer liberals’ requests for some binding statement of rights to protectenforced by the SCAF without them against the possibility of an Islamist takeover. The Turkish military assigned itself a similarhaving powers superseding supervisory role after its 1980 coup. However, without a public referendum on accepting thesethose of parliament principles and explicitly giving the Army the upper hand over the parliament, when it comes to fringing any of these principles, this declaration constitutes little value in itself.There is an 80% chance that Freedom & Justice Party, the flagship party that spun-off the MBs, has said that it will endorse athe coming constitution will be constitution that doesn’t fringe on individuals private lives and wouldn’t go to drafting lawssecular with the guidance from based on applying Islamic Shariaa. If the FJP align with other parties that agree with this ap-Islamic Shariaa, not far from proach, there is a good chance that Egypt’s coming constitution will provide an actual reformthe previous one in this respect from the previous one, but will not change the loosely secular nature of the country. The other alternative, which is an Islamic shariaa based constitution and what would this have on creating laws that would fringe on individuals lives provides an enigma, from an economic standpoint. Both since there are indefinite levels and interpretations of what is Shariaa, and each level will have its implications on tourism, foreign investment and even the migration of some of Egypt’s capital and talented workforce. The third hurdle is the presidential elections, which if the parliamentary and constitution are completed in time, is expected to be held sometime between May and July 2012. However, once the parliament and constitution are in place, this step is not expected to be as challenging.The future Egyptian political So from now, to the end of year, heightened uncertainty prevails, and an apparent political struc-structure will start to take ture will not formulate at least until the second half of 2012. There is good possibility that mat-shape by the end of the year ters will develop in a manner that wouldn’t deter economic growth or foreign investment. How- ever, it will remain a speculative environment until at least the end of the current year, and from there on, the level of uncertainty will start to gradually reside. Egypt’s finance minster, at the time, Samir Radwan, said in July 11, that Egypt will not draw-Egypt attempts to remain inde- down on the US$3 bn loans offered by the World Bank and IMF. This came at the request ofpendent in its path toward de- SCAF, on the basis that it doesn’t wish to increase Egypt’s foreign debt levels. However, themocracy may upset foreign WB may have tagged, as usual, a batch of demands that the SCAF didnt see in favor of Egypt orfunding gatekeepers won’t be taken well by the public. In August, the newly appointed finance minister, Hazem El- Beblawi, said Egypt may do draw-down on the aforementioned loans. Anyway, if our assumptions are true that the reasons for SCAF refusal, are due to a political dif- ferences in opinion, then Egypt may have upset the gatekeeper to foreign funding, and would have also shown adrift of what the US wishes. This may create a shortage of foreign funding for the period until matters are resolved one way or another. Following the death of 5 Egyptian army and security force personal, in fights that included Israe- li military forces, whom have crossed the boarders into Egypt on August 18th, to follow Palestin-Anti-Israeli sentiment rise on ian assailants, whom have killed 7 Israelis on the same day, in the close to the border, Eilat town,the Egyptian street have caused the level of tension between the two countries to escalate. Talks about withdrawing the Egyptian ambassador to Israel were rumored. In response, Israel’s defense minister, Ehud Barak, said two days later, that Israel deeply regrets the death of the Egyptian soldier, and launched an investigation into the matter. It isn’t in the benefit of neither Egypt nor Israel to es- calate the situation. However, the level of hostility to Israel has spiked on the Egyptian street, and will take sometime and a more formal type of apology from Israel to neutralize the situation.Egyptian Army launches oper- However, the real issue is the increased lack of security specially in Sinai (detailed in page 9)ation “Eagle” to eradicate mil- and the resurgence of militant groups in the peninsula, which can, until resolved, have a negativeitant group from Sinai impact on tourism, in areas such as Sharm El-Sheikh, which has been already suffering. 6
    • JAZIRA SECURITIES BROKERAGE EGYPT September 5, 2011 Equity Strategy Report The Egyptian Economy Quarterly Real GDP Growth (yoy) 8.0% The Egyptian GDP dropped 4.2% in real terms, 6.0%Egypt’s GDP falls 4.2% yoy in over the quarter from January to March 2011 com- 4.0%3Q FY11 pared to the same quarter in 2010, as economic ac- 2.0% tivity nearly froze from January 28th to February 0.0% 11th, in addition to the ensuing workers strikes, -2.0% 1Q 2Q 3Q 4Q which reduced productivity, as well as the elevated -4.0% FY10 FY11 lack of security, and capital and consumers’ spend- -6.0% Source: MoF & JC estimates ing contraction.Hotel and restaurants sector The section of the economy that was hit the most during that quarter, was the restaurants & ho-take the hardest hit during the tels sector, which witnessed a 33% yoy drop in its income to EGP6 billion in 3Q FY11 downquarter from EGP9.0 billion in the same period of 2010. Furthermore, its contribution to the private sec- tor portion of GDP dropped from 6.9% in 3Q FY10 to 5.0% in the last reported quarter. FY ending June 2010a 2011e 2012e The tourism sector employs over 1.4Tourism employs 6% of Population (mn) 79 80 82 million person, representing around 6%Egypt’s workforce and have a Workforce (mn) 26.2 26.4 26.6 of the Egypt’s 26 million workforce andfull impact representing 13% Unemployment 9.7% 11.9% 12.1% has an indirect impact on the economy,of GDP which have been estimated in FY10 to bring the full impact of the sector to Inflation (CPI) 12% 11% 10% about EGP155 bn, or 13% of GDP. Inflation (PPI) 5% 20% 12%Unemployment rise to 11.9% The drop in tourism, was essentially the Real GDP Growth 5.1% 1.6% 3.6%at the end of June 2011 com- main attribute to the surge in unemploy- Public 3.1% 3.2% 4.7%pared to 9.7% a year before ment rate to 11.9%, at the end of June Private 6.4% 0.6% 2.9% 2011, compared to 9.7% a year before. Other sectors that were hit in 3Q FY11, GDP Breakdown included the manufacturing, construc- Public 37.0% 37.6% 38.0% tion & building materials, transport and Private 63.0% 62.4% 62.0% the wholesale & retail sectors, the drops in these respective sectors were 11.4%, Nominal GDP (EGP bn) 1,151 1,306 1,490 9.1%, 9.7% and 7.9%, respectively. Nominal GDP (US$ bn) 209 225 246 On the other hand, Suez Canal income GDP per Capita (EGP) 14,620 16,242 18,136Suez Canal robust revenuegrowth was supported by the showed a robust 11% yoy growth dur- GDP per Capita (US$) 2,653 2,796 2,998minor Egyptian pound devalu- ing the quarter to EGP6.8 billion, which EGP/USD 5.51 5.81 6.05ation was partially supported by the minor devaluation of the Egyptian Source: CBE, MoF & JC estimates pound by 4% during the quarter vs. a year before.We expect 4Q FY11 real GDP We project a milder GDP drop in 4Q FY11 ending June 2011, than the 3Q FY11 drop, with realto show a yoy drop of 1.2% GDP estimated to have declined in 4Q by 1.2% compared to the same quarter the past year. The 4Q drop is expected to come essentially from the private sector GDP contribution, which weWe project FY11 GDP to predict will drop on a yoy basis by 2.4%, while have dropped 7.0% in 3Q FY11.grow by 1.6%, lifted-up by arobust 1st and 2nd quarters’ of Based on our 4Q FY11 GDP expectations, we estimate that FY11 will close, with an annualthe year performance GDP growth of 1.6%, driven by 5.5% and 5.6% growth recorded in the year’s first two quarters. Over FY12, we expect a 3.6% real growth in the Egyptian economy. The growth will be essen-We expect FY12 GDP to grow tially driven by the public contribution to GDP. The private sector is estimated to grow by 2.9%by 3.6% supported by higher over the fiscal year, but the bulk of this growth is expected to be delayed to the second half ofpublic spending the year, following the completion of the parliamentary elections and some kind of vision starts to materialize with regards to Egypt’s political direction for the coming period. Furthermore, 2H FY12 will be compared to an already weak 2H FY11, which will boost its growth rate levels. We expect that if parliamentary elections pass smoothly and in the right direction, the Egyptian economy will enjoy attractive growth levels over the period of the coming global economic ex- pansionary cycle, which we predict will kick-off by early 2013. With corruption more contained, a continuity of leadership policies in place, and less politically frustrated population, all together will encourage foreign and local investment as well as spend- ing. 7
    • JAZIRA SECURITIES BROKERAGE EGYPT September 5, 2011 Equity Strategy Report PPI by Year to June Producers endure lower margins Processing Classification 2011 Egypt’s producer price index - PPI, has shown an inflation Fuel 35.2% Cotton 89.5%PPI rise 70% over CPI in the level of over 20% in the year ending June 2011, while the Raw Materials 25.8%year ending June 11 consumer price index has shown cost of living has inflated Semi-Finished Goods 6.2% by 11.8% over the same period. Finished Goods 9.4% The intriguing point here, is that the PPI components, Overall PPI 20.1%Both raw materials & energy which shown the highest inflation, were those of basic in- CPI Inflationwitnessed significant spikes in put components of production, while the finished goods Overall CPI 11.8%prices price increase was even below the CPI overall annual Food & Beverages 19.0% growth. This implies that somewhere down the chain, pro- Tobacco 69.9% ducers were not able to pass the increased cost to the end Clothing 2.2% consumer, i.e, producers margins have been shrinking. Housing & Utilities 1.1% Furniture 2.5%Food & beverages, tobacco Looking at the cost of living, tobacco, food & beverages Medical Care 1.9%and education were the 3 and education were the three sections that witnessed the Transportation 1.1%spending criteria of the Egyp- highest inflation in the year ending June 2011, and we be- Communication 0.1%tian cost of living that wit- lieve their inflation would impact the general population in Entertainment 5.9%nessed the highest inflation in a manner that can well make consumers less able or at least Education 24.3%FY11 less willing to spend over the coming period on more non- Hotels & Restaurants 12.1% essential types of spending. Source: Ministry of Finance External account witness huge deficit 4 BO P Balance (US$ bn) Egypt recorded its largest BOP quarterly deficitEgypt reports a US$6.1 bn in over a decade, in 3Q FY11 ending March. A 2BOP deficit in 3Q FY11 whopping US$6.1 billion deficit was reported in the quarter vs. a BOP surplus of US$555 mn 0 1Q 2Q 3Q 4Q in 3Q FY10. (2)The major reasons for the defi- The deficit came essentially on the back of (4)cit are capital flight... portfolio investment recording outflows of FY10 FY11 funds of US$5.5 billion during the quarter com- (6) pared to US$5.6 billion inflows during 3Q FY10. FY Ending June (US$ bn) 2010a 2011e 2012e Trade balance (25.1) (23.9) (22.6) FDIs also shown a negative figure in the latest Export Proceeds 23.9 25.4 27.6...FDIs shifting to a negative reported quarter of US$164 million, not a big Import Payments (49.0) (49.3) (50.2)figure,... figure, but its comparable figure in 3Q FY10 Services (Net) 10.3 8.3 8.5 was a net inflow of US$1.7 billion. Service Receipts 23.6 21.8 21.6 Transportation 7.2 8.0 8.9...& tourism revenues 15% yoy Tourism related revenues, also witnessed a 15% Travel 11.6 10.7 9.2fall in 3Q FY11 and 34% yoy and qoq respective drop during Payments (13.2) (13.5) (13.1) 3Q FY11 to US$392 million. Goods & Services (14.8) (15.6) (11.6)We expect a deficit of US$2.9 We predict the BOP will report a deficit of Transfers 10.5 11.9 12.2bn in 4Q FY11, on the back of US$2.9 billion in 4Q FY11, as a result of a Current Account (4.3) (3.7) (2.9)lower tourism revenue, expat 25% yoy drop in travel income, although it Capital Account 8.3 (3.4) 2.1transfers and further portfolio would be a 5% rise on a quarterly basis. also, Net errors & omissions (0.7) (1.6) (0.6)investment outflows transfers will be impacted by the turbulent situ- Overall Balance 3.4 (8.6) (1.4) ation in Lybia, and Yamen and some expats FX Reserve 35.2 26.6 25.2 may see no sense into transferring money to FX Reserve/Imports (months) 8.6 6.5 6.0 Egypt until the picture becomes more clear. Source: CBE, MoF & JC estimates Furthermore, we expect the capital account to record a deficit of US$1.6 bn in 4Q FY11, as a continuation of portfolio investment outflow.A lower deficit in FY12 on We expect a smaller deficit in 2012, as a result of hopes that the promises of regional and inter-expectations of capital account national loans start to materialize, while we expect real FDI and portfolio investment inflows toturning positive on hopes of recover by 2H FY12, with its influx pace depending on the political situation at that time.donors promises materializingand private funds turning to Egypt Refinery Company - ERC, which is currently being established, at an investment cost ofinflows by 2H FY12 US$3.7 bn, will produce once operational, 4 mn tons of refined petroleum products per annum, including 1.5 mn tons of diesel. This will reduce Egypt refined petroleum products import bill significantly, which currently represent around 11% of Egypt’s imports value. 8
    • JAZIRA SECURITIES BROKERAGE EGYPT September 5, 2011 Equity Strategy Report Promised funds US$ bn Donors Promises Saudi Arabia 4Arab states promised over The United Arab Emirates promised that it would give Egypt Qatar 10 US$3 billion in financial assistance, which includes a US$1.5 UAE 3US$17 bn to support Egypt’s billion fund for small to medium businesses, US$750 million in IMF 3economy loans, and a US$750 million grant. USA 2 Total Promised Funds 22 Saudi Arabia pledged US$4 billion, out of which US$500 mil- JC Database lion are a grant to help finance the budget deficit, US$500 mil- lion in loans, and US$500 million in Egyptian bond purchases. Qatar promised Egypt a ballpark figure of US$10 billion, which probably will be mostly invest- ments, but the country has also given some grants. In the weeks that Egypt was revising its budg- et, so not to take on IMF loan, Qatar provided US$500 million grant to help the budget.Indecision on whether to ac- However, Hazem El-Biblawy, Egypt’s newly appointed finance minister and deputy PM, saidcept or reject IMF loans that he has not fully ruled out that Egypt may tape into the US$3 billion offered by the IMF. The US promised to offer US$1 billion in debt forgiveness and another US$1 billion in loan guarantees as support to nurture and advance the democratic strivings. The last part has steered some controversy among the Egyptian community and even in the government, since it had the implication of supporting groups that the US favor or have connections with. The sum of the aforementioned funds will be injected over a long period, of more than a year, not all will materialize, and some will not impact the BOP in the way it should. Tourism woes under security concernsTourist arrivals drop 45% yoy Tourists arrivals fell 45% in 3Q FY11, following the outbreak of violence on the backdrop of thein 3Q FY11 January and February 2011 demonstrations. Security is still weak all over Egypt in general, and Sinai’s lack of security is now capturingLack of security and militant world’s headlines, with gunmen, in late July 2011, have attacked Northern Sinai capital, Arish,groups in Sinai have relatively police station in a shootout that continued for 9 hours and with an outcome of five killed, includ-turned-off tourists for now... ing one police and one army officers. The injured were estimated to be 21 in total. Not far away from Arish, saboteurs have blew-up Egypt’s gas supply pipeline to Israel and Jordan over 4 times since last February.In response the army launched No attacks have targeted tourists, but the feel of insecurity has rippled to potential visitors. Theoperation “Eagle” to restore Egyptian army and security forces initiated in early August, operation “Eagle” to flush out thesecurity to the Sinai peninsula Sinai militant groups, but it will take time to bring peace to the Sinai peninsula, and all this was compounded by a rise in the tension, over the last couple of weeks, on the borders between Egypt and Israel.We expect hotel occupancy in All this have and will continue to have an impact on Egypt’s hotels occupancy rate, which fellFY11 to stand at 70% support- from 94.3% in 1H FY11, to less than 49% from January to May 2011.ed with 1H’s 94% high occu-pancy levels 1H FY11 witnessed a 14% and 16% increase in tourist arrivals and revenues, while we expect the drop in both items in 2H FY11, will cause a whole FY11 drop in both indicators to culminate to 12% and 8% respectively. FY ending June 2010a 2011e 2012eIn FY12, occupancy will fall Number of Tourist Arrivals (k) 13,758 12,146 11,055 A more significant drop in tourism arri- Growth 12% -12% -9%to 62%, however, still much vals, revenue and occupancy rates in Average Tourists per Month (k) 1,147 1,012 921better than 2H FY11 estimated FY12, compared to FY11, although Number of Tourist Nights (k) 136,370 123,838 109,578rate of 48.7% Tourism Related Income (US$ mn) 11,591 10,688 9,242 FY12 tourism activity is expected to be better than that of 2H FY11 estimates. Growth 11% -8% -14% Income/Tourist (US$) 842 880 836 Hotel Rooms (k) 215 219 219 Occupancy Rate (e. 2.2 tourist per room) 79% 70% 62% 1H (Jul. - Dec.) 3Q (Jan. - Mar.) Apr.-May 2H (Jan. - Jun.) 2010a 2011a 2010a 2011a 2011a 2010a 2011e Number of Tourist Arrivals (k) 6,824 7,796 3,464 1,894 1,509 6,934 4,350 Growth 13% 14% 0% -45% n/a 11% -37% Average Tourists per Month 1,137 1,299 1,155 631 754.5 1,156 725 Number of Tourist Nights (k) 70,666 81,680 31,958 21,083 14,050 65,704 42,158 Tourism Related Income (US$ k) 6,007 6,943 2,716 1,792 n/a 5,584 3,745 Growth 5% 16% 24% -34% n/a 18% -33% Income/Tourist (US$) 880 891 784 946 n/a 805 861 Occupancy Rate (e. 2.2 tourist per room) 83.2% 94.3% 75.2% 48.7% 48.6% 77.4% 48.7% Source: MoF, CAPMAS & JC estimates 9
    • JAZIRA SECURITIES BROKERAGE EGYPT September 5, 2011 Equity Strategy Report BOP deficit weighed heavily on FX reserves The BOP’s high deficit level in 3Q FY11 and the estimat- FX Reserve Monthly Change (US$ bn)  Jan‐11 Feb‐11 Mar‐11 Apr‐11 May ‐11 Jun‐11 Jul‐11FX reserves drop by US$10.3 ed one for 4Q FY11, have resulted in a net drop of over 0billion from the beginning of US$9.4 billion in Egypt’s official FX reserves from the ‐0.5the year to the end of July end of December 10 to end of June 11. July FX reserves ‐1 ‐1.5 figure showed a further US$860 million drop to US$25.71 ‐2 bn, or a US$10.3 billion YTD drop in Egypt’s FX re- ‐2.5 serves . ‐3 ‐3.5 Based on our projections for the BOP in FY12, we expect Source: CBE a minor drop in reserves to 25.2. Not a big drop, but this assumption depend largely on donors fulfilling at least a portion of their promises. We don’t expect real FDIs or portfolio investments influx, prior to the beginning of 2012. FY ending Net Int’l Net Int’l Imports Trade Deficit Imports Trade Deficit June Reserves Reserves Coverage Coverage In USD bn USD/€ In € bn In USD bn In USD bn Months Months 2000 15.1 0.93 16.4 17.9 11.5 10.1 15.8 2001 14.2 0.90 15.9 16.4 9.4 10.4 18.3The FY11 end of year FX re- 2002 14.1 0.95 15.0 14.7 7.5 11.6 22.6serve level, translates to 2003 14.8 1.13 13.1 14.8 6.6 12.0 26.9 2004 14.8 1.24 11.9 18.3 7.8 9.7 22.7Egypt’s lowest Import and 2005 19.3 1.25 15.5 24.2 10.4 9.6 22.4trade deficit coverage ratios in 2006 22.9 1.26 18.3 30.4 12.0 9.0 23.0over a decade. 2007 28.6 1.37 20.8 38.3 16.3 8.9 21.0 2008 34.6 1.47 23.5 52.8 23.4 7.9 17.7 2009 31.3 1.39 22.5 50.3 25.2 7.5 14.9 2010 35.2 1.33 26.5 49.0 25.1 8.6 16.8 2011 26.6 1.39 19.1 49.3 23.9 6.5 13.3 Source: MoF & JC calculations Government formulates a generous budget for FY12Egypt had to go for easing With the government stuck between managing a healthy budget, on one side, and on the otherpolicies through higher deficit side, needed to adhere to popular demands to see the impact of the Egyptian revolution ripplingto reduce public’s discontent through higher wages and benefits right away, have chosen to cave-in to the latter. Thereby for-with government mulating a budget, which underlined a 22% spike in the government’s annual payroll bill and increasing healthcare and educa- tion budget by 17% and 10%, re- FY ending June (EGP bn) 2010a 2011e 2012b 2012eThe main theme of the FY12 spectively compared to FY11 Tax Revenues 171 200 232 212budget is a 22% spike in pub- out of which: budget figures. Income & Capital Tax 77 93 110 97lic employees’ compensations Taxes on Goods & Services 67 77 85 80to represent 36% of the gov- The budget underline some as- Grants 4 5 10 10ernments revenues sumptions, which we are not sure Other Revenues 93 90 107 103 it can achieve. Total Revenues 268 294 350 325 Although government spending Employees Compensations (85) (96) (117) (117) will spike, general sentiment isn’t Purchase of Goods & Services (28) (29) (30) (30) Interest Expense (72) (87) (106) (130) that strong, government expansion- Subsidies & Social Benefits (103) (140) (158) (167)Even with the new budget’s ary budget will most probably im- out of which:: - - - -5% increase in income tax pact the basic goods segments of Food Commodities (17) (28) (19) (26)bracket for corporates taxable the economy, causing increase in Petroleum (67) (82) (96) (96)income over the EGP10 mn demand and inflation in these seg- Electricity n/a (1) (5) (5)threshold, which the govern- Export Incentives (3) (3) (3) (3) ments, but we don’t expect it to Other Expenses (29) (37) (32) (32)ment estimates will generate have much impact on the other Investments (48) (41) (47) (47)around an extra EGP4.8 bn. of segments of the economy. Total Expenditures (366) (428) (491) (523)income tax revenues, we as-sumed lower than the FY12 Furthermore, output may grow, but Budget Surplus (deficit) (98) (133) (141) (198) % of GDP -8.5% -10.2% -8.6% -13.3%budgeted income tax revenues, cost has increased too, partiallyon lower overall taxable in- due to higher wages, which will Gross Domestic Budget Debt 808 979 1,109 1,183come expectations yield a lower return on sales, and External Debt 149 160 165 175 consequently taxable income Gross Budget Debt 957 1,140 1,274 1,359 Budget Sector Deposits 145 153 156 154 would grow at a lower rate than Net Debt 813 987 1,118 1,205 nominal GDP. Gross Debt % of GDP 83% 87% 82% 91% Net Debt % of GDP 71% 76% 74% 81% b: government budget figures Source: MoF & JC estimates 10
    • JAZIRA SECURITIES BROKERAGE EGYPT September 5, 2011 Equity Strategy Report Government formulate a generous budget for FY12 (Continued)We believe the government Also, the budgeted food commodities subsidy plan of EGP19 billion for FY12, compared to anhas underestimated food com- estimate of EGP28 billion to have been spent on food subsidies through FY11, seems very low.modity subsidy value in FY12 We assume that this budgeted 32% drop in food subsidy, is based on the government’s expecta-budget tions of a drop in commodities prices and increased local output. But those two assumptions won’t bring subsidies that low. 400 Wheat & Corn Prices (US$/ton) 350 Prices of wheat and corn, two of Egypt’s most essen-Both wheat & corn prices up- tial imported food commodities for instance, have 300ward trend has not been dropped 14% and 6% respectively during the two 250thwarted yet months to July 2011. However, have shown another 200 Wheat 150 Corn upward movement in August 11, and now wheat and 100 corn prices are 14% and 24% higher than their 12 Jan-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Oct-10 Nov-10 Dec-10 Jan-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Feb-10 Sep-10 Feb-11 month average price in the period of the Egyptian Source: USDA government’s FY11, ending June 2011. 13% 91 day TB Interest Rate Another expense item, which we expect to record 12%We expect higher than budget- higher than the government’s FY12 budget figure, is 11%ed debt service given the spike debt service. Interest rates on 91 TBs, as an example, 10%in the government’s notes in- have spiked 26% since end of January 2011. We as-terest rates since the revolution sumed that the all interest rates will continue at their 9% current levels for the FY12, and concluded that it will 8% cost the government around an extra EGP24 billion 7% N-10 J-10 M-10 M-10 J-10 S-10 J-11 M-11 M-11 J-11 of interest expense in FY12, than it had budgeted. Source: Reuters We believe the FY12 budget, is the most appropriate for Egypt’sThe interim government has current political and social conditions. The SCAF and government need to deflate the Egyptianemphasized in its FY12 budget street’s heightened emotional state, that it has been experiencing since late January, in order toon focusing on low income be able to go through the upcoming parliamentary elections in the best manner possible.segment of the Egyptian com-munity, a pattern we expect to The government may for the coming couple of years, as it highlighted in the FY12 budget presscontinue, although a balance release, will put a priority on improving the wellbeing of the low income segments of the com-will be needed between im- munity. There is a wide gap between the low income and the middle income segments of theproving the wellbeing of low population and actually narrowing it down, would on the long-term support Egypt’s economicincome citizens and in the appeal. However, this may to a degree come at the account of the business community. The de-same time, not chocking the gree this will have on the business community and how the current interim government and thebusiness community future governments, will strike a balance between improving low-income citizens wellbeing, while not dampening the business environment, will be the main determinate for their success.The government is studying to Finance minister, Dr. Hazem El-Beblawi, said in early August 11, that the government is as-eliminate subsidies on indus- sessing methods to rationalize petroleum products consumption, with one of the options on thetries that are energy intensive, table is to remove all energy subsidies from industries such as cement, steel, fertilizers and ce-which represent around 20% ramics.of Egypt’s energy subsidy cost Energy subsidies alone consume 28% of the governments revenues and if the energy intensiveEnergy subsidy represent 28% industry energy subsidy is removed, it would reduce budgetary pressure by EGP19 bn, implyingof the budget revenues a 4% reduction in the budget’s expenditures. It is estimated that energy intensive industries, which include fertilizers, cement, chemicals, iron & steel, aluminum, and other industries, cap- ture around 20% of Egypt’s government energy subsidies. A major adjustment in diesel and petrol prices, would provide a more significant reduction in deficit, but will be met by fierce resistance by the Egyptian community at the time being.Egypt’s crude oil R/P stands at Egypt has a crude oil reserves to production - R/P ratio of 16 years, versus an African and Global16 years ratios of 36 and 46 years respectively. Even natural gas, which Egypt is said to have an abun- dance of, has its R/P ratio at 35 years, while Africa and World ratios stand at 77 and 46 years, respectively. Egypt depends on oil and natural gas for 44% and 50% of its energy needs, respectively. TheEgypt is currently a net export- negative impact of energy subsidies is somehow subdued, since Egypt is a net exporter of crudeer of crude oil by a ratio of 2:1 oil by a ratio of 2:1 to its imports of petroleum products, so for the time being, it is hedged fromto its petroleum products im- global oil price volatility. However, the fiscal budget can’t withstand indefinite deficit levels,ports and more hikes in public debt levels, can get interest rates and inflation spiraling and further currency devaluation can ensue. 11
    • JAZIRA SECURITIES BROKERAGE EGYPT September 5, 2011 Equity Strategy Report Market turnover & indices performance nosedivedInvestors wary from the conta- Investors became jittery once demonstrations turned serious in Tunisia by January 5th 2011, andgion effect of Tunisia’s revo- by January 27th, the last day of trading for nearly 2lution on Egypt, sold the mar- Indices Relative Performance MSCI-W months, the EGX30 and EGX70 had already rec- 130 MSCI-EMket aggressively in January EGX30 orded a YTD drop of 21% and 25% respectively. 120 EGX70The market reopened on a Market reopened on Wednesday March 23rd, and 110Wednesday, March 23rd, and by the next day close, the EGX30 & EGX70 rec- 100the EGX30 lost another 12% orded 12% and 6% drop, respectively, compared to 90by March 24 market close January 27th close. 80Since then the market has been Since the second week of resuming trading, 70trading sideways, with all the D-09 J-10 F-10 M-10 A-10 M-10 J-10 J-10 A-10 S-10 O-10 N-10 D-10 J-11 F-11 M-11 A-11 M-11 J-11 J-11 EGX30 recorded a 6% drop, while the EGX70weak earnings and headline gained 13%, as investors have, early on, discounted Index Changerisk discounted in the market all the headlines risks that surfaced until now. MSCI-W MSCI-EM EGX30 EGX70 3 Month -13% -15% -16% -12%EGX70 has performed at a The EGX70 with less liquidity and interest from 6 Month -15% -12% -17% 6%much better rate than EGX30, foreigners, was able to fair better than all of the 9-Month -7% -10% -30% -22%MSCI World and Emerging EGX30, MSCI World and MSCI Emerging indices 1-Year 2% 1% -28% -5%Markets indices over the last 6 months. Relative to MSCI World 3 Month -2% -3% 1%Suspension of same-day trad- The market was also hit by a drop in liquidity, 6 Month 3% -3% 24%ing has negatively impacted since market reopening, partly due to investors 9-Month -2% -25% -16%market liquidity 1-Year -1% -29% -7% concern on market outlook, but mainly due to sus- Daily Avg. Value Trading (EGP bn) pension of the same-day trading activity. 2.50 Daily average market trading value dropped 37% 2.00 2010 2011 YTD to EGP0.8 bn compared to EGP1.2 bn record- 1.50 ed during 2010. 1.00Non-Arab foreign trading ac- The main buyers in the market, since the beginningtivity has turned to a net seller, of the year, have been local investors, as non-Arab 0.50by EGP3.4 bn YTD vs. net foreign investors have been net sellers on the EGX 0.00buyer by EGP8.3 bn. in 2010, since the beginning of the year to date, by EGP3.4 Jan. Feb. Mar Apr May Jun Jul Aug Sep Oct Nov Dec Totaland with their representation bn, compared their net buyers position of EGP8.3 Daily Avg. Trading Value 2011:2010of trading activity increasing 180% bn in 2010. Furthermore, in 2010, foreign investors 160%to represent 27% of the market used to represent on average 17% of the EGX’s 140% market trading activity, but since the beginning of 120% the year their representation has grown to 27%, as 100% 80% they are pushing the market to sell. 60% 40%Arabs represented 5% of the Arabs have been net buyers by EGP0.6 bn since the 20%market turnover in 2011, vs. beginning of the year, with January as the only 0% Jan. Mar Apr May Jun Jul Aug6% last year month they were net sellers in, by EGP0.5 bn. 2.0 Net Trading Buying Value (EGP bn) Institutional investors have been net sellers by 1.5 Arabs Foreigners EGP1.8 bn since the market resumed trading on March 23rd, to date. We presume that the non-Arab 1.0 foreign institutional investors had a determinant 0.5 factor in turning institutional investors to net 0.0 J-10 F-10 M-10 A-10 M-10 J-10 J-10 A-10 S-10 O-10 N-10 D-10 J-11 F-11 M-11 A-11 M-11 J-11 J-11 A-11 sellers. Furthermore, institutional trading have in- -0.5 creased to represent 56.5% YTD of the total market -1.0 trading value vs. 51.0% in 2010. -1.5 Retail Contribution to Trading Contribution to Trading Institutions Net Trading Buying Value (EGP bn) Institutions 100% 100% 0.8 90% 90% 0.6 80% 80% 0.4 70% 70% 0.2 60% 60% Foreigners 50% 0.0 50% S-10 O-10 N-10 D-10 J-11 F-11 M-11 A-11 M-11 J-11 J-11 A-11 Arabs 40% -0.2 40% Egyptians 30% 30% -0.4 20% 20% -0.6 10% 10% 0% -0.8 0% J-10 F-10 A-10 J-10 J-10 A-10 S-10 O-10 N-10 D-10 J-11 F-11 A-11 J-11 J-11 A-11 M-10 M-10 M-11 M-11 J-10 J-10 J-10 J-11 J-11 J-11 F-10 M-10 A-10 M-10 A-10 S-10 O-10 N-10 D-10 F-11 M-11 A-11 M-11 A-11 -1.0 Source: Reuters & EGX 12
    • JAZIRA SECURITIES BROKERAGE EGYPT September 5, 2011 Equity Strategy Report EGX corrected to become inline with emerging peers multiples The Egyptian market sharp correction, since the beginning of the year, has brought the EGX30’s value down by 35%, have made the index trading at a 2011 earning multiple to 9.5x,The EGX30 is trading at an while if we remove Orascom Tele- 18 Price-Earning multiple 201119% discount to selected peer com and Orascom Constructiongroup markets on 2011 PER earnings and capitalization from 16 the calculation, the adjusted 14 EGX30 multiple would be 11.4x*. 12 While the corresponding selected 10 19 peer markets have an estimated 8 average price-earnings multiple of 6 11.7x based on 2011 earnings. 4 This imply that EGX30 is discount- Pakistan Hungary Poland Thailand Taiwan Chile EGX30* Peru Malaysia South Africa China Indonesia Turkey Czech Morocco Mexico Korea EGX30 India Philippines Brazil ed by 19% compared to the select- ed peers.If we remove OT and OCIfrom the calculation, the re- Furthermore, if we remove the two 10%maining EGX30 stocks, would aforementioned leading stocks YTD Major Indices Performance 5%be trading nearly at par with from Egypt’s PER calculation, the 0%the selected peers’ 2011 PER EGX30 would be trading, nearly at -5% par with its peer group. -10%The EGX30 sharp YTD drop EGX30’s earnings, excluding those -15%that was 2.7x more than the of OCI and OT, are expected to -20%average peers drop of 9%, was drop 19% in 2011, following the -25%ultimately a factoring for weak drop in economic activity since -30%economy and higher tax brack- February, in addition to the impact -35%et impact on Egyptian stocks’ of the increase in corporate taxes -40% Indonesia Philippines Thailand South Africa Malaysia Korea Pakistan Peru China Poland Taiwan Czech Chile Turkey Hungary Mexico Morocco EGX30 Brazil Indiaearnings, with only 19% of the by 5% for taxable income overdrop may be directly attributed EGP10 million, that the govern-to political concern ment has approved in its FY12 Source: Reuters & JC estimates budget.The 19 peer markets earnings On the other hand, the peer markets’ earnings are estimated to grow by an average of 6% inare estimated to grow yoy by 2011.6% on average in 2011 This has meant that in order for the EGX30 to adjust to its peer markets multiples, it had to fall 2.2x more than the peers’ YTD drop, which we calculated to have dropped at an average of 9.4%.The 2011 earnings adjustmentalone to peers’ earnings multi- Based on 2011 price-earning ratio comparable, investors have not penalized Egypt much onple required the EGX to fall political risk, as it seems that investors have brought the market downward based on revised2.2x more than the peers’ av- earnings forecast, with just an 19% discount from its peers, if both OCI and OT are included inerage drop or representing the calculation, which still imply investors are mostly looking at the Egyptian stocks from an79% of the index YTD fall earnings game perspective, rather than from a heightened political risk one, until now. 13
    • JAZIRA SECURITIES BROKERAGE EGYPT September 5, 2011 Equity Strategy Report Weak quarterly corporate earnings in 1Q & 2Q 11The 79 companies, we follow, The EGX30 index YTD drop, is relatively inline with the yoy drop, in the combined bottomwhich include all the EGX30 line, of 31% and 15%, for the 79 companies, we follow, in 1Q and 2Q 11, respectively, afterconstituents, have reported a excluding Orascom Telecom and Orascom Construction earnings from the analysis.combined earnings yoy drop Adding both OT and OCI would have cer- 20% Stocks Performance by Sector on EGX (YTD)of 31% and 15% in 1Q & 2Q tainly distorted 1Q bottom line, since the 10%2011, while excluding both former recorded a net income of around 0% -10%OT and OCI from the calcula- EGP4.9 bn in 1Q 11 vs. a loss of EGP0.9 bn -20%tion. in 1Q 10. OCI also had its bottom line rise -30% by 89% on a yoy basis in 1Q 11 to EGP1.2 -40% -50% bn. Both companies EGP6.1 bn 1Q 11 profit -60% represented around 62% of the 79 compa- Bank & Fin. Textile & Related Focus Durable Goods Pharma. Real Estate EGX30 Food & Related Oil Related Mills Telecom, Media & IT Const. & Related nies’ 1Q 11 quarter earnings. Sectors’ performance varied on the stockThe worst hit sectors on the market, with the worst hit sectors were the Source: Reuters & JC calculationsstock market, with respect to real estate and banking & finance sectors,their stocks’ prices, were the as these sectors respective stocks prices Bottom Line % Change YoY QoQ Q1 11 Q2 11 Q1 11 Q2 11real estate and banking & fi- fell by an avg. of 54% and 40% YTD. Focus Companies ▲53.8 ▼9.9 ▲92.6 ▼55.4nance sectors The real estate sector bottom line perfor- Focus Companies1&2 ▼30.7 ▼15.0 ▼24.0 ▲6.3 mance during 1H 11, came inline with its Banking & Finance ▼62.2 ▼5.1 ▼21.0 ▲37.0The real estate sector also rec- stocks’ market performance, as the com-orded a steep 56% yoy drop in Construction & Related ▲15.4 ▼42.3 ▼6.4 ▼13.1 bined earnings of the 10 real estate com-1H 11 earnings Construction & Related1 ▼25.7 ▼42.3 ▼24.9 ▼13.1 panies we follow, reported a 56% yoy Durable Goods - ▼58.9 - - earning decline in 1H 2011. Food & Related ▼12.6 ▲48.3 ▼36.7 ▲12.9 The banking & finance sector, 1Q 11 Mills ▲63.8 ▼30.3 ▼25.6 ▼23.5 bottom line fell yoy by 62%, mainly Oil Related ▲42.0 ▲61.3 ▼9.3 ▲24.6 driven by a 93% drop in EFG-Hermes Pharmaceuticals ▲19.4 ▼8.4 ▼14.7 ▲0.6 profits and Citadel recording a wider loss Real Estate & Related ▼58.3 ▼54.2 ▼52.0 ▼14.1 along with Naeem reporting a loss of Telecom, Media & IT ▲242.6 ▼31.9 n/a ▼89.8 EGP15 mn during 1Q 11. Commercial Telecom, Media & IT 2 ▼33.2 ▼42.7 ▼1.2 ▼17.0Banking & finance sector banks we follow, recorded a combined Textile & Related ▲4.6 ▲7.7 ▼66.6 ▼30.8showed better earnings perfor- 39% yoy drop in 1Q 11 net income. Dur-mance in 2Q 11 than 1Q’s ing 2Q 11, banks & finance corporates all together reported Source: companies financials & JC calculationsresults only a 5% yoy drop, while showed a qoq rise of 37%. Our focus companies that reported by now, 2Q 11 earnings, had their combined earnings with-Focus companies 2Q 11 quar- out OT, showing a qoq mild pick-up of 6.3% vs. 1Q 11, while on a yoy basis, the rate of quar-terly bottom line yoy drop terly earnings decline have slowed down to 15% or half the 1Q 11 rate of 31%.halved that of 1Q 11 For the whole of 2011, we expect EGX30 bottom line to drop 19% without OT, OCI and Cita-We expect the EGX30 at- del bottom lines, while our focus companies combined bottom line to drop 23%. The sectorstributable income to drop 19% that we expect to perform better than the market are food, milling, oil related and pharmaceuti-excluding OT, OCI and Cita- cals. While worst performers would be durable goods, real estate and textiles.del Capital’s bottom lines PER DY NAI % Change (YOY) 2010a 2011e 2012f 2010a 2011e 2012f 2010a 2011e 2012f EGX30 11.1 9.5 9.2 5.5% 4.9% 5.8% ▼3.8 ▲16.1 ▲3.9 EGX301,2 & 3 9.2 11.4 9.3 6.6% 3.9% 5.5% ▼2.6 ▼18.9 ▲21.7 Focus Companies 10.9 10.4 9.5 5.8% 5.0% 5.7% ▲0.9 ▲5.5 ▲9.1 Focus Companies1,2 & 3 9.0 11.7 9.8 6.6% 4.4% 5.4% ▲9.8 ▼22.8 ▲19.6 Banking & Finance 13.9 14.3 9.0 5.5% 2.2% 5.2% ▼16.7 ▼3.1 ▲58.8 Banking & Finance3 9.5 11.6 8.8 5.7% 2.3% 5.4% ▲21.2 ▼18.1 ▲31.8 Construction & Related 10.9 11.3 9.3 6.5% 5.8% 6.9% ▲19.2 ▼3.3 ▲21.1 Construction & Related1 7.6 11.5 9.3 8.6% 5.1% 6.1% ▲12.3 ▼33.7 ▲22.7 Durable Goods 16.9 44.7 21.1 3.1% 0.0% 0.0% ▲8.9 ▼62.2 ▲112.0 Food & Related 14.0 11.7 10.0 4.2% 6.9% 5.8% ▲7.3 ▲20.2 ▲16.9 Milling 10.5 8.6 7.8 7.4% 9.1% 0.0% ▼3.7 ▲22.3 ▲10.0 Oil Related 8.7 8.1 7.4 8.3% 8.4% 9.0% ▲24.2 ▲7.7 ▲9.5 Pharmaceuticals 9.1 8.8 7.7 5.5% 6.2% 7.7% ▲26.5 ▲2.7 ▲14.2 Real Estate & Related 7.8 19.5 17.8 1.5% 0.4% 0.4% ▲6.2 ▼60.1 ▲10.1 Telecom, Media & IT 10.5 6.5 8.9 6.4% 6.5% 5.9% ▼21.5 ▲61.6 ▼26.6 Telecom, Media & IT2 8.5 11.0 10.0 9.6% 5.6% 6.8% ▼9.4 ▼22.5 ▲10.0 Textile & Related 10.9 17.3 13.6 7.7% 3.0% 3.6% ▲54.3 ▼36.8 ▲27.1 1 without OCI, 2without OT, 3without Citadel Source: companies financials, Reuters& JC estimates 14
    • JAZIRA SECURITIES BROKERAGE EGYPT September 5, 2011 Equity Strategy Report Banking & FinanceCBE instructed banks to be The CBE has took actions to relax some of the banks’ requirements during 1H 2011. as it gavelenient on retail clients de- banks guidance, on not to book any retail related delayed payments on loans for the threelayed payments during 1Q 11 months following the revolution, as non-performing, and not asking for penalty charges on the- se late payments.And to reschedule tourism CBE went even further, by instructing banks to reschedule tourism related loans and credit fa-related loans dues till the end cilities due payments, for the period from January 2011 to June. Furthermore, the CBE request-of June 11 ed that banks review all its corporate clients positions, and assess the appropriate loans restruc- turing procedures, based on the state of the economy and the related sectors current conditions.Postponing banks’ due pay- Although these steps have certainly eased the pressure on the business community and retailments and rescheduling will clients to remain afloat, it can be masking an un-quantified non-performing loans amount, thatease the pressure on banks’ will not start to show on banks’ financials, at least until 3Q or 4Q 2011. However, if the size ofcustomers this non-performing loans grows, CBE or the banks through restructuring schemes can soften its impact on the short to medium term. On the other hand, Egyptian banks have been conservative for over a decade with respect to extending loans, resulting in a sector wide loans to deposits ratio of 50% at the end of March 2011 up from 49% at the end of December 2010.Private businesses and retail The private businesses and retail clients represented 39% and 20% of the banking sector loanscustomers represent a cumula- portfolio respectively at the end of April 2011. We estimate a maximum of 15% of those loanstive 59% of the banking sys- can turn non-performing, which imply a hike of no more than 9% in NPLs to total loans. Giventem loans balance that most banks have one digit NPL to loans ratio, ample liquidity and an excuse to restructure, we don’t expect a significant issue unless the economy takes longer than expected to recover. Our focus banks all reported a drop in their yoy 1Q earnings, with the exception for NSGB,NSGB & Baraka bank report- which reported a 3% yoy increase in 1Q 11. Furthermore, NSGB reconfirmed its resilienceed an 8% and 3% yoy growth against the economic conditions, and delivered a 14% yoy increase in its 2Q 11 earnings, there-in their respective 1H 11 bot- by, achieving an 8% yoy 1H 11 net income growth.tom lines Baraka Bank also delivered a strong 2Q earning growth of 42% yoy, which boosted its 1H 11 results to come 3% higher than the comparable period of 2010. With the Egyptian stock market turnover, 100% 1Q 11 2Q 11 Quarterly Earnings Growth (yoy) performance and even number of trading 80% days have been much less this year compared 60% to the previous year, EFG-Hermes reported 40%EFG 1Q 11 yoy net income a major drop in 1Q earnings, although the 20%dropped 60% after excluding comparable period income was inflated with 0%1Q 10 sale of Audi Bank stake CIB EK Holding Naeem EFG-Hermes Pioneers Baraka Bank Arab Gathering NDB NSGB Ahli Invest. Citadel Credit Agricole Bank Audi’s stake sale capital gain proceeds -20%impact of EGP716 mn. Excluding Bank Audi sale -40% -60% impact, 1Q 11 yoy bottom line drop wouldEFG Q2 11 earnings show an -80% be 60%. However, its 2Q 11 bottom line18% yoy drop while a 119% -100% showed only an 18% yoy drop and a 119%qoq spike -100% recording a loss Source: Corporates earning releases qoq rise. +100% shift from loss to profit or over 100% increase Naeem Holding reported a loss in both 1Q and 2Q 11, while Pioneers would have reported aPioneers report strong perfor- loss also, but capital gains income distorted 1Q 11 bottom. Pioneers 2Q net income was re-mance on capital gain profits leased showing a continuation to the strong 1Q performance, with bottom line soaring 67x and 3x in 1Q and 2Q 11 respectively, on a yoy basis. All in all, the 12 banks and finance corporates we follow, reported a 62% and 21% decline in 1Q combined earnings compared to the respective figures reported in 1Q 10 and 4Q 10. In the second quarter of 2011, the sector recovered significantly, with all but Citadel reporting its 2Q 11 results by the time of issuing this report, the sector shown a combined earnings yoy drop of just 5% and a qoq rise by 37%. Although Citadel Capital has reported a net loss in 1Q 11 of EGP111 million, and we expect it to continue delivering weak results this year, the stock has much locked-in value, which it can realize, once both the economy and capital markets start to pick-up. Sector picks: CIB, NSGB and Baraka Bank on PER and 2012 growth 15
    • JAZIRA SECURITIES BROKERAGE EGYPT September 5, 2011 Equity Strategy Report Quarterly Earnings Growth (yoy) 1Q 11 2Q 11 Construction & Related Corporates 100% 80%OCI earnings grew 77% in 1Q The construction, building materials & other 60%11 in US$ terms & 89% in its related companies, we cover, delivered a 15% 40%EGP consolidated statements, increase in 1Q 11 earnings, as a result of OCI 20%on the back of its fertilizer delivering a yoy 89% increase in bottom line 0% UE Contracting Sinai Cement OCI PACHIN Aracemco Giza Contracting Cables Misr Beni Suef Cem. Shini South V. Cement Suez Cement Sewedy ASEC Qena Cement Lecico -20%sales volumes increasing 2.3x 1Q 11 to EGP1.2 bn, while representing 59% of -40%in 1Q 11 vs. 1Q 10 amounts the sector’s earnings power during the quarter. -60%The sector excluding OCI had Excluding OCI, the remaining 16 corporates, -80% we cover in the sector, recorded a 26% decline -100%a 26% drop in its 1Q 11 earn- -100% recording a loss Source: Corporates earning releasesings in its 1Q 11 earnings. +100% shift from loss to profit or over 100% increaseEzz Steel & Ezz Dekhila have Sector’s corporates that reported 2Q 11 results until now, have shown a 42% yoy decline inneither reported their 1Q 11 earnings, while OCI haven’t reported its 2Q 11 results yet.nor 2Q 11 results yet. The main attributes for 2Q’s sharper drop, were a 61% yoy drop in Suez Cement 2Q 11 earn- ings vs. the company reporting a 10% yoy decline in 1Q 11, also ASEC Mining recording a wider loss in 2Q of EGP54 million, while reported a 1Q 11 loss of EGP18 mn. We see the sector will remain in this weak state until mid 2012, while we expect recovery to kick-in from that point forward.OCI had a construction back- OCI is our leading pick in the Sectorlog of US$5.1 bn at the end of OCI remain a favorite, with the ability to build-up its construction backlog at relatively goodQ1 11, out of which Egyptian margins (16.4% in 1Q 11), while benefiting from its recent added fertilizers capacity. OCI maycontracts represented less than well soon be moved from this sector, since two thirds of OCI value comes from its fertilizersa 1/4 operations. Maybe it’s the company’s name, that made us leave it, till now, in the construction sector.Fertilizers prices continue their With urea and ammonia prices continuing their upward trend driven by strong farmers demand,upward trend, which we ex- with both commodities respective, US FOB, prices reaching US$500/ton and US$510/ton, re-pect to downplay the impact of flecting a 28% and 18% YTD price increases, respectively; we expect OCI to remain deliveringhigher energy prices on OCI’s good results for the remaining of the year.Egyptian fertilizer operations Aracemco attractive on valuation as well as multiples We have factored Aracemco’s, yoy 42% and 28% respective 1Q 11 and 2Q 11 drop in profita- bility in our latest update issued in June 2011. Aracemco utilization rate fell to 62% in February and March 2011, but has bounced back to full utilization by June 11.Aracemco new sanitary ware The company benefits from targeting lower income segment, as well as implementing upgradeand glazing facilities are ex- and expansionary projects, that will cut cost by 5-6% once completed by the end of 2011. Thispected to reduce cost by 5-6% will compensate for the rise in workers’ compensations that occurred in 1Q 11.starting 2012 Although, we forecast a 28% drop in 2011 bottom line, the company is trading at a low 2011 PER, and with the expected expansions in place next year, we forecast an attractive dividend yield in 2012. Our Aracemco valuation is very conservative on figures and discount rates, however, remain providing around 20% upside from the stock’s current market price. Pachin, nice on multiples, bad 2H bottom line on Libyan plant concernPachin disappointing 3Q FY11 Paints & Chemicals Industries has a decent earnings multiple and dividend yield. However,results came mostly on the have reported a 62% and 32% yoy drop in its 3Q and 4Q FY11 ending June 2011 earnings.back of concern on its Libyan Revenues dropped 4% yoy in 3Q FY11, but bounced back with a 5% yoy increase in 4Q FY11.operations Full year detailed financials are not yet available, but 3Q FY11 financials, show that although gross profit dropped by just 5% yoy, the sharp bottom line drop was a result of the company’sWe expect as the situation concern about the fate of its Libyan plant and has written-off assets related to the Libyan opera-improves in Libya by time, the tion worth EGP9.6 million in 3Q FY11. We don’t know the conditions of the Libyan operationdiscounts factored for compa- at the time being, but as things calm down now, after the Gadaffi regime came to an end, therenies like Pachin, Sewedy Elec- is possibility of recovering some of these written-off amounts.tric, and Aracemco for lostbusiness there, will start to Low income housing isn’t expected to slowdown, as much as, that of middle and upper incomesubside segments of the market, which provide Pachin with a relative opportunity to perform. We ex- pect Pachin to achieve a 10% increase in bottom line in FY12 ending June 2012. 16
    • JAZIRA SECURITIES BROKERAGE EGYPT September 5, 2011 Equity Strategy Report Durable Goods GB Auto, reported an 89% then 35% yoy decline in 1Q 11 and 2Q 11 earnings respectively. Management said signs of recovery were seen in 2Q 11, as passengers cars sales grew 72%GB Auto has seen all its lines compared to 1Q 11 and bottom line increased 6.5x on a qoq basis. We expect GB Auto willof business recovering in 2Q record around 40% drop in its annual 2011 earnings, but would grow by 35% in 2012 compared11 from the prior quarter’s to expected 2011 figures.slump except commercial ve- Although demand is expected to bounce back, uncertainty is increasing day by day as GB’shicles & construction equip- assembly contract with Hyundai will expire at the end of 2013, and GB has not yet found a sub-ment stitute. However, with GB Auto capturing nearly one-third of the personal cars market, along with its experience, nationwide outlets and service centers, we see the odds are more favorable that GB will be able to find a suitable brand to locally assemble in time. Following some delay earlier in the year, Olympic Groups parent company Paradise Capital,Electrolux is taking Olympic which owns 52% stake of Olympic, has reached an agreement with Swedens Electrolux where-private by the latter would buy the former’s stake in Olympic at a deal, which valued the company at EGP2.4 billion or EGP40.6/share down from pre-revolution valuation of EGP2.7 billion. Later, Electrolux has initiated a compulsory bid to acquire the remaining of Olympic’s shares at the same price of EGP40.6/share. The bid started on August 3, 2011 and will expire by Septem- ber 4, and will be executed 5 days following the bid close. 17
    • JAZIRA SECURITIES BROKERAGE EGYPT September 5, 2011 Equity Strategy Report Food & FertilizersFood & fertilizer sector profits The earnings of food & fertilizer sector corporates, we follow, have declined 13% yoy in 1Q 11,dropped 13% yoy in 1Q 11 but but bounced back on a yoy basis by 48% in 2Q 11. The strong rebound in the sector’s 2Q 11bounced back with a 48% yoy earnings, was essentially driven by Abu Kier Fertilizers and Delta Sugar delivering 23% andgrowth in 2Q 11 188%, respective yoy growth in 2Q 11. The huge growth combined with their earnings power representation in the sector, which came at 84% in Quarterly Earnings Growth (yoy) 1Q 11 2Q 11 2Q 11 have supported the cumulative sector quar- terly growth. 100% 80% Juhayna showed resilience in 2Q 11, as its bot- 60%Juhayna came back strong in tom line grew 54% on a yoy basis after experienc- 40%2Q 11 after a weak 1Q results, ing a 17% 1Q 11 yoy earnings drop, while EFIC 20%however, its margins will be delivered a 2Q 11 bottom line similar to its 2Q 0% Delta Sugar Egypt Poultry Sharkia Food EFIC Juhayna Maize IFAP Abu Kiersomehow weakened in 2H 11 10’s, which was good news after a 1Q 11 reported -20%by the new raw milk purchase bottom line yoy drop of 88%. -40% -60%pricing policy -80% The food sector was one of our picks in our Feb- -100% ruary 2011 Egypt report, and has performed as expected on the stock market, as its companies’ -100% recording aloss to profit or over 100% Corporates earning releases +100% shift from loss Source: increase collective market capitalization, remain close to its beginning of the year levels, while witnessed some trading opportunities during the period. From a financial performance perspective, the sector had the best performance among the sec- tors we follow in 2Q 11. We expect this performance to continue, as the sector benefit from higher government employees wages, which will essentially ripple down into basic commodi- ties spending. Top Picks: Juhayna, Delta Sugar & National Maize Our top picks in the food sector are Juhayna Food Industries, Delta Sugar and National MaizeSome of the sector’s compa- for expected operational growth in 2012 and resilient 2011 performance, against the economicnies provide attractive PER slowdown. Furthermore, Delta Sugar and National Maize are attractive on multiples.levels Fertilizer companies are expected to benefit from increased food production Food prices hikes were at the core of what instigated the populace dismay that brought Mubar- ak’s regime to an end. Both the current interim government and any future one, will put food production and managing its prices at the top of their agendas, if they don’t wish for more riots.With plans to increase Egypt’sagricultural footprint and crop The interim government has already increased the price it will buy wheat from farmers by 25%yields combined with global and promised to provide high yielding seeds. Egypt produces only 60% of its needs from wheatrise in fertilizers prices, we and consumes over 16.5 million tons, out of which 9 million tons are directed to bread produc-expect improvement in de- tion. The interim government said it hopes to increase wheat production by 25% this year, andmand and prices of fertilizer there are plans to double production over the medium term.products, which should com- Furthermore, talks have emerged again concerning the use of the right proportion between thepensate for the risk of higher different types of fertilizers, in order to enhance crops yield, which would bode well to the ben-energy prices for local produc- efit of EFIC, since Egyptian farmers relatively neglect the right proportion of phosphate ferti-ers lizers. The Egyptian food predicament, is a global one, neither food nor fertilizer prices have globally corrected enough, given the global economic slowdown. We see the trend of increase in both food and fertilizers demand will remain persistent putting more pressure on its prices. We Pick Abu Kier on DY and growth, EFIC on expectations of a turnaround Abu Kier Fertilizers said it will propose a EGP22/share cash dividend and a 2:3 stock divi- dend for shareholders approval at the next AGM, which is expected to be in September 2011. This provides an attractive dividend yield combined with our projections of around 15% growth in next year’s bottom line.EFIC doesn’t depend much onenergy, as it uses sulfur, chain EFIC’s MD has recently said, that the highly priced raw materials inventories issues, whichreaction, to generate most of have been weighing on the company’s performance for the past years, are close to be complete-its energy needs ly resolved. This compounded with our expected robust fertilizer’s demand, encourage us to choose the company among our picks. 18
    • JAZIRA SECURITIES BROKERAGE EGYPT September 5, 2011 Equity Strategy Report Milling Sector 1Q 11 100% 2Q 11 Quarterly Earnings Growth (yoy) The listed milling sector companies, have reported a 80% 60%Milling sector companies de- combined 37% growth in FY11 ending June 2011 bot- 40%livered a 37% increase in tom line and all of them have contributed to this 20%FY11 combined net income, growth in varying degrees. 0% Alex. East Delta Middle & West Middle Egypt North Cairo South Cairo Upper Egypt -20%but witnessed a weakness in However, milling companies’ 4Q FY11 ending June -40%their 4Q results on the back of results, which corresponds to 2Q 11 calendar year, -60%higher works’ compensations have shown a combined net income drop by 30%. -80% -100% Higher wages, as part of Egypt’s lower income work- -100% recording a loss Source: Corporates earning releases force movement to capitalize on the weaker security +100% shift from loss to profit or over 100% increase grip and pressuring management for either higher compensation or they will take their compa- nies on strike, is the main culprit for the milling sector’s weak 2Q 11 results. We are concerned that higher wages would impact FY12 profitability. However, as Gouda Ab-Talks on raising government del Khalek, Egypt’s minister of social solidarity & justice, has approved raising the fee it paysgrinding fee to wheat milling for wheat grinding to EGP112.5/ton up from EGP75.0/ton, the risk of this higher cost pressurecompanies by 50% cascading on FY12 results should be limited. However, the new fee rate will not become effec- tive until sealed by an approval from the minster of finance. We are bullish on the announcement, but as industry officials commented that most of the in- crease will be eroded by the increase in workers’ compensations, consequently, we assumed an average 10% increase in the sector’s FY12 earnings. Picks: Middle & West and Upper Egypt Mills Both Upper Egypt and Middle & West Flour Mills, remain providing the potential for a good dividend yield rates in 2011, even though their stocks’ prices have appreciated YTD, by over 20%. 1Q 11 2Q 11 Quarterly Earnings Growth (yoy) Oil Related Sector 100% 80% As expected the sector showed strong resilience and 60% actually reported a combined yoy earnings growth in 1QAll of the Oil related stocks and 2Q 11 of 42% and 61% respectively. 40%reported growth in both their 20% AMOC’s stock rose over 46%, since the beginning ofQ1 & Q2 11 bottom lines 0% the year and still promises a 2012, dividend yield of over Egypt Maridive AMOC Sidi Kerir Gas 14.6%, while its 2011 dividend, which had its record date on August 24th reflect a dividend yield of 14.1%. -100% recording a loss Source: Corporates earning releases All the sector’s stocks are appealing +100% shift from loss to profit or over 100% increase All of AMOC, Sidi Kerir and Maridive provide good growth potential, specially in such times, given the sector’s defensive nature. In Maridive’s case, this is combined with a huge backlog of over US$450 mn, most of which is located outside Egypt. Quarterly Earnings Growth (yoy) Pharmaceutical Sector 100% 1Q 11 2Q 11 80% Pharmaceutical companies, we follow reported a com- 60% bined yoy earnings growth of 19% in 1Q 11, but then 40%Glaxo has been performing reported a yoy decline of 8% in 2Q 11. 20% 0%superbly as of late Cairo Nile EIPICO Minapharm Memphis Glaxo -20% Public sector pharmaceutical companies suffered the -40% most in both quarters, while GlaxoSmithKline has been -60% delivering some eye-catching profitability growth levels, -80% -100% supported by EBITDA growth of over 94% yoy in 1H -100% recording a loss Source: Corporates earning releases 11, while also benefited from lower provisioning. +100% shift from loss to profit or over 100% increase EIPICO, Glaxo & Minapharm on PER, EIPICO & Glaxo on DY Our picks all have a good PER with growth potential ahead, given our expectations of an in- crease in government spending on healthcare. Cairo Pharmaceutical also looks attractive on earning multiples despite a disappointing 2Q 11 results. However, it’s engaged in a relocation program worth EGP365 million and will take 3 years to complete, which will limit its capability to distribute cash dividends over the coming couple of years. 19
    • JAZIRA SECURITIES BROKERAGE EGYPT September 5, 2011 Equity Strategy Report Real Estate SectorProjections for 2011 & 2012 Turbulent time for the sector! If concerns for real estate firms was solely with respect to thereal estate companies have economic conditions, all would have been required, would be revising 2011 and 2012 perfor-been dramatically revised mance downward, significant downward revision, as it may prove, the situation looks bleaker.downward, combined with The sector’s leading companies are facing much scrutiny from the public and were dragged toincreased uncertainty regard- court for purchasing land plots at lower than market prices, and may lose a portion of their landing their land bank bank in the process or at least up the price they have paid for a portion of their land bank. Furthermore, questions arose concerning the affiliation between members of these companies boards with the former regime, and whether that was the main reason for these land transactions were executed in that manner. This have created an uncertainty even regarding the companies’ land bank and future outlook. Post-revolution; uncertainty rise with regards to some real estate companies land bank; such as: Palm Hills Development: Court ruled the annulment of the 2006 contract for 966k m2 Palm Hills’, Katameiya land, located in New Cairo City. Then, based on the company’s request, a land contract for 9.4 mn m2 in Matrouh was canceled. Finally, talks the ministry of housing may well cancel a Palm Hills’ contract for 882k m2 land plot, located in Sixth of October City. SODIC: New Urban Communities Authority - NUCA gave SODIC, 6 months to develop 46.2k m2 land plot located in Six of October City or it will withdraw the land from the company. TMG: The case regarding Madinaty’s 33.6 mn m2 land contract was postponed to October 4,An advisory committee to the 2011, to give time, to an advisory committee, to provide its opinion with regards to the contract.court, gave its recommenda- The committee came back with an outcome that the contract is in compliance with the prevail-tion to disregard Madinaty ing laws and recommended the waiver of the case against the company. However, the advisorycase committee opinion is merely a recommendation and not essentially to be adopted by the court. Amer Group: The company returned to the governorate of Matrouh, 2.5mn m2 land plot, which was designated for Porto Marina Golf third phase. Egyptian Resorts: The Tourism development Authority – TDA has decided to cancel the pre- liminary contract for ERC’s Sahl Hasheesh phase 3, 20 mn m2 and an administrative court has decided to postpone ERC’s Shahl Hasheesh land case in to December 12, 2011 Furthermore, it was said that the TDA has decided to revalue the sale price for land plots it has withdrawn from developers in tourist locations, to a range from US$5/m2 to US$12/m2 up fromERC may need to pay TDA a US$1/m2 in the initial contracts. The tourism agency will return the lands to the developers, if5x to 12x more on Sahl Hash- they agree to pay the new rates, with land plots belonging to 179 developer have been with-eesh’s phase III land, in order drawn because less than 1% of each of these land plots have been developed.to keep it This may well up ERC’s Sahl Hasheesh’s phase 3 cost, from US$1/m2 to between US$5/m2 and US$12/m2, 1Q 11 2Q 11 Quarterly Earnings Growth (yoy) Weak financial performance 100% 80%Real estate sector bottom line All in all, the news on the sector are not positive, 60%falls 58% and 54% yoy in 1Q and the combined earnings of the 10 companies 40%& 2Q 11 respectively we follow in the sector, have suffered a yoy 58% 20% and 54% decline in 1Q and 2Q 11, respectively. 0% Remco Egy. Resorts Heliopolis Palm Hills United SODIC TMG Cairo Nasr City Amer ‐20% Companies in the sector that have previously been ‐40% focusing on catering the upper and upper-middle ‐60% income home buyers, are currently realigning their ‐80% strategy to move more into middle and low in- ‐100% come segments, with SODIC announcing such -100% recording a loss Source: Corporates earning releases +100% shift from loss to profit or over 100% increaseDeep real estate stocks’ cor- plans already.rections may have well provid-ed the potential for good up- No safe picks, but deep market correction justify some exposureside in their market prices, Demand for the upper and upper-medium income segments on real estate is not expected toonce economy picks-up & dust recover prior to 2H 2012, and cancelations may increase over this period. However, after thesettles on their lands’ inquisi- sector’s stocks fell at an average of 55% since the beginning of the year, buying stocks such as,tions SODIC, Amer Group, TMG and Palm Hills, at the current prices, can prove a rewarding ven- ture in the medium term. 20
    • JAZIRA SECURITIES BROKERAGE EGYPT September 5, 2011 Equity Strategy Report Telecom, Media & IT Sector Quarterly Earnings Growth (yoy) Orascom Telecom reported a consolidated 1H 1Q 11 2Q 11 11 profit of EGP4.70 bn vs. EGP0.15 bn loss 100% 80% reported in 1H 10. 60%OT deliver outstanding 1H The sole driver for this outstanding 1H profit, is 40%results, on the back of the OT’s sale on January 4th 2011, of its entire stake 20%US$754 mn capital gain from in Orascom Tunisia Holding and Carthage Con- 0% OT TE Media Prod. Raya Mobinilthe sale of Tunisiana sortium, through which OT owned 50% of -20% -40% Orascom Telecom Tunisia - Tunisiana, for a total -60% cash consideration of US$1.2 billion and a capital -80% -100% gain of around US$754 mn (EGP4.4 bn). -100% recording a loss Source: Corporates earning releases Orascom Telecom has received its shareholders’ +100% shift from loss to profit or over 100% increase approval on April 14, 2011, on three corporateShareholders approved debt restructuring board suggestions. First, the refinancing plan, to restructure the company’s out-restructuring, raise in author- standing secured and high yield debt together with certain derivative transactions in an amountized capital & assets spin-off of approximately US$2.7 bn. Second, to increase OT’s authorized share capital to EGP 14 bn, while issued and paid-in capital remain unchanged. Third, the shareholders approved the planned demerger from OTH of Orascom Telecom Media and Technology Holding S.A.E. - OTMT, a company to be formed at the time of the demerger. OTMT will hold certain assets of OTH that are not intended to be part of the VimpelCom-Wind Telecom merger, going forward, including OTH’s direct and indirect interest in Egyptian Company for Mobile Services - Mo- binil, North Korea’s mobile operator, koryolink, Orascom Telecom Ventures, as well as other investments in the media and technology sectors, including undersea cable assets. On a quarterly basis, 2Q 11 showed a consolidated loss of EGP172.5 mn, which was essentiallyDebt restructuring result in a due to net financing cost soaring to EGP1.4 bn up from EGP349 mn reported in the prior quar-one-off expense of US$164 ter. The reason for this exceptionally high financing cost in 2Q 11, was that OT has refinancedmn recorded in 2Q 11 most of its debt obligations during that quarter, which resulted in an extra-ordinary one-off US$164 mn (EGP967 mn) refinancing cost due to early redemptions. The problem with OT nowadays, is that its business model is becoming less understandable, the Algerian government has not yet came back with its bid on Djezzy, limitations on managing Djezzy network efficiently, and almost all of its operations are getting very mature, all this com- bined with the uncertainties, with regards to the pricing of the planned spin-off entity and OT’s chairman plans to buy back some of the spin-off assets. However, all this have made the compa- ny trade at relatively attractive earning multiple and with the company’s debt service expected to start to decline significantly, we see the current price levels provide a good point for accumu- lation. Mobinil operates in a matured market, as Egypt’s mobile penetration is currently over the 91%Egypt’s mobile communica- level, combined with the current economic conditions, which have spurred competition betweention market is getting very rival mobile networks over customers. All this have resulted in Mobinil reporting 1% and 15%mature with penetration level decline in1H 11 revenues and EBITDA, respectively. Furthermore, net income before unusualwell over 90% items fell to EGP88 mn in 1H 11 vs. EGP732 mn in 1H 10. However, based on the recommen- dation of its tax advisor, Mobinil booked a non-cash one-off expense of EGP174 million, in 2Q 11, as an adjustment to its deferred tax balance due to the new tax code implication on that bal- ance, which resulted in recording a bottom line loss of EGP86 mn in 1H 11.Mobinil may suffer some loss In late June 2011, Mobinils founder Naguib Sawaris, was criticized for mocking Islam afterof customers on the back of tweeting a cartoon of Mickey and Minnie Mouse dressed in conservative Muslim attire. Thethe boycott image was already widely circulated online, but the telecom tycoons reposting, has sparked angry reactions with tens of thousands of Egyptians condemning Sawiris’ actions and demand a boycott of his companies, even though he apologized several times after. The impact of the boycott can’t be identified yet, since detailed figures of market shares and customers for July have not been released, but it seems to have made an impact, as it got Mo- binil’s management rattled and complaining to the NTRA, of competing networks capitalizing on the public’s sentiment towards the company, through offering mobile migration campaigns. In response the NTRA has requested from Mobinil’s competitors to limit their mobile migration promotions. The impact of this boycott will be reflected on 3Q 11 results. Continued next page 21
    • JAZIRA SECURITIES BROKERAGE EGYPT September 5, 2011 Equity Strategy Report Telecom, Media & IT Sector (continued) We believe both mobile and fixed line telecommunication have long peaked in Egypt, if not inMobinil’s appeal, on the mere the world in general and are currently going downhill. However, in the case of Mobinil at thepossibility of OT executing its current market price, we can’t help to imagine the upside, if the put option that Orascom Tele-put option on Mobinil shares com has on its Mobinil’s shares is executed at EGP221.7/share, once it becomes effective innext year with over 126% up- September 2012. The option execution would technically require France Telecom, the buyer inside from current market price, this put option, to issue a bid on all of Mobinil’s free float shares at the same price, which cancan’t be avoided provide an upside of over 126% from the current market price. Telecom Egypt is still suffering in its retail operation, which is compensated by the growth in wholesale international mobile and cable businesses. TE doesn’t provide much of a story with a 10% decline in each of 1Q and 2Q 11 bottom lines. However, have relatively low price-earnings multiple and still can provide an adequate dividend yield. Picks: OT & Mobinil on corporate actions, and TE on multiples You can’t avoid OT with all the action going around, the spin-off, as well as it is trading at lowWe don’t expect OT to stay on 2012 PER levels. We don’t see OT remaining on the market for long, it will be either boughtthe market much longer, it will fully by Vimpelcom, or broken and sold to highly leveraged buyers. With the telecom marketbe either bought by Vimpel- consolidating all the time, since it’s the best way for growth in this sector nowadays, we expectcom or broken down and sold rewarding valuation levels from buyers. For Mobinil, its all about the upside, if the put option ison the market executed. Telecom Egypt reads well on multiples and its key potential lies in that once political stability materialize, Egypt can continue its growth in call centers operations, which TE can benefit ei- ther directly by expanding its call service operations or through providing the infrastructure to others. High speed internet services and its infrastructure also can support TE’s growth in the future. Quarterly Earnings Growth (yoy) 1Q 11 2Q 11 Textiles & Related Sector 100% 80% The sector has suffered from a spike in workers’ com- 60% pensations that occurred earlier in the year and from 40% 20% imported goods from countries such as China and India. 0% Alex. Spin. Polvara Arafa Kabo Arab Cotton OW Nile Cotton -20% However, three textile companies grabbed our attention, -40% as they preformed superbly well, during the 1Q 11, -60% which corresponded to the 3rdQ of their fiscal year. -80% -100%Both Arab Cotton & Alex. Arab Cotton Ginning had its quarter ending March -100% recording a loss Source: Corporates earning releasesSpinning have been perform- 2011, revenues growing 57%, while operational expens- +100% shift from loss to profit or over 100% increaseing operationally well es to revenues ratio nearly slashed by half, and ultimate- ly more than doubling its 1Q 11 bottom line on a yoy basis. Alexandria Spinning & Weaving bottom line increased in 1Q 11 by 66% as a result of a 7% increase in revenues and a major drop in its operating expenses to sales ratio as GP margin in- creased from 18% in 1Q 10 to 38% in 1Q 11. Alex. Spinning also issued its FY11 full year bottom line, showing its 4Q FY11, which corre- sponds to 2Q 11 bottom line, have increased 6x, yoy. However, detailed financials are not yet available, to analyze the reasons for this spike. The last company that grabbed our attention in this sector, is Nile Cotton Ginning. However,Nile Cotton recorded a 13x this company didn’t perform well on its operational level in 1Q 11, but rather on the back ofqoq profit increase in 1Q 11 capital gain, it garnered from the sale of 2 poultry stations it used to own, in addition to incomeon sale of assets, but went into it generates from its real estate properties. Furthermore, Nile’s 2Q 11 bottom line was a loss.deep losses in 2Q 11 Arab Cotton has been performing financially well for the last period, while Alexandria Spinning management have said they expect FY12 turnover to improve even furtherer, after the comple- tion of its Sadat City new production facility last April. Alex. Spinning comes out as our sole pick from the sector Arab Cotton is expensive on multiples, if it is able to continue the high growth levels it has been doing, it can prove a good pick, but for now, on normal expectations of growth, Alexandria Spinning comes out as our only pick from the sector, on the grounds of cheap price-earnings multiple and growth potential. 22
    • JAZIRA SECURITIES BROKERAGE EGYPT September 5, 2011 Equity Strategy ReportSectors / Companies Reuters Last YTD % Market Cap % Free Weight Weight PER (x) DY (% )Prices are in EGP unless stated otherwise Code Price Change (EGP mn) Float in EGX in Focus 2010 (a) 2011 (e) 2012 (f) 2010 (a) 2011 (e) 2012 (f)EGX30 .EGX30 4,661 ▼34.7 198,506 40 100% 74.6% 11.1 9.5 9.2 5.5 4.9 5.8Jazira Securities Focus Companies ▼28.0 267,752 36 NI 100.0% 10.9 10.4 9.5 5.8 5.0 5.7Banking & Finance ▼40.3 47,929 61 34.6% 29.9% 13.9 14.3 9.0 5.5 2.2 5.2Al Baraka Bank* SAUD 9.6 ▼22.6 737 18 0.2% 0.1% 6.9 9.8 7.9 - - -Ahli Investment and Development AFDI 9.2 ▼40.3 185 37 NI 0.1% 12.6 31.5 22.5 - - -Arab Gathering Investment* AMIA 46.5 ▼46.7 572 15 0.1% 0.1% 10.2 14.6 11.2 8.6 5.5 7.1Commercial International Bank* COMI 27.1 ▼42.8 16,071 90 18.1% 15.1% 9.2 11.7 9.4 3.7 2.6 5.3Citadel Capital* CCAP 3.7 ▼59.8 1,841 44 1.1% 0.8% n/a n/a 18.4 - - -Credit Agricole Egypt Bank CIEB 8.8 ▼43.5 2,528 21 NI 0.6% 6.0 9.2 6.8 13.6 6.2 8.8EFG-Hermes Holding* HRHO 16.4 ▼51.2 6,280 74 5.8% 4.8% 9.6 17.4 11.6 12.2 - 4.3Egyptian Kuwaiti Holding (USD)* EKHO 1.2 ▼32.0 5,743 79 5.7% 4.7% 6.6 6.3 5.3 6.5 - 7.6Naeem Holding (USD) NAHO 0.3 ▼42.0 534 52 NI 0.3% 3.7 n/a 7.2 16.4 - -National Development Bank DEVE 3.7 ▼37.3 642 31 NI 0.2% n/a n/a n/a - - -National Societe Generale Bank* NSGB 28.6 ▼36.2 10,491 22 2.8% 2.4% 8.6 8.5 7.7 4.4 4.1 5.9Pioneers Holding* PIOH 4.6 ▲44.1 2,305 34 1.0% 0.8% 211.7 105.8 75.6 - - -Construction & Related ▼22.9 87,629 34 29.9% 30.8% 10.9 11.3 9.3 6.5 5.8 6.9Aracemco CERA 24.5 ▼21.6 613 24 NI 0.2% 6.6 9.0 7.6 12.2 8.2 12.2ASEC Company for Mining ASCM 9.3 ▼26.9 324 31 NI 0.1% 74.6 n/a 23.2 - - -Egyptian Electrical Cables ELEC 1.1 ▲12.2 546 88 NI 0.5% 8.7 10.3 8.9 6.8 5.8 6.7Ezz Aldekhela Steel IRAX 600.0 ▼23.5 8,019 9 NI 0.8% 12.8 21.3 17.8 5.8 3.3 3.9Ezz Steel Rebars* ESRS 8.6 ▼56.4 4,667 35 2.0% 1.7% 21.5 39.0 32.5 - - -General Ceramics & Porcelain* PRCL 6.6 ▲38.7 332 35 0.1% 0.1% 27.5 22.0 20.9 2.3 3.2 3.3Giza General Contracting* GGCC 19.8 ▼24.6 198 43 0.1% 0.1% 12.2 11.3 13.9 - - -Lecico Egypt LCSW 8.2 ▼35.7 653 61 NI 0.4% 7.3 14.6 14.3 9.2 4.6 4.7Misr Beni Suef Cement MBSC 64.8 ▼7.3 2,594 40 NI 1.1% 8.9 11.2 9.7 7.7 6.2 7.1Misr Cement (Qena) MCQE 100.0 ▼1.0 2,988 20 NI 0.6% 8.1 9.2 8.0 16.0 9.2 10.6Orascom Construction Industries* OCIC 239.9 ▼16.7 50,114 38 24.0% 20.1% 16.1 11.1 9.3 5.0 6.3 7.6Paint & Chemicals Industries PACH 39.0 ▼27.8 780 58 NI 0.5% 5.4 6.3 5.7 11.5 9.5 10.5Sewedy Cables* SWDY 27.3 ▼49.1 4,688 33 1.9% 1.6% 5.9 7.8 6.5 3.7 3.8 4.6Sinai Cement* SCEM 38.0 ▼21.1 2,657 30 1.0% 0.8% 3.0 4.7 3.9 25.0 16.3 19.6South Valley Cement SVCE 3.8 ▼24.9 1,892 24 NI 0.5% 37.2 53.1 44.2 2.6 - -Suez Cement SUCE 33.1 ▼12.9 6,016 19 NI 1.2% 4.9 8.2 6.9 14.8 6.1 7.2Upper Egypt Contracting* UEGC 1.5 ▲19.7 551 92 0.6% 0.5% 8.9 7.1 7.9 6.8 6.8 6.8Durable Goods ▼25.5 6,017 26 NI 1.6% 16.9 44.7 21.1 3.1 - -Ghabour Auto AUTO 28.1 ▼35.4 3,625 27 NI 1.0% 15.3 23.4 17.4 3.6 - -Olympic Group OLGR 39.8 ▼3.0 2,392 25 NI 0.6% 19.9 n/a 31.2 2.5 - -Food & Related ▼0.6 20,467 20 1.4% 4.1% 14.0 11.7 10.0 4.2 6.9 5.8Ajwa for Food Industries * AJWA 3.9 ▲14.0 393 38 0.2% 0.2% 154.8 33.0 30.0 - - -Abu Kier Fertilizers ABUK 236.0 ▲19.8 11,912 13 NI 1.6% 14.4 12.9 11.2 5.5 9.3 7.1Delta Sugar SUGR 22.0 ▼2.2 2,720 11 NI 0.3% 8.7 6.0 5.0 5.7 8.3 10.0Egypt Poultry EPCO 2.5 ▼33.9 119 94 NI 0.1% 51.6 68.8 62.6 - - -Egyptian Financial & Industrial EFIC 12.4 ▼33.6 859 54 NI 0.5% n/a 17.2 13.2 - - -Juhayna Food Industries* JUFO 5.0 ▼17.5 3,596 27 1.2% 1.0% 17.8 19.1 16.6 - - -International Agricultural Products IFAP 3.9 ▼25.4 294 47 NI 0.1% 38.4 21.3 18.5 - - -National Co. for Maize Products NCMP 15.9 ▼20.7 468 34 NI 0.2% 7.1 7.6 6.3 6.9 6.4 7.7Sharkia National for Food Security SNFC 6.5 ▼19.2 106 75 NI 0.1% 62.3 24.9 22.7 1.4 3.5 3.8Milling ▲9.5 1,544 0 NI 0.7% 10.5 8.6 7.8 7.4 9.1 -Alexandria Flour Mills AFMC 19.8 ▼11.6 79 30 NI 0.0% 24.4 21.3 19.4 3.5 4.2 4.6East Delta Flour Mills EDFM 37.8 ▲18.2 227 51 NI 0.1% 13.2 14.6 13.2 8.9 6.2 6.8Middle & West Delta Flour Mills WCDF 43.3 ▲21.9 324 63 NI 0.2% 8.0 7.4 6.8 9.0 11.4 12.6Middle Egypt Flour Mills CEFM 10.0 ▼17.1 147 26 NI 0.0% 18.1 9.3 8.4 - 7.6 8.3North Cairo Mills MILS 19.5 ▲4.7 209 20 NI 0.0% 18.9 14.0 12.7 7.7 6.4 7.1South Cairo Flour Mills SCFM 29.8 ▼14.3 89 30 NI 0.0% n/a 9.4 8.5 4.5 8.5 9.4Upper Egypt Flour Mills UEFM 67.0 ▲22.6 469 51 NI 0.2% 6.3 6.1 5.6 9.0 11.4 12.5Oil Related ▼1.5 18,413 24 5.3% 4.6% 8.7 8.1 7.4 8.3 8.4 9.0Alexandria Minerals Oil Company* AMOC 64.1 ▲46.2 5,515 20 1.4% 1.2% 5.6 5.2 4.8 8.6 14.1 14.6Egypt Gas EGAS 77.5 ▲1.7 930 20 NI 0.2% 7.0 6.9 6.5 8.4 8.6 9.1Maridive & Oil Services (USD)* MOIL 2.7 ▼25.2 4,880 31 1.9% 1.6% 19.0 15.6 12.5 2.2 2.6 3.2Sidi Kerir Petrochemicals* SKPC 13.5 ▼5.3 7,088 23 2.0% 1.7% 9.6 9.2 8.7 10.4 8.1 8.6Pharmaceutical ▼18.2 5,191 0 NI 0.7% 9.1 8.8 7.7 5.5 6.2 7.7Cairo Pharmaceuticals CPCI 25.6 ▼5.8 306 30 NI 0.1% 6.5 7.1 6.4 - - -Egyptian International Pharma. Ind. (EIPICO) PHAR 35.0 ▼5.5 2,777 7 NI 0.2% 9.2 8.8 7.8 7.1 8.0 9.0Glaxo Smith Kline BIOC 11.9 ▼24.6 995 5 NI 0.0% 11.9 9.5 8.2 6.3 7.9 9.1Memphis Pharmaceuticals MPCI 23.8 ▼29.2 134 30 NI 0.0% 9.4 24.7 10.4 8.3 3.0 7.2Minapharm Pharmaceuticals MIPH 46.1 ▼52.1 570 32 NI 0.2% 8.0 7.5 6.7 2.5 3.3 3.7Nile Pharmaceuticals NIPH 40.4 ▲5.7 409 23 NI 0.1% 7.7 10.0 9.0 - - 6.7Real Estate & Related ▼54.3 20,170 39 8.0% 8.2% 7.8 19.5 17.8 1.5 0.4 0.4Amer Group* AMER 1.4 ▼51.8 2,663 21 0.7% 0.6% 4.8 6.6 9.5 - - -Cairo Housing ELKA 5.0 ▼20.1 466 64 NI 0.3% 12.8 21.3 17.7 8.0 1.4 1.7Egyptian Resorts Company* EGTS 1.1 ▼47.5 1,103 43 0.6% 0.5% n/a n/a n/a - - -Heliopolis Housing HELI 16.1 ▼34.5 1,793 23 NI 0.4% 13.3 14.2 16.7 5.4 3.5 3.0Nasr City Housing MNHD 15.9 ▼47.5 1,668 46 NI 0.8% 23.4 42.6 35.5 - - -Palm Hills Development Company* PHDC 1.8 ▼72.1 1,835 35 0.8% 0.7% 3.5 n/a n/a - - -Remco for Touristic Villages Construction RTVC 2.7 ▼36.5 664 25 NI 0.2% 4.8 n/a n/a - - -SODIC* OCDI 17.0 ▼60.0 1,541 60 1.2% 1.0% 13.4 n/a n/a 9.4 - -T M G Holding* TMGH 3.9 ▼54.4 8,089 45 4.5% 3.8% 8.6 13.2 11.8 - - -United Housing & Development* UNIT 4.0 ▼37.9 347 67 0.3% 0.2% 15.3 19.1 16.3 7.5 3.9 4.6Telecom, Media & IT ▼24.3 54,078 30 19.8% 16.9% 10.5 6.5 8.9 6.4 6.5 5.9Mobinil* EMOB 96.7 ▼41.1 9,666 27 3.3% 2.7% 8.1 18.5 12.3 12.8 - 4.1Egyptian Media Production City MPRC 3.8 ▼31.1 717 20 NI 0.1% 7.9 9.0 7.8 - - -Orascom Telecom Holding* ORTE 3.4 ▼20.4 17,993 48 10.8% 9.1% 20.4 3.6 7.3 - 8.3 4.1Raya Holding RAYA 4.3 ▼27.2 267 61 NI 0.2% 6.3 10.5 9.0 - - -Telecom Egypt* ETEL 14.9 ▼17.9 25,435 18 5.7% 4.8% 8.7 9.5 9.3 8.7 7.9 8.1Textile & Related ▼16.6 6,313 38 0.9% 2.5% 10.9 17.3 13.6 7.7 3.0 3.6Alexandria Spinning & Weaving SPIN 1.3 ▼27.2 391 38 NI 0.2% 32.7 9.8 8.9 4.6 4.6 6.8Arab Cotton Ginning* ACGC 4.1 ▼6.2 1,116 63 0.9% 0.7% 6.8 14.6 13.3 23.1 2.0 2.3Arab Polvara Spinning & Weaving Co. APSW 2.3 ▼40.6 211 69 NI 0.2% 7.0 n/a n/a - - -Arafa Holding (USD) AIVC 0.5 ▼12.4 1,007 32 NI 0.3% 9.9 33.9 18.8 3.1 - -Nasr Clothes & Textiles (Kabo) KABO 0.8 ▼30.2 274 37 NI 0.1% n/a n/a n/a - - -Nile Cotton Ginning NCGC 10.8 ▼34.0 570 70 NI 0.4% n/a 25.5 36.5 - - -Oriental Weavers ORWE 30.5 ▼10.9 2,745 21 NI 0.6% 9.0 11.2 9.5 6.6 5.3 6.3As of September 4, 2011 closing prices *EGX constituent Source: Reuters, companies’ financials & JC calculations and estimates 23
    • JAZIRA SECURITIES BROKERAGE EGYPT September 5, 2011 Equity Strategy Report Jazira Securities Brokerage Jazira Securities Online Trading 15 Shooting Club Street, Mohandessin You can trade online through Jazira Securities Tel: (+202) 3760 9915 - 37609941 online trading portal ... Fax: (+202) 3760 9883 www.jaziracapital.com Please contact our customer Service representa- tives for further information..Note: Jazira Capital online trading platform is operational, however, JC’s corporate website is down to mid September 2011, dueto server relocationJSB Contacts Title Mobile EmailHussein El Sawalhy, CFA Managing Director (+202) 3760 9915 +2010 1410 690 helsawalhy@jaziracapital.comAhmed Helmy Head of Sales & Trading (+202) 3760 9915 +2010 1004 482 ahelmy@jaziracapital.comMohamed Fahmy Head of Research (+202) 3760 9915 +2012 2157 312 mfahmy@jaziracapital.comAhmed Hamdy Online Trading Tech. Support (+202) 37609941 +2012 0227 732 ahamdy@jaziracapital.comGeorge Mansour Customer Service (+202) 37609941 +2012 9214069 gmansour@jaziracapital.comDoaa Osman Customer Service (+202) 37609941 +2012 7552436 dosman@jaziracapital.com Disclaimer • Jazira Securities Brokerage (JSB) is a licensed Egyptian Stock Market Broker, regulated by the Egyptian Financial Service Authority. • Opinions, estimates and projections contained in the research reports or documents are of the author as of the date published and are subject to change without notice • JSB research reports or documents are not, and are not to be construed as, an offer to sell or solicitation of an offer to buy any securities. • Unless otherwise noted, all JSB research reports and documents provide information of a general nature and do not address the circumstances of any particular investor. • Neither JSB nor its mother company (Jazira Capital), or any of its affiliates accept liability whatsoever for any investment loss arising from any use of the research reports or their contents. • The information and opinions contained in JSB research reports or documents have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. • JSB, Jazira Capital or any of its affiliates and/or their respective officers, directors or employees may from time to time ac- quire, hold or sell securities mentioned herein as principal or agent. • JSB research reports and all the information opinions and conclusions contained in them are protected by copyright. • The research reports or documents may not be reproduced or distributed in whole or in part without express consent of JSB Research. JSB research reports or documents, recommendations and information are subject to change without further notice. 24