November 11, 2008

                        EGYPT | TABLE OF CONTENTS




           Sector/Co.                            ...
November 11, 2008




    THIS PAGE IS INTENTIONALLY LEFT BLANK




2
November 11, 2008

                               EGYPT | STRATEGY



     AN OASIS OF GROWTH AND VALUE THAT SURPASSES RIS...
November 11, 2008
                EGYPT | STRATEGY


    VALUATION AND STOCK SELECTION
    Our analysts use one main metho...
November 11, 2008
                EGYPT | STRATEGY


          ered more affordable in Egypt than in the Gulf. PALM HILLS ...
November 11, 2008
                                        EGYPT | STRATEGY


                     DRILLING DOWN
          ...
November 11, 2008
                    EGYPT | STRATEGY


     VALUATION
     Company                      2008E       2009...
November 11, 2008
                   EGYPT | STRATEGY


    PROFITABILTY & RISK
    ROE                         2008      ...
November 11, 2008
                     EGYPT | STRATEGY


     quot;Squot; SCORE
     Given the weightings and factors we ...
November 11, 2008
                 EGYPT | STRATEGY


     CONCLUSIONS
     Summarizing the charts, tables and data above,...
November 11, 2008

                           EGYPT | ECONOMY


     DEMAND & INVESTMENT: A DARING CHALLENGE              ...
November 11, 2008
                     EGYPT | ECONOMY


     REAL SECTOR
     Economic growth in recent years has been ag...
November 11, 2008
                            EGYPT | ECONOMY

      As SMEs provide affordable goods and services that su...
November 11, 2008
                       EGYPT | ECONOMY


     Investment & FDI & Shares in GDP                          ...
November 11, 2008
                         EGYPT | ECONOMY

     As domestic investments represent the bulk of total imple...
November 11, 2008
                 EGYPT | ECONOMY



     MONETARY SECTOR

     INFLATION
     Rising global oil prices a...
Cibc Egypt Year Book 2009
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Cibc Egypt Year Book 2009

  1. 1. November 11, 2008 EGYPT | TABLE OF CONTENTS Sector/Co. Page No. STRATEGY 3 11 ECONOMY INDUSTRY 22 BANKING 30 CEMENT 41 FERTILIZERS 50 POULTRY 58 REAL ESTATE 67 STEEL 80 SUGAR 91 TELECOM 101 WHITE CONSUMER GOODS EQUITY AL-EZZ CERAMICS & PORCELAIN (GEMMA) 107 109 ARAB COTTON GINNING CO. (ACGC) COMMERCIAL INTERNATIONAL BANK (CIB) 111 113 CREDIT AGRICOLE EGYPT (CAE) 115 DELTA SUGAR 117 EASTERN COMPANY (EC) EGYPTIAN FINANCIAL & INDUSTRIAL CO. (EFIC) 119 121 EIPICO EZZ AL-DEKHEILA STEEL 123 EZZ STEEL (ES) 125 MARIDIVE & OIL SERVICES 127 129 MISR BENI SUEF CEMENT (MBSC) 131 MISR CEMENT (QENA) MOBINIL 133 135 NASR CITY HOUSING & DEVELOPMENT (NCHD) 137 NATIONAL SOCIETE GENERALE BANK (NSGB) OLYMPIC GROUP 139 141 ORASCOM CONSTRUCTION INDUSTRIES (OCI) 143 ORASCOM TELECOM (OT) 145 ORIENTAL WEAVERS CARPETS (OWC) PAINTS & CHEMICAL INDUSTRIES (PACHIN) 147 149 PALM HILLS DEVELOPMENTS RAYA HOLDING 151 153 SINAI CEMENT 155 TELECOM EGYPT (TE) TMG HOLDING 157
  2. 2. November 11, 2008 THIS PAGE IS INTENTIONALLY LEFT BLANK 2
  3. 3. November 11, 2008 EGYPT | STRATEGY AN OASIS OF GROWTH AND VALUE THAT SURPASSES RISK Welcome to CI Capital Research (CICR)'s first Egypt Book, where we look from the top to drill down through 9 sectors and into 26 companies, which we think demonstrates a wide and deep knowledge of the market. WHY HERE? WHY NOW? The Egyptian market has been hit hard by factors not of its own making. Ever since its reformist government has been in place it has managed c.7% p.a. growth, and now, despite global events, is widely recognized as a market of least risk characteristics for its ability to continue delivering growth. Yet, as high com- modity prices brought inflation to emerging markets and as the dawning realization that the global financial crisis would have a global economic impact, then the Egyptian market was hit by an outflow of (largely foreign) portfolio investments. This saw the market plummet some 50% year-to-date. This is despite the potential to grow, despite the robustness of its banking system, despite the lack of toxic financial products, and despite economic growth being driven nearly 3/4's by local demand. In short, this has left investors with a market with the potential to grow through these turbulent times, the potential for strong long-term growth, a market of low-cost production, and at valuations often lower than their developed and emerging market peers. We conclude, therefore, that whilst the Warren Buffet approach of buying value for the long-term at times like these is correct, it is entirely possible that the returns may be seen rather sooner. Compelling macro backdrop Egypt’s reformist government is determined to keep growth going, to minimize risk, and to complete a program to bring rising living standards to the masses. It is a consumer-led environment, stimulated by investments, and gradually lowering interest rates. Long-term growth is assured by demographics and geographic loca- tion. Summary macro snapshot Actual Forecasts 2005/6 2006/7 2007/8 2008/9 2009/10 2010/11 2011/12 Real GDP Growth (%) 6.8% 7.1% 7.2% 5.0% 4.4% 5.7% 6.3% Population (000) 71,347 72,798 74,357 75,844 77,361 78,908 80,486 Avg. Population (>15<45 yrs old) 35,531 36,253 37,030 37,770 38,526 39,296 40,082 GDP/Capita, Current (US$) 1,527 1,792 2,191 2,305 2,455 2,698 3,026 Private Sector Credit Growth 5.3% 9.1% 13.4% 10.5% 9.0% 12.3% 14.0% Fiscal Deficit % GDP 8.0% 7.3% 6.6% 6.5% 6.0% 5.7% 5.3% Source: CBE and CICR forecast FIVE TOP PICKS We suggest below five interesting investments spread between a wealth of oppor- tunities and investment requirements. We have chosen these from among the lar- ger stocks, although within the body of the report there are exciting stories for those interested in smaller stocks. Top recommendations LE m LE LE 2008 2009 2008 2009 2008 2009 2008 2009 Up- 12M side EV/ EV/ Name M.Cap Price FV % PER PER PBV PBV EBITDA EBITDA Yield Yield NSGB 5,468 18.1 35.8 98% 5.4 4.8 1.27 1.07 N/A N/A 2.8% 4.1% EFIC 2,064 29.8 50.1 68% 9.7 4.5 2.91 2.33 6.5 3.3 2.9% 3.7% Mobinil 11,537 115.4 206.0 79% 6.2 5.5 8.54 6.51 3.9 3.6 13.9% 14.6% Ezz Steel 5,949 11.0 34.2 212% 3.3 4.4 0.99 0.81 1.8 2.1 2.7% 2.1% EIPICO 1,763 24.5 43.7 79% 6.6 5.9 1.50 1.36 3.2 2.6 7.8% 9.2% Source: CICR forecast 3
  4. 4. November 11, 2008 EGYPT | STRATEGY VALUATION AND STOCK SELECTION Our analysts use one main method of valuation, namely a discounted cash flow (DCF) model. This discounts the explicitly forecast free cash flow for our 5 year forecast period, then a terminal value at an assumed long-term growth rate. For the real estate companies, the analyst discounts only the expected performance of the known projects. Our basic cost of equity (COE) is taking a risk-free rate of 11.5% (derived from a 10-year bond) and 8% equity risk premium, which is con- siderably higher than the traditional 5-5.5% seen in global equity research for emerging markets. Individual company models have different COE, adjusting for specific risk and leveraged beta. Basically we think you want to see at least 20% upside potential from a share price performance in the current environment. After the steep market fall, it is unsurprising that every stock has a significant up- side potential to the thus-calculated methodology. Clearly in times like these, the sensitivities of DCF go awry, not least as the market perception is perhaps saying that the required rates of return have gone stratospheric. Whilst we are indeed debating changing the valuation methods (in addition to DCF) and how we choose a target price and recommendation, it is convenient to leave this in place, if noth- ing else to emphasize the fact that EGYPT is way below its long-term potential and indeed the whole market may be a “BUY”. For the purposes of this report, rather than a simple relative ranking between the stocks versus DCF upside potential, we have developed an “S” Score (or Subjec- tive) rating in order to rank the stocks in some order of preference. We do this by looking at a number of “screens” for Profitability, Momentum and Valuation, and by looking at some charts to highlight this relative positioning. We bring this together by including a number of factors, with weights to then pro- vide a ranking order of the stocks, and from this derive a focus list of five compa- nies drawn from different sectors. The factors and weightings we use include our relative assessment of: management, size and tradability of the shares, valuation from PER, PBV and EV/EBITDA, profitability from ROE or ROIC, balance sheet risk from gearing, industry risk from our top-down view, and relative DCF upside. We weight the factors subjectively, having higher weights for management and industry risk than DCF upside potential. We also add a factor if we think the com- pany may be an acquisition target. We only produce the result here in the form of a ranked chart and is only one factor in considering our assessment of our top rec- ommendations. FROM THE TOP - SECTORS From our view on the sustainability of growth in the economy, and with reducing but high inflation, we try to think about which sectors are most and least at risk. Given that the economy is 70% driven by local consumption, and given the gov- ernment’s desire to sustain economic growth, we generally think the least risky sectors should be the ones that would benefit from any investment program and are linked to domestic consumption. More risky In this global environment, it is perhaps easier to think about where nerves should settle, or where risks are increasing. The sectors below - we think - are relatively high risk: Housing & construction, particularly at the high-end of the market. De- mand has been falling away here and the market looks somewhat satu- rated. If economic growth continues and inflation abates, then there should be reducing pressure on the middle classes, and this is reflected in the housing companies’ shift towards the middle classes away from the top- end. It is worth noting that there has not been the property boom to the ex- tent there has been in parts of the Middle East, and property is still consid- 4
  5. 5. November 11, 2008 EGYPT | STRATEGY ered more affordable in Egypt than in the Gulf. PALM HILLS DEVELOPMENTS, SODIC, and TMG HOLDING are companies in this segment Tourism: Falling global demand should place tourist receipts at risk. In re- cent years, tourists have been coming not only from Europe and the Middle East but increasingly from CIS. Egypt is a relatively low-cost location, with good-all-year weather. Nonetheless, in our macro estimates, we pare the growth of tourist receipts and think this sector potentially at risk. Export oriented: With the slowdown in global trade expected, so too ex- ports, particularly of consumer goods, are at risk. Egypt has some advan- tage in that it is generally considered to be a low-cost producer. In addition, we expect some currency weakness and export incentives to mitigate this slowdown. Companies such as ORIENTAL WEAVERS CARPETS and OLYMPIC GROUP (the latter to a lesser extent; only 10% of sales come from exports to Arab and African countries) spring to mind as exporters in categories that may suffer from falling global consumption, and yet these companies will also spend efforts in focusing on domestic consumption as the export mar- kets weaken. Less Risky Agriculture: We think food and food services is an interesting sector from the top-down. Firstly, food is needed whatever the economy. Secondly, after the rapid rise in basic food staples last year, Egypt realizes it has to make more of its fertile crescent, and we think this is a sector which will receive investment. Fertilizer, sugar, poultry ,and flour mills all make inter- esting sectors. Included in this report are EFIC (fertilizers), DELTA SUGAR, and EASTERN COMPANY (tobacco). (Our industry team would be happy to help with bespoke requests on sectors, such as the milling sector, and companies not included in this report.) Non-housing construction: Since we think that there will be investment in infrastructure and help for strategic sectors, then construction per se should still be an activity going on in Egypt. Included in this should also be building services and materials companies. OCI is the principal company in this sector, but the larger proportion of its construction activity is outside of Egypt (mainly GCC). However, its main profit growth driver comes from the fertilizer segment. Other construction-related companies include EZZ STEEL (virtual monopoly in Egypt). In addition, we include cement companies, which is a sector wrongly out of favor – in our view. Within this, there are speculative investments (MISR CEMENT – QENA) and totally mispriced (MISR BENI SUEF CEMENT) and which foreigners can buy. Oil & oil services: We think the energy sector is also a strategic sector for further development. Mostly, we think this will benefit construction compa- nies in the quoted sector. MARIDIVE & OIL SERVICES is an oil services com- pany and has most of its earnings generated globally. Mostly, we think we shall see continuing foreign direct investments (FDIs) in this sector as in- deed recent press articles have continued to highlight the foreign interest in the sector. 5
  6. 6. November 11, 2008 EGYPT | STRATEGY DRILLING DOWN In this section we drill down from the top, running several screens and charts for consideration. We only show the top and bottom companies in each screen, so our top picks, including our quot;Squot; Score chart, may have companies that have not featured in these tables, but nonetheless in our opinion do well. PE versus growth 12.0 10.0 OCIC SUGR MCQE 8.0 ETEL 09E PER EAST ACGC MOIL 6.0 PHAR EMOB IRAX NSGB PACH COMI ORWE CIEB OLGR RAYA4.0 ESRS MBSC SCEM 2.0 0.0 -10% -5% 0% 5% 10% 15% 20% 25% 30% 35% 40% 3-year EPS CAGR Source: CICR forecast The downward sloping trend line perhaps indicates that growth is not the main factor on investors’ minds at the moment, or even that the very high growth rates are disbelieved. In any case, as the cycle goes round, growth should undoubtedly come back into fashion and now is the time to look at companies and markets with the potential for long-range growth – Egypt! Noteworthy above is Palm Hills Developments (PHDC), but this growth is coming off a very low base. We circled the quot;Sweet Spotquot; i.e. companies growing at a credible pace at under 6x earnings. ROE vs. PBV and ROIC vs. WACC The ROE versus PBV is in effect a diagram of the PER, and the slope of the line greatly affected by the outliers. The correlation is low, r-squared is just 0.25, but pictorially it does give a snapshot and prompt one to think about whether stocks in the bottom right hand corner really are cheap. The PBV, or Market Value to In- vested Capital, compared to the ROIC/WACC, or in a banks case ROE/COE, al- lows some comparison across sectors, adjusted for risk. The ROE/COE implies the level at which the equity or book value or invested capital should trade, and then (ignoring growth) can be compared to the PBV. ROE vs. PBV ROIC (ROE) vs. WACC (COE) 3.5 45% OCIC EMOB 40% 09E ROIC (ROE for banks) 3.0 MCQE COMI 35% EFIC EFIC 2.5 IRAX IRAX CIEB SUGR 30% MCQE 09E PBV SCEM 2.0 NSGB 25% SUGR PACH PHAR EAST MOIL CIEB PHDC 20% 1.5 ORTE MBSC EAST COMI PHAR MOIL OLGR ESRS OCIC PHDC 15% ETEL NSGB PACH OLGR RAYA ORTE 1.0 ECAP TMGH ESRS MBSC 10% ETEL ORWE ORWE ECAP MNHD 0.5 5% SCEM ACGC RAYA TMGH 0% - 7% 9% 11% 13% 15% 17% 19% 21% 23% 0% 10% 20% 30% 40% 50% 60% 09E ROE WACC (COE for banks) Source: CICR forecast Source: CICR forecast 6
  7. 7. November 11, 2008 EGYPT | STRATEGY VALUATION Company 2008E 2009E Company 2008E 2009E Cheapest PER PER Cheapest PBV PBV Sinai Cement 4.0 2.5 TMG Holding 0.35 0.32 Palm Hills Developments 4.4 2.9 Arab Cotton Ginning 0.48 0.46 TMG Holding 4.1 3.4 Raya Holding 0.55 0.50 Misr Beni Suef Cement 3.6 3.5 Oriental Weavers 0.65 0.60 Raya Holding 4.1 3.6 Sinai Cement 0.83 0.65 Dearest PER PER Dearest PBV PBV Delta Sugar 9.0 8.9 EFIC 2.91 2.33 OCI 9.5 9.4 Misr Cement (Qena) 2.95 2.52 Orascom Telecom Holding 12.3 9.5 OCI 2.82 3.16 Al-Ezz Ceramics 13.4 22.4 Mobinil 8.54 6.51 Nasr City Housing & Dev. 36.4 33.4 Nasr City Housing & Dev. 15.31 12.99 Company 2008E 2009E Company 2008E 2009E Highest Yield Yield Cheapest EV/EBITDA EV/EBITDA Mobinil 14% 15% Sinai Cement 3.3 1.5 Credit Agricole Bank-Egypt 10% 12% Palm Hills Developments 2.2 1.6 Ezz Al-Dekheila 14% 11% Arab Cotton Ginning 2.5 1.9 Misr Beni Suef Cement 6% 10% Misr Beni Suef Cement 2.9 2.0 Olympic Group 7% 9% Ezz Steel 1.8 2.1 Lowest Yield Yield Dearest EV/EBITDA EV/EBITDA Al-Ezz Ceramics 0% 0% Olympic Group 5.5 5.2 Maridive & Oil Services 0% 0% Delta Sugar 4.9 5.3 PACHIN 0% 0% Misr Cement (Qena) 5.5 5.3 Palm Hills Developments 0% 0% OCI 8.9 11.7 TMG Holding 0% 0% Nasr City Housing & Dev. 28.5 25.4 MOMENTUM Company 2009E 3yr CAGR Company 2009E 3yr CAGR Fastest EPS EPS Fastest EBITDA EBITDA Palm Hills Developments 52% 100% Palm Hills Developments 42% 105% EFIC 116% 69% TMG Holding -1% 95% TMG Holding 21% 47% EFIC 86% 62% Al-Ezz Ceramics -40% 42% OCI -12% 41% OCI 1% 40% Olympic Group 30% 25% Slowest EPS EPS Slowest EBITDA EBITDA Nasr City Housing & Dev. 9% -3% Eastern Company 2% 5% Delta Sugar 1% -5% Ezz Al-Dekheila -20% 5% Arab Cotton Ginning 10% -6% Nasr City Housing & Dev. 13% 1% Raya Holding 14% -6% Misr Cement (Qena) -4% -2% Orascom Telecom Holding 30% -27% Delta Sugar -7% -6% Company 2009E 3yr CAGR Company 2009E 3yr CAGR Fastest CASH CASH Fastest BVPS BVPS Sinai Cement 1389% 244% Maridive & Oil Services 29% 48% Maridive & Oil Services 5% 200% Ezz Steel 22% 36% Palm Hills Developments -4% 78% CIB 28% 29% EFIC 70% 53% Ezz Al-Dekheila 19% 26% TMG Holding 37% 45% Misr Beni Suef Cement 20% 25% Slowest CASH CASH Slowest BVPS BVPS Ezz Steel -28% -2% Delta Sugar 7% 7% Misr Beni Suef Cement 1033% -8% Arab Cotton Ginning 5% 5% Ezz Al-Dekheila -12% -11% PACHIN 5% 5% Raya Holding 5% -19% Telecom Egypt 4% 4% Nasr City Housing & Dev. -14% -24% Nasr City Housing & Dev. 18% 1% Source: CICR forecast The cheapest rated stocks, (PER) tend to come from the sectors out of favor, such as cement, real estate, and IT services, with steel not far behind. Similarly the highest yields are found there. Dividend yields are approaching money market rates, which should enhance any total return for an investment. Whilst a sector like cement is out of favor with investors, there really appears a good longer-term op- portunity. Consider that the government is trying to sustain growth through invest- ment, and there continues to be much need for infrastructure investment in Egypt to such an extent that the companies are finding it necessary to increase their capac- ity (see the industry section), and there is some sector consolidation to consider. 7
  8. 8. November 11, 2008 EGYPT | STRATEGY PROFITABILTY & RISK ROE 2008 2009 EBITDA Margin 2008 2009 Best Best Mobinil 120% 135% Palm Hills Developments 66% 59% EFIC 32% 58% Misr Cement (Qena) 53% 53% Ezz Al-Dekheila 74% 45% Telecom Egypt 50% 52% Palm Hills Developments 43% 43% TMG Holding 39% 51% Nasr City Housing & Dev. 36% 42% Misr Beni Suef Cement 56% 46% Worst 2008 2009 Worst 2008 2009 Oriental Weavers 13% 13% PACHIN 20% 20% Telecom Egypt 10% 12% Ezz Steel 22% 20% TMG Holding 9% 10% Oriental Weavers 17% 17% Arab Cotton Ginning 6% 6% Olympic Group 15% 16% Al-Ezz Ceramics 7% 4% Raya Holding 6% 6% NET DEBT/EQUITY 2008 2009 Net Interest/Revenue 2008 2009 Best Best Al-Ezz Ceramics 54% 37% Arab Cotton Ginning 33% 35% Orascom Telecom Holding 78% 50% OCI 8% 11% Olympic Group 51% 78% TMG Holding 8% 11% OCI 52% 113% EIPICO 5% 5% Misr Cement (Qena) 2% 4% Worst 2008 2009 Worst 2008 2009 PACHIN -20% -22% Oriental Weavers -12% -10% Palm Hills Developments -36% -33% Mobinil -9% -10% EIPICO -41% -45% Orascom Telecom Holding -21% -18% Misr Cement (Qena) -32% -45% Raya Holding -25% -19% Delta Sugar -48% -46% Olympic Group -16% -19% Source: CICR forecast Mobile telephony may start to benefit from sector rotation as recent results from MOBINIL suggest the concerns of a downturn in subscriber activity may have been overdone. Clearly, the market also fears the housing and real estate com- panies which seem already to be discounting a major downturn in real estate prices. This also is a sector where consolidation may occur, especially amongst smaller players, as in this environment the larger companies seek to acquire land banks. If our analysts are right there is considerable momentum still to be seen in Egypt. Even those ranking in the “worst section” have reasonable growth expectations. EZZ STEEL, almost a steel monopolist in Egypt, stands out as lowly rated and growing quickly. The catalyst again should be construction volumes as it can control its margin. MISR BENI SUEF CEMENT also falls into this category and looks potentially mispriced. EFIC has fast growing earnings and is cash generative, and a look at the com- pany pages shows that it too is not highly rated. This is in a strategically- important sector as the government wants to increase the agriculture capacity and is still benefiting from better pricing even if fertilizer prices are well off their peak. The lowly-rated housing and cement sector rank well on EBITDA margin, and MOBINIL in terms of returns on shareholders’ equity, but this latter is also one of the most highly leveraged, just escaping our list of bottom 5. Reducing interest rates, now that the cycle is turning may be of some help, but this is increased financial risk for the returns. Even the worst appear to have reasonable returns measured as EBITDA margin. 8
  9. 9. November 11, 2008 EGYPT | STRATEGY quot;Squot; SCORE Given the weightings and factors we include, the highest ranked stocks do not necessarily have the most compelling valuations. In this way, OCI has come out highly paced, and is indeed one of Egypt’s premier blue chips, with a well- regarded management. The banks as cheap and tradable come out well in this scoring too. “S” Score ranking 140 120 100 80 60 40 20 0 RAYA ORTE IRAX MNHD SUGR PHAR TMGH MOIL ETEL EAST ORWE ESRS CIEB NSGB PACH OLGR PHDC EFIC OCIC SCEM ECAP MCQE EMOB ACGC MBSC Source: CICR forecast CI Capital Research Universe LE m LE LE 2008 2009 2008 2009 2008 2009 2008 2009 Up- Price 12M side EV/ EV/ Div. Div. Name M.Cap (11/6/08) FV % PER PER PBV PBV EBITDA EBITDA Yield Yield Al-Ezz Ceramics 254 5.0 7.2 45% 13.4 22.4 0.80 0.78 5.6 4.2 0.0% 0.0% Arab Cotton Ginning 1,020 4.1 10.1 148% 8.0 7.3 0.48 0.46 2.5 1.9 3.8% 4.1% CIB 8,989 30.7 N/A N/A 5.1 4.3 1.69 1.32 N/A N/A 3.3% 4.1% Credit Agricole Bank-Egypt 2,959 10.3 15.3 49% 5.6 4.9 1.68 1.52 N/A N/A 9.7% 12.1% Delta Sugar 2,170 22.0 32.3 47% 9.0 8.9 2.42 2.27 4.9 5.3 8.3% 8.4% Eastern Company 5,450 218.0 305.6 40% 7.1 7.1 1.75 1.54 4.7 4.4 6.7% 7.0% EFIC 2,064 29.8 50.1 68% 9.7 4.5 2.91 2.33 6.5 3.3 2.9% 3.7% EIPICO 1,763 24.5 43.7 79% 6.6 5.9 1.50 1.36 3.2 2.6 7.8% 9.2% Ezz Al-Dekheila 12,249 896.2 1,501.9 68% 4.2 5.4 2.62 2.21 3.4 4.1 14.4% 11.2% Ezz Steel 5,949 11.0 34.2 212% 3.3 4.4 0.99 0.81 1.8 2.1 2.7% 2.1% Maridive & Oil Services 3,781 2.6 5.1 99% 7.8 6.5 1.85 1.44 5.9 4.6 0.0% 0.0% Misr Beni Suef Cement 936 46.8 152.5 226% 3.6 3.5 1.11 0.92 2.9 2.0 5.5% 10.0% Misr Cement (Qena) 2,310 77.0 98.5 28% 8.5 7.8 2.95 2.52 5.5 5.3 7.1% 7.7% Mobinil 11,537 115.4 206.0 79% 6.2 5.5 8.54 6.51 3.9 3.6 13.9% 14.6% Nasr City Housing & Dev. 3,122 31.2 42.8 37% 36.4 33.4 15.31 12.99 28.5 25.4 1.7% 1.8% NSGB 5,468 18.1 35.8 98% 5.4 4.8 1.27 1.07 N/A N/A 2.8% 4.1% OCI 42,192 196.5 330.5 68% 9.5 9.4 2.82 3.16 8.9 11.7 2.3% 2.9% Olympic Group 1,450 24.1 55.1 128% 5.5 4.2 1.51 1.23 5.5 5.2 7.2% 9.4% Orascom Telecom Holding 33,116 36.8 96.1 161% 12.3 9.5 1.46 1.28 3.9 3.3 2.7% 3.5% Oriental Weavers 1,708 22.9 48.3 111% 5.3 4.6 0.65 0.60 5.0 4.2 6.8% 7.8% PACHIN 585 29.2 83.4 185% 5.3 4.5 1.14 1.09 4.1 3.4 0.0% 0.0% Palm Hills Developments 3,774 8.1 24.3 199% 4.4 2.9 1.25 1.20 2.2 1.6 0.0% 0.0% Raya Holding 259 4.6 11.5 152% 4.1 3.6 0.55 0.50 3.6 3.0 8.0% 9.1% Sinai Cement 1,150 32.9 93.0 183% 4.0 2.5 0.83 0.65 3.3 1.5 5.0% 8.0% Telecom Egypt 26,801 15.7 24.3 55% 9.9 7.9 1.00 0.96 5.6 4.8 6.6% 8.2% TMG Holding 7,857 3.9 12.8 231% 4.1 3.4 0.35 0.32 3.0 2.4 0.0% 0.0% Source: CICR forecast *Maridive & Oil Services share price is in US dollar 9
  10. 10. November 11, 2008 EGYPT | STRATEGY CONCLUSIONS Summarizing the charts, tables and data above, these are the main conclusions we draw: A. Mispriced in our opinion: SINAI CEMENT - Heavily sold off and half the value of its peers. RAYA HOLDING - Consumer electronics, slow growth, and its net debt rank- ing belies a liquid balance sheet and investments into a growing service sector. EIPICO – Low PER, high yield, decent (defensive - pharmaceutical) growth, good margins and profitability. The banks (see industry section) do not make most of the screens but are rela- tively well placed as well capitalized and liquid, profitable, growing, and cheaply rated. Now that the interest rate cycle has stabilized, interest may return to this segment, not least as it is one banking sector in the world capable of lending to a market with the potential to grow. B. Speculative interest: RAYA HOLDING - Cheap liquid balance sheet could be made to sweat more. MISR CEMENT (QENA) - Cement in the right place at the right time, and ASEC is building a stake. Our top five picks From the above and from our “S” Score, we highlight the following investment opportunities from different sectors and in no particular order: NSGB: profitable, good returns, sound balance sheet, and still gaining restructuring benefits, trading at 4.8x 2009E earnings, 1.1x 2009E BV, ROE 24%, while earnings growing at 31% over next three years. EFIC: Sound high returning growth in a strategically-important agricul- tural sector, valued at 4.5x 2009E earnings. EIPICO: Defensive play in the healthcare sector. Stable earnings with long-range potential as health becomes an increasingly important issue in Egypt. MOBINIL: Mobile operator which has just beat consensus 3Q08 earnings. It pays a generous dividend and sweats the equity. Interest rate and lev- erage risk should be declining and has ongoing cost efficiency program. We think there is some rotation back to Telcos, which should benefit from stimulated consumer. EZZ STEEL: Virtual monopoly position in Egypt, with controlled margins, cheaper than foreign competition. Benefit from any rally in commodity prices, and more fundamentally from the continued (non-housing) con- struction investment we think will continue in Egypt. 10
  11. 11. November 11, 2008 EGYPT | ECONOMY DEMAND & INVESTMENT: A DARING CHALLENGE POTENTIALS Populous economy with inherent sizable From the beginning of 2008 emerging economies watched demand. the global tornado from afar. Now with a vanishing confi- Domestic investments represent the bulk – dence, foreign capital has fled compelling the waning of around 60% - of implemented investments. many emerging economies stock markets. Yet, we deem Well capitalized, under leveraged Banking Egypt's economy will reveal distinguished resilience sector flushed with liquidity. amidst the headwinds from the developed economies. Re- Solid BOP position even with the weaken- inforced by its diversified GDP, liquid banking system, ing at the margins. and an under-leveraged economy; Egypt is expected to Favorable factors of production and benign maintain a modest GDP growth rate of 5% in FY08/09 – business environment that allows Egypt to based on the GoE's ability to promote local investments, act as an investment hub within the region. with a focus on SMEs. Underlying potential in a number of sectors including fertilizers, infrastructure, agribusi- ness and pharmaceutical. Consumer-led recovery “the guardian” for growth: Reap- ing the fruits of bold reforms implemented to date and a grow- ing investors’ confidence, Egypt's economy has leapfrogged RISKS both on its economic and fiscal management platforms. Thanks to the export-led strategy adopted, which led to the witnessed domestic demand boom, GDP jumped to a growth The current global challenges that is ex- rate of 7.2% in FY07/08. pected to negatively impact exports growth. Highly affected FX earning sectors, namely FDI, a perfect exhale: Given Egypt’s fertile business soil and tourism, Suez Canal and FDI. the increasing investors’ confidence in a reformist government, Inability to rely on fiscal pumping to pro- FDI soared reaching US$13.2 bn in FY07/08 up from US$3.9 mote growth with the prevailing fiscal defi- bn in FY04/05. Yet, it is expected to be hardly hit by the global cit. downturn and exacerbated by investors’ panic all over the globe. SELECTED MACRO INDICATORS Sustained high inflation jeopardy fading away: Like other open economies, Egypt was hit hard by the surge in interna- 2006/7 2007/8 2008/9F GDP (Current, LE bn) 744.8 896.5 1,002.8 tional oil and food prices with inflation recording a double-digit Real GDP GR (%) 7.1% 7.2% 5.0% growth of 11.7% in FY07/08. However, complying with the ex- GDP/Capita (Current, US$) 1,792 2,191 2,305 Inflation (CPI %) 10.9% 11.7% 17.0% pected decline in international markets, we believe inflation to FDI (US$ mn) 11,053 13,237 6,364 simmer down driving the wheel for strengthened domestic de- Investments (LE bn) 155.3 179.3 190.8 mand. ALIA MAMDOUH BOP surplus maintained while current account deterio- ALIA.MAMDOUH@CICH.COM.EG rates: Expenses of the robust domestic demand has been re- flected in a deteriorating current account reaching US$0.9 bn EGYPT’S ECONOMIC PERFORMANCE in FY07/08 and turning into a deficit of US$ 3.3 bn in FY08/09 given the widening trade deficit and the relatively static ser- Real GDP GR Investment GR 8.0% 25.0% vices growth. Yet, still BOP reflects low vulnerability given the performance of the capital and financial account outweighing 7.0% 20.0% such pitfalls. 6.0% 5.0% Fiscal deficit restructuring, right on track: Despite the huge 15.0% hike in expenditures due to increased subsidies, driven by the 4.0% spiraling rise of oil prices; fiscal deficit to GDP narrowed to 10.0% 3.0% 6.6% in FY07/08 down from 7.3% in FY06/07. This is mainly 2.0% 5.0% attributable to the revenues growth, powered by tax revenues' 1.0% increase as well as other revenues including proceeds from 0.0% 0.0% cement licenses worth of around LE 1.14 bn in FY07/08. 2003/4 2004/5 2005/6 2006/7 2007/8 2008/9 2009/10 2010/11 2011/12 11
  12. 12. November 11, 2008 EGYPT | ECONOMY REAL SECTOR Economic growth in recent years has been aggravated by a diversified output Fueled by an ex- strategy that was reflected in the strong growth in tourism, construction, real es- panded output strat- tate, communications, oil and gas and trade sectors. The inflow of foreign invest- egy, economic ments as DAMAC and Emaar helped flourishing the construction and real estate growth has been sectors that in turn fed the building materials industry. In addition, the entrance of maintained over the the third mobile operator, Etisalat Misr, lifted up the communications sector. Export past years volumes, despite the strengthening of the Egyptian pound against the US$ helped the manufacturing sectors to record a growth of 8% in FY07/08 up from 5.9% in FY05/06. GDP growth by sector Real GDP growth breakdown 2006/7 2007/8 Private consumption Government consumption 30.0% Gross Capital Formation Net Exports 100% 25.0% 90% 20.0% 80% 70% 15.0% 60% 10.0% 50% 5.0% 40% 30% 0.0% Construction Real Estate Financial Oil & Gas Industries Others Tourism Communications Wholesale & services 20% Trade 10% 0% 2004/5 2005/6 2006/7 2007/8 Source: CBE Source: CBE SMEs have been one of the pillars of the Egyptian private sector, compromising An economy with an the bulk - above 90% - of the operating private non-agricultural establishments. increasing say for Micro, small and medium enterprises contribute with around 80% of total value SME’s and the infor- added and attract 47% of total investments. Moreover, their input to the country’s mal sector exports reached around 20%; of which chemical products represent the lion’s share of 38%. SME’s contribution to Industrial GDP 2006E 2000 Small, 12% Small, 14% Large, 38% Large, 48% Medium, 40% Medium, 50% Source: CICR database 12
  13. 13. November 11, 2008 EGYPT | ECONOMY As SMEs provide affordable goods and services that suits the lower and lower- High level of infor- middle income groups - which represents 57% of the population - they are highly mality is the main im- interrelated to the informal economy. Such high level of informality limits SMEs pediment facing access to a wide range of formal services, most importantly credit facilities. Rec- SMEs. Yet, they enjoy ognizing their vital role, GoE launched an Exchange market for growing medium increasing GoE sup- and small companies, Nilex, to facilitate access to capital as well as exposure to port foreign investors. We highly believe that increasing SMEs support is crucial to sus- tain high growth levels by promoting entrepreneurship, job creation and attracting domestic investments. INVESTMENTS The package of bold reforms implemented on all fronts, namely (1) reducing the Vibrant investment minimum capital requirement of incorporation to LE 1,000, (2) corporate tax cut by appetite half reaching 20%, (3) reducing weighted average custom tariffs from 14% to 6.9%, (4) tariff bands streamlined and reduced from 27 to 6, and (5) customs on capital assets capped at 5% have created an attractive environment for invest- ment. Moreover, with the country's favorable factors of production and competitive energy prices, both investment and FDI recorded buoyant growth. Based on weighted growth, the services sectors accounted for the bulk of new Services sectors led investments. In FY07/08, investment in transportation and communication wit- investment growth nessed the highest flow of 7.8%; followed by hydrocarbon investments, namely in the upstream activities which recorded a weighted growth of 7.1%. Infrastructure investments come next with a rate of 5% - especially in water and electricity sta- tions. Investment breakdown FY07/08 Investments weighted growth by sector 9.0% Others, Health, 8% Agriculture, 4% 2% 8.0% Education, 3% 7.0% Crude Oil & NG, 17% Real Estate, 7% 6.0% 5.0% Tourism, 3% 4.0% Financial 3.0% Intermediaries, 1% Manufacturing & Oil 2.0% Products, Wholesale & Retail 22% Trade, 1.0% 3% 0.0% Transp. & Com. Tourism Others Manuf.& Oil Suez Canal Real Estate Education Agriculture Crude Oil & NG Financial Sector Wholesale Trade Electricity & Water Construction Health Products Transp. & Com., 20% Construction & Electricity & Water, 8% Building, 2% Source: CBE Source: CBE Rising confidence in the country's economic performance loosened the wheel for Mounting FDI inflows FDI flows which maintained their high growth levels reaching US$13.2 bn in were reflected in a FY07/08 up from US$3.9 bn in FY04/05. FDI constitutes around 8.2% of the coun- strengthened cur- try's GDP in FY07/08. The petroleum sector held the major chunk of 38% of such rency and an ex- inflows, while the contribution of the real-estate still maintains a low level of 0.8% panded output in FY07/08, despite its strong growth reaching US$90.6 mn up from US$39 mn in FY06/07. Within the non-petroleum investments, the financial sector accounted for the lion’s share of 40% followed by industrial activities (32%) and the services sec- tors (15%). 13
  14. 14. November 11, 2008 EGYPT | ECONOMY Investment & FDI & Shares in GDP Non-Petroleum FDI Breakdown FY07/08 FDI Implemented Investments CIT, 0.3% US$ mn FDI % of GDP Investment % of GDP Real Estate, 1.8% Tourism, 2.2% 35,000 25.0% 30,000 Services, 15.3% 20.0% 25,000 15.0% Industry, 31.6% 20,000 15,000 10.0% Financial Sector, 10,000 40.1% Agriculture, 1.4% 5.0% 5,000 Construction, 7.3% 0 0.0% 2004/5 2005/6 2006/7 2007/8 Source: CBE Source: Ministry of Investment However, sustaining However, sustaining such strong FDI levels is doubtful, especially after the re- such strong FDI in- moval of tax exemptions from the free zones for energy-intensive industries cou- flows is of a concern pled with the increase in energy prices that were announced in May 2008. More- over, the current global financial turmoil is expected to have a negative impact on the inflow of FDI, as 70% of such inflows comes from the US and EU countries. Yet, with GCC surplus such decline is expected to be mitigated. We expect net FDI inflows to reach US$6.4 bn in FY08/09, followed by US$5.9 bn in FY09/10. On a different note, GoE expects FDI to reach around US$10 bn in FY08/09. Despite the global gloom, announcements of new projects are still in the head- A positive aspect is lines: Al Kharafi Group confirmed plans to pump US$2 bn in new investments in that announcements the steel industry; Schneider Electric will establish a new electricity plant with an of new foreign invest- investment cost of around US$ 45.5 mn; GlaxoSmithkline plans to buy the Egyp- ments are still in the tian mature products business of Bristol-Myers Squibb Co. for US$210 mn, and headlines Solvay SA, the world's largest soda- ash maker, bought Alexandria Sodium Car- bonate Co. in a deal worth US$137.5 mn. Moreover, the fertilizers sector is to wit- ness further investments including EBIC, Agrium and Egyphos. Key pipeline projects over 2008-12 Sector Project Investments Completion Date El-Swedy Cement US$350 mn 2010 North Sinai Cement LE 1,500 mn 2010 Cement LE 1,600 mn Al-Nahda Industries 2011 Al-Wady Cement LE 1,000 mn 2012 Four new steel raw materials factories; Ezz Steel (ES), Suez US$15 bn NA Steel Company, Tiba for Iron & Steel and the Egyptian Steel Company for Sponge Iron. Almaza City Center by Al-Futtaim US$0.5 bn 2008 Hyde Park by Damac US$5.5 bn 2011 Cairo Nile Corniche Towers project by Qatari Diar LE 5.75 bn Real Estate 2011 West Town Cairo, in Sheikh Zayed by SODIC US$2.4 bn 2011 East Town Cairo, in Katameya US$1.6 bn 2011 US$1.2 bn Port Ghalib by El-kharafi Group 2009 US$2.5 bn Serrenia resort by Shaheen Bus.& Inv, Group 2010 LE 1.5 bn Tourism Porto Sokhna by Amer Group 2010 US$1.74 bn Marassi by Emaar 2012 LE 2.56 bn Almaza Bay Resort by Travco 2012 US$432 mn Egyptian Basic Industries Co. (EBIC) 2008 US$250 - 300 mn Egyptian Fertilzers Co. (EFC) 2010 Fertilizers US$1400 mn Agrium 2010 US$680 mn Egyphos 2011 Source: CICR 14
  15. 15. November 11, 2008 EGYPT | ECONOMY As domestic investments represent the bulk of total implemented investments in Another positive as- Egypt, of which SMEs bears a considerable contribution, the GoE's commitment to pect is the GoE's support SMEs investments as well as providing them with export facilities – commitment to focus through tapping new potential markets – is expected to mitigate a reduced FDI on SMEs and con- inflows. Moreover, the GoE's decision of freezing any increase in energy prices till tinuing infrastructural the end of 2009 is another measure that can drive further investments. In addition development to the continued infrastructural development with US$8.9 bn worth of transport investments expected to pour into the country over the coming three years. We expect total implemented investments to reach LE 190.8 bn in FY08/09. Against this backdrop and given the purchasing power resilience of the upper and upper middle classes of the society and their influence on the informal sector domestic demand growth will likely maintain its levels. Thus, we believe Egypt to maintain a modest growth amidst such turbulence and negative sentiments with expected GDP growth rates of 5% and 4.4% in FY08/09 and FY09/10, respectively. Said moderate setback in growth is to be also supported by the country’s diversified GDP, liquid banking system with loans to deposits ratio of 53% and an under- leveraged economy. We highly believe a 5% GDP growth is still significantly higher than that witnessed during the slowdown early in the decade, reflecting a better-off economic structure with stronger spine and foundations. Overall, we believe economic slowdown will worsen in FY09/10 given the steep decline in oil prices and the maintained global slowdown affecting large emerging markets, including Russia and China. Our estimates are considered conservative, yet there might be upside surprises if the GoE succeeded to attract higher than expected FDI levels and support export- oriented industries. FDI & Investment Outlook LE bn Investment FDI US$ mn 300.0 14,000 12,000 250.0 10,000 200.0 8,000 150.0 6,000 100.0 4,000 50.0 2,000 0.0 - 2005/06 2006/07 2007/8 2008/9 2009/10 2010/11 Source: CICR forecast Public-private partnerships (PPP) are integral to investments, as well as sustained Public-private part- economic growth as it aims at lifting-off some of the burden on the government nership, another budget, particularly in terms of infrastructural investments. PPP is considered an mechanism for sup- important supporting tool for the private sector as well benefiting from the govern- porting investments ment endorsement in fast-tracking the projects permits. One of the main sectors that witnessed PPP projects is the transport sector with Cairo-Alexandria highway project that will be awarded to a private firm under the PPP model in January 2009 with an estimated investment cost of LE 1.9 bn. In addition to the Mediterranean Coastal highway with an investment cost of LE 1.5 bn. There are still a number of PPP opportunities in infrastructure development, including water facilities and sani- tation as well as electricity plants with Egyptian Contracting Co. (Mokhtar Ibrahim) winning a project for expanding a water utility in Obour City with an investment cost of LE 280 mn. We highly believe that endorsing PPP will enhance sustaining mod- erate economic growth levels without imperiling the existing fiscal deficit. 15
  16. 16. November 11, 2008 EGYPT | ECONOMY MONETARY SECTOR INFLATION Rising global oil prices as well as international commodities prices, namely food – High levels of infla- as Egypt is a net importer - lifted up local products' prices, leading CPI reading of tion imposed a threat 11.7% in FY07/08. Yet, the full impact should be reflected in FY08/09 by which to growth CPI reading is expected to reach 17%. In an effort to curb inflationary pressure, the GoE raised up interest rates; reduced imports tariff to 6.9% from 9%; and im- posed tariffs on certain export commodities (steel, cement, rice), yet, inflation maintained its increase – with CPI reading reaching the peak of 23.6% in August 2008. Bearing the highest weight in CPI (44%), food & non-alcoholic beverages drove up the hike being highly influenced by changes in oil prices. In an attempt to alleviate inflationary pressures on the public, as Egyptians spend around 45% of their income on food items expanding to 60% for the lowest income groups, GoE increased wages by 30% in May 2008. Yet, sustained high levels of inflation out- weighed such efforts and eroded the Egyptian's purchasing power and real in- comes. CPI, food & oil prices CPI Food prices Oil prices US$/barrel 35.0% 160.0 140.0 30.0% 120.0 25.0% 100.0 20.0% 80.0 15.0% 60.0 10.0% 40.0 5.0% 20.0 0.0% 0.0 May-07 May-08 Mar-07 Mar-08 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Apr-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Apr-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Source: CAPMAS & Bloomberg Yet, inflation started The decline in global oil prices witnessed since July 2008 was filtered down to cooling-off food commodities' prices which started to cool-off since September 2008, bringing down the CPI reading to 20.2% in October 2008. We believe inflation will not re- cord its 2008 skyrocketing readings, not only due to the cool-off in international prices but also due to the absence of the low base of the consumer price index effect. We expect inflation to start exhibiting lower levels in FY09/10, enhancing the purchasing power and driving up domestic demand. As a measure to counteract inflation, the Central Bank of Egypt (CBE) raised inter- Monetary tightening est rates for six consecutive times starting February 2008. The overnight deposits was the first re- and lending rates rose from 8.75% and 10.75% in December 2007 reaching sponse 11.5% and 13.5%, respectively in September 2008. Consequently, broad money supply and liquidity (M2) witnessed slower growth of 15.7% in FY07/08 down from 18.2% in FY06/07. We do not believe that the monetary tightening have been to- tally effective in curbing inflation mainly due to the slow pass of changes in corri- dor interest rates to general interest rates in the banking system. In addition to, the relatively low loan-to-deposits ratio of 53% that flushed the banks with excess li- quidity, along with the nature of the Egyptian economy – which bears a significant contribution from the informal sector. 16

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