Egypt Macro & Strategy

Navigating Egypt

14 December 2009

www.hc-si.com

Research Department

Egypt

Navigating Egypt

Government action has supported the economy but there are a

number of ongoing risks on the road to recovery. The return of
inflation removes the support of monetary policy to growth,
and we expect the CBE to deliver a series of interest rate hikes
in 2010.

Developments in the MENA region surrounding the Dubai Debt

Crisis provide a strategic opportunity for investors to look at
Egypt as a safe haven. We highlight the banking sector,
government support, low corporate leverage, defensive
characteristics and value of the Egyptian equity market and
place an 'Overweight' recommendation.

We reiterate our fundamental view on our research coverage

as providing both value and upside potential given uncertainty
in the broader GCC region. Our top stock picks are Telecom
Egypt, Mobinil, NSGB, Maridive, Citadel, and Eastern Company.

GDP Growth FY 09/10

GDP Growth FY 10/11

60%
50%
40%
30%
20%
10%
0%
13-Dec

10-Dec

9-Dec

8-Dec

7-Dec

6-Dec

3-Dec

2-Dec

1-Dec

Foreigners Net Position (Sell)

GDP Growth and EGX Performance

12000

The CBE interest rate cutting cycle that started in February 2009
and has seen interest rates fall to an historic low has come to an
end. The CBE is talking hard on inflation and will not tolerate a rise in core
inflation to unacceptable levels. We expect a hike in inflation in 2010 based
on base effects of higher energy prices, a possible reduction in energy
subsidies by the government, and higher commodity prices in world markets
as the global economy recovers.

8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0

10000
8000
6000
4000
2000

1 09/10Q

4 08/09Q

30EGX

3 08/09Q

2 08/09Q

1 08/09Q

4 07/08Q

3 07/08Q

2 07/08Q

1 07/08Q

Macro & Strategy

30-Nov

Foreigners Net Position (Buy)

The Egyptian economy is highly geared toward growth and trade in

the developed world; 70% of its exports go to the US and Europe
and it relies on these regions for 70% of its FDI. Egypt needs to
develop more links with faster growing Asian economies, which are expected
to lead the world out of recession.

The equity market presents an attractive opportunity in light of

heightened risk aversion within the GCC region. The Egyptian equity
market posted a strong rally moving from a low of 5200 in July 2009 to a
high of 7250 by mid October. In October we reversed our call on Egypt
from 'Overweight' to 'Underweight'. With the Egyptian equity market hitting
our end of year target of 6250, we view developments in the MENA region
surrounding the Dubai Debt Crisis as a strategic opportunity for investors to
look at Egypt as a safe haven and place an 'Overweight' on the market. The
Egyptian equity market initially plummeted by 8% after the Dubai
government's surprise announcement on Dubai Worlds debt on 25th
November 2009. Investors need to differentiate between highrisk and lowrisk countries. Egyptian banks have minimal exposure to Dubai World, which
has been fully provisioned by banks involved. The Egyptian stock market is
much lower geared than that of Dubai and does not present investors with
credit risk. Based on strong fundamentals in Egypt, we recommend a
strategic allocation to the Egyptian stock market.

4.3%
5.1%

Foreign investors net positions in EGX

25-Nov

Strong government support has seen the domestic economy

weather the global economic slowdown with distinction. Outlook for
growth in FY 09/10e is positive, with government officials quoting GDP
growth of 4.9% in Q1 FY09/10a. On the face of it, the Egyptian economy
appears to have turned through the low point of this cycle. However, a
number of key factors have yet to show clear signs of recovery. Growth has
been driven by increased government spending, which mainly focuses on
infrastructure, whilst the larger and more influential manufacturing sector
has stagnated. We revise our GDP growth estimate for FY09/10e to 4.3%
(up from 3.8%) based on higher government spending.

Overweight

Good Governance Yields Positive Returns

14 December 2009

% of Value Traded

A Defensive Play

GDP growth

Tudor Allin-Khan, CFA

+971 4 2935386

tudor. allin-khan@af-hc.com
Amr Abdel Khalek

+202 3332 638

aabdelkhalek@hc-si.com
* Disclaimer See Page 81

Egypt

Investment Case

Economic indicators are turning positive but recovery will be slow and pre-crisis growth levels will
now be reached during FY09/10.

Despite the challenges facing the economy, we are overweight on Egypt given the events that have
unfolded in Dubai.

Our top stock picks are Telecom Egypt, Mobinil, NSGB, Maridive, Citadel, and Eastern Company.

The linkages of the Egyptian economy to the developed world represent a risk to domestic growth, given the expectations of a
slow economic recovery in the latter. GDP growth in Egypt declined from the 7% average over the past few years to reach 4.7%
during FY08/09. This rate however, is better than expected given the recent global economic turmoil.
However, we remain cautious as we believe that growth rates have mainly been driven by government spending rather than the
private sector. Growth in the manufacturing sector has been stagnant (3.8%), while the construction sector (the main beneficiary
of government stimulus packages) grew at 12%. The manufacturing sector employs 10.4 % of the total labor force and represents
almost 30% of the economy (including extractions). As such, we would refrain from turning bullish on the macro economy until we
see a recovery in this crucial part of the domestic economy.
Government spending will likely continue in FY09/10 whilst the government awaits the private sector to pick up. The budget for
FY09/10 contains a stimulus package of EGP8 billion; a recent package of EGP10 billion was introduced and was not included in the
budget.
Indicators such as Suez Canal revenues, tourism receipts, foreign direct investments, and exports have already hit their lows and
are starting to shows signs of recovery. Total tourism revenues dropped 3.5% from January to November 2009 compared to the
same period last year. Suez Canal tolls have increased from their February 2009 low of USD301 million to reach USD397 million
and USD365.5 million during October and November, respectively. Net foreign direct investments during Q4 increased to USD2.8
billion, compared to USD1.9 billion during the same period last year. Exports increased from USD5.4 during Q2 FY08/09 to reach
USD5.6 billion and USD5.9 billion during Q3 and Q4 FY08/09 respectively. Given these developments, the outlook for Egypt
remains positive but we do not believe it is enough to reach pre-crisis levels of 7%.
After declining during 2009, inflation has started to pick up, reaching a low of 9% in August and increasing to 13.3% and 13.2% In
October and November, respectively. We expect inflation to rise in 2010 as a result of a rally in commodity prices, as the global
economy recovers and given the import nature of the Egyptian economy, in addition to base effects of higher energy prices. This is
negative given the high degree consumer spending on food and energy related products, and presents a hurdle for the Egyptian
consumer in light of the rise in unemployment and reduced remittances from abroad.
Following the recent interest rate cuts by the Central Bank of Egypt (CBE), it is likely that interest rates will be revised upwards in
2010, given the recent hike in inflation and the shift in focus of the CBE from supporting growth to targeting inflation.
Despite the challenges facing the Egyptian economy, we are overweight on Egypt and advise investors that the Egyptian equity
market will outperform its GCC peers given the recent events unfolding in Dubai.

Strategy Summery
With investors currently digesting the fallout of the risk of the Dubai Debt situation, we highlight a number of key factors that
investors should focus on, demonstrating why the Egyptian equity market will outperform its GCC peers over the interim:
I)
II)

III)
IV)

V)

Banking sector: Strong domestic banking sector with clear ability for large corporations to refinance and access
capital should alleviate any default risk.
Government support: Willingness of the government to support the domestic economy through continued
infrastructure spending, as well as the government's clear position within the corporate sector ,which removes the
risk of moral hazard.
Leverage: The Egyptian equity market is significantly underleveraged compared to GCC peers.
Defensive: Local investors, particularly retail, play a large part in the Egyptian equity market, limiting the effect of a
flight of capital by foreign investors. It is also more mature than its fledgling neighbors, with clearly defined
corporate governance and regulatory framework.
Value: Current valuations within the Egyptian equity market are not expensive.

Macro & Strategy

Egypt
Banking Sector: As the Egyptian sector has stayed clear from the recent debt developments in the region due to its low
integration within the global economy, and abundant liquidity, helps create better earning visibility on the sector. With private
corporate lending making up 72% of total loans in the economy, loan advancement over the year remained almost flat,
synthesizing a slow economy is seen as the only challenge to the sector at current times, with asset quality remaining unaffected.
Despite sluggish corporate lending, considerably under penetrated retail market provide huge potential for lending growth deriving
their strength from domestic demand, unlike elsewhere.
NSGB (TP: EGP36.4/share, upside: 25.4%)
We believe NSGB's retail penetration offers strong growth potential as the corporate segment in Egypt remains a challenge. With
an embedded 15% retail clientele base in addition to a cross selling ratio of 3.4x, we believe the bank to capitalize on higher
lending opportunities than its peer, CIB until macro conditions reverse. Over the course of the year, NSGB remained a cautious
lender focusing on risk management translating to an improvement in its NPL ratio improving to 6.8% from 7.1% during 1H09. We
believe NSGB is set to deliver attractive bottom line growth at a CAGR of 17.9% over our forecasted period compared to a slower
14.9% for CIB.
Real Estate Sector:
The Egyptian property sector is undergoing a transformation driven by new integrated communities and an evolving mortgage
market. We believe that Cairo is the best placed to benefit from these trends, and hence prefer it over second home destinations
(e.g. North Coast and Red Sea). Overall, the sectors dynamics remain robust, characterized by favorable demographic trends and
an expanding middle class. Also, considering that the high end market is saturating, we believe that the low-to mid income market
is likely to drive demand going forward. In Egypt, while affordability remains restrained, we believe that further potential lies in
structural and regulatory reform to address low mortgage penetration. The affordability ratio (housing prices/annual income) in
Cairo ranges between 3.9 for mid-income apartments to 5.3 for high-income villas. While an affordability ratio of 5x is typically
considered reasonable, given the high mortgage rates the effective debt service ratio is high, well above 50% in some cases.
Accordingly, we feel that interest rate reform, as well as easing up home financing, should unlock further potential demand. In
current market conditions we look for high sales backlog, central land bank, and exposure to the hospitality sector.
Talaat Mostafa Group (TP: EGP9.1, Upside: 40%)
TMG has the largest backlog among its peers - standing at EGP28bn - to be realized over the next three to four years, hence
providing strong cash flows and earnings visibility. Also, c90% of the companys land bank is located in Cairo which has the
strongest fundamentals driven by huge pent-up demand and urban migration. Additionally, we like the companys exposure to the
expanding middle-income segment. The company also has exposure to the luxury hospitality sector (780 rooms), which we feel
puts a floor under its valuation. Our target price for TMG implies a 32% discount to NAV.
SODIC (TP EGP105.2, Upside: 27%)
Although SODICs 5.7m sqm land bank is the smallest among the Egyptian developers that we cover, it is more central, divided
between West and East Cairo. Given the prime location of its land, the company mainly targets the high end residential market.
Given the size of its land bank, we believe that this is a sound strategy, despite the limited potential of that segment. Our valuation
for SODIC represents a roughly 50-50% valuation from DCF and land. Our target price for SODIC implies a 30% discount to NAV.
Telecom Sector: We consider the telecom sector as a safe haven in light of the world financial crisis and recent sell-offs.
Consumer telecom spending was not significantly affected by the recent crises. We positively view the strong cash flow generation
ability of Egyptian Telecom companies, particularly TE. The sector presents us a diversified investment story with TE as a play on
yields and Mobinil as a play on growth. Our preferred stock is TE as at such times, investors tend to prefer high yielding stocks.
Telecom Egypt (TP: EGP23.46/share, upside: 40%)
TE offers a diversified business model with exposure to Egypt's fixed and mobile markets. The company has a strong balance sheet
and is a net cash position, at a time where most telecom stocks in the region are in a net debt position. We view TE as a play on
yields, offering dividend and FCF yields of 9.9% and 17.6% for 2009e, unmatched by regional peers. Mobinil deal acts as a positive
trigger for TEs stock given that TE will now offer the only exposure to Egypts lucrative mobile market through its stake in VFE.
The stock is trading at a discount to peers of 18.5% and 29.4% on 2010f PER and EV/EBITDA multiples respectively and we
estimate that TEs stake in VFE is valued by the market at a 38.7% discount to its fair value.
Mobinil (TP: EGP250.04/share, upside: 21%)
We see Mobinil as a play on growth rather than dividends, offering an EPS CAGR of 19% from 2010f-2012f. Mobinil enjoys the
most important two elements of growth: 1) subscriber growth and 2) ability to stimulate usage. Mobinil is the market leader by
subscribers in Egypt's attractive mobile market. And, Given that the market is approaching maturity, we give more weight to usage
as a future revenue driver and Mobinil stands to benefit the most due to having the highest price elasticity of demand for its
services, among local players. Mobinil is an acquisition target and a deal at a price of EGP245/share limits the downside risks to our
valuation. The stock trades at a discount of 11.3% and 18.7% to peers on 2010f PER and EV/EBITDA multiples respectively.
Other:
Macro & Strategy

Egypt
Citadel Capital (TP: EGP14.83; Upside: 55%)
Despite its risky profile, we like Citadel Capital as it trades at a 6% premium to its floor valuation. Recent announcement of a
planned sale of a 6% stake in each of ASEC Holding and United Foundries will enhance the companys cash balance, and assigns a
value to Citadel Capitals largest investment. Share price performance is a concern but we expect volatility to ease and positive
news flow to support the share price.
Eastern Company (TP: EGP150.5; Upside: 27%)
We like Eastern Company for its defensive nature and believe that it is still geared for margin expansion driven by a stronger fee
business as well as expected savings from relocation to a new complex. Other catalysts include new business ventures including an
under-development royalty business and plans to venture into lucrative export markets, as well as a decision on the impending fate
of the company's to-be-evacuated facilities valued at EGP1.2 billion. The stock is currently trading at a 28% discount to its 5-year
historical average P/E and at a 44% discount to peers.
Maridive and Oil Services (TP: USD5.35; Upside: 37%)
We recommend Maridive for its strong earnings visibility. The company has a backlog of USD800 million, around half of which will
be booked in 2010f. The OCS business is set to retain solid numbers with the company expected to receive 2 more pipe-laying
barges by the end of 2010f. Additionally, thesegment already began implementing USD180 million contracts in India as well as the
procurement phase of the USD380 million Aramco Manifa field contract. Despite recent pressures on OSV daily rates, we expect
the segment to continue to deliver solid growth driven by fleet expansion with 9 more vessels to be delivered until 2011f.

Table 1: Stocks under coverage

Stock
NSGB
CIB
SODIC
TMG
Palm Hills
Orascom Development Holding
Telecom Egypt
Mobinil
Citadel Capital
Eastern Company
Maridive and Oil Services
ESRS
EZDK
OCI
GB Auto

Recommendation
Buy
Buy
Buy
Buy
Hold
Hold
Buy
Buy
Buy
Buy
Buy
Hold
Buy
Hold
Hold

Target Price
EGP36.4
EGP: 63.93
EGP105.2
EGP9.1
EGP: 9.5
EGP: 95.0
EGP23.46
EGP250.4
EGP14.83
EGP150.5
USD5.35
EGP17
EGP946
EGP 279
EGP 28.69

Upside
25.4%
20%
27%
40%
32%
18%
40%
21%
55%
27%
37%
6%
28%
9%
20%

Source: HC Brokerage

Macro & Strategy

Egypt

Searching for Growth

The linkages of the Egyptian economy to the developed world represent a risk to domestic growth, given expectations of a
moderate recovery in western developed economies. The Egyptian economy has, however, performed much better than
anticipated. GDP grew by 4.7% in FY 08/09a against our expectation of growth of 4.5%, (see Global Recession, Local Problem,
14 July 2009). Although lower than the 7% growth rate of the previous three years, this remains a positive development if viewed
within the context of the suppressed regional environment. According to preliminary data, growth in Q1 FY09/10a has been
quoted by government officials to be 4.9% (official data has yet to be released at time of publication), and growth for FY 09/10e is
expected to reach 5%.

Chart 1: Regional GDP Growth Comparison

GDP

GDP Growth Rates in %(Constant Prices)

12
10
8
6
%

4
2
0
24682004

2005

2006
Egypt

2007
GCC

2008

2009

Turkey

Source: IMF and HC Brokerage

The governance of the central government to respond quickly to the global financial crisis has enabled Egypt to outperform its
regional peers. The continued willingness of the government to support the domestic economy was clarified in the FY09/10a
budget (announced during Q2 FY 09/10 ) which contains a fiscal stimulus package of EGP8 billion, the third of its kind in two years;
on top of the EGP15 billion implemented in 2008-2009. An additional amount of EGP 10 billion is also likely to be added before end
2010. Although this increased spending comes at a cost (see page 12/13, Public Domestic Debt, and rise in Credit Default Swaps),
this should help to boost economic growth and will continue to focus on infrastructure development. A public private partnership
law is due to be reviewed by the legislature shortly, with the intention of combining public and private investments to improve
infrastructure in portable water, wastewater treatment, transportation, health and education. The construction sector will benefit
directly from the stimulus package, as the government will encourage both private and public investment to support housing
projects in the middle and lower ends of the market.
The strong regional performance of the Egyptian economy, when compared to regional competitors, is testament to its resilience
and the strong domestic demand that exists. However, with regional players expected to compete more aggressively for the share
of global demand and FDI investment, which are much lower than those available in the boom years, we do not believe Egypt is
fully out of the global economic slowdown.

Macro & Strategy

Egypt

Chart 2: GDP Growth Comparison of regional competitors

Egypt stands above its competitors in dealing with the global economic slowdown
12
10
8
6

4
2
0
24682004

2005
Egypt

2006
Turkey

Algeria

2007
Morocco

2008

2009

Tunisia

Source: IMF and HC Brokerage

Macro & Strategy

Egypt

Accounting for Growth

Table 2: Real GDP by Expenditure
2007/2008
GDP by
Expenditure
(Constant
Prices)
GDP at
Market
Prices
Final
Consumption
Household
Consumption
Public
Consumption
Total Capital
Formation

Q1

Q2

2008/2009

Q3

Q4

Q1

Q2

Q3

Q4

6.7

7.6

7.4

7.0

5.7

4.1

4.3

4.5

5.1

5.2

4.0

3.7

3.5

5.1

3.3

8.3

5.7

5.6

4.2

3.9

3.3

5.1

3.2

6.7

1.4

2.0

2.5

2.5

4.5

4.8

4.4

17.3

17.8

16.1

14.6

14.3

1.4

3.4

4.0

-34.4

9.5

3.2

-12.1

-7.5

-71.0

13.8

-12.7

4.1

Net Exports

Source: CBE and HC Brokerage

The quarterly profile of GDP growth for Egypt shows Q2 FY 08/09a as the low point in the cycle, with growth subsequently turning
up. However, national account data must be read with caution, given the time lag in getting accurate data and the subsequent
revisions that often take place, thus the provisional tag given to data as far back as Q1 FY07/08a. In particular, we highlight the
4.3% growth rate achieved in Q3 FY 08/09a. This result is largely due to base effects and the downward revisions to Q3 FY07/08a
data, or more precisely the downward revision to household consumption. If the data had not been revised, the actual recorded
growth rate for Q3 2008/09 would have been 3.8% and not the turn in growth that is otherwise recorded. If household
consumption growth in FY 07/08a had not been revised down, the GDP growth rate in FY08/09 would have been 4.55%.
However, this is a small point on accounting and should not distract investors from the overall growth rate achieved over the last
12-months.
Private Consumption: The quarterly growth rate in consumption has continued to slow, with a low of 3.2% in Q3 FY 08/09 (we
treat the 6.7% growth rate in Q4 FY 08/09a with caution). As we highlighted in our July publication, the rise in unemployment and
loss of spending support through weaker remittances, has curtailed consumers ability to spend. Total remittances for FY08/09a
declined to US$7.8bn (in line with our forecast of US$7.4bn) from US$ 8.6bn in FY07/08a; remittances declined from USD1.9 billion
in Q4 FY08/09a to USD1.8 billion during Q1 FY09/10a. Transfers of workers abroad in Q4 FY08/09a are down 6% QoQ and 32%
YoY. The rise in unemployment to 9.26% in Q3 2009 (check) is slightly lower than our expectation of unemployment to rise to
9.7% but is moving towards the 10% level that we expect to see before unemployment peaks.
Fixed Investment: The rate of capital consumption has dropped precipitously from high double digit levels in FY 07/08a to
negative growth in FY 08/09a. A detailed breakdown of the sector composition of investment is given in table 2 below, along with
the associated growth rates of the economy by economic group.

The importance of (Foreign Direct) Investment

We highlighted back in July 2009 that tourism and Suez Canal activity would be significantly curtailed by the current global
economic crisis. As highlighted in table 2, these sectors have witnessed the most dramatic slowdown in growth, although tourism
is showing some recovery in the latest quarter; we highlighted back in July, holidaymakers would be reluctant to fully cancel their
holiday plans.
Most importantly, manufacturing represents 30% of the Egyptian economy, and thus we would refrain from turning bullish on the
macro economy until we see a recovery in this crucial part of the domestic economy. The slowdown in investment spending in this
segment of the economy is most pronounced, down from EGP 12billion in Q4 FY07/08a to just over EGP 4billion in Q4 FY08/09a.
The associated slowdown in growth is not a surprise. Government support is able to support the domestic economy to a limited
extent but international demand is needed to see a strong recovery in the investment and production of manufactured goods.
There are some positive points to note. Water, Construction and Education and Health services have seen an increase in spending
and associated growth that can be attributed to the government's infrastructure spending program. We viewed the construction
sector as a key beneficiary of the spending program and recommended the buying of equities that were directly or indirectly
Macro & Strategy

Egypt
related to the construction sector. Secondly, the rise in commodity related growth in the Petroleum and Gas sectors can be
attributed to the increase in investment spending that has taken place in this group. This was one area within the private domain,
which we did not feel would see a dramatic change in the level of investment and is benefiting from the liquidity that is flooding
into commodity prices.

Table 3: Investment by Sector and associated GDP growth rates*

Investment

Sectors
Q1

Agriculture,
Extractions :
a) Petroleum
b) Gas
c) Other
Manufacturing
a) Petroleum
b) Others
Electricity
Water
Construction
Transportation
Communication
Suez Canal
Wholesale &
retail
Financial
services
Insurance
Tourism
Total

2007/2008
Q2
Q3

2008/2009
Q2
Q3

Q4

Q1

1697

1796

2738

1842

1585

1735

1627

1741

2041
5957
0

3950
6055
0

2511
2356
0

7907
5775
6

2084
9826
0

1598
9481
3

2105
10899
0

579.8
1381
0

1798
2023
1504
682
734
5132
2185
53

1117
11649
2443
1226
727
4176
3291
71

1548
11989
3112
1824
667
7016
3171
71

2483
9686
3666
3011
1187
8595
4694
210

1333
6041
2074
1573
844
3344
3233
75

1131
10591
3234
2039
948
4245
3722
122

1690
2693
4826
2612
958
8136
4083
87

1033

1034

2043

1166

1022

1278

1722

1836
4335
5245
2606
1090
5672
2808
147
476

142

144

135

242

83

129

122

4
688
33,530

12
1975
50,650

1
2122
51,905

115
517
63,449

0
1222
43,304

0
1452
52,522

0
1829
56,557

Q4

Q1

GDP Growth
2008/2009
Q2
Q3

2.9
10.0
12.0
9.0
1.9
4.4
1.0
4.6
7.4
6.1
9.5
3.5
11.9
18.5

3.1
4.8
4.7
4.9
3.2
3.8
-2.2
4.1
6.1
6.3
9.3
5.4
19.2
2.1

3.2
11.2
11.6
11.1
5.5
3.0
-5.9
3.5
3.2
7.5
16.1
6.8
13.6
-20.1

3.4
6.0
3.5
7.9
5.1
3.9
-16.6
5.1
4.3
7.9
13.9
6.4
14.6
-21.8

-0.7

-1.7

2.4

-0.2

3.6
6.4
16.9
5.7

3.8
4.5
-4.8
4.1

5.4
7.3
-6.9
4.3

5.9
7.6
14.5
4.5

Q4

104
0
708

44,737

Source: Ministry of Economic Development, Ministry of Finance, HC Brokerage

*Total includes sectors other than those listed in table

FDI Key to Economic Recovery

Overall, the Egyptian economy received EGP45 billion of investment in the fourth quarter of FY08/09a at current prices, down from
EGP63 billion a year ago. While FDI levels will continue to be lower than those of previous years, it could be envisaged that in view
of the expected slow recovery in developed economies, international investors will be targeting emerging markets that are
presently leading the global recovery. Should the Egyptian economy continue to grow and implement the reforms that have started
to create a better environment for investment, Egypt will need to reform and compete aggressively for capital flows. Net FDI
decreased to USD8.1 billion in FY 08/09a compared to USD13.2 billion in FY 07/0aa. The government is expecting FDI to reach
USD10 billion in FY09/10e, we feel this number is too optimistic, given the excess capacity that exits in the domestic economy and
lower levels of capital expected to be spent by corporations.
FDI investment by contributor is detailed in table 3. Net FDI flows in Q3 FY08/09a are down 50% QoQ and 65% YoY. In Q4
FY08/09, net FDI flows increased MoM and YoY, to reach USD2.8 billion. However this rise was directed towards the energy sector
which has little spill-over effects on the broader economy. Countries that have experienced a severe recession, most notably the
US, historically a significant contributor of capital to the Egyptian economy, has seen its flows drop by 42% YoY. The GCC, which
many thought would hold up relatively well during the global slowdown, has focused efforts on domestic growth. As such, flows
from the GCC have plummeted by 36% YoY. Moreover, GCC FDI declined to reach USD252 million in Q4 2008/2009, compared to
USD859 million in Q4 FY07/08a. Recent developments in Dubai may have further restrictions on capital flows out of GCC
economies. Given the slow recovery projected for the US, Europe and the GCC, we do not expect FDI levels to bounce back to
pre-crisis levels quickly and as such believe that the government's target of USD 10 billion is too optimistic.

Macro & Strategy

Egypt

Table 4: FDI by Destination (2008/2009)

USD million
Net Foreign Direct
Investment
Inflows
USA
EU
Germany
France
UK
Arab Countries
GCC
Saudi Arabia
UAE
Kuwait
Qatar
Bahrain
Oman
Non GCC
Other Countries
Outflows

Q1

Q2

Q3

Q4

FY08/09 Total

1655
2943.1
1306.2
1036
40.6
43.5
400.1
326.1
294.9
168
61.9
54.8
2.8
5.8
1.6
31.2
274.8
-1288.1

2372.6
2832.5
664.4
1468.4
32.2
106.2
854.3
415.1
362.8
170.6
151.1
8.4
31.4
0.5
0.8
52.3
284.6
-459.9

1211.3
2968.8
826.2
991.7
8.3
46.2
483.7
961.5
844.4
65
739.7
24.8
0.1
6.3
8.5
117.1
189.2
-1757.5

2874.5
4091.7
718
2082.3
21.5
58.4
1493.7
327
252
110.5
84.7
30
18.7
7.9
0.2
75
964.4
-1217.2

8113.4
12836.1
3514.8
5578.4
102.6
254.3
3231.8
2029.7
1754.1
514.1
1037.4
118.0
53.0
20.5
11.1
275.6
1713.0
-4722.7

CBE and HC Brokerage

Table 5: FDI by Destination (2007/2008) (cont'd)

USD Million
Net Foreign Direct
Investment
Inflows
USA
EU
Germany
France
UK
Arab Countries
GCC
Saudi Arabia
UAE
Kuwait
Qatar
Bahrain
Oman
Non GCC
Other Countries
Outflows

Q1
2969.1
3659.8
1633.9
1114.8
53.7
86.2
949.4
125.1
117.9
36.5
63.3
13.8
1.3
2.7
0.3
7.2
786
-690.7

Q2
4800.4
5572.5
2066.7
1351.9
127
225.2
887.8
1287.9
1182.4
37.6
107
1034.7
0.5
2.6
0
105.5
866
-772.1

Q3
3482.2
5282.7
1418.3
2011.2
4.6
808.8
948.3
660.2
588.1
42.4
413.2
104.6
3.1
24.5
0.3
72.1
1193
-1800.5

Q4
1984.8
3287.2
1316
636.2
12
129.7
255.6
985.8
859.5
101.2
134.6
434.7
179.8
4.9
4.3
126.3
349.2
-1302.4

FY 07/08*
13236.5
17802.2
6434.9
5114.1
197.3
1249.9
3041.1
3059
2747.9
217.7
718.1
1587.8
184.7
34.7
4.9
311.1
1215.5
-4565.7

CBE and HC Brokerage

The majority of foreign money has been flowing into the energy sector; this is unlikely to change given the governments recent
announcement of new energy exploration contracts with a number of foreign oil companies. Egypt signed six agreements to
explore oil and natural gas with Egypts Tharwa, British Petroleum and IEOC (a unit of Italys Eni SpA) with a total investment cost
of USD2.3 billion. The key issue is the direction of funds to the broader economy.
A most pronounced change in activity is centered on manufacturing, a key growth driver of the Egyptian economy. With a broad
brush, we can hypothesize that the dramatic slowdown in FDI and the lack of capital is impacting the manufacturing sector through
limited capital to facilitate expansionary activity. Although FDI flows were only USD 8.1 billion in FY 08/09a, (which accounts for
approximately 8% of total capital invested), they are directed to the largest segment of the economy and as such have significant
implications for employment.

Macro & Strategy

Egypt

Table 6: FDI by Sector Allocation

2007/2008
Total FDI Inflow in
Egypt
Manufacturing
Agriculture
Construction
Financing
Services
Tourism
Communications and IT
Real estate
Petroleum
Unclassified

Share (%)
14515
1325.9
57.8
304.7
1686.2
642.2
93
14.7
77
6640.4
3673.1

2008/2009
100
9.13
0.39
2.09
11.61
4.42
0.64
0.10
0.53
45.75
25.31

Share(%)
8744.4
752.7
73.8
174.3
352
242.2
105
723.2
112.1
5927
282.1

100
8.61
0.84
1.99
4.025
2.77
1.20
8.27
1.28
67.78
3.22

Source: CBE and HC Brokerage

*Preliminary data and vary from actual figures

The loss of certain growth drivers in the Egyptian economy in FY 08/09a and increased government spending has led to a number
of key developments in the employment demographics of the Egyptian economy
Table 5 looks at the sector composition of employment within the Egyptian economy. The Central Agency for Public Mobilization
and Statistics (CAPMAS) supply a breakdown of the percentage of labour force employed within each sector. By looking at the
total level of employment within Egypt, we are able to back-out the employment levels at the sector level. However, such data
must be treated with caution when the proportion of employment is extremely low, as the data provided is only to one decimal
place and changes in this rate can cause large changes in the level of employment.
Employment peaked in Q4 2007, with the unemployment rate trough taking place some two quarters later at 8.4%. The largest
employer of labour is the agricultural sector (32.2%), followed by Manufacturing (11.1%). Employment in the Building &
Construction and Electricity , Gas and Water sectors have benefited from government investment in these sectors but are likely to
suffer as the fiscal spending program initiated by the government abates. Also, government employees in Public Administration
and Defense and Education are likely to be held constant as governments continue to freeze hiring to control spending costs.
Looking at Manufacturing, employment has dropped from 2.85 million in Q1 2008 to 2.763 million in Q2 2009. This drop in
employment is consistent with the fall in FDI flows over this period of time, as highlighted above. Similarly the Wholesale and
retail trade sector (which employs 10.4% of the workforce) has seen its numbers drop from almost 2.7 million in Q4 2007 to
around 2.6 million in Q2 2009. Note the manufacturing sector, as we have discussed before, is a key contributor to economic
growth and contributed to substantial portion of the 4.7% economic growth achieved in FY 08/09a. We have talked at length
about the importance of FDI and the influence this has on economic growth and believe the slowdown in growth and employment
within Manufacturing, highlights this point. The Wholesale and retail trade sector has not been a beneficiary of FDI, and relies on
domestic finance. However, this is hard to come by, despite banks being cash rich, as SMEs are refused loans by banks and rely
on government sources for funding.

Macro & Strategy

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Egypt

Table 7: Employment by Sector

000s
Agriculture &
Fishing
Mining &
Quarrying
Manufacuring
Electricity, Gas &
Water
Building &
Construction
Wholesale &
Retail Trade
Transport, Storage
& Communication
Food Services &
Accomodation
Brokerage &
Insurance
Real Estate &
Renting Business
Activities
Public Admin &
Defense
Education
Health & Social
Work
Other Service
Activities
Private Household
with Employed
Person
Extra territorial
Organizations &
Bodies
Unknown Activities
Total Employment
Unemployment
Rate (%)

Q3 2007
7890

Q4 2007
8316

Q1 2008
8121

Q2 2008
8167

Q3 2008
8413

Q4 2008
8178

Q1 2009
8199

Q2 2009
8017

(%)
32.2

25

25

25

50

25

50

25

50

0.2

2671
343

2840
330

2847
297

2674
350

2771
297

2651
325

2577
295

2763
324

11.1
11.1

2450

2282

2476

2473

2499

2601

2577

2589

10.4

2499

2688

2526

2597

2524

2626

2504

2589

10.4

1568

1623

1585

1698

1732

1726

1767

2041

8.2

392

456

495

500

520

475

417

199

0.8

221

203

173

200

148

175

221

199

0.8

539

456

470

500

445

425

393

398

1.6

2279

2257

2105

2098

1979

2101

2062

2191

8.8

2352
613

2485
659

2327
644

2348
649

2078
594

2226
650

2185
614

2191
573

8.8
2.3

613

659

569

599

643

700

614

622

2.5

49

51

50

50

74

75

49

50

0.2

25
24504
8.9

51
2535
9.1

25
24760
9.0

25
24975
8.4

25
24743
8.6

25
25008
8.84

25
24547
9.3

25
24896
9.42

0.1

CAPMAS and HC Brokerage

*Unemployment rate for Q3 is 9.26%

Macro & Equity

11

Egypt

Egyptian exports face weak demand

Chart 3: Current Account Balance Falls
Yearly Current Account Balance (USDbn)
30

2008/2009 Quarterly Current Account Balance (USDbn)

8.0
6.0

20

4.0
10

2.0
0.0

2.010-

4.0-

20-

6.08.0-

30-

10.01Q

Trade Balance

(Services (net

Transfers

Current Account Balance

2Q

3Q

4Q

Trade Balance
(Services (net
Transfers
Current Account Balance

CBE and HC Brokerage

Egypts main export markets are Europe and the US (which account for circa 70% of demand), therefore export growth and
important FX revenues from exports will remain under pressure due to expectations of a slow economic recovery in these markets.
New Data shows that the current account deficit increased to USD1.5 billion during FY 08/09a, compared to USD1 billion during the
same period last year. The trade balance for Q4 FY08/09 reached USD5.6 billion compared to USD5.5billion in Q4 FY07/08.
However the balance for Q1 FY09/10a reached a deficit of USD7.2 billion, compared to USD7 billion during the same period last
year, as a result of a 34% decline in exports which have reached USD5.4 billion. During the same period, imports declined 16.7%
to reach USD 12.6 billion.
Emerging markets, particularly developing Asian economies, are leading the economic recovery and unless Egypt is able to tap into
these markets, we do not see the trade balance improving in FY09/10a. Moreover, based on the slow recovery projected for
Europe and the US, the manufacturing sector in Egypt will continue to be suppressed. However, with growth returning to these
markets, as detailed by reported Q3 GDP figures, how quickly and by how much can we expect Egyptian exports to recover? The
answer lies with the consumer. Figure 4 looks at the monthly evolution of Egyptian exports and compares this to a weighted index
of US and Eurozone retail sales.

Macro & Strategy

12

Egypt

Chart 4: Egyptian Exports and US and Eurozone Retail Sales Index

Strong Correlation between Egyptian Exports and Retail Sales Index
125

18000
16000

120

Index

12000
10000

110

8000

105

6000

EGP Million

14000

115

4000

100

2000

95

(Egyptian Exports (RHS

Retail Sales Index

CBE and HC Brokerage

Examining the country profile of the main destination of exports, Germany, France and Italy are among the top ten countries for
international sales; the UK does not register in the top 10 based on 2009 monthly data. As such, we feel monthly Euro zone retail
sales are a good proxy for European demand. To understand the demand profile for Egyptian exports, we have taken the monthly
US retail sales index, ex autos, and the Euro zone monthly retails sales index and created a joint index, weighted by the proportion
of exports from Egypt to the Euro zone (60%) and the US (40%). The correlation between the two is extremely high, 0.83, given
the density of exports to these two regions. However, if one were to lead retail sales to exports by 9 months, the correlation
increases to 0.91. A time lag of 2-3 quarters is reasonable to expect, given the length of time for orders to be placed and changes
in consumer activity to feed through to the producers in Egypt etc.
That said, the pronounced drop in retail activity in the US and Eurozone are likely to hold back exports from Egypt until consumer
demand in these markets recover. Current data shows the consumer is reluctant to spend. Peak levels of export activity seen in
2008, captured by the Egyptian FY 07/08a, will not be seen until the unemployment rate in the US and Euro zone return back to
the lows of 2007. With economic growth expected to be slow in these two important regions until 2011, another key driver of
Egyptian growth could be put on hold.

Tourism more resilient than expected

Chart 5: Tourism Revenues
Slow Recovery for Tourism Receipts
3400

USD Million

3200
3000
2800
2600
2400
2200
2000
1Q
07/08

2Q
07/08

3Q
07/08

4Q
07/08

1Q
08/09

2Q
08/09

3Q
08/09

4Q
08/09

Tourism Revenues

CBE and HC Brokerage

Macro & Strategy

13

Egypt

Tourism revenues in FY08/09a declined by USD0.3 billion to reach USD10.5 billion compared to USD10.8 billion last year. This
decline is much lower than what we had expected given the large share of arrivals from Europe, where the economy has been hit
hard by the global recession. However, as we highlighted in the July 2009 Egypt note "Global Recession, Local problem", survey
evidence from tour operators suggested that people were reluctant to fully cancel their holiday plans, preferring to delay their
holiday. This, along with the government's initiative to reduce landing fees, helped slow the decline in tourism revenues. We
expect that tourism arrivals and revenues should pick up in 2010 in line with the recoveries of world economies and concern
surrounding swine flu dissipate.

Remittances fall in-line with our expectations

Total Remittances for FY08/09a came in at USD7.8bn (versus HC expectations of USD 7.4bn). In Q1 of FY 09/10a, remittances
declined by almost 5% to reach USD1.8 billion, compared to USD1.9 billion during the same period last year. This is in line with our
expectations as the rise in unemployment in key markets, as foreign companies abroad shed workers, especially foreign workers,
reduces the transfer of much needed funds to families living in Egypt.
The key market for remittances is the US, which accounts for 30% of total transfers to Egypt. The rise in unemployment in the US
to 10%, based on the December unemployment report, presents a significant hurdle to capital transfers going forward. Even if the
US has turned the corner with regards to its economic recession, the risk of a jobless recovery could curtail transfers of capital to
Egyptian households for some time.

Chart 6: Remittances from the US and US Unemployment Rate

Inverse Relationship between US Unemployment Rate and Remittances from The US.

USD Billion

%
3

2.5

1.5

0.5

10

12
2003

2004

2005

.Remittances from US

2006

2007

2008

2009

2010

United States Unemployment Rate

Source: CBE, Datastream and HC Brokerage

Global economic recovery leads to recovery in Suez Canal toll revenues

Suez Canal tolls declined to reach a low of USD301 million in February 2009, the lowest monthly figure since April 2006. Year on
year changes in revenues showed a decline from USD5.1 billion during FY 07/08a to USD4.7 billion in FY 08/09a (in line with HC
expectations of USD4.8bn).

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14

Egypt

Chart 7: Suez Canal Revenues and Number of Vessels

2,500

Tolls (USD Million)

500

2,000

400
1,500
300
1,000
200

Number of Vessels

600

500

100
0

Tolls USD Millions

Number of Vessels

Suez Canal Authority and HC Brokerage

However, revenues have witnessed a slow but steady month on month increase since February 2009, with tolls reaching USD365
million during the month of November 2009. We expect this trend to continue through the first half of 2010 against the assumption
of a slow global economic recovery. We use the Baltic Dry Index as a proxy for global trade and the YoY rate of growth of activity
provides a good guide as to future projections of Suez Canal revenues.

Chart 8: Baltic Dry Index (BDI) a Good Measure for Projecting Suez Canal Revenue
500

50

400

40
30

300

20
200
10
100
0
0

10

100

20

200

30

01Mar 02Mar 03Mar 04Mar 05Mar 06Mar 07Mar 08Mar 09Mar

BDI y/y

(Tolls y/y (RHS

Suez Canal Authority, Datastream, HC Brokerage

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15

Egypt

Chart 9: Suez Canal Revenue Forecast

Suez Canal Revenues to Show Slow Recovery
1350

USD 1000 million

1300
1250
1200
1150
1100
1050
1 09/10Q 2 09/10Q 3 09/10Q 4 09/10Q 1 10/11Q 2 10/11Q 3 10/11Q 4 10/11Q
Suez Canal Tolls
Source: HC Brokerage

Banking on strong Governance

We are positive on the banking sector in Egypt. Strong governance has led to a conservative lending policy and low levels of bad
debts. Consequently, the sector was not affected by the global credit crunch. In addition, the Egyptian banking sector has strong
fundamentals, lower utilization rates, an underpenetrated retail market, a strong funding base and less integration within the global
banking system which should safeguard it from any external shocks, most recently the Dubai Debt Crisis. The sector's biggest
challenge, non-performing loans have been brought down to 16% from 26%, mainly coming from the public entities. As of July
2009, CIB and NSGB, given that their clientele base is comprised of dominant Egyptian blue chips and corporates, had an average
NPL/Gross loan ratio of 5%. Loan/Deposit ratio is only 52.3% as of September 2009, compared to a regional average of almost
80%. Most of the loans are granted to government related entities and therefore the retail and private sector have yet to be
penetrated. The mortgage sector is underdeveloped- and has virtually only begun in 2007.

Table 8: Egypt Banking Sector Relative to Peers

Egypt
Bahrain
Jordan
Kuwait
Oman
Qatar
Saudi Arabia
Turkey
UAE

Loan to Deposit
ratio (%)
52.3
57

Private Sector
credit/GDP (%)
34
60

90
100
96
85
74
100

63
37
47
40
30
73

Per capita
Deposits (USD)
1,645

16
5

Retail/Total
Loans(%)
20
39

7,875

NPL/Gross Loan
(%)
16
5
4
3
7
1
2

29
9
16
47

33
30
29
18

40,000

61

24

3,111
23,417
5,199

Retail Loans

Source: IMF, Bloomberg, CBE, Fitch, Reuters , HC Brokerage

Public Domestic Debt

The stock of public domestic debt the government has accumulated is not negligible and has seen government credit default swaps
move up (see page 22). Total public debt is estimated to be LE831 billion (79% of GDP), up from LE748 billion (86.5% of GDP)
the previous year. This highlights a significant risk given the upcoming parliamentary and presidential elections in 2010 and 2011
respectively. The government is aware of the social development priorities needed to ensure public rest and support. As a result,
its spending is likely to be based on a balance between its economic reform programs and its social development objectives.
Regardless, it will resort to borrowing additional funds to finance its spending. Due to the government's unwillingness to borrow
Macro & Strategy

16

Egypt
from international markets, most of the borrowing will be financed domestically and any risk of default or funding is unwarranted in
our view.
For revenue generation, the government may resort to the resumption of a program of reduction of subsidies on energy prices.
Measures to increase tax compliance are being introduced and the new property tax law will be implemented as of January 2010.
This may help in offsetting lower tax revenues resulting from lower economic activity. We expect the Egyptian government will
allow debt to grow in 2010 and will reduce spending and raise taxes in 2011; unless the private sector picks up momentum in
2011, we expect the Egyptian economy to be negatively impacted going forward.

Chart 10: Debt to GDP

120
100
80
60
40
20
0
2003/04

2004/05

2005/06

2006/07

Gross Domestic Public Debt

2007/08

2008/09

Gross External Debt

(%)
Source: Ministry of Finance, HC Brokerage

Inflation presents a significant risk to the domestic economy

The Central Bank of Egypt (CBE) is on a dedicated course to increase transparency and communication with the public and is in the
process of adopting an inflation targeting framework. The CBE has recently introduced and published a new core inflation index.
The CBE held a conference with members of the Media on 25 October 2009, with the aim of the timely communication of the core
inflation measure, intended to enhance the general understanding of inflation dynamics, so as to improve the public's expectations
of future inflation, a key driver (factor) of inflation. This would reduce the pass-through effects of temporary price shocks to
inflation expectations and thus minimize inflation volatility. The CBE also aims at communicating with the public by publishing
quarterly inflation reports, news, and press releases, available on their website. These actions by the CBE should be viewed as
important steps towards implementing its inflation targeting policy. The CBE does not disclose its inflation target comfort zone, nor
an expected time frame for reaching this target. It is estimated that the target rate is in the range of 6% to 8%, as highlighted by
the red/horizontal lines in chart 11.

Macro & Strategy

17

Egypt

Chart 11: Headline and Core Inflation Forecast

25
Red Lines: CBE Comfort
Zone (6%-8%)

20

15

10

Headline Inflation

Core Inflation

HC forecastHeadline Inflation

*Dotted Lines: HC
forecasts
Core Inflation

CBE and HC Brokerage

Inflation in Egypt has declined significantly in 2009, allowing the CBE to implement a series of interest rate cuts between February
and August 2009 to support economic growth. Inflation reached a low of 9% in August 2009, from a high of 23.7% in August
2008. This drop in inflation is attributed to the lagged effects of tight monetary policy, lower commodity prices and slower
domestic and global economic activity. Headline inflation however, has risen sharply with readings in both October and November
2009 exceeding 13%. The CBE attributes this rise to higher fruit and vegetable prices (which are extremely volatile). As a result,
the gap between headline and core inflation has been widening. Core inflation (which excludes fruits and vegetables) has risen
from 6.3% in September 2009 to 6.5% in October 2009 (November core inflation have not been released at the date of
publication).
The CBEs monetary policy committee left interest rates unchanged at its meeting on November 5th and although we expect the
CBE to leave rates unchanged at its meeting on 24th December, the loosening cycle has ended and the language from the CBE is
one of rate tightening to come soon. The tone of the CBE has shifted away from one of stimulating growth and viewing inflation as
a secondary concern, current CBE projections point to a further softening of domestic GDP growth (July 30th, 2009 press release),
to warning "while underlying inflation is expected to remain within the CBE's comfort zone in the period ahead, annual headline
inflation is likely to inch up over the coming months"(September 17th press release). Thus, we could see interest rates hike sooner
rather than later, especially if the Fed begins to raise its rates with growing signs of a sustained recovery in the US economy (see
below for more detail).
We expect the CBE to begin raising interest rates sooner rather than later for several reasons. The Egyptian government could
resume the program of reducing energy subsidies in 2010 (a program which was put on hold during the period of increasing
inflation). Also, as a result of base effects of higher energy prices in 2010, we can expect the rate of inflation to remain high and
the CBE could start raising interest rates again, should this be dictated by higher commodity prices in world markets as the global
economic recovery picks up momentum.

Macro & Strategy

18

Egypt

Table 9: Contribution to Annual Inflation by Component

May 09

June 09

July 09

August 09

September 09

October 09

12.5

12.2

13.4

13.4

17.4

22.2

7.9

7.9

7.9

7.9

0.0

0.0

13.4

13.4

13.4

3.4

3.4

3.1

November 09
22.1

Food & Beverages

Tobacco

0.0

Clothing & Footwear

3.7

Housing,Water,Elec.

1.7

,Gas,Fuel
4.2

4.2

3.1

2.5

2.5

2.0

Furniture

3.8

& Equipments
13.1

13.1

10.9

4.8

4.8

4.1

4.6

4.6

4.6

4.9

4.9

4.9

4.1

4.1

2.8

2.8

2.8

2.0

5.2

5.2

-0.1

-0.1

-0.1

-0.1

Health

4.8

Transport

1.9

Communication

-0.1

Recreation

5.8

& Culture
Education
Hotels,Cafes

19.7
4.7

14.9
4.7

6.6
4.7

5.7
4.7

1.0
4.7

5.7
9.4

12.7
8.2
10.2

12.7
8.3
9.9

16.3
8.2
9.9

16.4
9.6
9.0

16.4
10.2
10.7

10.5
24.4
13.2

9.4
10.5

Restaurants
Miscellaneous
Index

24.8
13.2

Source: CBE, Bloomberg and HC Brokerage

EGP has benefited from the USD carry trade

The interest rate differential between the Egyptian pound and the US dollar and the better than expected performance of the
Egyptian economy during the crisis has resulted in the appreciation of the Egyptian Pound. The main driving forces behind the
appreciation the Egyptian pound centre around the weakness of the US dollar and the carry trade; where investors sell the US
dollar short and invest in higher yielding foreign currencies. The subsequent capital inflows and increased demand for the Egyptian
pound have resulted in a 2.65% appreciation in the EGP relative to the dollar since March 2009.

Macro & Strategy

19

Egypt

5.70

29.0

5.60

30.0
31.0

5.50

32.0
5.40
33.0
5.30

34.0

5.20

35.0

5.10

36.0

Exchange Rates

Foreign Exchage Reserves

Exchange Rate

Chart 12: EGP vs US dollar and Foreign Exchange Reserves

Foreign Exchange Reserves

Source: CBE, HC Brokerage

As a consequence of this trade, foreign exchange reserves of the CBE have remained broadly stable. Foreign reserves increased to
USD34.11 billion in November 2009, compared to their low of USD31.18 in April 2009. A significant risk in 2010, is the reversal of
the US dollar carry trade. Although the US Federal Reserve has made it clear that they will not reverse ultra loose monetary policy
any time soon, for fear of making the same mistakes that plagued the US economy following the 1930 recession, as the US
government raised rates too quickly, and in Japan in the 1980s, the recovery in the domestic economy and the risk of asset
bubbles forming will force the hand of the US Fed. However, we do not expect the US fed to move rates higher in H1 2010 but
wait until H2 2010. The market will start to price in the risk of the reversal of the USD carry trade and we could see a depreciation
in the Egyptian pound. This will result in upward inflationary pressures, which will force the CBE to spend some of its FX reserves
to manage a controlled depreciation of the currency. The US Dollar index has recovered some 3% since its end November 2009
and could signal some decline in risk appetite and reversal of the US dollar carry trade.

Macro & Strategy

20

Egypt

Equity Outlook and Strategy: A strategic Shift to Safer Sands

Despite the Egyptian equity market initially plummeting by 8%, as measured by the EGX 30, on the first day of trading after
Dubais surprise announcement of a request for a standstill on Dubai Worlds debt on 25th of November, the Egyptian Stock
Exchange quickly rebounded. Investors views on Middle Eastern markets were negatively impacted by the Dubai government's
actions and fears of regional contagion influenced a snap reaction. As investors consider the implications of Dubais move, we
encourage investors to differentiate between highrisk and low-risk countries, and highlight a number of safe companies. With the
EXG 30 currently trading at our end of year target of 6250 (current level of EGX 30 on 10th December 6200) we reverse our
underweight position which we have been communicating to investors since the end of September 2009, and place a strategic
overweight recommendation on the market.
With investors currently digesting the fallout of the risk of the Dubai Debt situation, we highlight a number of key factors that
investors should focus on, demonstrating why the Egyptian equity market will outperform its GCC peers over the interim:
VI)
VII)

VIII)
IX)

X)

Banking sector: Strong domestic banking sector with clear ability for large corporations to refinance and access
capital should alleviate any default risk.
Government support: Willingness of the government to support the domestic economy through continued
infrastructure spending, as well as the government's clear position within the corporate sector ,which removes the
risk of moral hazard.
Leverage: The Egyptian equity market is significantly underleveraged compared to GCC peers.
Defensive: Local investors, particularly retail, play a large part in the Egyptian equity market, limiting the effect of a
flight of capital by foreign investors. It is also more mature than its fledgling neighbors, with clearly defined
corporate governance and regulatory framework.
Value: Current valuations within the Egyptian equity market are not expensive.

I. Banking Sector
The CBE announced on the 2nd of December that the total exposure of banks in Egypt to Dubai World is minimal (under USD100
million), and that the Dubai World loans were fully provisioned by the Egyptian banks involved. With uncertainty surrounding the
extent of exposure of regional banks to Dubai Debt, the limited exposure of Egyptian banks and strong governance to restrict
excessive lending should ensure their outperformance relative to regional peers.

Table 10: Egypt Banking Sector Relative to Peers

Egypt
Bahrain
Jordan
Kuwait
Oman
Qatar
Saudi Arabia
Turkey
UAE

Loan to Deposit
ratio (%)
54
57

Private Sector
credit/GDP (%)
34
60

90
100
96
85
74
100

63
37
47
40
30
73

Per capita
Deposits (USD)
1,645

Retail Loans

7,875

NPL/Gross Loan
(%)
17
5
4
3
7
1
2

40,000

3,111
23,417
5,199

16
5

Retail/Total
Loans(%)
20
39

29
9
16
47

33
30
29
18

61

24

Source: IMF, Bloomberg, CBE, Fitch, Reuters and HC Brokerage

Egyptian banks have limited their lending to large corporations (approximately 72% of lending portfolio). Although this sector is
not immune from the negative effects of the global economic slowdown, the ability of these organizations to restructure, expand
into the broader North African region, and to capitalize on a robust domestic economy should enable them to maintain profitability.
The real estate dynamics within the Egyptian economy is another positive factor, lending support not only to banks and developers
but also to the broader markets through reduced financial contagion. With supply and demand dynamics in the real estate sector
causing much uncertainty in some GCC markets, as an unknown funding gap to developers impacts bond and equity holders, we
do not see these risks within the Egyptian real estate sector:

The housing market is relatively safe compared to other GCC markets in view of its cash rich nature, due to the late
introduction of mortgage financing in Egypt.
Mortgages are difficult to obtain and as a result there is little risk of mortgages defaults.
Banks face an under-penetrated market, limiting the risk of products being removed from the market and causing funding

Macro & Strategy

21

Egypt

issues to buyers.
There is excess demand for housing units within inner cities, supported by an expanding middle class and urban
migration, which results in little risk of prices moving downwards.
Affordability remains an issue but structural and regulatory reform could help alleviate such concerns going forward.

II. Government Support

Although Egypt has the highest Debt to GDP ratio within the region, it is important to understand and differentiate the funding
source. Egypt has historically run a high debt to GDP ratio. Rather than seek funding from external parties, it has relied on
domestic banks to buy its bonds. With the financial crisis in Dubai likely to raise the risk premium in the MENA region as a whole,
the cost of international capital going forward is likely to rise, with detrimental consequence for those countries that rely on foreign
capital.

Table 11: 2008 (estimates) Debt/GDP Ratios

Country
Egypt
Morocco
Kuwait
Saudi Arabia
Turkey
Qatar
United Arab Emirates
Oman
*2008 Figure

Net Public Debt/GDP (%)

79%
55.6%
8.2%
18.9%
40.0%*
5.1%
40.74%
2.9%

Source: CIA World Factbook, Datastream, Bloomberg, HC Brokerage

In our note, Dubai Debt Default Overstated (1st December 2009), we highlighted the problem of Moral Hazard within the GCC
market. Due to complex ownership structures in the GCC region, people incorrectly assumed there was a blanket guarantee of
financial support from the government to Government Related Entities (GREs). With such a misunderstanding, corporate entities
were able to borrow excessively and maintain high credit ratings. Recent announcements from the Dubai government have tried
to remove this moral hazard and place the emphasis on corporations to work with creditors for a satisfactory resolution to the
situation. With limited involvement by the Egyptian government in corporate Egypt there has not been the excessive build up in
debt by corporations. As such, CDS spreads on government debt in Egypt have come back in from the highs on 30 November, and
should continue to contract; this is a positive for the equity market (see chart 14), as investors differentiate between high and low
risk countries

Chart 13: Egypt, GCC and Dubai Credit Default Swaps

GCC and Middle Eastern CDS
250
245
240
235
230
225
220
215
210
205
200

180
160
140
120
100
80
60

700
650
600
550
bps

200

Dubai CDS

500
450
400
350
300
250

(Qatar (LHS

(KSA (LHS

(Abu Dhabi (LHS

(Egypt (RHS

Source: (Chart Note Light )

The relationship between the Egyptian Credit Default Swaps (CDS) and the EGX 30 is extremely close (correlation coefficient = 0.90). The credit market was correctly pricing in the removal of financial risk at the start of 2009 and as a result the equity market
Macro & Strategy

22

Egypt
rallied. Credit spreads started to tighten in mid January but the equity market did not start to rally until early February. The credit
market has also tended to move before the equity market on the down side, as seen by the expansion of credit spreads in May
2009 from 300bps to 400bps in June and again in September from 200 to 250 in October, highlighted in figure 14. On both
occasions the equity market reacted negatively to the increased risk being priced into the domestic market, moving markedly lower
but with a lag of about a month.

Chart 14: Egypt CDS and EGX 30 performance

7,500

7,000

100

6,500

200

6,000

300

5,500

400

5,000

500

4,500
4,000

600

3,500

700

3,000

800

30EGX

(CDS (RHS, inverted

Source: Bloomberg

If we are correct in anticipating a contraction for CDS in Egypt, as a result of the low risk nature of the market due to its stable
funding base and historical presence to run a high debt to GDP ratio, the narrowing in spreads should herald a rally in the equity
market.

III. Leverage
The Debt to Equity ratio of corporate Egypt is much lower than in other markets in the GCC region. In a time when cash is king,
we take a look at the Net Debt of listed equities as of the end of December 2008, and measure this relative to the market value of
outstanding equities. Although the reported figures are dated and we do not follow the text book formula for calculating leverage,
our aim is to simply show the under-leveraged status of the Egyptian equity market and we do not view there to be a credit risk
within the region.

Table 12: Net Debt to Equity FY2008

Egypt
Bahrain
Kuwait
Oman
Qatar
KSA
Abu Dhabi
Dubai

Equity on Current Price

-5.5%
78.1%
51.8%
-0.6%
8.1%
18.2%
27.6%
62.3%

Equity on 2008 Average

-3.8%
42.6%
27.5%
-0.5%
6.3%
14.2%
17.8%
26.6%

Source: Bloomberg

After examining the prudent nature of banks within the Egyptian market, the conservative nature of corporate Egypt to not gear
balance sheets, along with the lack of government involvement that would have allowed corporations to build-up excessive levels
of debt, we do not believe there to be a credit risk within the region.

Macro & Strategy

23

Egypt

IV. Defensive
The Egyptian equity market, as measured by the EGX 30, was at 12,000 in May 2008, then fell 70 per cent in just under a year.
The rise in the market since the low has been a staggering 100%. Before preaching market booms and busts, we would highlight
the sophisticated and strong retail base of investors in Egypt.
The Egyptian equity market remains predominately domestic;
75% of activity is local, with retail representing 60% and
institutional investors representing 40%. Foreigners represent about 25% of the market, with non GCC foreigners accounting for
15-20% and Arabs representing 5-10% of the market. Foreigners have been net buyers of the since the outbreak of the Dubai
Debt Crisis on 25th November. If domestic investors in Egypt are more aware of the macroeconomic conditions facing the country
and region, their reaction to recent events in Dubai , combined with foriengers turning net buyers of the market, could highlight
the defensive characteristics of the equity market.

Table 13: Market Reactions to the Dubai Announcement

Egypt (EGX 30)
11/25/2009
11/26/2009
11/30/2009
12/01/2009
12/02/2009
12/03/2009
12/05/2009
12/06/2009
12/07/2009
12/08/2009
12/09/2009
12/10/2009
Absolute
Performance
Since
25/11/09

Dubai (DFM)

Abu Dhabi (ASI)

6376

2093

2910

5868
6068
6240
6384
6379

1940
1831

2668
2573

1853

2673

6323
6365
6133
6193

1745
1638
1533
1641

2627
2539
2467
2502

-2.8%

-22%

-14%

Saudi Arabia(
TASI)
6356

Oman (MSI)
6386
6357

Qatar (DSM)
7193

6598
6949
7034
6288
6309
6247
6103
5954

-6%

Kuwait
(KSE)
6933

6282
6302
6215
5968
5976

7057
7132
6984
6845
6927

6745
6650
6698
6732
6679
6765
6743
6758
6819

-6.4%

-3.6%

-1.6%

Source: Reuters

In addition, we highlight the maturity of the Egyptian equity market, which is a lot more developed than some of its fledgling
neighbors and should provide further protection to investors. Having experienced two crashes in the last decade, market
participants are well versed in the volatility of the market and have become more sophisticated in being able to identity and invest
in sound companies for the long term. However, the key point to stress and that which distinguishes the Egyptian equity market
from other regional peers is that of the well defined property rights of investors. With well established corporate governance and
corporate disclosure and minimal involvement by the government in terms of equity ownership, investors are provided greater
certainty that their rights are best served by management.

Macro & Strategy

24

Egypt

Chart 15: EGX 30 Volatility

14000
12000
10000
8000
6000
4000
2000
0
1/2/2003

1/2/2004

1/2/2005

1/2/2006

1/2/2007

1/2/2008

1/2/2009

30EGX
Source: Reuters

V. Value
Chart 16: Egyptian Market PE and DY
Egyptian Market PE

Egyptian Market DY

80
14

70

12

60

10
50

40

30

20

10

0
Jan 00Jan 01Jan 02Jan 03Jan 04Jan 05Jan 06Jan 07Jan 08Jan 09
1/31/2009

1/31/2008

1/31/2007

1/31/2006

1/31/2005

1/31/2004

1/31/2003

1/31/2002

1/31/2001

1/31/2000

1/31/1999

1/31/1998

Egypt

UAE

Source: Datastream, S&P and HC Brokerage

On a valuation basis, as measured by the trailing PE multiple, the Egyptian equity market has moved up from extremely cheap
levels at the start of 2009, when the market was trading at just three times historic earnings. Currently, the PE multiple and the
cyclically adjusted PE for the market are trading at 10.9x, which is only marginally higher than the market average from 1998 to
2004, of just 10.2x. The market is no longer cheap but is not expensive either, given historic precedence.
Secondly, the
attractiveness of the market on a dividend yield perspective relative to the likes of the UAE is also compelling. The Egyptian Equity
market currently trades on an historic dividend yield of 4.0%, relative to a yield of less than 4% in the UAE. On a simple yield
enhancement basis, and with lower risk of cash flows being diverted to bond holders than equity holders, the switch to Egyptian
equities is further supported.

Macro & Strategy

25

Egypt

Table 14: GCC Equity Market Valuation

Country
Egypt

Bahrain

Kuwait

Oman

Qatar

Saudi Arabia

Abu Dhabi

Dubai

Metric
PE (x)
Price to Sales (x)
Price to Book (x)
Dividend Yield (%)
PE (x)
Price to Sales (x)
Price to Book (x)
Dividend Yield (%)
PE (x)
Price to Sales (x)
Price to Book (x)
Dividend Yield (%)
PE (x)
Price to Sales (x)
Price to Book (x)
Dividend Yield (%)
PE (x)
Price to Sales (x)
Price to Book (x)
Dividend Yield (%)
PE (x)
Price to Sales (x)
Price to Book (x)
Dividend Yield (%)
PE (x)
Price to Sales (x)
Price to Book (x)
Dividend Yield (%)
PE (x)
Price to Sales (x)
Price to Book (x)
Dividend Yield (%)

2006
16.1
3.4
4.5
1.3
12.5
5.1
2.0
2.5

11.9
2.5
2.3
4.4
15.9
7.5
3.2
2.2
22.2
7.1
5.2
2.0
14.9
7.1
3.0
2.7

2007
15.2
3.1
3.5
1.8
8.9
4.3
1.8
3.4
12.1
5.1
2.4
2.7
12.3
2.7
2.9
4.0
13.5
6.0
3.3
2.9
15.9
4.8
3.4
2.6
13.6
5.5
2.4
2.5
13.2
5.0
2.5
1.7

2008
14.2
2.1
2.7
22.4
18.7
3.7
1.8
4.0
16.7
3.6
0.6
4.0
11.0
2.5
2.8
3.6
13.6
5.5
2.9
2.2
16.5
4.2
2.9
2.7
12.1
4.6
2.4
2.3
11.6
4.0
1.9
2.3

2009
10.9
1.9
1.7
4.0
8.6
2.9
1.0
6.1
13.5
1.2
3.1
4.9
1.7
1.8
4.2
12.7
5.0
1.9
5.8
16.8
3.2
2.0
2.9
8.5
2.0
1.0
4.7
9.7
1.6
0.7
3.7

Source: HC Brokerage, Bloomberg and Zawya

*2006, 2007 & 2008 are year averages. 2009 represents latest available valuations

Macro & Strategy

26

Egypt

Sector Allocation
Events within the GCC region, most notably the Dubai Debt crisis, make us more confident on the Egyptian equity market due to
low exposure to credit default of companies operating within Dubai and much stronger governance within Egypt. Along with our
strategic Buy recommendation on the Egyptian equity market, table 15 outlines HC strategys sector allocation recommendation.

Table 15
Resources
Basic Industries
Industrials
Consumer Cyclical
Consumer Staples
Telecoms
Financials:
Banks
Real Estate
Other

Overweight
Overweight
Overweight
Underweight
Underweight
Overweight
Neutral
Overweight
Overweight
Underweight

Source: HC Brokerage

Resources: The increase in government spending to support domestic economies, which started in early 2009, was discounted
by commodity markets as bullish for a recovery in the global economy- commodity prices surged. With the economic recovery
expected to continue into 2010, we believe commodity prices will continue to do well, albeit with some selling pressure due to
heightened risk aversion at this moment in time. Also, the lowering of interest rates to record lows has fueled a liquidity surge into
commodities. With inflation expected to return to many economies in 2010, due to ultra loose monetary policy, commodities will
provide protection to investors. We recommend an overweight allocation to this sector.
Basic Industries/Industrials: The fiscal expansion by the Egyptian government to pump billions of EGP into the domestic
economy to stimulate demand is expected to continue in 2010, as highlighted above. The key beneficiary of increased spending by
the government is construction companies, as the government focuses on improving domestic infrastructure. With strong domestic
demand for Steel and Cement for such projects, and construction companies expected to be awarded new projects, we maintain
an overweight recommendation in these sectors.
Consumer Cyclicals: Due to the rise in unemployment, which is a lagging indicator, and is expected to rise further before
benefiting from the increase in economic activity, and weak external factors, namely lower remittance from abroad, that support
domestic consumption, and the expected rise in inflation, we are underweight consumer cyclicals.
Consumer Staples: Although we are advocating an allocation to the Egyptian equity market as a defensive play on uncertainty
within the broader GCC region, we do not believe that it is time to overly play a defensive strategy within the Egyptian equity
market. Also, with a lack of large cap stocks within this sector, (as we currently favour large cap stocks to small cap), there is a
lack of depth within the market to invest. However, we do currently like Eastern Tobacco on fundamentals.
Telecoms: The strong cash nature of the Telecom sector and the desire to place some defensive characteristics in the portfolio,
we overweight the Telecom sector, particularly TE. The sector presents a diversified investment story with TE as a play on yields
and Mobinil as a play on growth. Our preferred stock is TE as at such time, investors tend to prefer high yielding stocks.
FINANCIALS
Banks: As highlighted above, Egyptian banks are not heavily exposed to the real estate and construction boom in the GCC region
or the domestic market. Strong governance and a reluctance to lend to SMEs and other high risk groups should see this segment
of the market outperform its regional peers over the coming months, as other banks increase their loan loss provisions.
Real Estate: The real estate dynamic in Egypt is very different from that in the GCC region. Strong demand relative to supply
and the cash nature of transactions, should help the sector outperform regional peers. Also, if inflation returns to the market in
2010, real estate should be a winner.

Macro & Strategy

27

Egypt

Egypt Banking Sector

We prefer Egyptian banks to GCC players in the current context on the back of better earnings
visibility as the Egyptian sector has stayed clear from the recent debt developments in the region.

Liquidity continues to be solid in the Egyptian banking sector with low utilization levels and better
funding. This in turn would help the banks immediately benefit from the improvement in global
economic conditions without relying on international capital markets.

We remain positive on the Egyptian banking sector and prefer NSGB with exhibits strong earnings
growth and benign credit asset quality, given the current economic environment. Although we have
a Hold on CIB, we find the stock offering value in the short term with its defensive profile in the
current market dislocation.

We remain positive on the banking sector in Egypt which is free of the ongoing issues in the GCC. We reiterate our
positive view on the Egyptian banking sector based on low utilization rates, an under-penetrated market, strong funding, almost no
exposure to toxic assets and insignificant exposure to the troubled real estate sector in the GCC. These attributes translate to a
safe haven, especially in the current global economic climate. We find the sector resilient despite the slowdown in the Egyptian
banking sector which occurred for obvious reasons. FY08/09 GDP growth was 4.7% vs. the 3 year average of 7% due to a
slowdown in Suez Canal revenues and FDI. With corporate lending making up 72% of aggregate sector loans, banks loan portfolios
remained almost flat from FY08 levels. In line with the sector, banks under our coverage showed soft growth as corporate lending
remained constrained, with reluctance in launching new projects. Retail, a relatively smaller portion, was unaffected. Banks have
continued adopting a conservative lending approach and accumulated deposits. Liquidity remains solid in the banking sector with
loan to deposit ratio dropping further to 52%. We find the Egyptian banking sectors liquidity and lack of exposure to major asset
quality concerns, as opposed to the GCC, to be attractive.
Egyptian banks offer better growth potential vs. regional peers. With risk levels rising in the GCC banking sector due to
uncertainty surrounding the Dubai World debt and disclosure drawbacks, we find the Egyptian banking sector offers value with
better earnings visibility and growth potential (to some extent). Banks under our coverage do not have any exposure to Dubai
World and related entities and hence offer better earnings visibility versus regional peers. Currently, there is huge uncertainty in
terms of provisioning in the GCC banking sector after the default of the two Saudi conglomerates and the recent Dubai World
situation. Liquidity may tighten in the GCC if things turn out to be worse than expected. Tapping international capital markets will
prove to be especially challenging. The Egyptian banking sector is at an advantage given its solid liquidity, enabling it to benefit
from the growth once the global economy rebounds. NSGB shows strong earnings growth, ranking second among MENA banks in
terms of eps growth in the next two years, coming just after CBK. We find the stock offering value trading at a FY11e PE of 5.8x
and a return on equity (ROE) of 24%. CIB also exhibits strong profitability with a FY10e ROE of 24%, higher than NSGBs 24%.

Chart 1: Loan growth (MoM) remained soft while liquidity had steadily improved in the Egyptian banking sector
09Feb '
%1.5

1.2%

09Mar '

09Apr'

09May '
1.4%

09Jun '

09Jul '

09Aug'

%56.00

1.2%
0.9%

%1.0
%0.5

09Sep'

0.3%
0.1%

0.6%

0.5%
0.2%

0.5%
0.3%

%53.00
0.0%

-0.1%

%1.0-

Loans

%54.00

0.3%

%0.0
%0.5-

%55.00

Deposits

L/D

-0.3%

%52.00
%51.00

-0.6%
%50.00

Source: CBE, HC Brokerage

Macro & Strategy

28

Egypt

Sector's asset quality remains intact during the year

Cautious lending and corporate governance alleviate asset quality concerns. During the third quarter of 2009, the
market saw only a few signs of lending. Syndications make up a 2.7% of aggregate loans, with state-owned banks in the forefront,
in order to support the economy. It appears that banks are adopting a cautious lending approach and strictly adhering to the single
obligor limit, which allows a bank to lend only 20% of Tier I to one company and 25% of Tier II to a group. This limits exposure to
a single client and thus restrains negative repercussions from default. Similarly, NSGB and CIBs asset quality remained unchanged
from levels seen at the beginning of 2009. NPL ratios were 6.8% and 2.9% for NSGB and CIB, respectively, during 9M09.
Moreover, both banks announced that they do not have any exposure to Dubai World debt or Nakheel bonds, leading to earnings
visibility. As such, we do not see any upside risk in terms of NPLs and provisioning.

Chart 2: CIB & NSGB outperforming EGX upon Dubai World announcement, showing intact asset quality
CIB

CAR

NSGB

EGX

7200
7000
6800
6600
6400
6200
6000
5800

Source: Reuters, HC Brokerage

Minimal exposure to market risk with a defensive investment portfolio

Declining equity markets during the recession led to a shift to safer but lower-yield investments such as T-bills, translating to lower
investment income, representing a tiny 3.5% of operating income for banks during 2008. In order to alleviate losses on the
investment portfolio, the CBE allowed the banks to classify their available-for-sale (AFS) securities as held-to-maturity (HTM) and
the trading activities as AFS, according to IFRS (International Financial Reporting Standards). Although most of the banks under
our coverage in the GCC region are also following the same approach, the widening of sovereign and corporate spreads in the GCC
post the Dubai World events, relatively higher than that of Egypts, is likely to feed into the income statement as marked-to-market
(MTM) losses. Regardless of the investments in Dubai World and related entities, banks in the GCC are likely to see some
provisioning on their investment portfolio at the end of the year if the debt situation continues to weigh in on the international
capital markets with elevated levels of risk perception in the region. This again affects the earnings outlook of the GCC banks and
thus gives an edge to the Egyptian banking sector.

Macro & Strategy

29

Egypt

NSGB is a safe haven in current turbulent times. NPL ratio shows

signs of improvement and is not affected by the ongoing Dubai World
debt situation.

Retail penetration offers strong growth potential while the corporate

segment remains challenging in Egypt.

We reiterate our 'Buy' recommendation on the stock and slightly

adjust our target price to EGP36.4.

Asset quality will continue to improve despite the recent debt events. Given the
recent developments in Dubai, we find the stock to be a safe haven with no adverse impacts
on its loan and investment portfolios and, hence, profitability. NSGB remains a cautious lender
focusing on risk management, translating to an improvement in its NPL ratio. Non-performing
loans to total loans ratio (NPL ratio) improved to 6.8% from 7.1% during 1H09, helped by
lower delinquencies. We expect this positive trend in asset quality to continue into the coming
quarters due to its conservative lending approach. Coverage ratio (loan loss provisions/NPL)
during 9M09 reached 93% and we expect it to improve further to a healthy 98% in FY09e as
the bank continues to book provisions. Loan loss provisioning was 67% lower than our
expectations during the third quarter, supported by recoveries. NSGB is likely to see stronger
recoveries in the coming quarter as well. We would expect coverage to exceed 100%
thereafter.
Benefits from a bigger retail book than its peer CIB, with relatively better growth
potential. During the quarter, NSGB adopted a prudent approach and grew its loan portfolio
by only 3% quarterly, and in line with our expectations. Unlike its peers, the bank limited its
participation in the loan syndications launched during the quarter. Another factor is its
corporate book, representing 85% of the total loan portfolio, which was affected by the
economic environment. Having said that, we prefer NSGB to CIB as it offers better growth
potential with its 15% retail book vs. CIBs 8%. Given the current economic context, the retail
sector provides better growth opportunities whilst corporate appears challenging in Egypt.
NSGBs retail penetration should drive growth, offsetting the negative consequences of the
corporate book to some extent.
NIMs expected to widen in an increasing interest rate environment. NSGB reported a
net income of EGP223.7 million in 3Q09, 7.6% below our forecasts mainly due to margin
compression. However, given the expectation of a rise in interest rates, we would expect this
situation to reverse. During the third quarter, NSGB re-priced loans and deposits following the
Central Bank of Egypt's rate cuts of almost 75 bps in July and September, translating to lower
net interest income. Net interest margin shrank by 40 bps quarterly to 3.45% in 3Q09, while
the bank managed to increase low-cost deposits by 11.3%, helping reduce its interest
expense. We expect NIMs to widen to 3.5% as NSGB re-prices its loan book upwards amid a
tightening interest rate environment.

Target Price (EGP)

Market Price (EGP)
Upside

36.4
29.0
25.4%

Listed on
Bloomberg
RIC

EGX
NSGB EY
NSGB.CA

Market Cap. (EGP m)

Market Cap. (USD m)

9,663
1,767

No of shares (m)

333.2

Shareholding Structure
Societe Generale
Free Float
Price Performance Chart
45
40
35

(NSGB (LHS
(ADX (RHS

30

6,000

15

NII (EGP Mil.)

Total income (EGP
Mil.)
Net income (EGP Mil.)
Net interest margin
Gross loans (EGP
Bil.)
Cost/Income
Gross LD
EPS
DPS
Dividend Yield
P/E (x)
P/B (x)

ROAE
ROAA

Macro & Strategy

FY10e

1,612.3

1,868.3

1,604.2

1,859.6

2,494.6
1,083.0
3.43%

2,801.6
1,227.2
3.50%

2,536.6
1,002.7
3.42%

2,846.1
1,204.3
3.48%

29.8
33.0%
67.0%
3.25
1.01
3.47%
8.92
1.77
21.3%
2.2%

33.5
32.8%
73.0%
3.68
0.99
3.43%
7.87
1.45
20.8%
2.2%

30.4
33.4%
73.0%
3.01
0.93
3.22%
9.64
1.41%
19.9%
2.1%

34.2
33.1%
73.0%
3.61
0.98
3.36%
8.02
1.19%
20.6%
2.2%

4,000

10
5

2,000

+202 33328 636

FY09e

10,000
8,000

Key Performance Indicators

Consensus
FY09e
FY10e
-

12,000

20

Engy El Dishish

Old
FY09e
FY10e

14,000

25

We reiterate our 'Buy' and adjust our TP to EGP36.4. We changed our cost of equity to
12.70% from 12.95% as we reduced the risk-free interest rate to 8.25% to fall in line with the
CBE rate cuts. We have revised our earnings estimates upwards, primarily on the back of
lower provisioning. Given the asset quality situation in the GCC region, we find value in the
stock, which is trading at an adjusted PB for FY10f of 1.45x.
New

77.2 %
22.8%

Index Performance(EGP)

Buy

Stock Performance (EGP)

National Socit Gnrale Bank (NSGB)

engy.eldishish@af-hc.com
Germaine Benyamin

+971 42 935 353 (Ext. 382)

germaine.benyamin@af-hc.com

30

Egypt

Table 1: Comparison of Actual vs. Estimates

EGP000
Net interest income
Non-interest income
Total income
Operating expenses
Operating profit
Provisions
Net income
Cost/Income
Gross loans
Deposit

3Q09a
401,311
173,458
574,769
292,876
281,893
15,818
223,699

3Q08a
359,868
249,970
609,838
284,668
325,171
22,787
247,471

35.4%

31.8%

27,666,430
43,399,470

YoY change
11.5%
-30.6%
-5.8%
2.9%
-13.3%
-30.6%
-9.6%

2Q09a
409,914
176,812
586,726
290,547
296,180
(12,951)
254,991

QoQ change
-2.1%
-1.9%
-2.0%
0.8%
-4.8%
222.1%
-12.3%

3Q09e
415,531
193,624
609,155
289,330
319,825
49,187
242,127

35.1%

25,670,061
36,607,742

7.8%
18.6%

Deviation
-3.4%
-10.4%
-5.6%
1.2%
-11.9%
-67.8%
-7.6%

33.0%

26,875,471
39,009,378

2.9%
11.3%

27,547,357
39,789,565

0.4%
9.1%

Source: Company financials, HC Brokerage

Chart 1: Valuation
FY10e PB vs. FY10e ROE

FY10e PB vs. ROE/COE

4.00

4.00
3.50

3.50

RJHI

RJHI

3.00

FY10e PB

2.50
2.00
1.50
1.00
0.50
0.00
%0

%5

FY10e PB

3.00
BKDBCBK
EGBE
NBK SAMBA
QIB QNB
RIBL
CIB
ARNB NSGB
DHB
CAE
NBAD
BKMB
ABK
CBQ FGB
BURG
CBD
UNB
ADCB
ADIB DIB ENBD
NSGB
%10
%15
%20
%25
%30
FY10e ROE

CBK
SAMBA
QIB
QNB
RIBL
ARNB
CIB
FGB
BKMB
NSGB
NBAD DHB
CBQ
BURG ADIB CBD CAE
DIB
ABK
ENBD EGBE
UNB
HDB
ADCB

2.50
2.00
1.50
1.00
0.50
0.00
0.00

0.50

1.00

1.50
2.00
FY10e ROE/COE

2.50

3.00

FY11e PE vs. EPS Growth (FY10e FY11e)

16.0
14.0

RJHI
RIBL
NBK

ARNB

10.0
FY11e PE

CBK

BKDB

12.0

SAMBA
8.0

QIB

CIB
HDB
CAE

6.0

CBQ DIB ABK

DHB
NBAD UNB
ENBD
EGBE

CBD
4.0
2.0

QNB

BKMB

FGB

NSGB

ADIB

ADCB

%35

%40

0.0
%0

%5

%10

%15

%20
%25
%30
EPS Growth FY10eFY11e

%45

Source: Company financials, Bloomberg, HC Brokerage

Macro & Strategy

31

Egypt

Financial Statements
EGP Million
Income Statement
Interest income
Interest expense
Net interest income
Fees & Commissions
FX Income
Investment income
Other income
Non-interest income
Total income
Total operating expenses
Pre-provision income
Provisions
Associate and other income
Pre-tax income
Income taxes
Net income after tax
Minority interest
Net income

2008a

2009e

2010e

2011e

2012e

2013e

3,020.9
1,772.3
1,427.9
545.3
144.7
55.2
418.1
1,163.2
2,591.1
1,085.0
1,506.1
213.4
4.3
1,297.0
160.2
1,136.9
1,136.9

3,400.7
1,788.2
1,612.5
550.7
173.7
55.3
102.6
882.3
2,494.8
1,164.6
1,330.2
44.7
3.8
1,289.3
206.3
1,083.0
1,083.0

3,875.2
2,006.7
1,868.5
578.2
182.3
65.6
107.1
933.3
2,801.8
1,206.9
1,540.9
134.2
3.9
1,410.6
183.4
1,227.2
1,227.2

4,375.3
2,250.8
2,124.5
607.2
191.5
73.5
74.7
946.8
3,071.3
970.9
2,100.4
189.5
4.1
1,915.0
248.9
1,666.0
1,666.0

4,928.0
2,541.2
2,386.8
637.5
201.0
82.3
77.8
998.7
3,385.4
1,048.5
2,336.9
172.1
4.3
2,169.1
282.0
1,887.1
1,887.1

5,525.6
2,849.4
2,676.2
669.4
211.1
92.2
81.3
1,054.0
3,730.2
1,132.4
2,597.7
196.2
4.5
2,406.0
312.8
2,093.2
2,093.2

Balance Sheet
Assets
Cash & due from central bank
Due from banks
Investments
Gross loans
NPL provisions
Net loans
Other assets
Net fixed assets
Total assets

6,078.9
9,027.2
3,776.3
27,109.1
2,097.9
25,011.2
1,423.7
729.5
46,046.8

12,040.7
6,188.7
4,125.8
29,820.0
2,126.9
27,693.1
1,125.2
399.0
51,572.4

12,252.8
8,664.2
4,620.9
33,547.5
2,231.5
31,316.0
794.2
113.0
57,761.1

10,081.4
12,938.5
5,175.4
37,908.6
2,425.8
35,482.8
821.6
192.8
64,692.4

10,621.5
14,491.1
5,796.4
43,026.3
2,600.5
40,425.8
844.1
276.6
72,455.5

10,844.9
16,230.0
6,492.0
49,050.0
2,772.7
46,277.3
941.3
364.5
81,150.2

Liabilities
Total deposits
Due to banks
Borrowings
Other liabilities
Total liabilities
Shareholders equity

36,889.2
1,460.2
821.5
2,188.4
41,359.4
4,687.4

44,507.4
25.5
845.3
726.7
46,104.9
5,467.5

45,955.4
2,477.2
845.3
2,124.2
51,402.1
6,359.0

52,650.9
1,671.5
845.3
1,831.1
56,998.8
7,693.7

59,758.8
1,890.2
831.7
727.3
63,208.0
9,247.6

66,283.8
2,321.2
831.7
712.5
70,149.1
11,001.1

Macro & Strategy

32

Egypt

Hold

CIB continues to operate as a safe player with an NPL ratio of 2.92%,

the lowest under our coverage universe.

Net income registered EGP410.9 million, up 34.8% YoY but 7.5%

below our estimates due to weaker non interest income.

We cut our FY09e and FY10f net income estimates by 9.5% and 9.0%
respectively on the back of weaker non interest income, which more
than offsets the potential NIM expansion. We maintain our 'Hold'
recommendation on the stock, slightly adjusting the target price to
EGP63.93. We adjust our CoE upon CBE rate cuts.

We like CIB as it delivers the best asset quality among its peers. We believe it is a
good candidate for cash allocation at current times in the financial sector. The bank managed
to deliver an NPL ratio of 2.9%, almost flat compared to 1H09. Serving Egypt's top tier
corporate firms, no exposure to Dubai World and related-entities, minimal real estate exposure
(1.3%) and no investments in toxic assets place CIB at an attractive position. We would like to
highlight that the bank's aggressive retail market penetration is likely to pose some upside risk
to delinquencies. NPL ratio is expected to increase to 3.1% in FY09e and FY10f with the
coverage ratio remaining healthy, exceeding 150% levels.
CIB's third quarter net income came in 7.5% below our estimates at EGP410.9
million on the back of lower-than expected non-interest income, which more than
offset better-than-expected net interest income and provisions. Net interest income
beat our estimates by 14.5% as NIMs widened to 3.43% from 3.38% during 1H09, thanks to
interest rates which moved south, helping the bank minimize costly deposits. We expect NIMs
to continue to improve to 3.51% and 3.57% in FY09e and FY10f as the bank should benefit
from reduction in its funding costs. We attribute this to the banks ability to secure cheaper
payroll based deposits and stronger interest income as the CBE is expected to raise interest
rates. On the other hand, weak fee and brokerage income took its toll on non interest income.
Since we do not expect a rebound during the remaining quarter of the year, we cut our noninterest income estimates by 17%.
Loans came in at EGP28.7 billion, below our expectations by a slight 3.5%, in line
with the slow private corporate credit expansion. Given its size and particularly its
corporate book, which represents approximately 85% of its portfolio, CIB was the lead
beneficiary in several loan syndications launched during the quarter. In addition, its loan
portfolio benefitted from expansion of the retail segment. We expect the loan book to see
strong growth during 4Q09 upon the finalization of the deals. Hence, utilization is expected to
rise to 59% for FY09e from 56.5% for 9M09.
We reiterate our 'Hold' and adjust our TP to EGP63.93. We changed our CoE to 12.70%
as we dropped the risk free rate to 8.25%, in line with the CBE rate cuts. We have revised our
earnings estimates upwards mainly on the back of lower provisioning and wider NIMs. The
bank is trading at an adjusted PB for FY10f of 1.65x, 6.2% premium to its implied PB of 1.57x.
According to our 70:30 weighting, we arrived at a TP of EGP363.9, providing an upside of only
15.3%. Although the valuations do not appear compelling under normal circumstances, we
view the stock as a good investment given its defensive profile in the current context when
asset quality poses significant downside risks to earnings.

Key Performance Indicators

New
NII (EGP Mil.)
Total income (EGP
Mil.)
Net income (EGP Mil.)
Net interest margin
Gross loans (EGP Bil.)
Cost/Income
Gross LD
EPS
DPS
Dividend Yield
P/E (x)
P/B (x)

ROAE
ROAA

Macro & Strategy

FY09e

FY10e

Old
FY09e
FY10e

1,991.4

2,271.3

1,964.1

2,331.4

3,369.9
1,712.4
3.51%
30.5
35.44%
59.0%
5.85
0.92
1.66%
9.47
2.01
26.2%
2.9%

3,853.0
1,940.8
3.57%
33.4
34.41%
58.0%
6.64
0.83
1.50%
8.35
1.65
24.0%
2.9%

3,622.1
1,891.8
3.41%
30.8
32.98%
56.5%
6.47
1.02
1.79%
8.57
1.95
28.6%
3.1%

4,205.7
2,132.1
3.51%
34.8
31.52%
58.0%
7.29
0.91
1.60%
7.60
2.41
25.6%
3.1%

Consensus
FY09e
FY10e
-

Target Price (EGP)

Market Price (EGP)
Upside

63.93
55.4
15.3%

Listed on
Bloomberg
RIC

EGX
COMI EY
COMI.CA

Market Cap. (EGP m)

Market Cap. (USD m)

16,213
2,895

No of shares (m)

292,500

Shareholding Structure
Ripple Woods Consortium
Actis Private Equity
Free Float

9.4%
9.3%
81.3%

Price Performance Chart

70

14,000

60

(COMI (LHS

12,000

50

(ADX (RHS

10,000

40

8,000

30

6,000

20

4,000

10

2,000

Index Performance(EGP)

Stock Performance (EGP)

Commercial International Bank (CIB)

Engy El Dishish

+202 33328 636

engy.eldishish@af-hc.com
Germaine Benyamin

+971 42 935 353 (Ext. 382)

germaine.benyamin@af-hc.com

33

Egypt

Table 1: Comparison of Actual vs. Estimates

EGP000
Net interest income
Non-interest income
Total income
Operating expenses
Operating profit
Provisions
Net income

3Q09a
553,400
273,812
827,212
308,248
518,964
26,776
410,941

3Q08a
450,675
245,814
696,489
289,668
406,821
30,170
304,768

Cost/Income

37.3%

41.6%

28,703,858

28,125,016

2.1%

28,809,405

-0.37%

29,731,306

-3.5%

50,836,118

47,823,186

6.3%

50,798,329

0.75%

51,306,313

-0.9%

YoY change
22.8%
11.4%
18.77%
6.4%
27.6%
-11.3%
34.8%

2Q09a
463,774
418,460
882,234
327,045
555,189
19,234
436,548

QoQ change
19.3%
-34.6%
-6.2%
-5.7%
-6.5%
39.2%
-5.9%

3Q09e
483,504
403,837
887,341
328,813
558,528
30,039
444,103

37.1%

Deviation
14.46%
-32.20%
-6.78%
-6.25%
-7.08%
-10.86%
-7.47%

37.1%

Gross loans
Deposit

Source: Company financials, HC Brokerage

Chart 1: Valuation
FY10e PB vs. FY10e ROE

FY10e PB vs. ROE/COE

4.00

4.00
3.50

3.50

RJHI

3.00

3.00
2.50

CBK
BKDB
EGBE

2.00
RIBL

ARNB

1.50

BKMB
ABK
BURG

1.00
0.50

ADCB
ADIB

QNB
NBK SAMBA
QIB
CIB
CAE
CBQ

UNB
DIB

0.00
0%

5%

10%

RIBL

0.50
0.00

NSGB
20%

15%

FGB

1.00

ENBD

QNB

ARNB

CIB
BKMB
NSGB
NBAD DHB
CBQ
BURG
CBD CAE
ADIB
DIB
ABK
ENBD
EGBE
UNB
HDB
ADCB

1.50

FGB
CBD

SAMBA

QIB

2.00

DHB
NBAD

NSGB

CBK

2.50

FY10e PB

FY10e PB

RJHI

25%

0.00

30%

0.50

1.00

FY10e ROE

1.50

2.00

2.50

3.00

FY10e ROE/COE

FY11e PE vs. EPS Growth (FY10e FY11e)

16.0
14.0

RJHI

RIBL
NBK

ARNB

10.0

FY11e PE

CBK

BKDB

12.0

SAMBA

QIB

CIB

8.0

HDB
QNB

CAE

6.0
CBD

DHB

4.0

CBQ
DIB ABK
NBAD
UNB

BKMB

FGB

NSGB
ADIB

ADCB

35%

40%

ENBD
EGBE

2.0
0.0
0%

5%

10%

15%

20%

25%

30%

45%

EPS Growth FY10eFY11e

Source: Company financials, Bloomberg, HC Brokerage

Macro & Strategy

34

Egypt

Financial Statements
EGP Million
Income Statement
Interest income
Interest expense
Net interest income
Fees & Commissions
FX Income
Investment income
Other income
Non-interest income
Total income
Total operating expenses
Pre-provision income
Provisions
Associate and other income
Pre-tax income
Income taxes
Net income after tax
Minority interest
Net income

Balance Sheet
Assets
Cash & due from central bank
Due from banks
Investments
Gross loans
NPL provisions
Net loans
Other assets
Net fixed assets
Total assets

Liabilities
Total deposits
Due to banks
Borrowings
Other liabilities
Total liabilities
Shareholders equity

Macro & Strategy

2008a

2009e

2010e

2011e

2012e

2013e

3,765.2
1,966.5
1,798.7
747.7
345.4
65.0
326.2
1,484.4
3,283.0
1,256.1
2,026.9
410.5
1,616.4
251.0
1,365.4
(5.2)
1,370.6

4,122.1
2,130.7
1,991.4
695.3
397.2
94.5
191.6
1,378.5
3,369.9
1,259.7
2,110.2
91.6
2,018.7
302.8
1,715.9
3.4
1,712.4

4,739.0
2,467.7
2,271.3
806.6
436.9
113.3
224.9
1,581.7
3,853.0
1,393.0
2,460.0
117.0
2,343.0
398.3
1,944.7
3.9
1,940.8

5,426.6
2,743.5
2,683.1
927.5
480.6
91.7
191.8
1,691.6
4,374.7
1,540.9
2,833.8
170.7
2,663.1
479.4
2,183.7
4.4
2,179.3

6,237.6
3,125.1
3,112.6
1,113.1
528.6
104.5
205.8
1,952.0
5,064.6
1,704.9
3,359.7
216.3
3,143.5
597.3
2,546.2
5.1
2,541.1

7,159.0
3,588.4
3,570.6
1,335.7
581.5
119.1
220.1
2,256.5
5,827.1
1,886.7
3,940.4
247.6
3,692.8
701.6
2,991.1
6.0
2,985.2

16,930.0
6,572.2
4,097.9
28,007.9
1,677.6
26,330.3
2,783.1
748.3
57,461.8

15,702.8
5,637.0
9,395.0
30,528.7
1,793.0
28,735.7
2,149.2
1,013.7
62,633.4

25,721.1
4,998.1
5,712.2
33,428.9
1,937.8
31,491.1
2,392.6
1,087.0
71,402.0

29,156.0
6,104.9
6,511.9
37,941.8
2,153.0
35,788.8
2,672.8
1,164.0
81,398.3

32,873.7
7,423.5
7,423.5
43,253.6
2,420.4
40,833.2
2,995.3
1,244.8
92,794.1

37,366.9
8,462.8
8,462.8
49,525.4
2,728.4
46,797.0
3,366.1
1,329.7
105,785.2

48,790.0
229.0
109.3

51,743.5
2,959.1
106.3

57,636.0
1,941.1
124.8

64,308.1
2,877.8
124.5

73,311.2
3,556.9
166.8

83,941.4
4,188.8
199.1

2,467.7
51,596.0

540.3
55,349.2

2,744.6
62,446.6

3,195.7
70,506.1

2,545.0
79,580.0

1,475.0
89,804.2

35

Egypt

Egypt Real Estate

Our preferred exposure is Cairo as it is best placed to benefit from underway sector transformation.

Further structural reforms key to unlock long-term potential of the sector.

TMG is our top pick on EGP28bn backlog, exposure to Cairo, and hospitality business.

We believe the Egyptian property sector is undergoing a transformation driven by new integrated communities and
an evolving mortgage market. Cairo is the best placed to benefit from these trends, and hence we prefer it over second home
destinations (e.g. North Coast and Red Sea). Overall, the sector dynamics remain robust, characterized by favorable demographic
trends and an expanding middle class. Also, considering that the high end market is saturating, we believe that the low-to mid
income market is likely to drive demand going forward.
While affordability remains restrained in Egypt, further potential lies in structural and regulatory reforms to
address low mortgage penetration. The affordability ratio (housing prices/annual income) in Cairo ranges between 3.9 for
mid-income apartments to 5.3 for high-income villas. While an affordability ratio of 5x is typically considered reasonable, given the
high mortgage rates the effective debt service ratio is high, well above 50% in some cases. Accordingly, we feel that interest rate
reform, as well as easing up home financing, should unlock further potential demand.
On the demographic front Egypt represent a solid domestic demand. We estimate that the population of Cairo will grow at
a CAGR of 3% to reach c22m by 2015e. Based on economic growth and changing income distribution expectations, we assume
that the middle to high-income segment will expand by 50bps per annum to reach 28% of the citys total population by 2015e.
Accordingly, we estimate that the relevant target segment (which excludes the low income segment) will grow from 4m at the end
of 2007 to 6.2m by 2015e, at a CAGR of 19%. Furthermore, following historic trends, we assume that the average household size
will fall from 3.85 to 3.65 by 2015e, driven by a changing family structure and upward mobility. Consequently, we forecast that
roughly 565,000 units will be required by 2015e.
In terms of supply, we estimate that at the end of 2006, the number of housing units catering to the middle to
high-income segment stood at 1.1m, or 23.5% overall supply. Based on supply expectations of the regions big five
developers and conservatively assuming that smaller developers make up 50% of total supply, we forecast that our target market
housing supply will reach 1.65m units by 2015e, an addition of 550,000 units over 2006. As highlighted in the right chart above,
we estimate a shortage of c20,000 units by 2015e.
The hospitality industry in Egypt has recorded exceptional growth over the past few years. Based on data collected by
the Ministry of Tourism, the average tourist stay increased from 6.4 nights in 2001 to 8 in 2008, a CAGR of 3.3%. More
importantly, total hotel nights spent grew from 30m to 90m over the same period. That said, the global tourism industry in facing
strong headwinds this year on the back of the financial crisis, and Egypt is no exception. We expect tourist arrival in 2009e to be
10-15% lower compared to last year. Nonetheless, considering the shortage in hotel space and the relatively attractive rates, we
feel that Egypts hospitality industry is well positioned to benefit from the global economic recovery underway. Also, while the
hospitality sector in the Gulf States is dominated by five-star hotels, Egypt has a healthy mix. Given that economic growth is
expected to return to developed markets in 2010e, we could expect tourism numbers to return to 2008a recorded levels of 13
million by end of 2010e, as health concerns surrounding swine flu quickly dissipates as it did following the bird flu epidemic in
2004-05. Although it remained weak in 2009, historic precedence suggests that tourism numbers tend to recover quickly from
exogenous shocks and economic slowdowns.
On the positive note, the liquidity and gearing position of Egyptian developers remains very comfortable. Lower debt
to equities ratios also provide room to raise debt going forward. While we believe that all the companies under our coverage could
optimize their capital structure by infusing debt, raising equity could be a better option at this stage given the uncertainties
surrounding the pre-sales model. Many real estate companies have recently opted for rights issues as they protect against dilution
and provide the necessary liquidity. Accordingly, we view the recent announcement by SODIC to raise EGP500mn through a rights
issue as a positive indicator for the Egyptian real estate sector. Also, PHDs intention to fund its hotel venture through bond
issuance underlines the return of investor confidence in the sector, in our opinion.
In current market conditions we look for high sales backlog, central land bank, and exposure to the hospitality
sector, which based on, our preferred play is TMG and SODIC. TMG has the largest backlog among its peers standing at
EGP28bn to be realized over the next three to four years, hence providing strong cash flows and earnings visibility. Also, c90% of
the companys land bank is located in Cairo which has the strongest fundamentals driven by huge pent-up demand and urban
migration. Additionally, we like the companys exposure to expanding middle-income segment. The company also has exposure to
the luxury hospitality sector (780 rooms), which we feel puts a floor under its valuation. For SODIC also, we like its Cairo land bank
exposure and backlog worth EGP2.3bn in similar lines with TMG.

Macro & Strategy

36

Egypt

TMG Holding

Buy

Best play on Cairo with an exposure to the expanding mid-income

segment.

Large land bank and EGP28bn backlog provides earnings and cash
flow visibility.

We initiate on TMG with a Buy recommendation with a TP of

EGP9.1, implying a 40% upside and 32% discount to NAV.

TMG is one of the largest and most diversified real estate developers in
Egypt with a 49m sq m land bank located in Egypt and Saudi. The
development schedule of its land bank extends beyond 2020, mainly driven by
its flagship project Madinaty, divided over 8 phases with phase 1 deliveries set
to commence in 2010, ahead of schedule. In an effort to diversify its exposure,
TMG plans to launch projects in Saudi starting next year. That said, we believe
that over the medium term Egypt is likely to drive its valuation
The hospitality business provides support to TMGs valuation, while an
EGP28bn backlog provides further near term earnings visibility.
Although TMG is largely focused on mid-income housing developments, it also
holds several hotels (780 rooms) targeting the luxury segment. We believe this
recurring income stream provides a floor to the companys valuation considering
the strong hospitality sector fundamentals. Also, TMGs current development
backlog is worth EGP28bn (the highest among the Egyptian players), to be
delivered over the next three to four years. This, we feel, provides more clarity
on earnings potential.

Target Price (EGP)

Market Price (EGP)
Upside

9.1
6.5
40%

Listed on
Bloomberg Code
RIC

EGX
TMGH EY
TMGH.CA

Enterprise Value (EGPmn)

Net Debt (EGPmn)
Market Cap. (EGPmn)
Market Cap. (USDmn)
Number of Shares (mn)

16,317
1,576
13,044
2,393
2,006.8

Daily Turnover (EGPmn)

Daily Turnover (USDmn)

67.8
12.4

Shareholders Structure
Promoters
Other Major Shareholders
Free Float

49.9%
25.6%
24.5%

Price Performance Chart

Deliveries of backlog to improve cash flows and enhance land
valuations. As deliveries gain momentum in 2010, the companys cash flows
are likely to improve as installments are skewed towards completion. Deliveries
are also likely to enhance the adjacent land valuations.

300

30EGX

250

TMGH

200
150
100

We initiate on TMG with a Buy recommendation and a TP of EGP9.1,

implying a potential upside of 40%. We use DCF and residual land methods
to value the stock. To be conservative, we do not include future projects in our
DCF; instead we apply a c50% discount to the land bank. We value TMG at a
32% discount to its 2009e NAV of EGP13.4 per share.
Potential catalysts include land bank rerating in line with development
progress. Since the current stock price does not reflect the value of TMGs raw
land bank, it could be a considered a free option, and is likely to drive valuation
as deliveries progress.

2008a
3,977
1,237
1,082
591
0
11

2009e
5,927
1,529
1,321
1,173
1
12
0.5x
11.1x
0.6x

0
D

Ankur Khetawat

+971 4 2935387

ankur.khetawat@af-hc.com
Majed Azzam

Key Performance Indicators

EGP
Revenue(mn)
EBITDA(mn)
EBIT(mn)
NPAT(mn)
EPS
BVPS
P/NAV
P/E
P/B

50

2009c
6,190
1,766
1,683
1,288
1
12

Diff
-4%
-13%
-21%
-9%
-7%
1%

2010f
7,565
2,768
2,507
2,067
1
13

2010c
8,597
2,815
2,743
2,609
1
13

Diff
-12%
-2%
-9%
-21%
-20%
-2%

+971 4 2935385

majed.azzam@af-hc.com
Nermeen Abdel Gawad

+202 3332 8628

ngawad@hc-si.com

6.3x
0.5x

A=Actual; E/F=HCs Estimates/Forecasts; C=Consensus Estimates

Macro & Strategy

37

Egypt

TMG Financial Statements (EGPmn)

Year to December
Income Statement
Total Revenue
Total Costs

% of sales
Gross Profit

Margin

2008a

2009e

2010f

2011f

2012f

2013f

3,977
(2,728)

5,927
(4,091)

7,565
(4,234)

7,917
(4,261)

6,389
(3,103)

5,306
(2,377)

69%

69%

56%

54%

49%

45%

1,249

1,836

3,331

3,656

3,285

2,929

31%

31%

44%

46%

51%

55%

(5)
(162)
(167)
1,082

(353)
(162)
(515)
1,321

(507)
(317)
(824)
2,507

(538)
(410)
(948)
2,708

(581)
(467)
(1,048)
2,237

(581)
(490)
(1,071)
1,858

27%

22%

33%

34%

35%

35%

(65)
147
(603)
561
(151)
182
591

(78)
120
2
1,365
(182)
(11)
1,173

(113)
149
5
2,548
(382)
(99)
2,067

123
152
5
2,988
(448)
(112)
2,428

385
155
5
2,783
(417)
(119)
2,246

629
159
5
2,651
(398)
(125)
2,128

15%

20%

27%

31%

35%

40%

Balance Sheet
Cash and Cash Equivalents
Trade & Other Receivables
Development Properties
Development Work in Progress
Other Current Assets
Total Current Assets
Investments in Associates
Long Term Investments
Total Non Current Assets

1,425
6,461
10,306
16,115
34,307
1
391
393

496
2,902
4,000
9,244
17,061
33,703
3
388
391

2,961
2,257
4,153
7,190
13,483
30,044
7
388
395

6,044
1,612
3,206
5,136
9,904
25,901
12
388
400

9,439
967
2,623
3,081
6,325
22,436
17
388
405

10,036
646
1,877
1,027
2,746
16,332
22
388
411

Property, Plant and Equipment

Investment Properties
Other Permanent Assets
Permanent Assets
Total Assets

3,798
385
14,918
19,101
53,800

3,697
516
15,565
19,779
53,872

3,583
596
16,521
20,700
51,139

3,475
681
17,421
21,576
47,878

3,371
801
18,436
22,608
45,449

3,273
923
19,056
23,252
39,994

Total Current Liabilities

Total Non Current Liabilities
Shareholder's Equity

9,925
19,927
23,949

10,218
18,819
24,836

9,134
15,005
27,001

7,146
11,190
29,541

6,167
7,376
31,907

2,266
3,568
34,160

Cash Flow Statement

Net profit
Change in Working Capital
Other operating activities
Net cash generated from operating activities
Capex (Excl Hotel Properties)
Additions to Hotels Properties
Other Investments
Net cash generated from investment activities
Net cash generated from financing activities
Net addition (deduction) in cash
Cash at beginning of fiscal year
Cash at end of fiscal year

2,017
(2,964)
204
(743)
(4,285)
(2,164)
(6,449)
8,506
1,314
1,425

1,287
(1,170)
161
214
(187)
(436)
(8)
(630)
149
(267)
1,425
1,158

2,166
1,225
261
3,652
(178)
(1,004)
(5)
(1,187)
2,465
1,158
3,623

2,540
1,424
303
4,268
(188)
(992)
(5)
(1,184)
3,083
3,623
6,706

2,365
2,066
352
4,784
(228)
(1,156)
(5)
(1,389)
3,395
6,706
10,101

2,254
(1,007)
395
1,642
(235)
(804)
(5)
(1,044)
597
10,101
10,698

Selling and Marketing Expenses

Other Income
Operating Expenses
EBIT (incl Revaluation Gain)

Margin
Net Financing cost
Other fin. Income/charges
Associate Income
Profit before Taxes
Income Taxes
Minority Shareholders' Interest
Net Profit (Loss)

Margin
Basic EPS

Macro & Strategy

38

Egypt

Sixth of October Development Company

Relatively small but Cairo centric land bank provides faster

value unlocking potential, in our opinion

EGP500m rights issue highlights market confidence and

further improves liquidity

We initiate on SODIC with a Buy recommendation and a

target price of EGP105.2, implying a potential upside of
27%.

Although SODICs 5.7m sqm land bank is the smallest among the
Egyptian developers that we cover, it is more central, divided between
West and East Cairo. Given the prime location of its land, the company mainly
targets the high end residential market. Given the size of its land bank, we
believe that this is a sound strategy, despite the limited potential of that
segment.
SODIC intends to extend its business model into all diversified real
estate verticals, including commercial and retail, going forward. Also,
the company plans to hold 26% of its portfolio for investment purposes, hence
tapping the attractive Cairo rental market. SODIC has partnered with Lebanese
developer Solidere, which we feel enhances its project design and marketing
capabilities.
We expect SODIC to turn profitable next year as deliveries in Allegria
commence. Also, the companys liquidity position is solid, with almost no
leverage as of 3Q09. In our opinion, the recent rights issue further strengthens
its balance sheet and provides funding for its planned investment portfolio.
We initiate on SODIC with a Buy recommendation and a target price of
EGP105.2, implying a potential upside of 27%. We value the company
using DCF and residual land methods. To be conservative, we do not include
future projects in our DCF, instead we apply a 50% discount to the land bank.
We value SODIC at a -30% discount to its 2009e NAV of EGP151 per share.

Buy
Target Price
Market Price (EGP)
Upside
Listed on
Bloomberg Code
RIC

2008a
232
26
26
26
1
63
88.9
1.3x

2009e
22
-47
-42
-50
-1
66
0.5x
NM
1.2x

2009c
35
-45
-56
-50
-1

Diff
-39%
5%
-25%
0%
5%

A=Actual; E/F=HCs Estimates/Forecasts; C=Consensus Estimates

Macro & Strategy

2,460
(500)
2937
536
35.6

Daily Turnover (USDmn)

Daily Turnover (EGPmn)

2.3
12.5

Shareholders Structure
Free Float
Institutions
Individuals
Others

60.1%
28.1%
11.5%
0.3%

Price Performance Chart

250

30EGX

200

SODIC

150
100
50
0
J

Ankur Khetawat

+971 4 2935387

Key Performance Indicators

EGP
Revenue
EBITDA
EBIT
NPAT
EPS
BVPS
P/NAV
P/E
P/B

EGX
OCDI EY
OCDI.CA

Enterprise Value (EGPmn)

Net Debt (EGPmn)
Market Cap. (EGPmn)
Market Cap. (USDmn)
Number of Shares (mn)

The key challenges for SODIC include consistently attracting demand

for its high end projects and land replenishment at reasonable terms.

105.2
82.6
27%

2010f
427
139
149
130
4
79

2010c
525
186
176
173
5

Diff
-19%
-26%
-15%
-25%
-25%

ankur.khetawat@af-hc.com
Majed Azzam

+971 4 2935385

majed.azzam@af-hc.com
Nermeen Abdel Gawad

22.6x
1.0x

+202 3332 8628

ngawad@hc-si.com

39

Egypt

SODIC Financial Statements (EGPmn)

Year to December
Income Statement
Total Revenue
Total Costs

2008a

2009e

2010f

2011f

2012f

2013f

232
(109)

22
(18)

427
(243)

1,303
(762)

1,418
(822)

431
(245)

% of sales

47%

85%

57%

58%

58%

57%

Gross Profit

123

184

541

596

186

Margin

53%

15%

43%

42%

42%

43%

(103)
(1)
38
(98)
25

(78)
(1)
40
(56)
(53)

(80)
(1)
42
(57)
127

(81)
(1)
44
(58)
484

(77)
(1)
46
(52)
544

(74)
(1)
49
(48)
138

Margin

10%

-250%

30%

40%

40%

30%

Net Financing cost

Associate Income
Profit before Taxes
Income Taxes
Minority Shareholders' Interest
Net Profit (Loss)

12
37
(10)
0
26
11%
1

2
(51)
3
1
(50)
-231%
(1)

26
153
(23)
130
30%
4

58
542
(81)
461
35%
13

70
614
(92)
522
37%
15

84
222
(33)
188
44%
5

Balance Sheet
Cash and Cash Equivalents
Trade & Other Receivables(Current and Non Current)
Amount due from customers
Allegria Development Properties
Other development properties
Other Assets
Total Current Assets
Total Non Current Assets
Property, Plant and Equipment
Investment Properties
Deferred Tax Assets
Total Permanent Assets
Total Assets

238
1,895
2
1,310
1
3,863
4
44
307
23
375
4,242

536
723
2
1,133
775
116
4,646
4
54
303
26
383
5,033

1,363
563
2
1,337
775
116
5,213
4
62
294
26
382
5,600

1,752
402
2
856
775
116
4,658
4
70
286
26
382
5,044

2,026
241
2
233
775
116
3,845
4
78
277
26
381
4,230

2,564
80
2
775
116
3,687
4
86
269
26
380
4,071

Total Current Liabilities

Total Non- current Liabilities
Shareholder's Equity

2,277
183
1,782

2,664
146
2,223

3,101
146
2,353

2,085
146
2,813

749
146
3,335

402
146
3,524

130
696
11
837
(10)
(10)
827
539
1,365

461
(72)
11
399
(10)
(10)
389
1,365
1,754

522
(249)
11
284
(10)
(10)
274
1,754
2,028

188
349
11
548
(10)
(10)
538
2,028
2,566

SGA Expenses
Other operating expenses
Other Operating Income
Operating Expenses
EBIT (incl Revaluation Gain)

Margin
Basic EPS

Cash Flow Statement

Net Profit
Change in Working Capital
Other operating activities
Net cash generated from operating activities
Capex (Excl Hotel Properties)
Other Investments
Net cash generated from investment activities
Net cash generated from financing activities
Net addition (deduction) in cash
Cash at beginning of fiscal year
Cash at end of fiscal year

37
(83)
71
29
(14)
(217)
(229)
(17)
(217)
6,799
238

(65)
(53)
8
(107)
(14)
(114)
(128)
536
301
238
539

Source: Company Data, HC estimates

Macro & Strategy

40

Egypt

Palm Hills

Hold

Most diversified land bank in Egypt, but evolves as second

home developer as its Cairo land depletes.

Hotel foray positive start, but likely to remain value neutral

in the medium-term, in our view.

We initiate on PHD with a Hold recommendation and a

target price of EGP9.5.

Palm Hills 40m sqm land bank is among the most geographically
diversified in Egypt, spread across Cairo, North Coast, Red Sea, Alexandria,
and Aswan. The company also recently acquired 8m sq m in the two largest
Saudi cities, Riyadh and Jeddah. PHD focuses on both mid- high range Cairo
residential communities as well as high-end second homes in resort towns,
mainly on the North Coast.
PHDs strategy entails the acquisition of attractively priced land plots
in untapped locations, transforming them into high value destinations.
The company has a property sales backlog of EGP9.1bn to be delivered over the
next three to four years, out of which 37% comes from Cairo, and the remaining
largely from the North Coast targeting second home buyers. PHD also intends to
foray into the hotel business through an acquisition.
We expect EPS growth of c29% over the next three years, driven by
unit deliveries. That said, we expect margins to come under pressure over the
same period, due to a shift in the mix from high margin villas (recognized on a
50% threshold of completion) and corresponding land (recognized on signing of
contracts) to apartments (recognized on delivery). Also, we expect the company
to increase its gearing to fund the hotel business.

Target Price
Market Price (EGP)
Upside

9.5
7.16
32%

Listed on
EGX, LSE
Bloomberg Code
PHDC EY, PHDC LI
RIC
PHDC.CA, PHDCQ.L
GDRs to Local Shares
1:5
Enterprise Value (EGPmn)
Net Debt (EGPmn)
Market Cap. (EGPmn)
Market Cap. (USDmn)
Number of Shares (mn)
Daily Turnover (USDm)
Daily Turnover (EGPm)

3.3
18.1

Shareholders Structure
MMID
Free Float
ESOP
Executive Director

54%
36%
3%
7%

Price Performance Chart

250

30EGX

We initiate on PHD with a Hold rating and a target price of EGP9.5,

implying a potential upside of 32%. We use DCF and residual land methods
to value the stock. To be conservative, we do not include future projects in our
DCF, instead we apply a 50% discount to the land bank. We apply a higher
discount to the companys North Coast land given remote location. We value
PHD at a 42% discount to its 2009e NAV of EGP13.2 per share.
Upside risks to our valuation include a pickup in second home demand
as the global economy recovers, as well as rerating of land bank.
Downside risks include project execution and higher than expected property
reservations cancellation, as PHD recently lowered the reservation amount by
5% to stand at 10% of the unit value.

2007a
535
287
287
322
1.1

2008a
1,235
755
755
633
1.4
6.1

6.3x

5.0x

PHDC

200
150
100
50
0
D

Ankur Khetawat

+971 4 2935387

ankur.khetawat@af-hc.com

Key Performance Indicators

EGP
Revenue (mn)
EBITDA (mn)
EBIT(mn)
NPAT(mn)
EPS
BVPS
P/NAV
PE
PB

5,162
(51)
5,004
913
698.9

2009e
1,033
661
624
548
0.8
5.2
0.5x
9.1x
1.4x

2009c
1,288
697
644
506
0.7

Diff
-20%
-5%
-3%
8%
10%

2010f
2,174
1,113
1,078
1,032
1.5
6.5
4.9x
1.1x

2010c
1,938
1,001
2,171
724
1.0

Diff
12%
11%
-50%
42%
46%

Majed Azzam

+971 4 2935385

majed.azzam@af-hc.com
Nermeen Abdel Gawad

+202 3332 8628

ngawad@hc-si.com

A=Actual; E/F=HCs Estimates/Forecasts; C=Consensus Estimates

Macro & Strategy

41

Egypt

Palm Hills Financial Statements (EGPmn)

Year to December
Income Statement
Total Revenue
Total Costs

2007a

2008a

2009e

2010f

2011f

2012f

2013f

535
(142)

1,235
(293)

1,033
(254)

2,174
(949)

3,403
(1,967)

3,084
(1,799)

1,065
(623)

% of sales

27%

24%

25%

44%

58%

58%

59%

Gross Profit

393

942

779

1,225

1,435

1,285

442

Margin

73%

76%

75%

56%

42%

42%

41%

(111)
5
(105)
287

(211)
25
(187)
755

(146)
(19)
10
(156)
624

(110)
(38)
(147)
1,078

(116)
(36)
(152)
1,283

(125)
(35)
(160)
1,125

(125)
(34)
(160)
283

Margin

54%

61%

60%

50%

38%

36%

27%

Net Financing cost

Profit before Taxes
Income Taxes
Minority Shareholders' Interest
Net Profit (Loss)

24
311
11
1
322

(24)
731
(98)
633

34
658
(110)
548

54
1,132
(100)
1,032

48
1,331
(82)
1,248

70
1,194
(17)
1,177

83
365
(2)
363

Margin

60%

51%

53%

47%

37%

38%

34%

3,405

280

720

775

354

1,011

1,691

1,731
12
3,989
1,704
10,867
34
100
7,829
7,963
2,562
16,763
5,023
24,348
43,178

683
4,940
522
6,425
0
471
1,658
2,129
543
48

550
4,879
1,653
779
8,636
0
487
1,411
1,899
592
33

393
4,879
2,064
556
8,246
0
487
1,008
1,495
592
27

236
4,879
849
334
7,309
0
487
605
1,092
592
22

79
4,879
111
6,760
0
487
202
689
592
18

613
9,014

609
8,058

Selling and Marketing Expenses

Depriciation
Other Income
Operating Expenses
EBIT (incl Revaluation Gain)

Basic EPS
Balance Sheet
Cash and Cash Equivalents
Notes Receivable (PDC)
Development Properties
Development Work in Progress
Other Current Assets
Total Current Assets
Investments in Associates
Long Term Investments
Notes Receivables (PDC)
Total Non Current Assets
Property, Plant and Equipment
Intangible asset
Other Permanent Assets
Total Permanent Assets
Total Assets
Total Current Liabilities
Total Non Current Liabilities
Shareholder's Equity
Cash Flow Statement
Net profit
Change in Working Capital
Other operating activities
Net cash generated from operating activities
Capex PPE
Advance Payments for investment acquisition
Net cash generated from investment activities
Net cash generated from financing activities
Net addition (deduction) in cash
Cash at beginning of fiscal year
Cash at end of fiscal year

Macro & Strategy

3,748
15,068
24,397

223
(80)
25
167
(451)
(108)
(1,254)
756
(330)
-

591
9,145

707
4,879
1,036
1,001
8,344
0
487
1,815
2,302
591
41
632
11,278

2,681
3,633
2,832

6,926
743
3,609

719
(1,308)
11
(572)
(58)
(362)
(518)
1,359
268
-

779
(325)
24
481
(68)
(16)
(84)
55
451
451

624
11,159
5,936
673
4,550

941
(650)
38
329
(30)
(30)
(244)
55
451
506

618
10,360
4,289
374
5,697

1,146
(1,345)
36
(163)
(30)
(30)
(229)
(422)
506
84

2,194
123
6,697

1,001
(168)
35
868
(30)
(30)
(181)
657
84
742

986
37
7,034

337
354
34
725
(30)
(30)
(15)
680
742
1,422

42

Egypt

Orascom Development Holding (ODH)

Unique land acquisition strategy reduces land carry cost

and hence enhances liquidity and margins.

UK and Montenegro land acquisitions reinforces strategy,

but value accretion over the long-term only, we believe.

We initiate on ODH with a Hold recommendation and a

target price of CHF95.

ODH creates value by acquiring land at very competitive terms and

then transforming it into high-end integrated communities. This
translates into lower carrying cost and higher margins. The company has
successfully replicated this strategy across multiple geographies, including
Egypt, Oman, UAE, Switzerland and the United Kingdom. ODH currently holds a
land bank of 141m sqm, with the biggest exposure to Egypt with 73m sqm.

Hold
Target Price (CHF)
Market Price (CHF)
Upside

95.0
80.2
18%

Listed on
Bloomberg Code
RIC

EGX, SIX
ODHN EY, ODHN SE
ODHN.CA, ODH.S

Enterprise Value (CHFmn)

Net Debt (CHFmn)
Market Cap. (CHFmn)
Market Cap. (USDmn)
Number of Shares (mn)

2,381
350
1,863
1,864
23.2

ODHs business model is the most vertically and geographically

diversified among its peers in Egypt. The company owns c6,900 hotel
rooms and operates tour management services, making it the largest player in
the hospitality segment. Unlike a typical real estate developer, this provides
strong earnings visibility and stability. ODH is also among a few Egyptian
developers that have exposure to the low income segment, which, although
marginally contributing to the overall valuation, could unlock further potential.
However, we feel that for ODH rapid land value unlocking potential remains
limited due to its large size, remote location and the companys selective launch
strategy.

Daily Turnover (USDmn)

Daily Turnover (CHFmn)

0.55
0.54

Shareholders Structure
Promoters
Janus Capital Mgmt LLC
Free Float
Others

60%
6%
10%
24%

We initiate on ODH with a Hold rating and a target price (TP) of

CHF95, implying a potential upside of 18%. We use DCF to value hotel
and existing backlog and use NAV to value the land. To be conservative, we do
not include future projects in our DCF, instead we apply a 50% discount to the
land bank. We value ODH at a 34% discount to its 2009e NAV of CHF142.6 per
share.

Price Performance Chart

300

30EGX

250

ODHN

200
150
100
50

EDR listing is likely to enhance visibility/liquidity and hence may lead

to renewed interest on the EGX. A weaker than expected tourism market in
Egypt poses a key risk.

0
D

Ankur Khetawat

+971 4 2935387

Key Performance Indicators

CHF
Revenue(mn)
EBITDA(mn)
EBIT(mn)
NPAT(mn)
EPS
BVPS
P/NAV
PE
PB

2007a
407
126
126
84
3.6
22

2008a
568
168
202
96
4.1
35

22.1x
3.6x

19.3x
2.3x

2009e
562
162
176
87
3.7
39
0.6x
21.5x
2.1x

2009c
592
190
164
109
4.6
39

Diff
-5%
-15%
7%
-20%
-19%
0%

A=Actual; E/F=HCs Estimates/Forecasts; C=Consensus Estimates

Macro & Strategy

2010f
698
259
287
147
6.3
45
12.7x
1.8x

2010c
681
266
232
142
6.4
44

Diff
3%
-2%
24%
3%
-2%
2%

ankur.khetawat@af-hc.com
Majed Azzam

+971 4 2935385

majed.azzam@af-hc.com
Nermeen Abdel Gawad

+202 3332 8628

ngawad@hc-si.com

43

Egypt

ODH Financial Statements (CHFmn)

Year to December
Income Statement
Total Revenue
Total Cost

2007a

2008a

2009e

2010f

2011f

2012f

2013f

407
(258)

568
(371)

562
(389)

698
(452)

825
(531)

769
(447)

650
(413)

% of sales

63%

65%

69%

65%

64%

58%

63%

Gross Profit

149

197

173

246

294

322

237

Margin

37%

35%

31%

35%

36%

42%

37%

SGA Expenses
Other Operating Expenses
Total Operating Expenses

(10)
(13)
(23)

(30)
(34)
(64)

(34)
8
(25)

(32)
17
(15)

(34)
17
(17)

(36)
15
(21)

(38)
13
(25)

EBIT (incl Revaluation Gain)

126

133

148

231

277

302

212

Margin

31%

23%

26%

33%

34%

39%

33%

Net Financing cost

Investment Income
Associate Income
Increase of provisions
Profit before Taxes
Income Taxes

(12)
4
(5)
113
(10)

(15)
6
2
(1)
126
(10)

(16)
5
(0)
(9)
127
(16)

(19)
212
(32)

6
282
(42)

23
325
(49)

35
248
(37)

Income Taxes %

-9%

-8%

-13%

-15%

-15%

-15%

-15%

18
84

19
96

24
87

34
147

46
194

39
237

30
181

21%

17%

15%

21%

24%

31%

28%

10

Balance Sheet
Cash and Cash Equivalents
Trade & Other Rec Current and Non Current)
Development Properties
Development Work in Progress
Other Current assets
Total Current Assets
Investments in Associates
Other Financial Assets
Total Non Current Assets
Intangible asset
Property, Plant and Equipment
Permanent Assets
Total Assets
Total Current Liabilities
Total Non Current Liabilities
Shareholder's Equity

87
95
69
161
412
40
40
33
676
708
1,160
337
150
674

177
182
141
188
688
37
46
82
33
857
890
1,660
538
175
947

55
173
514
375
1,117
37
49
86
33
928
961
2,163
908
189
1,066

507
102
569
375
1,553
37
49
86
33
920
953
2,592
1,157
189
1,247

943
47
378
375
1,743
37
49
86
33
912
945
2,774
1,099
189
1,487

1,179
198
375
1,752
37
49
86
33
905
938
2,776
864
189
1,724

1,331
121
375
1,827
37
49
86
33
897
931
2,843
768
189
1,887

Cash Flow Statement

Net Profit
Change in Working Capital
Other operating activities
Net cash generated from operating activities
Capex (Excl Hotel Properties)
Additions to Development WIP
Other Investments
Net cash generated from investment activities
Net cash generated from financing activities
Net addition (deduction) in cash
Cash at beginning of fiscal year
Cash at end of fiscal year

112
(94)
28
46
(151)
(10)
(33)
(194)
166
19
6,799
6,814

120
(106)
43
57
(199)
(28)
(40)
(266)
305
96
6,799
177

119
(198)
12
(68)
(10)
0
(10)
29
(49)
177
129

180
264
28
472
(20)
(20)
452
129
581

240
188
28
456
(20)
(20)
436
581
1,017

276
(8)
27
295
(20)
(20)
(39)
237
1,017
1,253

211
(19)
27
219
(20)
(20)
(48)
152
1,253
1,405

Minority Shareholders
Net Profit (Loss)

Margin
EPS

Macro & Strategy

44

Egypt

Egypt's Telecom Sector

We consider the telecom sector to be a safe haven in light of the world financial crisis and recent
sell-offs.
offs. Consumer telecom spending is not significantly
ificantly affected by the recent crises.

We positively view the strong cash flow generation ability of Egyptian Telecom companies,
particularly TE.

The sector presents us with a diversified investment story,

story with TE as a play on yields and Mobinil as
a play
lay on growth. Our preferred stock at such times is TE, as investors tend to prefer high yielding
stocks.

TE and Mobinil trade at a discount to regional peers on PER and EV/EBITDA multiples for 2010f

Chart 1: Egyptian players outperforming peers and MSCI Telecom EMEA, investors confidence in the sector
MSCI Telecom EMEA

Qtel

NMTC

ZAIN

ORTE

OTEL

EMOB

ETEL

430
330
230
130
30

Source Bloomberg, HC Brokerage

Chart 2: TE and Mobinil relative to peers

2010f EV/EBITDA vs. EBITDA CAGR (2010f-2012f)
(2010f

16.0
Bharti
14.0 Maroc Tel. Telenor
12.0Telefonica
Turkcell Bezeq
WataniyaBelgacom
MTN
10.0
Zain
Cellcom
OTH
Partner
Reliance 8.0
TE
Mobinil
Qtel
6.0
Omantel
4.0
2.0
-

20.0%

10.0%

0.0%

10.0%

20.0%

EPS CAGR (2010f-2012

2012f)

30.0%

10.0
EV/EBITDA 2010f

PER 2010f

2010f PER vs. EPS CAGR (2010f-2012f)

2012f)

Bharti
Turkcell

8.0
Wataniya
Telefonica
Partner
Omantel
6.0
Belgacom

4.0
TE

Maroc Tel.

Qtel

Bezeq OTH

TelenorCellcom

Reliance

Zain

Mobinil
MTN

2.0
-

2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0% 12.0%

EBITDA CAGR (2010f-2012f)

(

Source: TE, Bloomberg,

g, Reuters Knowledge and HC Research

Macro & Strategy

45

Egypt

Chart 3: Telecom players offer decent yields relative to regional peers, especially TE
Dividend yield of Egyptian telecoms relative to peers
(2009e)
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%

11%10%
9%

FCF yield of Egyptian telecoms relative to peers (2009e)

25.0%
8% 8% 8%

20%
18%

20.0%
6%

5% 5% 4%

15.0%
3% 3%

2%

7%
5% 6% 7%

10.0%
1% 1% 1%

5.0%

11%12%12%
9% 10%

0% 1%

0.0%
-5.0%

-1%

Source Bloomberg and HC Brokerage

Macro & Strategy

46

Egypt

Telecom Egypt (TE)

Buy

We view TE as a play on yields, offering dividend and FCF yields of

9.9% and 17.6% for 2009e, unmatched by regional peers. In the
absence of acquisition targets, TE will keep returning the excess cash
to shareholders.

Target Price
Market Price
Upside

EGP23.46
EGP16.77
39.9%

Mobinil deal acts as a positive trigger for TEs stock given that TE will
now offer the only exposure to Egypts lucrative mobile market
through its stake in VFE.

We maintain our 'Buy' recommendation and increase our target price

by 4.7% to EGP23.46/share, reflecting lower WACC post MPCs rate
cuts. Post Egyptian market sell-offs, the stock offers a 40% upside
potential.

Listed on
GDRs to local shares
Bloomberg Code
Reuters Code

EGX, LSE
1:5
ETEL EY
ETEL.CA

Ent. Val. (EGP)

Net Debt (EGP)
Mark. Cap (EGP)
Mark. Cap (USD)
Num. of Shares

27.9 billion
-0.7 billion
28.6 billion
5.2 billion
1,707 million

Daily Turn. (EGP)

Daily Turn. (USD)

25.2 million
4.6 million

TE posted strong 3Q09 results in line with our estimates. Revenue came in 2.0% below
our expectations due to lower contribution from the wholesale LoB, reflecting seasonality and
the impact of the new agreement signed with VFE offering the latter discounted rates. Despite
recording lower sales, net income came in line with our estimates with a deviation of 1.9% due
to a 16.9% higher than expected contribution from Vodafone Egypt (VFE) on the heels of
surprising EBITDA margin and higher usage. We believe that the wholesale LoB, broadband and
TE North are TEs top line growth saviors and positively view the recent offers introduced by TE
to compete with mobile players. We are estimating a downward trend in TEs EBITDA margin,
reflecting strong competition from mobile players. We forecast net income to grow at a CAGR of
6.7% from 2010f-2012f, backed by hefty contributions from VFE and cost savings.
TE is going through two arbitration cases against VFE and Mobinil in a dispute over
interconnection rates. This dispute has affected VFEs 2009 dividend distributions, as
Vodafone Group preferred not to distribute dividends and wait for the outcome of the
arbitration. We believe that its unlikely that the National Telecommunications Regulatory
Authority (NTRA) would go back on its decision and view this as a way by Vodafone Group to
pressure TE to change its stance with regards to the interconnection rates. We believe that TE is
in a solid position and it's a matter of time before the company starts receiving dividends from
VFE again (by 2010f, in our view). Excluding the withheld dividends from VFE, TE is expected to
close 2009e with a net cash position of around EGP1.4 billion, offering a dividend and FCF yields
of 9.9% and 17.6% respectively for 2009e.
We downplay the effect of the issuance of two triple play licenses on TEs voice
revenue stream given that these licenses wont include voice and would mainly be offering
internet services. Besides, the licenses are not expected to be operational before 2H10. The
winners of these licenses would service compounds with a maximum number of units of 5,000;
anything in excess would be serviced by TE. Also, TE announced that it would roll out fiber optic
cable networks in at least four to five big residential compounds next year, including Katameya.
We maintain our 'Buy' recommendation and increase our target price by 4.7% to
EGP23.46/share, reflecting lower WACC post MPCs rate cuts. The stock trades at a discount
to peers of 18.5% and 29.4% on 2010f PER and EV/EBITDA multiples respectively. The
EV/EBITDA multiples is adjusted to TEs stake in VFE. We estimate that TEs stake in VFE is
valued by the market at a 38.7% discount to its fair value.

Shareholders Structure
Government
Free Float

80 %
20%

Price Performance Chart

25

EGX30
ETEL

23
21
19
17
15
13
11
N

NematAllah Choucri

+202 3332-8610

nchoucri@hc-si.com
Sarah Shabayek

EGP Million
Revenue
EBITDA
EBITDA Margin
Net income
EPS (EGP)
EPS growth
Net debt/EBITDA (x)
PER (x)
EV/EBITDA (x)*
Dividend Yield
Free cash flow yield

Macro & Strategy

New
09E
10,314
5,093
49.4%
3,235
1.90
32.2%
-0.28
8.85
3.60
9.9%
17.6%

Old
10E
10,397
4,817
46.3%
3,374
1.98
4.3%
-0.57
8.49
3.41
10.0%
16.0%

09E
10,265
4,857
47.3%
3,086
1.81
26.1%
-0.38
9.28
3.61
9.5%
15.5%

10E
10,599
5,042
47.6%
3,441
2.02
11.5%
-0.65
8.32
3.24
10.2%
16.4%

Consensus
09C
10C
10,265
10,599
5,108
5,269
49.8%
49.7%
3,086
3,530
1.82
2.11
22.3%
16.0%
-0.36
-0.75
9.09
8.26
5.47
5.30
8.9%
10.2%
NA
NA

+202 3332-8640

sshabayek@hc-si.com

47

Egypt

Table 1: 3Q09 results KPIs

Subscribers (000)
Net adds (000)
Retail Revenue
Wholesale Revenue
Total Revenue (EGP mill.)
EBITDA (EGP mill.)
EBITDA margin (%)
Net income (EGP mill.)
NPM (%)
CAPEX (EGP mill.)
CAPEX/Sales (%)

3Q09a
9,631
-208
1,506
1,034
2,540
1,261
49.6%
768
30.2%
260
10.2%

2Q09a
9,840
-1,707
1,550
1,127
2,676
1,293
48.3%
741
27.7%
259
9.7%

QoQ
-2.1%
-87.8%
-2.8%
-8.3%
-5.1%
-2.5%
3.6%
0.2%

3Q08a
11,325
58
1,653
1,035
2,688
1,363
50.7%
891
33.1%
203
7.5%

YoY
-15.0%
-458.7%
-8.9%
-0.1%
-5.5%
-7.5%
-13.8%
28.4%

3Q09e
10,699
53
1,433
1,158
2,591
1,245
48.0%
754
29.1%
391
15.1%

Dev.
-10.0%
-494.8%
5.1%
-10.7%
-2.0%
1.3%
1.9%
-33.4%

9M09a
9,631
-2,071
4,524
3,219
7,742
3,830
49.5%
2,410
31.1%
697
9.0%

9M08a
11,325
96
4,558
2,934
7,492
3,667
48.9%
2,015
26.9%
658
8.8%

YoY
-15.0%
NM
-0.7%
9.7%
3.3%
4.5%
19.6%
5.9%

Source: TE, HC Research

Chart 1: Revenue Breakdown as of 9M09

Retail vs. wholesale

Total Revenue Mix

Internet &
Others
Domestic %10

Access
%21

WS
%10
Wholesale
Revenue
%42
Retail
Revenue
%58
Voice
%28

Int'l WS
%31

Source TE, HC Research

TE trades at a discount to peers,, TEs stake in VFE valued at a 38% discount to its fair value
nd EV/EBITDA multiple of 3.4x
3.4 (adjusted to TEs stake in VFE),
VFE) which represents discounts of
TE trades at a 2010f PER of 8.5x and
18.5% and 29.4%
% to peers on 2010f PER and EV/EBITDA multiples respectively. We estimate that TEs stake in VFE is valued by
the market at a 38.7% discount to its fair value.

Chart 2: TE relative to peers

2010f PER vs. EPS CAGR (2010f-2012f)
2012f)

2010f EV/EBITDA vs.

s. EBITDA CAGR (2010f-2012f)
(2010f

Bharti
Maroc Tel.Telenor
Turkcell Bezeq
Telefonica
Belgacom
10.0
Wataniya
MTN
Zain
Cellcom
OTH
Partner
Reliance
TE
Mobinil
Qtel
Omantel
5.0

10.0
EV/EBITDA 2010f

PER 2010f

15.0

%10.0

Turkcell

Wataniya
Telefonica
Partner
Omantel
6.0
Belgacom

4.0
TE

Maroc Tel.

Qtel

Bezeq OTH

Telenor Cellcom

Reliance

Zain

Mobinil
MTN

2.0

%20.0

Bharti

8.0

%0.0

%10.0

%20.0

EPS CAGR (2010f-2012f)

%30.0

%2.0

%0.0

%2.0

%4.0

%6.0

%8.0

%10.0

%12.0

EBITDA CAGR (2010

2010f-2012f)

Source: TE,, Bloomberg, Reuters Knowledge and HC Research

Macro & Strategy

48

Egypt

Financial Statements
All figures in EGP Million

Income Statement
Retail Revenue
Wholesale Revenue
Total Revenue

Growth in Revenue (%)

EBITDA

EBITDA Margin

2008a

2009e

2010f

2011f

2012f

2013f

6,181
3,936
10,117

6,065
4,249
10,314

5,818
4,580
10,397

5,936
4,746
10,682

5,997
4,964
10,961

5,932
5,179
11,110

1.2%

1.9%

0.8%

2.7%

2.6%

1.4%

4,600

5,093

4,817

4,879

4,939

4,906

45.5%

49.4%

46.3%

45.7%

45.1%

44.2%

(2,696)
1,904

(2,686)
2,407

(2,406)
2,412

(2,271)
2,608

(2,131)
2,808

(2,001)
2,905

OPM

18.8%

23.3%

23.2%

24.4%

25.6%

26.1%

Investment income
Net Interest
Profit Before Taxes (PBT)
Taxes
Minority Interest
Net Profit

1,180
(118)
2,966
(512)
(6)
2,448

1,347
29
3,782
(541)
(6)
3,235

1,477
93
3,982
(601)
(7)
3,374

1,502
198
4,309
(674)
(8)
3,627

1,547
346
4,700
(757)
(10)
3,934

1,630
495
5,029
(816)
(11)
4,202

Net Profit Margin

24.2%

31.4%

32.4%

34.0%

35.9%

37.8%

Depreciation & Amortization

Operating Profit

Earnings per Share (EPS)

1.43

1.90

1.98

2.12

2.30

2.46

Growth in EPS (%)

2.8%

32.2%

4.3%

7.5%

8.5%

6.8%

Dividends Per Share (DPS)

1.30

1.67

1.68

1.81

1.96

2.09

90.7%

88.0%

85.0%

85.0%

85.0%

85.0%

Balance Sheet
Intangible Assets
Tangible Assets
Investments
Total Fixed Assets
Total Current Assets
Total Current Liabilities
Total LT Liabilities
Minority Interest
Shareholders Equity

155
18,213
7,009
25,377
8,061
5,663
1,971
38
25,766

128
16,843
7,669
24,640
7,070
5,008
286
47
26,369

102
15,893
8,169
24,164
8,424
5,073
586
54
26,875

77
14,908
8,377
23,361
10,376
5,370
886
62
27,419

51
13,988
8,609
22,647
12,341
5,722
1,186
71
28,009

25
13,214
8,853
22,092
14,130
6,014
1,486
83
28,640

Cash flow Statement

Cash Flow from Operations
Dividends received
Interest
Taxes
Capex & Investments
Dividends paid
Net Cash Flow Pre Financing
Financing
Change in cash

5,211
1,321
(342)
(522)
(823)
(1,706)
3,154
(1,869)
1,408

5,159
704
(192)
(532)
(935)
(2,219)
1,830
(2,504)
(551)

5,077
977
93
(541)
(1,430)
(2,847)
1,329
1,329

5,103
1,294
198
(601)
(1,260)
(2,868)
1,866
1,866

5,163
1,315
346
(674)
(1,185)
(3,083)
1,882
1,882

5,167
1,385
495
(757)
(1,202)
(3,344)
1,744
1,744

0.10
9.1%

(0.28)
9.7%

(0.57)
14.0%

(0.94)
12.0%

(1.31)
11.0%

(1.68)
11.0%

Dividends Pay-Out (%)

Key Ratios
Net Debt/EBITDA (x)
CAPEX to Sales

Macro & Strategy

49

Egypt

Mobinil

Buy

We see Mobinil as a play on growth rather than dividends, with an EPS

CAGR of 19% from 2010f-2012f. Given the company's significant
financial obligations in 2010f, we believe that its decision to lower
dividend payout is well justified.

Target Price
Market Price
Upside

EGP250.04
EGP205.97
21%

Mobinils deal valuation implies an EV/EBITDA of 5.5x (2010f), which

in our view includes a controlling premium of 26% and a PER of
10.8x.

Listed on
Bloomberg Code
Reuters Code

EGX
EMOB EY
EMOB.CA

We issue a 'Buy' on Mobinil based on a target price of EGP250/share,

suggesting an upside of 21%. FTs offer to acquire up to 100% of
Mobinil limits the downside risk to our valuation.

Ent. Val. (EGP)

Net Debt (EGP)
Mark. Cap (EGP)
Mark. Cap (USD)
Num. of Shares

25.5 billion
4.9 billion
20.6 billion
3.8 billion
100 million

Daily Turn. (EGP)

Daily Turn. (USD)

19.8 million
3.6 million

We believe that the Egyptian mobile market, with a penetration rate of 68%, still offers
room for growth relative to other markets in the region. However, we believe that the
growth drivers have changed, reflecting the markets stage of growth, approaching
maturity. We give a higher weight to usage and subscribers growth as a future revenue
driver, and a lower weight to value added services. For these reasons, we like Mobinil as
it is the market leader by subscribers (a 46% market share) and the demand for its
services is more elastic than that of Vodafone Egypt (VFE) (Etisalat Misr KPIs are not
publicly disclosed). Mobinils price elasticity of demand in 3Q09 was 1.78 vs. 0.47 for VFE.
Mobinil is seeking to acquire LinkDotNet and has three major upcoming payments with a
total combined value of around EGP2.6 billion, broken down as follows: an EGP750
million 2G related payment that was due in January 2009 but was postponed as the
company did not receive the required frequency (will most probably be paid in 2010), an
EGP750 million 3G payment that is due in January 2010, and an EGP1.1 billion 3G
payment that is due in December 2010. Given the tight credit environment the company
is operating in and the CBE regulations stipulating that banks are allowed to lend only a
certain portion of their total loans to any one client (the banks are linking Mobinils ability
to borrow to its shareholder OTH), the company has resorted to two solutions: 1)
lowering the dividend payout. Mobinil approved a DPS of EGP2.0 for 1H09, suggesting a
dividend payout of 21%, lower than 68% in 1H08 which suggests that total dividends for
2009e will be lower than those in 2008, and 2) issuing bonds with a maximum value of
EGP1.5 billion (USD273 million). We believe that Mobinils decision to lower its dividend
payout in 2009e is well justified.

Shareholders Structure
Free Float
29.0%
Mobinil
51.0%
Consortium*
OTH
20.0%
*Mobinil Consortium is 71.25% owned by France
Telecom and 28.75% owned by OTH.

Price Performance Chart

250
200
150

We rate Mobinil as a 'Buy' based on our DCF target price of EGP250/share, offering a
21% upside. We forecast net income to grow at a CAGR of 19% from 2010f-2012f,
backed by operational growth and deleveraging. The stock trades at a discount of 11.3%
and 18.7% to peers on 2010f PER and EV/EBITDA multiples, respectively.

100

EMOB

50

EGX30

0
N

EGP Million
Revenue
EBITDA
EBITDA Margin
Net income
EPS (EGP)
EPS growth
Net debt/EBITDA (x)
PER (x)
EV/EBITDA (x)*
Dividend Yield
Free cash flow yield

Macro & Strategy

New
09E
10,911
5,138
47.1%
1,892
18.9
-3.9%
0.93
10.88
4.94
3.1%
5.9%

Old
10E
12,272
5,706
46.5%
2,397
24.0
26.7%
0.95
8.59
4.56
7.0%
4.1%

09E
11,211
5,226
46.6%
2,007
20.1
1.9%
1.30
10.26
5.24
6.5%
3.4%

10E
12,237
5,602
45.8%
2,089
20.9
4.1%
1.23
9.86
4.90
6.8%
6.2%

Consensus
09C
10C
10,978
11,894
5,120
5,458
46.6%
45.9%
1,999
1,990
20.0
19.9
1.52%
-3.30%
1.01
1.13
10.41
10.22
4.81
4.51
4.89%
5.76%
N/A
N/A

NematAllah Choucri

+202 3332-8610

nchoucri@hc-si.com
Sarah Shabayek

+202 3332-8640

sshabayek@hc-si.com

50

Egypt

Mobile Penetration (%)

(2008)

Chart 1: Egypts mobile penetration rate still below others in the region, usage is a key element to drive growth
120.0%

Maldives

100.0%
Morocco

80.0%

Malaysia

Jordan
Tunisia

Algeria

60.0%

Pakistan

40.0%

Iraq
Syria

20.0%

Iran
Lebanon

Egypt
China

Yemen

0.0%
0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

GDP per Capita (PPP) (USD/2008)

Source: ITU, IMF and HC Research

Chart 2: Mobinil has higher elasticity of demand than VFE

Mobinil usage vs. effective tariff per minute
170

MoU

Vodafone Egypt usage vs. effective tariff per minute

0.50

190

0.60

170
150

110
90

0.30

70
50

0.20

130

Minutes

0.40

EGP/minute

130

110
90
70
50

0.50

EGP/minute

150

Minutes

MoU

0.40
0.30
0.20

Source: Mobinil, VFE and HC Research

Chart 3: ARPU dilution is decelerating, promising market stabilization and growth

ARPU in EGP (including roaming)
140
120
100
80
60
40
20
0

Source Mobinil, HC Research

Macro & Strategy

51

Egypt

Mobinil trades at a discount to peers on 2010f multiples

Mobinil trades at a 2010f PER of 8.6x and EV/EBITDA multiple of 4.6x, which represents a discount to peers of 11.3% and 18.7%
on 2010f PER and EV/EBITDA respectively.

Chart 4: Mobinil relative to peers

2010f PER vs. EPS CAGR (2010f-2012f)

2010f EV/EBITDA vs. EBITDA CAGR (2010f-2012f)

PER 2010f

14.0
12.0

Wataniya

Bhart
Maroci
Telecom

10.0

Reliance

8.0

Telenor

Turkcell
Telefonica
Cellcom
Partner
Qtel
TE
Omantel

MTN
Zain
OTH
Mobinil

6.0
%12.0

%2.0

%8.0

%18.0

EV/EBITDA 2010f

16.0

9.0
Bharti
8.0
Maroc
Telecom
7.0
Turkcell
Qtel
Wataniya
6.0
Telefonica
Telenor
5.0
Mobinil
OTH
Partner
Cellcom
4.0 Omantel
MTN
Reliance
Zain
TE3.0
2.0
1.0
-

%2.0

%3.0

%8.0

EBITDA CAGR (2010f-2012f)

EPS CAGR (2010f-2012f)

Source: Mobinil, Bloomberg, Reuters Knowledge and HC Research

Mobinil deal to take place at implied EV/EBITDA of 5.5x and PER of 10.8x for 2010f
FT's offer to acquire up to 100% of Mobinil represents a premium of 18.9% to the market price, 17.7% to the average price for the
last six months, and 63.3% to the closing price on April 5th, 2009 (last share price before the arbitration ruling was announced). We
estimate the deal to take place at an implied EV/EBITDA of 5.5x and PER of 10.8x, suggesting a controlling premium of around
26%. FTs offer will be valid from December 15th, 2009 to January 14th, 2010.
According to FT, obtaining this approval was the only condition set by the Egyptian authorities that would enable the Trading
Committee of the Egyptian stock exchange to authorize the execution of the arbitration ruling that was handed down by the
Arbitration Court of the International Chamber of Commerce to settle the dispute between Mobinils two shareholders, FT and
Orascom Telecom Holding (OTH).

Table 1: Calculation of deals multiples

OTHs indirect stake of 14.7%
FTs indirect stake of 36.3%
OTHs direct stake of 20.0%
Free Float stake of 29.0%
Total
2010f Net debt
EV
2010f EBITDA
Deal implied EV/EBITDA (2010f)
Deal average price
2010f EPS
Deal implied PER (2010f)

Price per share

EGP273
EGP273
EGP245
EGP245
-

Total value in EGP

EGP4,013 million
EGP9,909 million
EGP4,900 million
EGP7,105 million
EGP25,927
EGP5,404
EGP31,331
EGP5,706
5.5x
EGP259.27/share
EGP23.97
10.8x

Total value in USD

USD734 million
USD1,812 million
USD896 million
USD1,299 million
USD4,741
USD988
USD5,729
USD1,043
5.5x
USD47.40/share
USD4.38
10.8x

Source: FT and HC Research

Macro & Strategy

52

Egypt

Financial Statements
All figures in EGP Million

Income Statement
Revenue

Growth in Revenue (%)

Total Operating Costs (excl. D&A)
EBITDA

EBITDA Margin

2008a

2009e

2010f

2011f

2012f

2013f

10,003

10,911

12,272

13,616

14,686

15,475

22.0%

9.1%

12.5%

11.0%

7.9%

5.4%

(5,257)
4,681

(5,773)
5,138

(6,565)
5,706

(7,321)
6,296

(7,928)
6,758

(8,382)
7,093

46.8%

47.1%

46.5%

46.2%

46.0%

45.8%

(1,660)
3,086

(1,910)
3,228

(2,104)
3,602

(2,224)
4,071

(2,265)
4,493

(2,307)
4,785

OPM

30.8%

29.6%

29.4%

29.9%

30.6%

30.9%

Other non-oper. income

Net Interest Expense
PBT
Taxes
Minority Interest
Net Profit

(72)
(546)
2,468
(499)
(1)
1,969

23
(674)
2,577
(683)
(1)
1,892

(586)
3,017
(618)
(1)
2,397

(532)
3,539
(726)
(1)
2,813

(467)
4,027
(825)
(1)
3,200

(330)
4,456
(913)
(1)
3,541

Depreciation & Amortization

Operating Profit

Net Profit Margin

19.7%

17.3%

19.5%

20.7%

21.8%

22.9%

Appropriations
Net Profit after appropriations

(156)
1,813

(132)
1,760

(168)
2,229

(197)
2,616

(224)
2,976

(248)
3,293

EPS

19.69

18.92

23.97

28.13

32.00

35.41

7.7%

-3.9%

26.7%

17.3%

13.8%

10.7%

Growth in EPS (%)

Dividends Per Share

12.60

6.32

14.38

16.88

19.20

21.25

Dividends Pay-Out (%)

64.0%

33.4%

60.0%

60.0%

60.0%

60.0%

Intangible Assets & other

Tangible Assets and Investments
Total Fixed Assets
Total Current Assets
Total Current Liabilities
Total LT Liabilities
Shar. Equity & Minorities

4,199
7,871
12,070
1,588
5,429
6,453
2,245

3,630
8,922
12,552
1,595
5,216
5,263
3,668

3,399
9,215
12,615
2,024
3,747
6,263
4,628

4,169
9,592
13,761
1,684
3,940
5,750
5,755

3,838
9,962
13,800
1,719
4,102
4,381
7,036

3,507
10,293
13,800
2,273
4,238
3,381
8,454

Cash flow Statement

Cash Flow from Operations
Interest + Minority Divs
Taxes
Capex + Investment
Dividends paid
Net Cash Flow Pre Financing
Financing
Change in cash

4,609
(491)
(562)
(3,532)
(1,197)
(1,173)
1,403
230

4,753
(106)
(431)
(2,340)
(908)
968
(747)
221

5,758
(585)
(683)
(3,667)
(1,438)
(615)
1,000
385

6,336
(532)
(618)
(3,370)
(1,688)
128
(513)
(385)

6,785
(467)
(726)
(2,305)
(1,920)
1,369
(1,369)
-

7,115
(330)
(825)
(2,307)
(2,125)
1,528
(1,000)
528

1.27
31.7%

0.93
22.0%

0.95
17.7%

0.84
16.7%

0.58
15.7%

0.34
14.9%

Balance Sheet

Key Ratios
Net Debt/EBITDA
CAPEX to Sales

Macro & Strategy

53

Egypt

Eastern Company (EC)

Buy

We remain positive about EC given its defensiveness and margin

expansion story driven by a stronger fee business and its impending
relocation to a new production complex.

Other catalysts include an under-development royalty business,

expansion into new export markets and a decision on the fate of its
EGP1.2 billion existing facilities.

We have a target price of EGP150.5/share (27% upside) and a Buy

recommendation on the stock.

We like Eastern Company (EC) for its defensive nature. The company posted revenue
and earnings growth in 2008/09 of 4% and 11%, respectively, capitalizing on still-growing
cigarette consumption despite tough economic conditions. EC has seen the market share for
its own products drop at the expense of foreign brands produced at ECs own facilities (whose
market share increased from 17% in 2007/08 to 21% 2008/09). The increased demand on
foreign brands has been driven by a reduction in their price differential with ECs own brands
following retail price increases imposed by the government in May 2008. This trend bore
favorably on ECs margins (EBITDAR improved by 344 bps in 2008/09) given the fee nature of
the under-license business where no corresponding costs are booked. We expect margins to
remain near current levels as under-license revenues continue to contribute strongly to ECs
revenues. The company is in negotiations with government authorities to alter the current
multi-layered tax system on cigarettes, as any further price increases would subject ECs
brands to higher taxes with minimal benefits on ex-factory prices.
Margins are set to further expand upon relocation to a new production complex
expected in 2011/12. The complex, which is located in Sixth of October City and has an
investment cost of around EGP5.5 billion, will utilize new technologies that would lower costs
through reducing tobacco requirement per unit produced. The complex has placed some
funding pressures on the company, which resorted to the loan market for the first time in its
history. EC recently secured an EGP1 billion loan facility, in addition to an EGP672 million loan
and new lease contracts both of which were secured in 2008/09. Additionally, EC cut its
dividend payout (DPO) to 27% in 2008/09 from 45-50% historically to meet growing financing
needs as relocation nears. This year could see a similar DPO unless EC fully draws down its
existing debt facilities. We expect a sustainable DPO of 60-65% starting 2010/11. A decision
on ECs existing facilities, which will be gradually evacuated starting 2010, is expected in the
near-term. The facilities were valued at EGP1.2 billion by an independent appraiser in August
2009.
A potential royalty business and venturing into untapped export markets (both of
which are not included in our current numbers) could serve as growth drivers for
EC. The company is reportedly in the process of concluding a licensing agreement with a
Jordanian company to produce and market cigarettes under the EC brand in return for royalty
fees. EC is looking to secure similar agreements in other markets such as Sudan. Such
agreements could boost revenues and enhance margins given that their fee nature similar is to
ECs under-license business. Additionally, the company is looking to tap into new, promising
export markets to capitalize on new capacities available upon relocation (roughly an additional
20 billion cigarettes). Exports currently represent 2% of the companys revenue.
We have a Buy recommendation on EC based on a target price of EGP150.5/share
(27% upside). The stock is currently trading at a P/E (10e) of 6.83x, which is at a 28%
discount to its 5-year historical average and at a 44% discount to peers, which is below its
historical discount of around 24% (mainly due to its lower liquidity).

Key Performance Indicators

KPIs
Revenues (EGPm)
EBITDA (EGPm)

EBITDA Margin

150.5
118.3
27.2%

Listed on
Bloomberg Code
RIC

EGX
EAST EY
EAST.CA

Enterprise Value (EGPm)

Net Debt (EGPm)
Market Cap. (EGPm)
Market Cap. (USDm)
Number of Shares (m)

7,036
1,119
5,917
1,086
50.0

Daily Turnover (EGPm)

Daily Turnover (USDm)

3.1
0.6

Shareholding Structure
Free Float
Holding Co. for Chem. Ind.
Employee Association
Others

38.3%
55.0%
5.4%
1.3%

Price Performance Chart

EAST

EGX

Hatem Alaa

+202 33328 614

halaa@hc-si.com
Mai Nehad

NEW
09/10E
10/11F
4,114
4,258
1,258
1,352

OLD*
09/10E
10/11F
4,104
4,251
1,324
1,409

CONSENSUS
09/10E
10/11F
4,206
4,426
1,352
1,448

30.6%

31.8%

32.3%

33.3%

32.1%

32.7%

Net Income (EGPm)

EPS (EGP)

867
17.3

906
18.1

875
17.5

923
18.5

802
16.0

835
16.7

EPS Growth

4%

5%

5%

6%

-3.4%

4.1%

DPS (EGP)

5.2

10.9

8.7

11.1

6.7

7.0

6.83x
5.58x
4.4%
-10.2%

6.53x
5.17x
9.2%
4.6%

6.76x
5.75x
7.4%
-7.5%

6.41x
5.03x
9.4%
11.6%

7.38x
5.11x
5.7%
-

7.09x
4.81x
5.9%
-

P/E
EV/EBITDA
Dividend Yield
FCF Yield

Target Price
Market Price (EGP)
Upside

+202 33328 626

mnehad@hc-si.com

* Old Estimates from Note Dated May 11th, 2009

A = Actual; E/F = HCs Estimates/Forecasts; C = Consensus Estimates

Macro & Strategy

54

Egypt

Financial Statements
2008/09a

2009/10e

2010/11f

2011/12f

2012/13f

2013/14f

INCOME STATEMENT
Local Cigarettes Volume (Bn Sticks)
Local Cigarettes Revenue
Under-License Revenue
Other Revenue
Sales Revenue

Revenue Growth

61.9

63.0

64.2

65.4

66.6

67.9

3,248
492
227
3,967

3,325
576
213
4,114

3,394
649
215
4,258

3,465
718
216
4,399

3,536
780
217
4,533

3,609
830
218
4,658

3.9%

3.7%

3.5%

3.3%

3.1%

2.7%

(2,085)
(336)
(56)
(43)
1,447

(2,138)
(366)
(61)
(41)
1,508

(2,172)
(396)
(65)
(43)
1,583

(2,125)
(453)
(70)
(46)
1,705

(2,185)
(483)
(74)
(50)
1,741

(2,240)
(512)
(78)
(54)
1,773

EBITDAR Growth
EBITDAR Margin

14.7%
36.5%

4.2%
36.7%

4.9%
37.2%

7.8%
38.8%

2.1%
38.4%

1.8%
38.1%

Lease Expense
EBITDA
Depreciation & Amortization
EBIT
Net Interest Income (Expense)
Provisions
Other Income (Expenses)
Non-Recurring Items
EBT
Taxes
Net Income Before Appropriations

(194)
1,253
(200)
1,053
(4)
(60)
(13)
43
1,018
(188)
830

(250)
1,258
(194)
1,064
(3)
(3)
(11)
10
1,057
(191)
867

(230)
1,352
(222)
1,130
(13)
(3)
(13)
1,100
(195)
906

(298)
1,408
(244)
1,163
(11)
(3)
(15)
1,134
(203)
932

(251)
1,491
(269)
1,222
(9)
(4)
(15)
1,194
(218)
977

(204)
1,569
(298)
1,271
(6)
(4)
(16)
1,245
(232)
1,013

Net Income Growth

Net Margin

10.5%
20.9%

4.4%
21.1%

4.5%
21.3%

2.9%
21.2%

4.8%
21.5%

3.8%
21.8%

(70)
760
4.50

(87)
780
5.20

(91)
815
10.87

(93)
839
12.11

(98)
879
12.69

(101)
912
13.17

420
39
2,425
41
2,925
3,836
50.454
3,887
6,812

172
56
2,648
42
2,918
5,177
49.835
5,227
8,145

197
73
2,879
43
3,192
5,678
49.835
5,728
8,920

330
91
3,118
44
3,583
5,696
49.835
5,746
9,329

374
110
3,364
45
3,893
5,682
49.835
5,732
9,625

480
129
3,617
46
4,272
5,627
49.835
5,677
9,949

488
323
1,845
2,656
672
699
1,371
4,027
2784.6

547
347
2,000
2,895
1,272
674
1,946
4,840
3304.7

112
633
634
2,128
3,507
1,160
677
1,837
5,344
3576.5

212
720
699
2,260
3,891
948
680
1,629
5,520
3809.4

193
811
732
2,396
4,133
755
684
1,439
5,572
4053.5

158
904
760
2,536
4,358
597
687
1,284
5,642
4306.9

830
224
97
1,151
(486)
(154)
(640)
(316)
196

867
191
(27)
1,030
(1,535)
6
(1,529)
251
(248)

906
240
(37)
1,109
(723)
(723)
(361)
25

932
261
(38)
1,155
(262)
(262)
(759)
133

977
284
(39)
1,222
(255)
(255)
(922)
44

1,013
311
(40)
1,285
(244)
(244)
(935)
106
55

Raw Materials
Direct Labor
SG&A Expenses
Other Operating Income (Expense)
EBITDAR

Appropriations
Net Income After Appropriations
DPS (EGP)

BALANCE SHEET
Cash & Equivalents
Receivables
Inventory
Other Current Assets
Total Current Assets
Net Fixed Assets
Other Non-Current Assets
Total Non-Current Assets
Total Assets
Short-Term Debt
Payables
Distributions Payable
Other Current Liabilities
Current Liabilities
Long-Term Debt
Other Non-Current Liabilities
Total Non Current Liabilities
Total Liabilities
Total Shareholders Equity

CASH FLOW STATEMENT

Net Income
Non-Cash Items
Net Change in Working Capital
Operating Cash Flows
Net CAPEX
Other Investments
Investing Cash Flows
Financing Cash Flows
Change in Cash

Macro & Strategy

Egypt

Maridive and Oil Services

Buy

We remain positive about the OCS segments prospects given a

strong backlog of around USD560 million until 2011f.

Recent pressures on OSV rates are a concern, but the segments

growth will be driven by fleet additions (9 more vessels until 2011f).

We have a target price of USD5.35/share (37% upside) and a Buy

recommendation on the stock, as we believe high earnings visibility
in 2010f is key at this stage.

We remain bullish on the Offshore Construction Services (OCS) segment

given its solid backlog (67% of total valuation). The company has roughly
USD560 million in secured OCS contracts until 2011f. We expect a strong reversal
in OCS revenues in 4Q09 as the company already began implementing USD180
million contracts in India as well as the procurement phase of the USD380 million
Aramco Manifa field contract. Current backlog implies OCS revenue of over USD65
million in 4Q09, above our estimate of USD52 million (which assumes a spillover of
portion of that into 2010f); therefore, 4Q09 numbers could surprise on the upside.
Over 50% of the OCS segments backlog is expected to be booked in 2010f. Out of
conservatism, we assume minimal EPC contract awards post 2010f. Still, our
numbers from 2011f onwards are nearly double 2008 levels as the company is
expected to receive two new pipe-laying barges one in 4Q09/1Q10 and another
in late 2010f. The company is reportedly still bidding for EPC contracts in different
parts of the world, with an expected near-term announcement that would serve as
a major catalyst for the share price.
We are cautious about the Offshore Support Vessels (OSV) segment
(33% of total valuation) at this stage given pressures on daily rates
witnessed in 3Q09, but fleet additions should drive growth. Daily rates
dropped 12% from 2Q09 levels due to a downward revision on some contracts. We
now conservatively assume nearly flat rates at current levels, but the segment is
still to witness good growth at a CAGR of 16% (09e-11f) driven by the delivery of 9
additional vessels until 2011f, bringing its fleet of new vessels to 21.
We have a Buy recommendation on Maridive as we believe that high
earnings visibility for 2010f is key at this stage. Our price target of
USD5.35/share yields an upside of 37% to the current market price. We like the
company due to its: (i) backlog of around USD800 million (2009e-2011f), around
half of which will be booked in 2010f, (ii) already-secured cheap financing facilities
to finance vessel expansion, and (iii) a low effective tax rate as three subsidiaries
operate in Egyptian free zones, while UAE-based Valentine pays taxes only in
countries where taxes are levied. The stock trades at attractive multiples with a P/E
(10f) of 8.08x. Catalysts include a pick-up in oil prices (with which the share price
has a historical correlation), as well as a rebound in the companys OSV rates and
securing more big OCS contracts, both of which would mandate an upgrade to our
current numbers.

Target Price (USD)

Market Price (USD)
Upside

5.35
3.92
36.5%

Listed on
Bloomberg Code
RIC

EGX
MOIL EY
MOIL.CA

Enterprise Value (USDm)

Net Debt (USDm)
Market Cap. (EGPm)
Market Cap. (USDm)

1,130
92
5,469
1,003

Number of Shares (m)

256

Foreign Ownership Limit

Foreign Ownership Level

Daily Turnover (EGPm)

Daily Turnover (USDm)

11.0
2.0
5.35

Shareholding Structure
Free Float
Offshore Oil Services*
Zeid Family
Others
Eleish Family
CIB

44.48%
21.39%
14.26%
7.76%
6.11%
6.00%

*52%-owned by EFG-Hermes entities, remainder owned

equally by founding families

Price Performance Chart

5

MOIL

30EGX

2
D

Key Performance Indicators

KPIs
Revenues (USDm)
EBITDA (USDm)

NEW*
09E
10F
235
466
111
191

OLD*
09E
279
136

EBITDA Margin

10F
494
207

CONSENSUS
09E
10F
217
442
104
188

47.1%

41.0%

48.9%

41.9%

47.9%

42.5%

Net Income (USDm)

EPS (USD)

75
0.29

124
0.49

102
0.40

143
0.56

74
0.28

137
0.54

EPS Growth (Recurring)

-2%

65%

33%

40%

-3%

82%

DPS

P/E
EV/EBITDA
Dividend Yield
FCF Yield

0.21

0.35

0.28

0.40

0.19

0.38

13.36x
10.95x
5.4%
5.8%

8.08x
6.62x
8.9%
7.8%

10.40x
9.28x
7.2%
4.3%

6.99x
6.47x
10.1%
6.2%

13.35x
10.63x
4.6%
-

7.32x
6.15x
9.1%
-

Hatem Alaa

+202 33328614

halaa@hc-si.com

*Old & New Estimates from Notes Dated Aug. 18th, 2009 and Dec. 7th, 2009, respectively
A = Actual; E/F = HCs Estimates/Forecasts; C = Consensus Estimates

Macro & Strategy

56

Egypt

Financial Statements
USDm

2008a

2009e

2010f

2011f

2012f

2013f

257
(149)
108

235
(124)
111

466
(275)
191

438
(256)
183

451
(263)
188

453
(264)
189

42.2%

47.1%

41.0%

41.7%

41.8%

41.7%

(14)
95
(4)
(7)
84
(1)
(13)
69

(20)
91
(8)
3
86
(2)
(9)
75

(25)
166
(13)
1
154
(4)
(25)
124

(31)
152
(13)
138
(3)
(16)
119

(32)
157
(14)
143
(3)
(16)
124

(33)
156
(11)
145
(3)
(16)
126

26.8%

31.9%

26.7%

27.2%

27.5%

27.8%

(6)
63

(7)
68

(12)
112

(12)
107

(12)
112

(12)
113

Balance Sheet
Cash & Equivalents
Receivables
Other Current Assets
Total Current Assets
Net Fixed Assets
Other Non-Current Assets
Total Non-Current Assets
Total Assets

78
72
26
176
304
16
321
497

78
79
126
283
315
6
321
604

117
110
170
396
364
6
370
767

107
138
208
454
405
6
411
865

101
167
247
515
389
6
395
910

105
196
285
586
372
6
378
965

Short Term Debt

Payables
Distributions
Other Current Liabilities
Total Current Liabilities
Long Term Debt
Other Non-Current Liabilities
Total Non-Current Liabilities
Total Liabilities
Shareholders' Equity

50
18
58
35
161
83
21
104
265
232

39
3
70
97
210
130
40
171
380
224

34
18
125
148
326
152
40
193
518
248

34
31
113
193
371
183
40
223
594
270

33
44
117
238
432
144
40
184
616
294

37
57
118
283
495
112
40
152
647
317

143
28
(12)
158
(106)
4
(102)
12
68

90
28
34
152
(70)
9
(61)
(91)
(0)

150
38
(8)
180
(75)
(75)
(66)
39

135
45
(9)
172
(72)
(72)
(109)
(9)

140
46
(9)
178
(16)
(16)
(167)
(6)

142
45
(10)
177
(16)
(16)
(157)
3

Income Statement
Revenue
Operating Expenses
EBITDA

EBITDA Margin
Depreciation & Amortization
EBIT
Net Interest Income (Expense)
Others
EBT
Taxes
Minority Interest
Net Income

Net Margin
Appropriations
Net Income After Appropriations

Cash Flow Statement

Net Income Before Minority Interest
Non Cash Items
Change in Working Capital
Operating Cash Flow
Net CAPEX
Other Investments
Investing Cash Flows
Financing Cash Flows
Change in Cash

Macro & Strategy

57

Egypt

Citadel Capital

Buy

Recent announcement of planned sale of a 6% stake in each of ASEC

Holding and United Foundries values Citadel Capitals remaining
stake in both at USD452 million (EGP2.46 billion).

Share price performance in first week of trading is a concern but we

expect less volatility and more stock-supportive news flow.

We have a target price of EGP14.73/share (55% upside) and a Buy

recommendation on the stock as it is currently trading near its floor
valuation.

Recent announcement of a planned sale of a 6% stake in each of ASEC

Holding and United Foundries will enhance the companys cash balance, and
assigns a value to Citadel Capitals largest investment. The deal values ASEC
Holding at around USD850 million (EGP4.6 billion). We believe that the deals valuation
does not really reflect the potential value that Citadel Capital is expected to capture upon
exit given that: (i) many of ASEC Holdings projects and investments are still not
operational and restructuring efforts are underway, and (ii) the stake sold is small and
thus does not include a controlling stake premium. The implied valuation of United
Foundries is USD67 million (EGP365 million). The sale will be for USD55 million (EGP300
million) to Emirates International Investment Company (EIIC), bringing Citadel Capitals
stake in both companies down to 49% and resulting in capital gains of around EGP200
million. This development is in line with the companys strategy to hold non-controlling
interests in its platform companies.
Share price performance is a concern but volatility shall ease and positive
news flow is likely to support share price. In its first week of trading, the stock
dropped around 30% from its opening price. We believe that the share price
performance was triggered by investors who have been locked-in the company for years
and wanted to cash out. We thus expect selling pressures to gradually ease. We expect
positive news flow, including a likely rights issue, to support share price performance in
the near-term. The company already made a number of other positive announcements
over the past few weeks including: (i) the acquisition of 75% of Sudanese confectionary
Al-Musharraf by El Rashidi El Mizan, a subsidiary of Citadel Capitals food and beverages
platform Gozour Holding, (ii) the establishment of ENTAG Holding, Citadel Capitals 18th
platform company for solid waste management, through the acquisition of the Egyptian
Company for Solid Waste Recycling (ECARU) and the Engineering Tasks Group (ENTAG),
and (iii) National Petroleum Company (NPC), Citadel Capitals oil and gas exploration and
production platform company, raised production on Shukheir Bay-5 ST from 60 to 1,600
bopd, raising NPCs production to 1,908 bopd.
Despite its risky profile, we have a Buy recommendation on Citadel Capital
based on a price target of EGP14.83/share (55% upside) as the stock
currently trades near its floor valuation. We believe that EGP5.9 billion
(EGP8.91/share) is a conservative floor valuation for Citadel Capital based on: (i) implied
valuations from recent transactions on ASEC Holding, United Foundries and TAQA Arabia
(sale of a 2% stake by some shareholders last October), (ii) 6-month average market
price for ASEC Mining, (iii) valuing all other investments at cost, and (iii) assigning a
zero-value to the asset management business. The stock currently trades at a slight 7%
premium to its floor valuation. Catalysts include exits from investments, the ability to
assign a market value to existing investments and new platform companies/investments.

Key Performance Indicators

KPIs

Revenues (EGPm)
Net Income (EGPm)
EPS
FCF Yield

NEW*
09/10E
10/11F

459
314
0.47
1.38x

230
96
0.15
1.34x

OLD*
09/10E
10/11F

206
66
0.10
2.03x

230
94
0.14
2.02x

CONSENSUS
09/10E
10/11F

Target Price (EGP)

Market Price (EGP)
Upside

Listed on
Bloomberg Code
RIC

Enterprise Value (EGPm)

Net Debt (EGPm)
Market Cap. (EGPm)
Market Cap. (USDm)
Number of Shares (m)

14.83
9.55
55.3%

EGX
CCAP EY
CCAP.CA

6,386
67
6,319
1,159
661.6

Daily Turnover (EGPm)

Daily Turnover (USDm)

N/A
N/A

Shareholding Structure
Free Float & Others
Citadel Capital Partners
EIIC
Alaa Arafa
Amina Allam
Al Olayan Financial Ltd.

35.6%
40.0%
15.7%
3.3%
3.1%
2.3%

Hatem Alaa

+2 02 3332 8614

halaa@hc-si.com
Roaa Alian

+2 02 3332 8612

ralian@hc-si.com
Mai Nehad

+2 02 3332 8626

mnehad@hc-si.com

* Old and New Estimates from Notes Dated November 16th and December 8th, 2009, respectively
A = Actual; E/F = HCs Estimates/Forecasts; C = Consensus Estimates

Macro & Strategy

58

Egypt

Financial Statements
2008a

2009e

2010f

2011f

2012f

2013f

2014f

Income Statement
Subsidiaries & Dividend Income*
Advisory Fee
Gains on Sale of Investments**
Total Revenue
General & Administrative Expenses
Impairment Loss on Assets
Provisions
Management Fee
Other Income
Net Operating Profit
Finance Expenses (Net)
Interest Income
Interest Expense
FX Gains (Losses)
Net Profit Before Tax
Deferred Income Tax (Expense)
Net Profit for the year

73
198
270
(174)
(18)
(11)
(3)
5
69
(47)
10
(45)
(11)
22
2
23

146
104
208
459
(149)
(7)
(31)
39
311
11
24
(10)
6
323
(9)
314

92
138
230
(135)
(5)
(11)
79
20
41
(20)
100
(4)
96

123
179
302
(148)
(4)
(18)
132
35
56
(21)
167
(7)
161

184
233
417
(163)
(3)
(29)
221
55
75
(21)
276
(11)
265

292
302
594
(180)
(2)
(46)
366
74
94
(21)
440
(18)
423

338
393
731
(198)
(1)
(60)
472
95
115
(21)
567
(23)
544

126
662
25
813

406
671
15
1,092

233
537
15
784

388
376
14
778

509
263
14
786

618
184
14
816

752
129
13
894

40
2,184
719
79
3,022
3,835

36
2,465
918
82
0.6
3,501
4,593

36
2,558
918
83
0.6
3,594
4,379

36
2,681
918
84
0.6
3,719
4,497

36
2,864
918
86
0.6
3,904
4,690

36
3,156
918
87
0.6
4,197
5,013

36
3,494
918
88
0.6
4,536
5,430

Due to Related Parties

Other Credit Balances
Provisions
Total Current Liabilities

138
23
11
172

75
17
11
104

73
17
11
102

71
18
11
99

69
18
11
97

67
18
11
95

65
18
11
94

Loans & Borrowings***

Total Liabilities

815
987

810
913

824
925

824
923

824
921

824
919

824
917

2,848

3,679

3,453

3,574

3,768

4,093

4,512

Balance Sheet
Cash & Equivalents
Due from Related Parties (Net)
Other Current Assets
Total Current Assets
Available-for-Sale Investments
Investments in Subsidiaries & Associates
Payments for Investments
Net Fixed Assets
Deferred Tax Assets
Total Non-Current Assets
Total Assets

Total Equity

*Equity consolidation of ASEC Holding, Glass Works and Pharos only given limited information on other ventures
**We have not included any exits in our numbers
***Current debt must be fully repaid by 2013f, but we believe it will be either re-financed or repaid through exits

Macro & Strategy

59

Egypt

Al Ezz Steel Rebars (ESRS)

Hold

A drop in selling prices met by higher cost of production along with FX

losses led to net loss of EGP68 million in 3Q09.

Fluctuating scrap prices and continuing imports remain a concern. Any

imposed anti-dumping import fees will revive local prices.

We reiterate our Hold recommendation on ESRS based on a fair value per

share of EGP17 (upside 6.2%).

ESRS has witnessed a decline in top line and pressure on margins in 3Q09, along
with non operating expenses that include FX losses of EGP50 million, which led to a
significant decline in its bottom line. This quarter was a weak one in term of prices, which
eased 6.8% QoQ for rebars and 0.6% QoQ for HRC. However, revenues beat our estimates by
3.5% mainly on the back of 12.9% higher volume sold than estimated. The strong demand reenforces our outlook on resilient local steel consumption. 3Q09 showed weakness in EBITDA
margin, which retreated by 270 bps to 12.7% compared to 15.4% in 2Q09, but higher than
our estimates of 9%. This was a reflection of the delay in pricing alignment between end
products and raw materials, as explained in our last update Pressure on Selling Prices and
Margins Warrants a Downgrade, published on November 17th. Despite higher than expected
revenues and EBITDA, the companys net loss came higher than expected by 29.5% on the
back of higher than estimated net financing costs and FX losses.
Despite our positive outlook on the local steel sector, continuing fluctuation in raw
material prices remains a concern. We believe that 4Q09 and 1Q10 will be challenging
quarters for the companys profitability due to the flux in scrap prices. Although Rotterdam
scrap index showed a decline of 16% MoM in October, it climbed 11% in November, implying
that the company will continue to witness margin pressures in 4Q09. Steel imports (mainly
from Turkey) are another concern that continues to pressure local prices downwards. Despite a
5.4% increase in December rebars prices; we still see imports as a major threat to local prices
which are at a 2-3% premium to import prices. However, we note that the Ministry of Trade
and Industry is currently studying an anti dumping complaint from local steel producers. In
case it is proven that local producers need protection, an anti-dumping fee may be imposed,
which will at least temporarily improve producers margins.
We reiterate our Hold recommendation on ESRS based on a fair value per share of
EGP17 (upside 6.2%). Our SOTP-DCF valuation suggests that the bulk of the value comes
from EZDK (73%), followed by ESR/ESM (17%), and EFS (10%). We did not make significant
changes in our assumptions as since our last update published on November 17th. ESRS looks
expensive on 2010f multiples, trading at a PER of 28.9x (premium of 38% to steel peers). Main
catalysts for the share price would be: (i) a rebound in selling prices, (ii) increase in
construction activity, and (iii) the imposition of anti dumping fees on steel imports. Risks to our
valuation include: (i) a further decline in selling prices without a corresponding decline in raw
material prices, and (ii) any delay to the implementation of the companys upcoming
expansions plans. Our 2009e-2010f net income estimates are below consensus and we expect
the street to revise its estimates downwards.

Key Performance Indicators

EGP Mil.
09E

10F

09E

10E

Consensus
09C
10C

Revenues
EBITDA

11,965
1,538

12,567
1,869

11,585
1,326

12,130
1,636

11,950
1,984

15,700
3,450

EBITDA Margin

12.9%

14.9%

11.4%

13.5%

16.6%

22.0%

Net Income
EPS (EGP)

3
0.01

301
0.55

9
0.02

209
0.38

276
0.51

691
1.27

EPS Growth

-99.7%

-77.4%

150.4%

DPS (EGP)
Net Debt/EBITDA (x)
P/E
EV/EBITDA

Dividend Yield (%)

FCF

Macro & Strategy

New

Old

-99.3%

0.0
3.7x
14.4x

0.06
2.6x
28.9x
11.4x

0.0
3.9x
16.4x

0.04
3.2x
41.8x
13.4x

2.7x
31.6x
8.0x

1.4x
12.6x
4.9x

0.0%
-0.3%

0.3%
3.7%

0.0%
-2.2%

0.2%
2.8%

Target Price

17.0

Market Price (EGP)

Upside

16.05
6.2%

Listed on
GDRs: Local Share
Bloomberg Code
RIC

EGX,LSE
1:3
ESRS EY
ESRS.CA

EV (EGPm)
Net Debt (EGPm)
Market Cap. (EGPm)
Market Cap. (USDm)

22,155
5,675
8,719
1,600

Number of Shares (m)

Foreign Ownership Limit
Foreign Ownership Limit

543.3
-

Avg. Daily Turn. (EGPm)

Avg. Daily Turn. (USDm)

37.0
6.8

Shareholders Structure
Free Float
Ezz Industries

34.3 %
65.7%

Price Performance Chart

19

ESRS

17

HCMI

15
13
11
9
7
5
J

*Prices as of December 10th, 2009

Menna El Hefnawy

+02 33328632

melhefnawy@hc-si.com
Roaa Alian

+02 33328612

ralian@hc-si.com

60

Egypt

Table 1: ESRS 3Q09 KPIs

EGP Mil.
Volume (K tons)
Rebars Avg Price*
Flat Avg Price*
Revenues
EBITDA

3Q09a
1,059
2,750
2,500
2,703
344

3Q08a
1,072
5,950
5,758
6,314
1,399

12.7%

22.2%

8.5%

(68)

502

(52)

-2.5%

7.9%

-2.0%

EBITDA margin
Net Income

NPM

YoY
-1.2%
-53.8%
-56.6%
-57.2%
-75.4%

3Q09e
938
2,714
2,545
2,611
221

% Dev.
12.9%
1.3%
-1.8%
3.5%
55.7%

2Q09a
1,047
2,951
2,516
2,976
459

2009e
4,206
2,929
2,734
11,965
1,538

2009c
N/A
N/A
N/A
11,950
1,984

15.4%

12.9%

16.6%

35

276

1.2%

0.0%

2.3%

-29.5%

QoQ
1.1%
-6.8%
-0.6%
-9.2%
-25.1%

% Dev
N/A
N/A
N/A
0.1%
-22.5%
-98.9%

*Prices exclude sales taxes

Source: ESRS, HC estimates

Chart 1: ESRS looks expensive on multiples

ESRS trades a premium of 38% to global peers

ESRS trades a premium of 5.8% to the Egyptian market

35.0x

30.0x
ESRS

Blue Scope

30.0x

EZDK

25.0x

20.0x
OCI

20.0x

Boaoshan

Jindal

Novolipetsk
Wuhan

10.0x

Tala Steel
Posco

PER 2010

PER 2010

Angang

Temium 15.0x

EZDK

25.0x

ESRS

Usinas

Eregli D.

JSW

15.0x

OTH

TE

10.0x

Mobinil

NSGB

CIB

5.0x

5.0x

Dongkuk Steel Mills

TMG
PHD

0.0x
-20%

El Sewedy

0.0x

0%

20%

40%
EPS CAGR (2010-2012)

60%

80%

100%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

EPS CAGR (2010-2012)

Source: HC estimates, Bloomberg

Macro & Strategy

61

Egypt

ESRS Financial Statements and Ratios

EGP Mil.

2008

2009

2010

2011

2012

2013

Income Statement
Revenues
COGS
Gross Profit
S. , G. & Adm. Expenses
EBITDA

21,792
(16,834)
4,958
(519)
4,439

11,965
(10,014)
1,950
(413)
1,538

12,567
(10,421)
2,147
(278)
1,869

13,458
(10,814)
2,644
(375)
2,269

14,208
(11,165)
3,042
(397)
2,646

14,876
(11,601)
3,275
(411)
2,864

20.4%

12.9%

14.9%

16.9%

18.6%

19.3%

(659)
3,807
(460)
(36)
3,311
(746)
(1,341)
1,223

(646)
892
(759)
(18)
114
(23)
(88)
3

(688)
1,181
(617)
(13)
551
(99)
(151)
301

(744)
1,525
(506)
(20)
998
(200)
(339)
460

(797)
1,849
(352)
(21)
1,476
(295)
(549)
632

(826)
2,038
(224)
(22)
1,791
(358)
(651)
782

5.6%

0.0%

2.4%

3.4%

4.4%

5.3%

2.25
9.0%
3.30
146.5%

0.01
-99.7%
0.00
10.0%

0.55
0.06
10.0%

0.85
52.5%
0.08
10.0%

1.16
37.5%
0.17
15.0%

1.44
23.8%
0.22
15.0%

Cash and Excess Cash

Net Accounts Receivables
Inventory
Other Current Assets
Total Current Assets
Total Non-Current Assets
Total Assets

4,090
58
3,178
455
7,781
10,810
18,590

991
114
1,974
479
3,557
11,740
15,298

967
119
2,074
503
3,663
11,387
15,050

1,042
128
2,019
538
3,727
11,530
15,257

1,612
135
2,344
568
4,660
10,920
15,580

2,037
207
2,946
669
5,860
10,267
16,127

Short term debt & CPLTD

Accounts Payable
Other Current Liabilities
Total Current Liabilities
Total Long Term Debt
Other Non-Current Liabilities
Minority Interest
Total Non-Current Liabilities
Total Liabilities
Shareholders' Equity

3,914
831
2,427
7,172
3,736
746
1,757
6,811
13,410
5,180

2,743
718
1,093
4,554
3,924
757
1,846
7,104
11,080
4,218

2,311
754
1,193
4,259
3,530
791
1,996
6,920
10,576
4,474

1,884
1,009
1,363
4,255
2,881
922
2,335
6,790
10,393
4,864

1,785
1,023
1,421
4,229
2,158
939
2,884
6,708
10,211
5,369

1,527
1,026
1,512
4,066
1,493
1,039
3,535
6,882
10,132
5,994

3,559
0.8x
6.6%
23.6%
2.4%
40.2%

5,675
3.7x
0.0%
0.1%
10.4%
-0.3%

4,875
2.6x
2.0%
6.7%
6.9%
3.7%

3,722
1.6x
3.0%
9.4%
6.4%
8.2%

2,331
0.9x
4.1%
11.8%
1.2%
20.1%

982
0.3x
4.9%
13.1%
1.1%
22.8%

EBITDA Margin
Depreciation
Operating Profit -EBIT
Net Financing Cost
Non-Operating Income (Expense)
NPBT
Income Tax
Minority Interest
Net Income

NPM
Adjusted Earnings per share (EPS)
Growth in EPS
Adjusted Dividends per share (DPS)
Dividends Payout

Balance Sheet

Key Ratios
Net Debt
Net Debt/EBITDA
RoA
RoE
Capex/sales
FCF Yield

Macro & Strategy

62

Egypt

Ezz Al Dekheila (EZDK)

Buy

Higher than estimated net financing cost offsets larger volumes and
revenues, which led to a significant decline in bottom line.

Given its fully integrated production process, EZDK is prone to a much

lower risk of fluctuating raw materials prices compared to ESRS.

We adjust our recommendation from Hold to Buy following the 5% drop

in the share price from our last update. We maintain a fair value of EGP946
per share (upside of 27.6%).

Despite larger than estimated volumes, EZDKs standalone 3Q09 net income
came 12.8% below estimates, on the back of higher net financing cost. Top line
beat our expectations by 22.8% driven mainly by volumes that came above estimates by
17.5%. Total volumes sold during 3Q09 advanced 36.9% YoY mainly on the back of
higher utilization to compensate for the production halt in Al Ezz Flat Steel (EFS). EBITDA
for 3Q09 surpassed our estimates by 25.7% mainly on the back of slightly lower than
estimated raw material prices. However, cost of production increased QoQ by 2.7%,
compressing margins by 220 bps. On the consolidated level, EZDK recorded a top line of
EGP2.2 billion, an estimated EBITDA of EGP330 million (EBITDA margin of 15.1%) and a
net profit of EGP50.9 million. We note that EFS became fully consolidated in EZDK as of
3Q09 without pro-forma statements for 2008.
On a standalone level, we are less concerned about the fluctuating scrap
prices effect on EZDKs profitability. This is mainly because of its reliance on iron
ore pellets as the main raw materials, with around 10% of raw materials contributed by
scrap. However, on the consolidated level, with EFS becoming fully consolidated, the risk
of margin contraction becomes higher. In addition, since both companies produce flat
steel, an increase in ones utilization would require a decrease in the others. With no
expected strong pickup in the flat market in 2010, we believe that EFS will use at least
30% of its utilization in producing billets that will be sold at production cost to its sister
company ESR/ESM.

Target Price

946

Market Price (EGP)

Upside

741.7
27.6%

Listed on
Bloomberg Code
RIC

EGX
IRAX EY
IRAX.CA

EV (EGPm)
Net Debt (EGPm)
Market Cap. (EGPm)
Market Cap. (USDm)

12,774
1,606
9,912
1,819

Number of Shares (m)

Foreign Ownership Limit
Foreign Ownership Limit

13.4
-

Avg. Daily Turn. (EGPm)

Avg. Daily Turn. (USDm)

1.4
0.3

Shareholders Structure
Free Float
Al Ezz Steel
State Owned Institutions

6.38%
53.24%
40.38%

Price Performance Chart

We maintain a fair value of EGP946 per share, of which 12% is contributed by
EFS. This represents an upside of 27.6% and accordingly we adjust our recommendation
from Hold to Buy following the 5% drop in share prices since our last update on
November 17th. Although we believe in the soundness of the companys fundamentals,
we are concerned about the low liquidity of the stock. EZDK trades at a PER 25.4x for
2010f (premium of 33.9% to global peers).

900

EZDK

HCMI

850
800
750
700
650
600
J

Key Performance Indicators

Consolidated
EGP Mil.

Revenues
EBITDA

09E

Old
10F

09E

10E

Consensus
09C
10C

9,264
1,461

7,627
1,438

9,295
1,367

7,833
1,879

8,957
2,853

17.6%

15.8%

18.9%

14.7%

24.0%

31.9%

Net Income
EPS (EGP)

473
35.36

391
29.23

533
39.88

402
30.05

948
70.95

1,586
118.67

EPS Growth

-84.1%

-17.3%

-82.0%

-24.6%

-68.0%

67.3%

DPS (EGP)
Net Debt/EBITDA (x)
P/E
EV/EBITDA

24.8
2.7x
21.0x
10.4x

26.3
2.3x
25.4x
10.0x

27.9
1.7x
18.6x
9.6x

27.0
1.8x
24.7x
10.1x

Dividend Yield (%)

FCF

3.3%

3.5%

3.8%

3.6%

5.4%

8.9%

3.3%

8.0%

1.1x
6.6x
10.5x
-

0.8x
4.4x
6.3x
-

Macro & Strategy

*Prices as of December 10th, 2009

New

8,180
1,439

EBITDA Margin

Menna El Hefnawy

+02 33328632

melhefnawy@hc-si.com
Roaa Alian

+02 33328612

ralian@hc-si.com

63

Egypt

Table 1: EZDK Standalone 3Q09 KPIs

EGP Mil.
Volume (K Tons)
Rebars Avg Price*
Flat Avg Price*
Revenues
EBITDA

EBITDA margin
Net Income

NPM

3Q09a

3Q08a

YoY

691
2,750
2,500
1,934
355

505
5,950
5,758
3,022
1,336

18.4%

44.2%

110

974

5.7%

32.2%

36.9%
-53.8%
-56.6%
-36.0%
-73.4%

3Q09e
588
2,714
2,545
1,575
282

% Dev.
17.5%
1.3%
-1.8%
22.8%
25.7%

17.9%
-88.7%

126

8.0%

2Q09a

QoQ

725
2,951
2,516
2,051
422

-4.7%
-6.8%
-0.6%
-5.7%
-15.9%

20.6%
-12.8%

189

9.2%

2009e
2,775
2,929
2,734
8,095
1,490

18.4%
-41.8%

616

7.6%

*Prices exclude sales taxes

Source: ESRS, HC Estimates Source: OCI, HC Estimates

Macro & Strategy

64

Egypt

EZDK Consolidated Financial Statements and Ratios Section title

EGP Mil.

2008

2009

2010

2011

2012

2013

Income Statement
Revenues
COGS
S. , G. & Adm. Expenses
EBITDA

11,639
(7,109)
(238)
4,292

8,180
(6,502)
(238)
1,439

9,264
(7,615)
(189)
1,461

10,081
(8,083)
(284)
1,714

10,613
(8,278)
(303)
2,032

11,035
(8,504)
(315)
2,216

EBITDA Margin

36.9%

17.6%

15.8%

17.0%

19.1%

20.1%

Depreciation
Operating Profit -EBIT
Net Interest Expenses
Other Income (Expenses)
NPBT
Income Tax
NPAUI
Minority Interest
Net Income

(427)
3,865
(425)
65
3,702
736
2,966
2,966

(484)
955
(580)
49
466
96
371
102
473

(633)
828
(588)
93
444
76
369
22
391

(627)
1,088
(534)
66
723
145
579
(68)
510

(679)
1,353
(424)
69
1,090
218
872
(140)
732

(707)
1,510
(342)
72
1,333
267
1,066
(152)
915

NPM

25.5%

5.8%

4.2%

5.1%

6.9%

8.3%

Earnings per share (EPS)

222

35

29

38

55

68

Growth in EPS

29.2%

-84.1%

-17.3%

30.6%

43.4%

25.0%

Dividends per share (DPS)

210
95%
28.3%

25
70%
3.3%

26
90%
3.5%

34
90%
4.6%

49
90%
6.6%

62
90%
8.3%

2,525
61
1,895
223
4,704
5,550
10,253
2,552
705
1,764
5,021
1,579
509
2,088
7,109
3,145

1,171
393
1,881
41
3,486
8,924
12,412
1,435
3,272
432
5,138
3,600
509
(102)
4,007
9,145
3,268

1,235
445
2,131
46
3,857
8,588
12,448
1,141
3,706
460
5,306
3,466
509
(124)
3,851
9,157
3,291

1,326
484
2,319
50
4,179
8,301
12,483
1,281
4,033
583
5,897
2,814
509
(55)
3,268
9,164
3,319

1,274
509
2,441
53
4,277
7,990
12,270
1,160
4,139
798
6,097
2,219
509
85
2,813
8,911
3,359

1,307
530
2,538
55
4,430
7,650
12,083
862
4,304
975
6,140
1,787
509
237
2,533
8,673
3,410

1,606
0.37x
28.9%
94.3%
3.5%
44.5%

3,863
2.68x
3.8%
14.5%
47.0%
5.4%

3,371
2.31x
3.1%
11.9%
3.1%
8.9%

2,769
1.62x
4.1%
15.4%
3.3%
11.7%

2,106
1.04x
6.0%
21.8%
3.4%
14.4%

1,343
0.61x
7.6%
26.8%
3.3%
16.7%

Dividends Payout
Dividends yield

Balance Sheet
Cash and Excess Cash
Net Accounts Receivables
Inventory
Other Current Assets
Total Current Assets
Total Non Current Assets
Total Assets
Short Term Debt
Accounts Payable
Other Current Liabilities
Total Current Liabilities
Total Long Term Debt
Provisions For Deferred Taxes
Minority Interest
Total Long Term Liabilities
Total Liabilities
Shareholders' Equity
Net Debt
Net Debt/EBITDA
RoA
RoE
Capex/sales
FCF Yield

Macro & Strategy

65

Egypt

Orascom Construction Industries

Hold

Seasonal slowdown and low fertilizer prices and volumes sold pull
3Q09 revenues down but margin expansion offsets below the line
adversities.

Margins to improve in 4Q09 and 2010 on the back of full contribution

from EBIC and less emphasis on fertilizer trading activity, along with
more contribution from infrastructure works

We keep our Hold recommendation on OCI as a cautious approach to

the fluctuating demand prospects in the international fertilizer sector.
We raise our target price (TP) by 7.7% to EGP279/share, reflecting a
stable outlook on construction and margins expansion on both fronts.

Margin improvement offsets slowdown in revenues. Although seasonal slowdown and

low fertilizer prices resulted in revenues missing our estimates by 9.6%, margins surpass our
expectations on the back of cost efficiency and the absence of fertilizer trading activity.
Consolidated revenues came in at USD933 million compared to our estimate of USD1,032
million, down 9.3% YoY and down 14.5% QoQ. Meanwhile, EBITDA exceeded our estimate of
USD197 million by 3.3% to register USD203.5 million, and margins improved by 470bps to
21.8% compared to 17.1% in 2Q09. Consolidated net income beat our estimate by 7.8% to
USD121 million, up 17.9% QoQ but down 41.2% YoY. NPM improved by 360bps over 2Q09 to
12.9% surpassing our estimate of 10.9% by 200bps.
Limited exposure to Dubai while Algeria remains an attractive market. We are not
worried about OCIs exposure to Dubai and Algeria given that: (i) backlog exposure to Dubai is
minimal at 4.5% of total backlog, (ii) OCI has been one of the top contractors in Algeria for
over a decade, (iii) OCI already pays a 19% tax rate on its construction projects in Algeria,
accounting for 23% of total backlog, (iv) OCI is a value added to the Algerian economy,
providing job opportunities to locals (75% of OCIs total employees in Algeria are Algerians),
and (v) OCIs partner in Sorfert is state-owned Sonatrach.
Although unlikely, the downside risks to OCI from its exposure to Dubai and Algeria
would be: (i) excluding the 4.5% of its backlog exposure to Dubai, thus a 0.8% drop in value
to EGP277/share, (ii) excluding the 23% of its backlog exposure in Algeria, thus a 4.2% drop
in value to EGP267.4/share, (iii) cancelling Sorfert Algerie's 19% tax exemption, thus a 5.4%
drop in value to EGP264/share, (iv) excluding Sorfert Algerie from our valuation, thus a
14.4%% drop in value to EGP239/share, (v) excluding exposure to Algeria altogether, thus a
19% drop in value to EGP227/share.
We remain cautious on fertilizer prices even with the current upward movement as
we believe it is not sustainable due to underlying demand fluctuations, and thus
maintain our Hold on OCI. We increase our TP by 7.7% to EGP279/share, offering an upside
of 9.0%. Although we believe future value for OCI will come from the fertilizer group, we
remain confident in the construction group as OCIs safe haven with a stable outlook,
supported by increasing infrastructure spending in Egypt and the region, along with OCIs
position as one of the largest contractors in the region. The construction group is trading at a
discount of 8.3% versus peers on 2010e PE multiple of 13.3x, while the fertilizer group trades
at a 6.2% premium compared to peers on 2011f PE multiple of 11.9x. We believe stock price
catalysts would be further integration with fertilizer distributors and/or potential acquisitions or
Greenfiled projects in new markets. Also, an increase in natural gas prices would position OCI
at an advantage given its low priced natural gas. The construction group valuation yielded a
fair value of EGP121.4/ share (USD22.3/share) (43.5% of total value) while the fertilizer group
SOTP valuation yielded EGP157.7/share (USD28.9/share), comprising 56.5% of OCI's total
value.

Key Performance Indicators

New

Old

In USD mil (unless stated

otherwise)

09E

10E

09E

10E

Revenues
EBITDA
EBITDA margin
Net Income
EPS
EPS Growth
DPS
Net Debt/EBITDA
PER
EV/EBITDA
Free Cash Flow Yield

3,977
791
19.9%
461
2.23
-35.9%
1.40
1.85x
21.1x
14.1x
-1.1%

4,443
975
21.9%
560
2.71
18.7%
1.41
1.10x
17.4x
11.1x
2.4%

4,067
807
19.8%
476
2.30
-33.8%
1.45
1.93x
20.4x
13.0x
-3.5%

4,807
994
20.7%
553
2.68
16.2%
1.39
1.06x
17.5x
10.1x
4.1%

Macro & Strategy

Consensus
09C
10C
4,166
803
19.3%
464
2.24
-35.5%
1.31
1.46x
20.9x
13.6x
-

4,900
1,056
21.6%
651
3.14
40.2%
2.16
1.03x
14.9x
10.2x
-

Target Price
Market Price (EGP)
Upside

279
256
9.0%

Listed on
GDR to Local Shares
Bloomberg Code
RIC

EGX, LSE
1:1
OCIC EY
OCIC.CA

Enterprise Value (EGPm)

Net Debt (EGPm)
Market Cap (EGPm)
Market Cap (USDm)

61,236
7,965
52,971
9,720

Number of Shares (m)

Foreign Ownership Limit
Foreign Ownership Level

206.9
-

Avg. Daily Turnover (EGPm)

Avg. Daily Turnover (USDm)

66.6
12.2

Shareholders Structure
Free Float
Sawiris Family

46%
54%

Price Performance Chart

290

OCIC

270

HCMI

250
230
210
190
170
150
J

* prices as of December 10, 2009

Roaa Alian

+202 33328612

ralian@hc-si.com
Menna El Hefnawy

+202 33328632

melhefnawy@hc-si.com

66

Egypt

Table 1: Key Performance Indicators

Fertilizer Revenues
Construction Revenues
Consolidated Revenues
Fertilizer EBITDA

3Q09a
118
816
933

3Q08a
251
778
1,029

74

211

63.3%

84.2%

Construction EBITDA

129

181

Construction EBITDA
margin

15.8%

23.2%

Consolidated EBITDA

203.5

392

EBITDA margin

21.8%

38.1%

Fertilizer EBITDA margin

Fertilizer NI

Fertilizer NPM
Construction NI

Construction NPM
Consolidated Net
Income

NPM margin

32

116

27.6%

46.0%

88

89

10.8%

11.5%

121

205

12.9%

19.9%

% YoY

-53.2%
4.9%
-9.3%
-64.8%

3Q09e
146
886
1,032
84

% Dev.

-19.4%
-7.9%
-9.6%
-11.3%

57.5%
-28.5%

113

197

14.2%

41
71

-21.2%

112

10.9%

126

2.5%

187

32

24.4%

70

1.3%
25.4%

7.3%
7.8%

102

09 New
476
3,501
3,977

17.9%

09 Old
545
3,523
4,067

295

338

62.0%

62.0%

496

470

14.2%
8.8%

26.2%

8.0%
-41.2%

21.8%

17.1%

28.2%
-1.3%

-3.8%
-15.8%
-14.4%

13.0%
3.3%

19.1%
-71.9%

61

% QoQ

50.0%

12.8%
-48.1%

2Q09a
122
969
1,091

% Dev.

-12.4%
-4.9%
-5.9%
-12.4%
1.4%

13.3%

791

807

19.9%

19.8%

158

176

33.2%

32.4%

303

300

8.6%

8.5%

461

476

11.6%

11.7%

-4.4%

-10.4%
0.8%
-3.2%

*Source: OCI, HC Estimates

Seasonal slowdown and low fertilizer prices hit revenues

Missing our estimates by 9.6% on the back of a weaker than expected quarter, consolidated revenues came in at USD933 million
compared to our estimate of USD1,032 million. Revenues were hit by lower construction activity during summer holidays, Ramadan
and feast holidays as well as lower than expected fertilizer prices and volumes sold. Consolidated revenues were down 9.3% YoY
and 14.5% QoQ. Construction revenues came in at USD816 million, off by 7.9% from our estimates mainly due to seasonal
slowdown in construction sector. At the same time, fertilizer revenues came in at USD118 million, 19.4% below our estimates of
USD146 million as a result of lower than assumed volumes of ammonia sold from EBIC and lower average ammonia prices of
USD218 per ton compared to our estimate of USD241 per ton. Similarly, revenues from EFC came in below our estimates on the
back of lower volumes sold and prices. OCIs average selling price of urea during 3Q09 was USD250 per ton compared to our
estimate of USD265 per ton. EBIC had did not reach full production capacity during the quarter; we expect it to do so in 4Q09. We
also expect to see more contribution to top line from EBIC during the current quarter.

Momentous margin improvement offsets low revenues

Margin improvement during 3Q09 on both construction and fertilizer fronts was a surprise that offset the slowdown in revenues,
providing impetus to EBITDA and net income. Consolidated EBITDA registered USD203.5 million, 3.3% above our estimate of
USD197 million, on the back of a 470bps improvement in EBITDA margin to 21.8% from 17.1% in 2Q09. Consolidated 3Q09
EBITDA was down 48.1% YoY but up 8.8% QoQ. Construction EBITDA came in at USD129 million (down 28.5% YoY, but up 2.5%
QoQ) beating our estimate of USD113 million by 14.2% mainly on the back of better margins triggered by the companys cost
efficiency approaches. EBITDA margin on the construction front improved to 16% versus our estimates of 12.8% and 13% in
2Q09. Meanwhile, the absence of fertilizer trading activity during 3Q09 was reflected positively on margins, resulting in a significant
1303bps improvement in EBITDA margin to 63.3% from 50% in 2Q09, beating our estimate of 57.5% by 580bps. However,
EBITDA registered USD74.5 million, missing our estimates by 11.3%, down 64.8% YoY and up 21.8% QoQ.
Reflective of strong construction net profit margin, consolidated net income exceeded our estimate of USD112 million by 7.8% to
come in at USD121 million, down 41.2% YoY and up 17.9% QoQ. Construction net income came in at USD88 million, down 1.3%
YoY but up 25.4% QoQ, beating our estimate by 24.4%. NPM improved to 10.8% compared to 7.3% in 2Q09, exceeding our
estimate of 8% by 280bps. On the other hand, net income from fertilizers missed our estimate of USD41 million by 21.2% to come
in at USD32 million. Although fertilizer NPM improved from 2Q09 by 140bps to 27.6%, it came in below our estimate by 60bps.
We expect further margin expansion to come through from the fertilizers group as EBIC starts to operate at full capacity and
benefits from the recent JV with Brazilian distributor FITCO start to materialize, cutting down on or maybe eliminating distribution
costs.

Macro & Strategy

67

Egypt

Exposure to risky markets is not that big of a concern

Table 2: Different Valuation Scenarios
Scenario
Base Case
Excluding Dubai from backlog
Excluding Algeria from backlog
Imposing 19% taxes on Sorfert Algerie
Excluding Sorfert Algeria from Valuation
Excluding Algeria altogether

Value (EGP/share)

Downgrade by
279.0
276.8
267.4
264.0
238.9
227.3

-0.8%
-4.2%
-5.4%
-14.4%
-19.0%

Source:

We remain positive on OCI's fundamentals despite current exposure to Dubai and Algeria on both construction and fertilizers
fronts. Generally, we believe OCIs dual business model and international exposure minimizes any adversities that can come from
its exposure to risky markets; specifically, we view worries about Algeria as over stated. We believe that:

In the case of backlog exposure to Dubai, while other contractors may be prone to project cancellations, OCI would be
more prone to delays in projects rather than cancellations. Possible delays in projects, we believe, come as a general
concern regarding the construction sector. OCIs backlog has minimal exposure in Dubai, at 4.5% of total backlog;
accordingly we estimate that Dubai has little contribution to our fair value for OCI. Thus, in a worst case scenario, a total
cancellation of Dubais backlog of USD324 million, would translate into a respective decline of 1.3%, and 3.4% in 2009
and 2010 construction revenues, and 1.3% and 4.5% in net income respectively. Hence, our fair value for OCI would be
reduced by a meager 0.8% to EGP276.8 per share.

OCI is considered one of the top contractors in Algeria, adding value to the Algerian economy over the past decade. OCI
employs around 12,000 employees in Algeria, of which 75% are Algerians. According to management, Algeria remains an
attractive market where future potential projects may materialize. The company is already paying a 19% tax rate on the
construction front, as its tax exemption expired in 2007. We believe that worries over exposure to Algeria are over stated
and will be short lived, thus we have minimal concerns regarding OCIs 23% backlog there. Nonetheless, if we exclude the
construction works in Algeria from our backlog, our revenue forecasts will come down by an average of 8% and net
income by an average of 12.4% over the forecasted horizon (09e-13f). Hence, our fair value for OCI would be reduced
by 4.2% to EGP267.4 per share.

Chart 1: OCI 9M09 Backlog division by sector and location

60% of Backlog is assigned to infrastructure projects
Infrastructure

%100
%32

%80
%60

%26

%25
%27

Industrial

%27

%34

%31
%14

Commercial

Others, 8%
KSA, 1%

%27

%25

%26

%13

%12

%14

%60

%63

%60

%40
%42

%20

%48

%56

Backlog is only exposed 4.5% to Dubai

%40

Abu Dhabi,
15%

Europe ,
9%
Dubai, 5%

%0
08Q1

08H1

08M9

2008

09Q1

09H1

09M9

Egypt,
24%

Algeria,
23%

Qatar, 15%

Source: OCI

We are less concerned on the fertilizer front given that OCI's partner in Sorfert Algerie is the Algerian state-owned
Sonatrach (49% stake), and that this project is a value added to the Algerian economy as well as a notable development
for the Algerian fertilizers sector. In a worst case scenario, which we believe is unlikely, should the government terminate
the current tax exemption, Sorfert will then be subjected to a 19% tax starting 2011; this would lower our valuation for
Sorfert by 36.5% from the current EGP40.7/share to EGP25.7/share, thus reducing OCIs total value by 5.4% to
EGP264/share.

Macro & Strategy

68

Egypt

Since Sorfert accounts for 14.4% (EGP40.7 per share) of the total value of OCI in our valuation, if we totally exclude
Sorfert from our valuation, our target price for OCI will go down to EGP238.9 per share.

In an extreme case, if we exclude OCI exposure to Algeria altogether on both construction and fertilizers fronts, our fair
value for OCI will be reduced by 19% to EGP227/share.

Table 3: OCI Sum of the Parts Valuation

Group/Subsidiary
Construction Group
Fertilizer Group
EFC
Sorfert Algerie
EBIC
Total

OCI Stake
100%

100%
51%
60%

Equity Value
In USD million
4,607
5,987

WACC

3,398
1,522
1067
10,593

9.2%
11.3%
9.8%
9.1%

Value/share
In USD/Share
22.3
28.9

In EGP

% of total Value

121.3
157.7

43.5%
56.5%

16.4
7.4
5.2

89.5
40.1
28.1

32.1%
14.4%
10.1%

51.2

279.0

100%

Source: HC estimates

Out of caution, we have kept our fertilizer prices assumptions unchanged despite some signs of price recovery in the market; if
price increases persist, this would trigger more value. Other value triggers would be higher than expected new awards to come in
during 4Q09. We believe stock price catalysts would be further integration between OCI and international fertilizer distributors
and/or potential acquisitions or Greenfiled projects in new markets. Also, an increase in natural gas prices would position OCI at an
advantage given its low priced natural gas long term agreement. Moreover, more infrastructure spending in Egypt and the region
would provide an impetus to construction group value. The construction group valuation yielded a fair value of EGP121.7/ share
(USD22.3/share) (43.5% of total value) while the fertilizer group SOTP valuation yielded EGP157.7/share (USD28.9/share),
comprising 56.5% of OCI's total value.

Potential value driver: Building a fertilizer empire, OCI eyes expansion into international market
In line with our expectations, OCI revealed its openness to bidding for existing fertilizer players in an attempt to expand its fertilizer
group and establish a presence as a local player in international markets. Management has big plans for the fertilizer group during
2010, which we believe is timely since the current vulnerability of the industry presents consolidation opportunities. Moreover, we
believe that the companys plans to upgrade and increase its existing capacities and product mix in Egypt during the coming 6
months is in anticipation of a pickup in demand by the second half of 2010. Although we have not incorporated the expected
expansions as no details have been announced, we believe that upcoming plans would be strong value drivers for the fertilizer
group and OCI. Plans in the pipeline include:

Establishing an Ammonium Sulfate plant in EFC capitalizing on excess ammonia produced in EFC as well as EBICs
production.

Upgrading the existing EFC urea production capacity.

Establishing a UAN production line in EFC to take advantage of the increasing demand on UAN worldwide.

Expanding presence in South America through similar ventures as the recently announced JV with FITCO, a Brazilian
distributor, if the opportunity arises.

Openness to bidding for the acquisition of existing international fertilizer producers and/or Greenfield licenses in countries
with abundant cheap natural gas, to establish OCI as a local player in high consuming markets. OCI expressed interest in
bidding for a Brazilian fertilizer producer, Copebras, owned by Anglo American, as well as a license to produce fertilizers in
India, one of the world's biggest consumers of fertilizers.

We are not concerned about OCIs debt exposure, even with a net debt/EBITDA level of 1.85x for 2009e, as we believe it is
natural given the current expenditure on Sorfert Algerie plant (to be operational 4Q10/1Q11). We believe OCI will be able to
manage its planned expansions through leverage as by the time Sorferts expenditure is complete expectantly by the end of
second half of 2010, net debt level would have improved. The companys current cash level is sufficient to meet its working
capital requirements.

Macro & Strategy

69

Egypt

Towards the end of 4Q09, Urea market firms up and Ammonia stabilizes

Subse

Generally, we see the international fertilizer market as on to a slow but sure recovery, with ammonia prices holding steady within
in the range of USD280 and USD300 per ton and demand on urea picking up as 4Q09 approaches to end. We believe the main
highlights of 4Q09 going into 1Q10 include:

The anticipated increase in gas prices in Ukraine to take place in January 2010, which suggests that demand may increase
during December to fill tanks which would support ammonia prices at current levels or higher.

Positive outlook for the US spring season, even in the case of a delay in the fall season and restrictions outlined by the
late harvest. This is mainly a result of the US urea market gaining momentum and showing considerable strength,
providing a rising floor for prices in major export origins. Current Urea prices hover around the USD300 and USD305 level.
(Based on Profercy USA November 2009 report.)

Most major consumers are going into 1Q10 with low inventory levels, suggesting a pickup in demand during December
and into 1Q10.

Thus we believe demand prospects should be improving in 2010. However, we remain conservative on our forecasted prices until
we witness some sustainability in market recovery.

On multiples: construction cheap, fertilizers expensive

We remain cautious on our fertilizer pricing assumptions (Urea: 09e USD275 per ton, 10f USD300 per ton and Ammonia: 09e
USD247 per ton, 10f USD 318 per ton) given uncertainty regarding the sustainability of the current pick up in the international
market; however, we believe that future value would come from the fertilizer group whether in terms of higher prices or volumes
from expected expansions and synergies. The fertilizer group trades at a 6.2% premium compared to peers on 2011f PE multiple
of 11.9x. As for the construction group, the backbone of OCI, we believe that over the short term until a solid recovery becomes
visible, the construction group will continue to support the consolidated entitys value. With increasing infrastructure spending in
Egypt and the region, along with OCIs position as one of the largest contractors in the region, we believe the construction group is
OCIs safe haven, with a stable outlook. Construction group is trading at a discount of 8.3% versus peers on 2010f PE multiple of
13.3x.

Chart 2: OCI Implied Multiples

The construction group trades at a discount of 8.3%

The fertilizer group trades at a premium of 6.2%

PER (2011)

PER (2010)
18

35

25

CF Industries
12

Nagarjuna

20
China Railway
IJM
Gamuda
Enka
15
Tekfen Holding
OCI
China Com.
10Samsung Eng.Const.
Huyndai Eng.
GSEC
5
DSI Galfar
-

10

%20

K+S

OCI

Terra Ind.
IQ

Agrium

Arab Potash
Bunge

8
6

Hyundai Dev.

Bagfas

4
2
-

Arabtec
%0

Yara
Anzko International

14

IVRCL

%20-

Potash Corp.

16

Hindustan

Larsen &
Tourbo

PER (11)

PER (10)

30

%40

%60

EPS CAGR (09-11)

%80

%100

%120

% 20-

%0

% 20

% 40

% 60

% 80

% 100

% 120

% 140

EPS CAGR (09-11)

Source: HC estimates, Bloomberg

Macro & Strategy

70

Egypt

Financial Statements and Ratios

In USD Million
Income Statement
Construction Business
Fertilizer Business
Revenues from Operation
Growth in Revenue (%)
Total Operating Costs (excl. D&A)
EBITDA
EBITDA Margin
Depreciation & Amortization
Operating Profit
Operating Margin
Investment Income
Net Interest & FX Gains
Profit Before Taxes (PBT)
Taxes
Net Profit BUI
Unusual Items
Minority Interest
Net Profit
Net Profit Margin

2008

2009

2010

2011

2012

2013

3,073
644
3,717
60.0%
2,811
906
24.4%
(134)
772
20.8%
0.3
92
840
106
734
265
14
985
26.5%

3,501
476
3,977
7.0%
3,186
791
19.9%
(142)
649
16.3%
28.0
(63)
572
82
490
29
461
11.6%

3,770
673
4,443
11.7%
3,469
975
21.9%
(180)
794
17.9%
25.0
(48)
731
114
617
57
560
12.6%

4,087
1,026
5,113
15.1%
3,822
1,291
25.3%
(204)
1,088
21.3%
32.0
(27)
1,044
194
850
66
784
15.3%

4,282
1,145
5,427
6.1%
3,969
1,457
26.9%
(215)
1,243
22.9%
32.4
(18)
1,206
226
981
71
910
16.8%

4,398
1,157
5,555
2.4%
4,042
1,513
27.2%
(226)
1,287
23.2%
32.4
(9)
1,258
235
1,022
72
951
17.1%

3.48
229.9%
2.00
43.6%
4.3%

2.23
-35.9%
1.40
63.3%
3.0%

2.71
21.4%
1.41
52.3%
3.0%

3.79
40.0%
1.45
38.6%
3.1%

4.40
16.1%
1.69
38.6%
3.6%

4.59
4.5%
1.76
38.6%
3.8%

Total Fixed Assets

Total Current Assets
Total Current Liabilities
Total Long Term Liabilities
Total Shareholders Equity

4,212
3,611
2,669
1,999
3,155

4,892
2,756
3,188
2,846
1,609

4,836
2,653
3,107
2,502
1,875

4,784
3,302
3,535
2,192
2,354

4,754
3,957
3,591
2,206
2,910

4,723
4,561
3,781
2,007
3,491

Key Ratios
Net Debt/EBITDA
RoA
RoE
Capex to Sales

0.60x
9.4%
20.7%
23.6%

1.85x
6.0%
19.8%
25.1%

1.10x
7.4%
33.9%
9.5%

0.27x
10.1%
39.3%
3.2%

-0.25x
10.8%
36.5%
2.7%

-0.71x
10.6%
31.2%
2.8%

Earnings Per Share (EPS)

Growth in EPS (%)
Dividends Per Share (DPS)
Dividends Payout (%)
Dividends Yield
Balance Sheet

Macro & Strategy

71

Egypt

GB Auto

Hold

Egypts PC market recovered 128% from its lows, bearing favorably

on GB Autos share price performance which increased 175% since
March.

We are concerned about the CV segment with margins expected to

remain pressured until 2Q10, in addition to the unforeseen near-term
commencement of the draw-bar trailer replacement program.

We have a target price (TP) of EGP28.7/share (20% upside) and a

Hold recommendation on the stock.

Passenger Car (PC) market recovery is still intact but priced in. Monthly PC
market sales volumes have increased 128% from their bottom in January 2009
reaching 16,212 units in October 2009, aided by the government-sponsored taxi
replacement program. GB Auto has been a clear beneficiary of the market recovery
with its quarterly PC sales revenues increasing 2.7-times from 1Q09 levels, and the
segments gross margins improved from 8% to 11% as overhead under-recovery
eased and dealer inventory (and thus GB Autos) inventory returned to normal
levels. GB Autos share price has reacted accordingly, increasing 175% since
reaching its low in March 2009.
GB Autos Commercial Vehicles (CV) business is of concern in light of stillweak corporate and tourism demand, high-cost inventory and overhead
under-recovery. The company is relocating its bus assembly facility from Qaliyoub
to Suez (the site of the GB Polo joint venture assembly plant) and so CV margins
are expected to remain impaired until GB Polo officially begins in 2Q10 (delayed
from 4Q09), affected by under-recovered overheads as well as price concessions to
reduce high-cost inventory. We are also concerned about the repeated delays of the
government-sponsored trailer replacement program, and we thus opt to exclude GB
Autos trailer sales to the program from our estimates until a timeframe becomes
clear. The Two- and Three-Wheeler segment bucked the business trend, advancing
2% YoY in 9M09, and has positive prospects especially with GB Autos expected
launch of a new microfinance venture by 1Q10, which will offer flexible payment
options for the segment.

Target Price
Market Price (EGP)
Upside

28.69
23.94
19.8%

Listed on
Bloomberg Code
RIC

EGX
AUTO EY
AUTO.CA

Enterprise Value (EGPm)

Net Debt (EGPm)
Market Cap. (EGPm)
Market Cap. (USDm)
Number of Shares (m)

3,643
603
3,088
564
129.0

Daily Turnover (EGPm)

Daily Turnover (USDm)

3.8
0.7

Shareholding Structure
Free Float
Ghabbour Family
Others

22.7%
70.6%
6.7%

Price Performance Chart

30

AUTO

30EGX

25
20

Despite a number of potential near-term catalysts, we have a Hold

recommendation on GB Auto as we believe that the recovery-driven
improvements are reflected at current levels, in addition to recent
concerns regarding the CV segment. Our price target of EGP28.7/share yields
an upside of 20% to the current market price. Catalysts heading into 2010 include:
(i) a new brand representation on the passenger car front, (ii) a new tire
representation on top of the current Lassa brand, (iii) more export agreements (the
company already has a trailer distribution agreement in Algeria), (iv) an anticipated
commencement of the belated draw-bar trailer replacement program, (v)
participation in a government-sponsored micro-bus replacement program with total
expected replacements of 65,000 microbuses, and an anticipated market share of
25% for GB Auto, and (vi) higher-than-expected two- and three-wheelers sales
volumes aided by GB Autos new microfinance venture.
NEW*
09E
10F

OLD*
09E

10F

Revenues (EGPm)
EBITDA (EGPm)

4,154
407

5,113
562

4,498
466

5,649
672

EBITDA Margin

9.8%

11.0%

10.4%

11.9%

Net Income (EGPm)

EPS (EGP)

175
1.35

276
2.13

221
1.71

-58.0%
17.30x
8.93x
1.59x
8.1%

57.5%
11.00x
7.05x
1.40x
-5.9%

-46.9%
13.71x
8.20x
1.53x
3.1%

EPS Growth
P/E
EV/EBITDA
P/BV
FCF Yield

10
5
0
D

Mai Nehad

+202 33328 626

mnehad@hc-si.com
Hatem Alaa

+202 33328 614

Key Performance Indicators

KPIs

15

CONSENSUS
09E
10F

364
2.82

4,550
482
10.6%
251
1.95

5,659
672
11.9%
363
2.81

64.8%
8.32x
5.83x
1.30x
1.6%

-39.6%
12.30x
8.93x
-

44.5%
8.51x
5.85x
-

halaa@hc-si.com

* Old and New Estimates from Notes Dated August 17th and November 23rd, 2009, respectively
A = Actual; E/F = HCs Estimates/Forecasts; C = Consensus Estimates

Macro & Strategy

72

Egypt

Financial Statements
2008a

2009e

2010f

2011f

2012f

2013f

Total Revenue

5,192

4,156

5,115

6,185

7,852

9,677

Revenue Growth

12%

-20%

23%

21%

27%

23%

(4,320)
872

(3,613)
543

(4,388)
727

(5,279)
906

(6,646)
1,206

(8,177)
1,500

16.8%

13.1%

14.2%

14.7%

15.4%

15.5%

(277)
32
628

(246)
41
338

(271)
36
491

(312)
37
631

(383)
43
866

(460)
48
1,089

Income Statement

Cost of Goods Sold

Gross Profit

Gross Margin
SG&A Expenses
Other Operating Income (Expenses)
Operating Profit

Operating Margin

12.1%

8.1%

9.6%

10.2%

11.0%

11.3%

Net Provisions
Net Interest Cost
Other Non-Operating Income
(Expenses)
Net Income Before Taxes
Taxes
Net Income Before Minority
Interest
Minority Interest
Net Income Before
Appropriations
Appropriations
Net Income After Appropriations

19
(116)

6
(128)

(6)
(140)

(9)
(158)

(12)
(131)

(13)
(102)

(18)
512
(94)

16
231
(56)

5.11
351
(70)

6.19
470
(94)

7.85
731
(146)

9.68
984
(197)

418
(2)

175
-

281
(5)

376
(7)

585
(11)

787
(14)

416
(19)
397

175
(8)
167

276
(12)
263

369
(17)
352

575
(26)
549

773
(35)
738

Net Income Growth

Net Margin

-4%
8.0%

-58%
4.2%

57%
5.4%

34%
6.0%

56%
7.3%

35%
8.0%

EBITDA

698

408

563

717

957

1,186

14%
13.4%

-42%
9.8%

38%
11.0%

27%
11.6%

33%
12.2%

24%
12.3%

Cash and Equivalents

Receivables
Inventories
Other Current Assets
Total Current Assets
Net Property, Plant & Equipment
Other Non-Current Assets
Total Non Current-Assets
Total Assets

124
500
1,345
244
2,214
1,181
233
1,415
3,629

298
513
1,046
274
2,130
1,416
234
1,649
3,780

580
517
1,169
304
2,570
1,865
246
2,111
4,681

500
521
1,304
337
2,663
1,939
263
2,203
4,865

503
526
1,453
388
2,870
1,987
287
2,274
5,144

526
533
1,610
444
3,113
2,030
320
2,350
5,463

Total Current Liabilities

Total Non-Current Liabilities
Shareholders' Equity

1,696
191
1,741

1,784
93
1,903

914
1,596
2,171

1,079
1,385
2,401

1,296
1,175
2,673

1,460
964
3,039

416
172
(542)
46
(255)
(4)
(258)
56
(156)

175
193
211
580
(298)
3
(295)
(111)
173

276
247
(137)
386
(526)
(9)
(535)
432
283

369
292
(150)
511
(170)
(14)
(183)
(408)
(80)

575
278
(167)
686
(150)
(20)
(170)
(513)
2

773
261
(177)
858
(152)
(30)
(182)
(653)
23

EBITDA Growth
EBITDA Margin

Balance Sheet

Cash Flow Statement

Net Income
Non-Cash Items
Net Change in Working Capital
Operating Cash Flow
Net CAPEX
Other Investments
Investing Cash Flow
Financing Cash Flow
Change in Cash

Macro & Strategy

73

Egypt

Thematic Ideas and Stock Selection

Along without fundamental analysis of stocks, the following themes and ideas are highlighted by HC Strategy as currently in-play,
or will be rewarded by the market in coming months:

Theme 1: US Dollar carry trade

The US dollar is being used as a funding currency to search for higher yielding assets abroad. Consequently the dollar is being sold
short to buy emerging market assets, such as commodities and equities. We believe this macro trend is likely to continue for as
long as the Fed is willing to keep interest rates at current record lows, but is coming to an end as markets anticipate a rise of US
rates in 2010 and declining risk appetite sees the US dollar recovery and some commodity prices weaken, modestly.

Theme 2: Fallen Angels, stocks that were heavily sold off in 2008, despite good fundamentals
The financial risk of 2008 saw all stocks sell-off, the good the bad and the ugly. Through HC research we pick stocks that were
aggressively sold-off in 2008 and 2009 and have not yet recovered fully in 2009, rather than chasing stocks higher in 2010 that
have already been re-rated and done very well in 2009. We look for those stocks that, despite having good fundamentals and/or
being upgraded by sector analysts, have yet to see strong market performance. These fallen angels" offer investors an attractive
investment opportunity and protection from steep market sell-offs.

Theme 3: Cash is Cash

Capital is still difficult for companies to source, as banks are reluctant to lend/refinance companies given excess investment and
debt from the boom. We look to invest in those companies that have either paid down debt or have net cash on the balance
sheet. We believe these companies will be in a strong position to compete in the market. They may also get better financing from
banks, or rating agency upgrades.

Theme 4: Top-line to Bottom-line

In a more competitive world, we look for those companies that have consistently been able to deliver top line revenue growth,
EBITDA growth and EBITDA margin expansion over the last three years. We look to these companies as the best placed to deliver
on the upside in the next quarterly earnings update.
In conjunction with the above thematic ideas and sector views we highlight the following stock criteria to identify good stocks:
Price Performance: We look for stocks that have been neglected by the market and as such have underperformed the rally since
the start of 2009. Such stocks could be re-rated by the market or avoid a sell-off if the market corrects.
Earnings momentum: We look at those stocks that have had earnings upgrades to 12 month forward EPS estimates that have
yet had an impact on stock market valuation.
Valuation: Stocks that are currently trading at a discount to their historic average. We view stocks that are currently at a 25%
discount as cheap on a price to book measure.
Fundamentals: In a world that will exhibit slower growth in 2010, we look at those stocks that can generate both top line and
bottom line growth and will not be penalized from having high levels of debt:
1.
2.
3.

Revenue: We like those stocks that did not see declines in revenue in the latest financial year, having strong business
models and being able to maintain revenue growth in the next financial year.
EBITDA: We like strong earnings growth as companies restructure and cut costs.
Debt: Companies that have been able to pay down their debt or are cash rich, could have the upside surprise of a debt
upgrade from ratings agencies, do not have to worry about the need to refinance or could secure new assets at low prices
as rivals fail.

The result of the process aims at singling out (or emphasizing on) the potential stocks that are currently both in an up-trend and
are outperforming the benchmark (MSCI-GCC index).
Stocks are then assigned the following: Overweight (OW), Market Weight (MW) ,or Underweight (UW).

Macro & Strategy

74

Egypt

Appendix I: HC Pyramid Portfolio

Sector
Company

Index

Alexandria Mineral Oils Co

Asek Co for Mining
Egyptian Financial &
Industrial Co
Egypt Aluminium
El Ezz Steel Co
EL Ezz Aldekhela Steel
Alexandria
Egyptian Iron & Steel Co
Misr Chemical Industries
Rakta Paper Manufacturing
Sidi Kerir Petrochemicals Co
Samad Misr - EGYFERT

Liquidity (local
currency)
000s

Consensus
Earnings

Valuation on
History

Rev
Growth

Stock Market
Performance

EGX 70
EGX 70

Basic Materials
Basic Materials

3191
554

1192
7417

EGX 70
EGX 70
EGX30

Basic Materials
Basic Materials
Basic Materials

1459
3574
8719

10146
1317
36842

EGX 70
EGX 70
EGX 70
EGX 70
EGX30
EGX 70

Basic Materials
Basic Materials
Basic Materials
Basic Materials
Basic Materials
Basic Materials
Consumer,
Cyclical
Consumer,
Cyclical
Consumer,
Cyclical
Consumer,
Cyclical
Consumer,
Cyclical
Consumer,
Cyclical
Consumer,
Cyclical
Consumer,
Cyclical
Consumer,
Cyclical
Consumer,
Cyclical
Consumer,
Cyclical
Consumer,
Cyclical
Consumer,
Cyclical

10137
6291
319
212
5271
102

1747
4441
3389
885
10398
3648

1088

26993

377

18427

3088

4027

252

1328

1418

733

440

10977

307

773

933

4367

753

2468

46

2233

1674

3293

2317

1520

328

2550

Arab Cotton Ginning

Arab Polvara Spinning &
Weaving Co

EGX30

Ghabbour Auto

EGX 70

National Glass & Crystal Co

EGX 70

Delta Industrial Co

EGX 70

El Nasr Clothes & Textiles

EGX30

Misr Duty Free Shops

Egyptian Media Production
City

EGX 70

Nile Cotton Ginning

EGX30

Nile FOR Matches

Olympic Group Financial
Investments

EGX 70
EGX 70

Oriental Weavers

EGX 70

B-Tech

EGX 70

Macro & Strategy

Mkt Cap (local

currency)

EGX30

EGX 70

+
+

+
+

+
+
+

+
+

EBITDA
Grwth.

Net Debt
Change

HC Analyst
Rating
+
+

+
+

+
+

+
+

+
+
+
+
+

Hold

17.0

Buy

1090

Hold

28.7

+
+
+

+
+

+
+

Target
Price

75

Egypt
Sector

Mkt Cap (local

currency)

Liquidity (local
currency)
000s

Company

Index

Raya Holding Co
Alex Spinning & Weaving
Assiut Islamic Trading
Glaxo Smith Kline
Middle Egypt Flour Mills
Eastern Tobacco
Egyptian for Developing
Building Materia
El Nasr For
Manufacturing
Agricultural C
Egypt for Poultry
Gharbia Islamic Housing
Development
GMC Group for Industrial
Commercial & Fi
International Agricultural
Products
Ajwa For Food Industries
Co Egypt
North Cairo Flour Mills
Misr Oils & Soap
Mansourah Poultry
Northern Upper Egypt
Development
Cairo Poultry Co
Sharkia National Food
Delta Sugar Co
Extracted Oils
Maridive & Oil Services
SAE
Egyptians Abroad Inv &
Development
El Ahli Investment and
Development
Al Arafa Investments and
Consulting
Egyptian Real Estate
Group
Suez Canal Bank
Gulf Canadian Real
Estate Investment Co

EGX 70
EGX30
EGX 70
EGX 70
EGX 70
HERMES

Consumer, Cyclical
Consumer, Cyclical
Consumer, Staples
Consumer, Staples
Consumer, Staples
Consumer, Staples

304
441
88
1545
185
5917

5686
11557
2510
1352
2612
3985

EGX 70

Consumer, Staples

38

33

EGX 70
EGX 70

Consumer, Staples
Consumer, Staples

220
181

2249
8060

EGX 70

Consumer, Staples

28

1701

EGX 70

Consumer, Staples

146

3886

EGX30

Consumer, Staples

619

9812

Macro & Strategy

EGX
EGX
EGX
EGX

70
70
70
70

Consumer,
Consumer,
Consumer,
Consumer,

Staples
Staples
Staples
Staples

1344
200
102
147

5258
2395
1145
1179

EGX 70
EGX 70
EGX 70
EGX 70
EGX30

Consumer,
Consumer,
Consumer,
Consumer,
Consumer,

Staples
Staples
Staples
Staples
Staples

63
1391
70
2316
241

3399
1259
3436
2022
7325

EGX30

Energy

1004

363

EGX30

Financial

216

12600

EGX30

Financial

399

10963

EGX 70

Financial

154

289

EGX 70
EGX 70

Financial
Financial

162
1504

2012
734

EGX 70

Financial

70

2235

Consensus
Earnings

Valuation on
History
+
+

Rev
Growth

Stock Market
Performance

EBITDA
Grwth.

Net Debt
Change

HC Analyst
Rating

+
+

+
+
+

Target
Price

Buy

120.46

Buy

5.56

+
+

+
+
+
+

+
+

+
+
+
+
+

+
+

76

Egypt
Sector
Company
Credit Agricole Egypt SAE
Cairo Investment & Real
Estate Developme
Commercial International
Bank
Development &
Engineering Consulting
Delta Construction &
Rebuilding
National Development
Bank/Egypt
Egyptian for Tourism
Resorts
Egyptians Housing
Development &
Reconstruction
Egyptian Kuwaiti Holding
Co
Cairo Housing &
Development Co SAE (El
Kahera Housing)
EL Shams Housing &
Urbanization
Giza General Contracting
& Real Estate I
Housing & Development
Bank
Heliopolis Housing
Egyptian Financial GroupHermes Holding
Mena Touristic & Real
Estate Investment
Medinet Nasr Housing
Naeem Holding
Namaa for Development
and Real Estate In
National Real Estate Bank
for Developmen
National Societe Generale
Bank SAE
Six of October
Development &
Investment
Palm Hills Developments
SAE
Pioneers Holding

Macro & Strategy

Mkt Cap (local

currency)

Index

Liquidity (local currency)

000s

Consensus
Earnings

Valuation
on History
-

Rev
Growth

Stock Market
Performance
+

EBITDA
Grwth.

Net Debt
Change

EGX 70

Financial

3082

1166

EGX 70

Financial

132

947

EGX30

Financial

16213

35164

EGX 70

Financial

172

2462

EGX 70

Financial

178

2188

EGX 70

Financial

1069

5812

EGX30

Financial

1796

15403

EGX30

Financial

365

13162

EGX30

Financial

1514

2283

EGX30

Financial

674

23676

EGX 70

Financial

354

2962

EGX 70

Financial

152

4086

EGX 70
EGX 70

Financial
Financial

2168
2178

1580
7159

EGX30

Financial

10261

42544

EGX 70
EGX 70
EGX 70

Financial
Financial
Financial

297
2442
138

2515
8754
854

EGX 70

Financial

503

4571

EGX 70

Financial

66

2499

HERMES

Financial

9674

2709

EGX30

Financial

2996

11176

EGX30
EGX30

Financial
Financial

5004
3105

18116
45669

Target
Price

Hold

59.98

Buy

39.62

Buy

105.2

Hold

9.5

HC
Analyst
Rating

+
+

+
+

+
+
+
+

+
+
+

77

Egypt
Sector
Company

EG Saudi Finance Bank

Talaat Moustafa Group
Upper Egypt Contracting Co
United Housing &
Development
Alexandria Containers &
Goods
Canal Shipping Agencies
Co
EL EZZ Ceramics and
Porcelain Co
Egypt Contracting
Mokhtar Ibrahim
Egyptian Electrical Cables
Engineering Industries
ICON
Egytrans
Lecico Egypt SAE
El Nasr Co for Transformers
and Electric
Nasr Co for Civil Works
Orascom Construction
Industries
GEN Co FOR Ceramics &
Porcel
Remco for Touristic
Villages Constructio
Rubex Plastics
South Valley Cement
ElSwedy Cables Holding
Co
United Arab Shipping
Universal Unipack
Egyptian Co for Mobile
Services
Telecom Egypt
Orascom Telecom
Holding SAE
Natural Gas & Mining
Project

Macro & Strategy

Mkt Cap (local

currency)

Index

Liquidity (local currency)

000s

Consensus
Earnings

EGX
70
EGX30
EGX30

Financial
Financial
Financial

557
13115
568

3981
68935
23149

EGX 70

Financial

447

5933

EGX 70

Industrial

1846

2307

EGX 70

Industrial

1742

4862

EGX 70

Industrial

281

2021

EGX 70
EGX30

Industrial
Industrial

828
605

1094
14318

EGX 70
EGX
70
EGX 70
EGX
70
EGX 70

Industrial

69

4140

Industrial
Industrial

271
687

6647
1722

Industrial
Industrial

511
240

2723
1657

EGX30

Industrial

52671

67163

EGX 70

Industrial

280

5101

EGX 70
EGX 70
EGX30

Industrial
Industrial
Industrial

1424
78
3306

6297
3213
13010

EGX30
EGX 70
EGX 70

Industrial
Industrial
Industrial

8580
374
48

21064
5036
2148

EGX30
EGX30

Telecommunications
Telecommunications

20597
28628

25841
31747

EGX30

Telecommunications

24311

79335

EGX 70

Utilities

831

2032

Valuation
on History

Rev
Growth

Stock Market
Performance

EBITDA
Grwth.

Net Debt
Change

HC
Analyst
Rating

Target
Price

Buy

9.1

Hold

258.9

Buy
Buy

250
22.4

+
+
+

+
+
+

+
+

+
+
+
+

+
+

+
+

+
+

+
+

+
+

+
+

78

Egypt

1. Performance: + = Heavily sold stocks in 2008 that have lagged behind in 2009
2. Earnings: Change in consensus 12-mth forward EPS estimates (+ = Upgrade - = Downgrade to last change in EPS)
3. Valuation: + = stock that is at 25% discount or more to historic P/B multiples
4. Net debt for companies that have been paying, down debts or are cash rich, thus less concerned about refinancing needs will have a positive rating "+

Macro & Strategy

79

Egypt

Rating Scale
Recommendation
Buy
Hold
Sell

Upside
Greater than 25%
0-25%
Less than 0%

Disclaimer
This memorandum is based on information available to the public. This memorandum is not an offer to buy or sell, or a solicitation of an offer to buy or sell the
securities mentioned. The information and opinions in this memorandum were prepared by HC Brokerage from sources it believes to be reliable and from
information available to the public. HC Brokerage makes no guarantee or warranty to the accuracy and thoroughness of the information mentioned in this
memorandum, and accepts no responsibility or liability for losses or damages incurred as a result of opinions formed and decisions made based on information
presented in this memorandum. HC Brokerage does not undertake to advise you of changes in its opinion or information. HC Brokerage and its affiliates and/or its
directors and employees may own or have positions in, and effect transactions of companies mentioned in this memorandum. HC Brokerage and its affiliates may
also seek to perform or have performed investment-banking services for companies mentioned in this memorandum.

Macro & Strategy

80

Egypt

HC Research

research@hc-si.com

Karim Khadr

Regional Head of Research

karim.khadr@af-hc.com

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Tudor Allin-Khan, CFA

Amr Abdel Khalek

Chief Economist/Strategist
Junior Economist

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Telecoms
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206
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238
219
207
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Macro & Strategy

4
4
4
4
4

293
293
293
293
293

5365
5309
5353
5301
5302

81