egypt · sunday, 20 january 2019 egypt / strategy, macro, & equities egypt 2019 –a year of...

2019 – A Year of Selectivity

Egypt

Sunday, 20 January 2019Egypt / Strategy, Macro, & Equities

Egypt


Last year (2018) has been one of those strange years that exhibited a heightened level of volatility by historical measures. In hindsight, we think it was unpredictable to expect such a dramatic end to a year that started off on the right foot up until early Q2 2018. For this, we have a 50/50 chance in calling the market direction (as measured by EGX 30) stepping into the New Year (2019). Thus, we prefer to consider both on- and off-index bets in line with our key macro and equity themes. Incidentally, we are introducing our new model portfolio, including 20 stock picks that we will continue to monitor throughout the year.

More specifically in this note, …

• We lay down our outlook for 2019 and our suggested strategy in view of the macroeconomic landscape, ending with our top stock picks.

• We set a year-end target for the market bellwether EGX 30 index.

• We take a more granular look at the EGX through the “size” binoculars, introducing large-, mid-, and small-cap analysis.

• We sum up our sector views for 2019.

• We launch our equal-weights model portfolio with 20 stock picks.

For more details, please read on …

Table of Contents

Prefaceo Globalo Egypt

Macro – A Balanced Year for Egypt’s Economyo Zooming Out: Four Key Global Factors to Impact Egypt in Different Directionso Zooming In: Egypt’s Economic Outlook

Equity Strategy – Conditional Optimismo EGX 30: Analysis and Targeto What Really Pushed EGX 30’s Buttons in 2018?o Relative Performance: Sectors vs. EGX 30o Analyst Ratingso What Composition Could EGX 30 Have by 2019-End?o EGX 30 Rebalance Preview: The Widest Since 2012o Does Size Matter?o Trading by Investor Type

Sector Views

EGX Top Picks – SSE Model Portfolioo Our EGX Stock Calls in 2018o Equity Screenso Launching Our EGX Model Portfolioo Our EGX Top Picks Summary Table

1. ACAMD2. AMOC3. ATLC4. CIEB5. CLHO

6. CSAG7. EAST8. ESRS9. ETEL10. FAIT

11. HRHO12. ISPH13. MFPC14. OIH15. ORAS

16. ORHD17. ORWE18. PHDC19. SKPC20. TMGH

Research TeamSHUAA Securities [email protected]

Listen to the audio brief

mailto:[email protected]

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Sunday, 20 January 2019


SHUAA Research of 64

Looking ahead to 2019, investors should not rule out the impact that global markets can—and probably will—have on local market performance. First, a more hawkish environment in developed markets pose a threat to emerging markets in general, especially those with budget deficits and relying on debt to fill in the gap, such as Egypt. Second, Egypt’s capital market in and of itself is part of the emerging markets space that is often impacted by fund inflows into and out of EMs as an asset class, be it equity or fixed income. Overall, we do not think 2019 will be of a rollercoaster like 2018 was (save for unexpected global events), but it will not be an easy ride either, especially in a global environment marred by heightened volatility.

Global

As for global markets, volatility was the name of the game. It was driven mostly by global trade tensions between the United States and China and partly by country-specific woes, such as Argentina and Turkey—the worst two performing markets in 2018 (down 50.2% and 41.0%, respectively, in USD terms). Global stock market performance has been impacted by the US Fed’s then-more hawkish view with certain EM countries feeling the brunt, such as Pakistan whose stock market fell 27.2% in USD terms. Meanwhile, global asset classes had the worst annual performance since 2015, with almost all asset classes falling between 2% (gold) to 20% (oil).

• Global economic growth outlook: In its October 2018 World Economic Outlook, the IMF has lowered global growth forecasts for both years 2018 and 2019, citing weaker trade and investment. Growth projections for the euro area and the United Kingdom were reduced as well, in view of “surprises that suppressed activity in early 2018”. As for emerging markets, oil exporters were seen benefiting off higher oil prices in 2018, while oil importers were seen more vulnerable. We note that country-specific factors led some EM countries’ growth downward, namely Argentina, Brazil, Iran, and Turkey. Despite general unfriendly weather in the EMs, Egypt’s performance was outstanding. Indeed, Egypt has outperformed developing economies and MENA region in terms of GDP growth, recording 5.3% vs. around 4.7% and 2.5%, respectively.

#10YearsChallenge – Asset class performance in the last 10 years (USD)

Preface Amr Hussein Elalfy, MBA, CFA | Head of [email protected]

Note: The red line separates the positive from the negative performance each year.Source: Bloomberg, SHUAA Securities Egypt.

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Asset Class

5.80% 140.23% 83.16% 13.33% 18.62% 27.47% 5.61% 0.32% 59.23% 37.79% 2.38% USD Cash (3M)

3.02% 78.92% 30.17% 10.10% 16.71% 26.77% 2.09% (0.25%) 52.41% 30.92% (1.56%) Gold

(22.95%) 70.94% 29.57% 0.34% 14.95% 23.95% 0.24% (1.77%) 17.65% 23.57% (6.22%) S&P Global 100

(24.49%) 48.03% 21.58% (4.17%) 13.67% 0.27% (1.44%) (10.41%) 15.02% 23.10% (8.19%) Developed Mkts

(36.09%) 30.94% 19.30% (4.92%) 9.02% (0.28%) (1.97%) (11.86%) 11.45% 17.69% (8.52%) Silver

(40.23%) 24.37% 12.49% (9.94%) 7.06% (2.26%) (14.40%) (14.83%) 8.37% 13.53% (9.95%) Natural Gas

(51.42%) 24.09% 5.85% (18.16%) 4.36% (7.20%) (19.31%) (22.79%) 8.19% 6.34% (14.49%) Emerging Mkts

(53.18%) 3.39% 0.35% (20.83%) 3.47% (28.28%) (31.06%) (25.32%) 8.14% 1.28% (17.69%) Copper

(54.01%) 0.71% (27.46%) (29.41%) 0.44% (35.83%) (48.26%) (34.97%) 0.76% (3.87%) (19.55%) Oil


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• Trade war between the US and China: Ever since the ongoing tit for tat between the United States and China made the news headlines in 2018, markets have been rattled in fear of what could lie ahead. From their perspective, the US administration is keen to “Make America Great Again” by reducing its trade deficit with the rest of the world in general and with China in specific. China represents c.20% of US imports or USD500bn+, while the US represents c.6% of Chinese imports or USD130bn. So far, the US has launched three waves of tariffs (ranging between 10-25%) on Chinese goods exceeding a total of USD250bn and including an array of consumer and industrial items. In retaliation, China responded with tariffs (ranging between 5-25%) on US goods totaling USD110bn, including soybeans, chemicals, coal, and medical equipment. More recently, the two countries agreed to halt new trade tariffs to allow for talks, the failure of which would push global markets into more chaos depending on the magnitude of tariffs. However, given the size of China’s imports relative to the US, we believe both countries will find middle ground. After all, the US may not have substitutes for most Chinese imports until years to come (e.g. from Vietnam). If talks between the two giants fail, we see this may raise a red flag on trade activity passing through the Suez Canal. However, there is some blessing in disguise here as well, as China may seek stronger trade and investment relations with other nations, such as the MENA region including Egypt.

• Oil prices volatility in view of geopolitical landscape: Last year witnessed a paradigm shift in how the large oil exporters deal with low oil prices. Through OPEC, Saudi Arabia – the world’s largest oil exporter – resorted to direct coordination with Russia (a non-OPEC member) to reach a more concerted effort to maintain oil prices within a tight range. This has partially succeeded, but volatility risk remains in view of changes in demand. For Egypt, we prefer lower than USD70/bbl for Brent as it helps keep the budget deficit on an even keel, and will protect end-users against surging oil prices as the government lifts subsidies and introduces price indexation mechanism. However, we see some factors that may send oil prices up again to USD70/bbl (more on that in the Macrosection). Within EGX, companies whose sales are benchmarked to oil will benefit (e.g. AMOC, CCAP, SKPC, EKHO), while those with imported production factors will tend to suffer (e.g. ORWE), especially if they could not pass on the higher cost to their customers.

• Interest rate tightening in DMs and EMs: Globally, most developed markets (DMs) have started their tightening cycle already, including the United States and the United Kingdom. Meanwhile, other emerging markets (EMs) opted to raise their policy rates to address economic issues specific to their countries, such as Turkey, Russia, South Africa, India, and Mexico. We think Egypt is relatively better positioned for the tightening rounds in either DMs or EM, compared to peers. Post its IMF-blessed economic reform program, Egypt’s interest rate environment changed to an

“easing” mode between mid-February and late March 2018 when global rates began to rise. Since then, Egypt’s policy rates have been on hold at a time when inflation was creeping above the CBE’s comfort zone (13% ± 3%). However, with inflation reaching a five-month low of 12% in December 2018, the landscape is set for more easing to come in 2019 and beyond as monetary policy normalizes and Egypt’s credit profile improves.

• Sovereign risk pressure: Throughout 2018, EM credit default swaps (CDS)—a measure of sovereign risk—have been rising in view of (1) increased risk in EM as an asset class following a then-more hawkish view throughout the year and (2) specific risk in certain countries, such as Turkey and Argentina. Still, EM economies are expected to post higher real GDP growth rate compared to DM peers. In Egypt, 5-year CDS rates have risen as well but to a less extent; it only began to pick up again by mid-December 2018, more likely after news spread of a delay in the disbursement of the IMF fifth USD2bn tranche scheduled for before year-end. While there seems to be a negative correlation between Egypt’s CDS rates and its stock market, we believe the latest increase in the former has more to do with overall market sentiment (impacted by the EM apocalypse) as opposed to macro-economic issues.

• Key events to watch: This year, there are several political and macro events that may change the direction of some global markets altogether. As for the political events, the key highlight for the year will be the Brexit effective date. However, after the British Parliament had recently rejected May’s exit deal, questions are now raised on how – and if – Britain will leave the EU on 29 March 2019 as promised. The United Kingdom represents 4.3% of Egypt’s total trade, 6.7% of Egypt’s exports, and c.35% of FDI inflows. Failure of the Brexit implementation will likely pressure the British pound and may impact British investments in Egypt and tourism. As for the macro events, the Fed’s rate hike path will be influential. We need to keep an eye on each and every FOMC meeting by the Fed, the first of which is scheduled by end of January with focus directed towards the meeting minutes to gauge FOMC members’ expectation of the rate hike pace. Besides, there are several national elections taking place in Turkey in March, India in April/May, and Greece, Canada, and Argentina in October, shaping up a more dynamic political scene to keep an eye on.

Preface (Cont.’d) Amr Hussein Elalfy, MBA, CFA | Head of [email protected]


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Egypt

As for Egypt, we believe 2019 will be a balanced play on both the macro and the equity fronts. On one hand, key macro indicators will play a key role in setting the scene for economic growth recovery and expansion. On the other hand, certain company-specific factors can propel stock prices higher, hopefully outperforming the market (EGX 30 and EGX 50). We prefer scanning EGX-listed stocks using a bottom-up (as opposed to top-down) approach, which we believe can help us spot under-researched and neglected stocks that are often undervalued. We then piece those stocks together within the general outlook to ensure there are enough catalysts to unlock their intrinsic value. This means, investors need to be “selective”, which is why we call 2019 “a year of selectivity”.


• Stocks trading below pre-flotation levels (c.40 stocks in EGP, c.150 stocks in USD): Although Egyptian equities are generally above their pre-flotation levels in EGP terms (i.e. compared to prices of 2 November 2016), they are not in USD terms. Indeed, EGX 30 is c.60% above its pre-flotation level in EGP but still 17% below in USD. Also, the median stock (on a total return basis) is up 50% in EGP, but it is still down by a fifth or 22% in USD. While there are some 40 stocks still trading below their pre-flotation levels in EGP terms, there are some 150 stocks trading below their pre-flotation levels in USD terms.

• Trading liquidity: Obviously, the EGP flotation was the milestone for Egyptian equities which helped push their prices higher to a peak of 18,414.11 on the EGX 30 intraday on 29 April 2018, with average daily trade values jumping from EGP476mn in 2015 to EGP1bn in both 2017 and 2018. However, the market’s daily traded value averaged USD58mn in 2018, 47% below its 2014 peak of USD109mn. To go back to the 2014 levels in USD, average daily traded value needs to reach EGP2bn, a level seen in a few days before in the past decade.

• Sector views: Regardless of their constituents’ valuation levels, we generally prefer Consumer Staples, Non-Banking Financials, Health Care, and Telecom, Media & Technology. We opt to avoid Banks in general, save for a couple of names that are deeply undervalued. Meanwhile, we are neutral on Consumer Discretionary, Energy & Utilities, Industrials, Materials, and Real Estate. Please click here for our Sector Views.


#10YearsChallenge – MENA + BRICS + US stock market performance in the last 10 years (USD)

Note: Boxed countries are BRICS.Source: Bloomberg, SHUAA Securities Egypt.

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Market

5.05% 144.92% 33.49% 6.05% 50.98% 117.24% 54.01% 6.36% 69.07% 37.93% 27.34% Qatar

(12.84%) 120.85% 30.80% 2.11% 24.56% 72.85% 30.16% 5.36% 59.25% 34.18% 17.76% UAE - ADX

(14.70%) 91.72% 24.00% 0.38% 24.05% 32.38% 29.14% 1.37% 35.98% 27.86% 12.09% Saudi Arabia

(26.31%) 82.59% 23.68% (8.39%) 20.80% 31.35% 23.48% 0.41% 16.70% 24.70% 8.28% Kuwait

(32.05%) 68.81% 19.52% (9.38%) 15.99% 30.99% 19.95% (0.21%) 15.87% 21.82% 6.81% Bahrain

(36.57%) 51.27% 15.06% (12.11%) 15.73% 30.72% 17.55% (7.66%) 12.22% 19.08% (1.76%) India

(37.00%) 47.18% 12.61% (12.29%) 14.72% 23.65% 13.68% (8.06%) 11.95% 18.47% (1.79%) Brazil

(37.88%) 42.25% 11.86% (12.97%) 9.83% 22.24% 9.21% (10.64%) 11.49% 15.99% (1.93%) Russia

(43.91%) 32.20% 11.68% (13.92%) 6.92% 16.71% 6.15% (10.91%) 10.30% 15.54% (3.99%) Tunisia

(46.52%) 26.45% 11.49% (16.23%) 5.78% 5.57% 3.82% (11.56%) 8.25% 8.86% (4.39%) US

(49.29%) 22.92% 9.97% (16.54%) 4.05% 2.31% 1.16% (11.65%) 6.15% 6.20% (7.56%) Morocco

(55.33%) 19.65% 5.95% (16.61%) 3.93% (0.98%) 0.54% (13.30%) 5.36% 3.72% (8.15%) Lebanon

(55.48%) 14.39% 4.07% (16.90%) (0.62%) (1.93%) (0.20%) (13.82%) 4.15% 2.17% (10.91%) Oman

(60.97%) 9.69% 2.21% (19.32%) (1.99%) (2.01%) (3.23%) (14.57%) 0.81% 1.91% (11.67%) Egypt

(62.43%) (1.09%) 1.84% (27.07%) (2.33%) (2.30%) (13.44%) (21.39%) (1.54%) (0.64%) (20.53%) UAE - DFM

(71.90%) (10.94%) (6.79%) (35.72%) (5.10%) (7.67%) (13.44%) (26.98%) (16.33%) (7.22%) (21.11%) South Africa

(72.29%) (14.66%) (9.70%) (49.53%) (10.68%) (26.83%) (42.12%) (41.97%) (22.19%) (15.90%) (26.91%) China


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771 476

739 1,024 1,036

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

31-Dec-13 31-Dec-14 31-Dec-15 31-Dec-16 31-Dec-17 31-Dec-18

Daily traded value (EGPmn) Annual average (EGPmn) EGX 30 (EGP) - RHS

109

62 70 57 58 -

200

400

600

800

1,000

1,200

1,400

1,600

-

50

100

150

200

250

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31-Dec-13 31-Dec-14 31-Dec-15 31-Dec-16 31-Dec-17 31-Dec-18

Daily traded value (USDmn) Annual average (USDmn) EGX 30 (USD) - RHS

• Six key themes: Realizing that the market is not close to see its hay days in terms of trading liquidity, we prefer using a more selective approach by picking stocks that fit certain themes. We can think of many themes as much as there are economic or company KPIs, but we choose to focus in our strategy on six key themes that we think are more relevant in 2019, namely:

1) Declining interest rates: Leveraged companies in general, each depending on its exposure to EGP-denominated debts (ASCM, AUTO, ESRS) or in the real-estate sector in specific (ORHD, PHDC) and those in the non-banking financial sector (ATLC, CICH, HRHO, SRWA) should benefit off any interest rate cut.

2) Firming oil prices: Companies whose top-line performance is linked to oil prices should benefit as oil prices stabilize or firm higher (AMOC, CCAP, EKHO, SKPC).

3) Booming tourism: Companies with exposure to the tourism sector, be it a hotel operator (ORHD, PHTV, TMGH) or a touristic developer/manager (EGTS).

4) Government-driven stories: Companies that can benefit off (a) government spending on infrastructure (ORAS, SWDY), (b) the resumption of the public offerings program (ABUK, ALCN, AMOC, EAST, EGAL, HDBK, HELI, MNHD, SKPC), and (c) those impacted positively by subsidy cuts (BINV, CCAP, EGAS, EKHO).

5) Cash rich: Companies that generate sustainable operating cash flows and/or are cash rich can (a) pay out generous cash dividends (ATLC, CIEB, FAIT, ORWE) or (b) buy back shares as treasury stocks (EMFD, SWDY, TMGH).

6) Company-specific drivers: Companies that have certain pending issues, the resolution of which would unlock value (AMOC, EGAL, SKPC – all three have new projects planned, OIH – profit repatriation from North Korea, CCAP – commencement of its refinery operations).


Source: Bloomberg, SHUAA Securities Egypt.

EGX 30 vs. daily traded value (USD)

EGX 30 vs. daily traded value (EGP)



Macro

A Balanced Year for Egypt’s Economy

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Macro Esraa Ahmed | Senior [email protected]

A Balanced Year for Egypt’s Economy

We expect 2019 to witness more improvement in most macroeconomic indicators. We believe growth will be stronger, fiscal discipline measures will continue giving a brighter outlook for the state budget, and inflation will likely be more tame relative to an average of 14%. On the other side, we need to keep an eye on vulnerability to international factors, such as global monetary stance, USD outlook, and oil prices. In this note, we highlight both sides of the story, detailing at the end our forecasts for the main economic indicators for 2019.

2019 Key Themes

Growth acceleration

Progress in fiscal consolidation

Disinflation path

Global monetary tightening

Slightly higher pressure on current

account

A potential rally in oil prices

NegativePositive


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0102030405060708090

100

USD p/b

Macro (Cont.’d)

Zooming Out: Four Main Global Factors to Impact Egypt in Different Directions

Trying to analyze the big context in which Egypt’s economy operates, we see that there are four main determinants that usually impact the economy directly and indirectly, namely: (1) global growth (the Eurozone in particular), (2) the pace of global monetary tightening, (3) oil prices, and (4) USD trend worldwide.

1. The world economy will grow slower in 2019: World growth is expected to slow down in 2019. According to the IMF, world growth in 2019 was revised downward in October to 3.7% (almost unchanged from 2018) compared to the 3.9% previously estimated in April 2018. Uncertainty over trade policies and softer growth in China were among the factors that weighed on expectations of global economic activity. The Euro area, in particular, is expected to slow down from 2.4% in 2017 to 2% in 2018 and to 1.9% in 2019.

Impact on Egypt: We do not see this softening hitting demand for Egypt’s exports significantly – either merchandise or service exports (i.e. tourism) – as Egypt’s exports are currently gaining strength from post-flotation competitiveness of the EGP.

2. Global monetary tightening in progress: Looking at the global monetary scene, we see the Fed expected to hike Federal funds rate target range again in 2019 two times to reach 3.0% by 2019-end up from the current 2.5%.The ECB has recently announced the end of its Asset Purchase Program, its main post-crisis easing procedure. Meanwhile, emerging markets have already raised their rates during the latest turmoil.

Impact on Egypt: The aforementioned scenario suggests a slow tempo for the Central Bank of Egypt’s (CBE) easing cycle, with at most a cumulative 2% rate cut through 2019. Besides, we see a

negative impact on Egypt’s cost of borrowing with regards to its international bond issuances, of which the soonest is expected in January 2019.

3. Current oil prices plunge not expected to reverse strongly in the near future: Since early October 2018, Brent crude has lost 37% off its peak price reached on 3 October (USD86/bbl). Although global growth is expected to slow in the medium term, and China – the largest crude importer – is showing weaker economic data, which casts a shadow over oil price in the year ahead, we still prefer to adopt a conservative view on oil prices (i.e. we do not expect oil prices to remain this low for long). This is attributed to: (1) OPEC and its allies have agreed to cut production by 1.2mn barrel per day (b/d), (2) a potential decision to repeal Iran waivers in May 2019 might push prices up by mid-2019. Indeed, various international institutions – including the IMF –expect around USD72/bbl in 2019.

Impact on Egypt: We believe c.USD70/bbl is reasonable for 2019 forecasts. A USD70 price for Brent crude gives us room to lower forecast budget deficit to c.EGP464.6bn, equivalent to 8.9-9% to GDP.

4. Global outlook for the US dollar during the year: Although the Fed decided to hike rates for the fourth time in 2018 (as planned before), the general sentiment among monetary policy makers has switched to be “less bullish” on the US economy and thus limited their expectations for 2019 monetary path to only two hikes (down from expected three hikes previously). In the same context, data from the US Commodity Futures Trading Commission show that net long positions of asset managers and leveraged funds have lost momentum in December, showing their lower appetite to bet on a US dollar rally in 2019.

Impact on Egypt: A more stable value for USD worldwide somehow helps cushion pressure on EGP.

Source: Bloomberg.

Oil Prices have skidded substantially since October 2018, giving a breather to Egypt’s public finances.

Net long positions of Asset Managers and Leveraged Funds on DXY Futures are losing momentum…

Source: US Commodity Futures Trading Commission.

-20000

-10000

0

10000

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30000

40000

50000

No. of Contracts

Esraa Ahmed | Senior [email protected]


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Macro (Cont.’d)

Base-Case Scenario

1. Growth acceleration to reach around 5.8%, driven by infrastructure projects, investment in the natural gas sector and growth in net exports.

2. Further progress in the reform measures, eliminating fuel subsidies by mid-year and introducing indexation pricing mechanism for fuel products at the same time. This should help shrink the budget deficit to 8.9-9% to GDP.

3. Such progress will help maintain a positive perception of Egypt’s economic path by international stakeholders (e.g. credit rating agencies, long-term investors, donor institutions, etc.), securing continuing inflows of fresh funds.

4. FDI is expected to stabilize at c.USD8bn in FY2018/19.

5. Disinflation path will be in place, with anticipated inflationary waves of a 4-5% jump in inflation rates following the implementation of reform measures. We expect inflation to average c.14% in FY2018/19.

6. Slow resumption of monetary easing, with a maximum 2% cut in 2019, mainly in H1 2019.

7. We expect the current account to witness a slightly higher pressure compared to last year, as we expect workers’ remittances to grow at a slower pace and trade deficit to slightly widen in FY2018/19 to c.USD38bn in FY2018/19. This should be partly offset by a higher services balance surplus, with tourism receipts expected to pick up to c.USD11bn in the same period. We see the current account deficit at 2.3% of GDP or c.USD7bn, up from USD6bn a year ago.

8. We see a balanced outlook for the USD/EGP exchange rate. We believe the exchange rate will stabilize at c.EGP18 per USD (±EGP0.10).

Key Downside Risks and Threats: What Could Make Things Go Wrong?

1. A stumbling reform pace that hits confidence in the fiscal outlook, especially internationally. This might trigger credit rating/outlook downgrade, thus putting foreign liquidity under particular pressure.

2. A stronger-than-anticipated inflationary wave leading to a deep decline in aggregate demand.

3. A strongly adverse international monetary stance pushing Egypt’s cost of debt higher substantially.

4. A USD or oil price rally that could place high pressures on the EGP and government finances.

Key Upside Risks and Potential Opportunities: What Could Make Things Go Better?

1. A suspension of global tightening wave potentially reallocating inflows worldwide in favor of emerging markets.

2. Faster-than-anticipated rate cuts by the CBE may allow the private sector to get a second wind, enhancing their access to credit and fostering growth and private investments.

3. Lower-than-budgeted oil prices, if maintained, could help save the state budget between EGP39-50bn, assuming Brent crude oil price at USD54/bbl. (The government had announced before that each ±USD1/bbl has a net effect of EGP3-4bn on the budget deficit).

Zooming In: Egypt’s Economic Outlook



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-40%-30%-20%-10%0%10%20%30%40%

-6%

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6%

Dec

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r-1

7

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Monthly inflation Annual inflation - Right

Macro (Cont.’d)

Real growth expected to continue accelerating, thanks to higher investment and net exports

6.8% 7.1% 7.2%

4.7%

5.1%

1.8%2.2% 2.1%

2.2%

4.2% 4.3%

4.2%

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0%

1%

2%

3%

4%

5%

6%

7%

8%

At most a 2% rate cut expected during 2019, most probably during H1 2019

Budget overall deficit to GDP expected to shrink to 8.9-9%

Source: Ministry of Planning, SHUAA Securities Egypt estimates. Source: CBE, SHUAA Securities Egypt estimates.

FDI expected to inch slightly up to c.USD8bn in FY2018/19 CA deficit % to GDP expected to stay flat at 2.3% or c.USD6.7bn.

17.75%16.75% 16.75%

15.75%

14.7… 14.75%

10%

11%

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19%

Q1 2018 Q2 2018 Q3 2018 Q4 2018 Q1 2019f

Q2 2019f

Q3 2019f

Q4 2019f

-14%

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-8%

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0%

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4%

FY2013/14 FY2014/15 FY2015/16 FY2016/17 FY2017/18 FY2018/19f

Overall Deficit/ GDP (%) Primary Balance / GDP (%)

Source: CBE.

8.1

6.8

2.2

4.0 3.8 4.2

6.46.8

7.9 7.7 8.0

0123456789

USDbn

Source: MoF, SHUAA Securities Egypt estimates. Source: CBE, SHUAA Securities Egypt estimates. Source: CBE, SHUAA Securities Egypt estimates.

-8%

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2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 e 2018/19 f

USDbn % to GDP (Right)


After becoming more tame relatively in 2018, we expect average inflation in FY2018/19 to reach c.14%.


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Macro (Cont.’d)

Source: CBE, MoF, SHUAA Securities Egypt.

Egypt’s macro indicators 2012/13 a – 2018/19 f


FY2012/13 a FY2013/14 a FY2014/15 a FY2015/16 a FY2016/17 a FY2017/18 e FY2018/19 f

Nominal GDP (EGPbn) 1,844 2,102 2,430 2,708 3,470 4,400 5,221

Real GDP growth (%) 2.1% 2.2% 4.2% 4.3% 4.2% 5.2% 5.8%

Urban inflation (CPI, % avg.) 6.9% 10.1% 11.0% 10.2% 23.3% 21.6% 13.5%

Budget deficit (EGPbn) 239.7 255.4 279.4 339.5 379.6 431.2 464.6

Budget deficit (% GDP) 13.0% 12.2% 11.5% 12.5% 10.9% 9.8% 9.0%

Primary balance (% to GDP) -5.0% -3.9% -3.5% -3.5% -1.8% 0.2% 1.7%

Current account (USDbn) -6.4 -2.8 -12.1 -19.8 -14.3 -6.0 -6.7

Current account (% to GDP) -2.2% -0.9% -3.7% -5.9% -6.8% -2.3% -2.3%

Tourism Receipts 9.75 5.07 7.37 3.77 4.38 9.80 11.50

Remittances from Egyptian working abroad 18.67 18.52 19.33 17.08 21.82 26.39 28.50

Net Foreign Direct Investment (FDI) 3.75 4.18 6.38 6.84 7.93 7.72 8.00

USD-EGP spot rate (avg. FY) 6.44 6.99 7.38 8.17 15.25 17.74 17.85

CBE O/N lending rate (EOP) 10.75% 9.25% 9.75% 12.75% 17.75% 17.75% 15.75%


13




Event Expected Date

Receiving 5th USD2bn tranche (of the IMF USD12bn loan) January 2019

Implementation Fuel products price indexation mechanism 95-Octane gas in Q1 2019, and mid-year for the rest of fuel grades

Around USD6bn Eurobond issuance Q1 2019

Fuel products subsidy elimination June 2019

Receiving 6th USD2bn tranche (the last of the IMF USD12bn loan) June 2019

New Labor Law Mid-2019

Income Tax Law Amendments / Drafting a Whole New Law Not Specified

New Social Insurance Law Not Specified

SMEs Tax Treatment Law Not Specified

New Banking Law Not Specified

New Law Organizing Federation of Industries and Industrial Chambers Not Specified

2019 landmark expected events and laws in the making

Macro (Cont.’d) Esraa Ahmed | Senior [email protected]

Source: Media reports, SHUAA Securities Egypt.


14




Q1 2019 Q2 2019

January 2019 February 2019 March 2019 April 2019 May 2019 June 2019• 22-25 January

World Economic Forum• 7 February

BoE meeting• 7 March

ECB meeting• 10 April

ECB meeting• 30 April-1 May

FOMC meeting• 6 June

ECB meeting• 22-23 January

BoJ meeting• 14 February

CBE meeting• 14-15 March

BoJ meeting• 12-14 April

World Bank and IMF meeting• 2 May

BoE meeting• 18-19 June

FOMC meeting

• 24 JanuaryECB meeting

• 19-20 MarchFOMC meeting

• 24-25 AprilBoJ meeting

• 2 MayEngland and Northern Ireland, Local elections

• 19-20 JuneBoJ meeting

• 29-30 JanuaryFOMC meeting

• 21 MarchBoE meeting

• 30 April-1 MayFOMC meeting

• 23-26 MayEuropean parliamentary elections

• 20 JuneBoE meeting

• 28 MarchCBE meeting

• April/MayIndia, General election (date tbd)

• 23 MayCBE meeting

• 28-29 JuneG20 Summit in Osaka, Japan

• 29 March 11 pmUTC, Brexit take effect

• April/MayIndia, General election (date tbd)

• May/JuneOPEC meeting (date tbd)

• 31 MarchTurkey, Local elections

• May/JuneOPEC meeting (date tbd)

Q3 2019 Q4 2019

July 2019 August 2019 September 2019 October 2019 November 2019 December 2019• 11 July

CBE meeting• 1 August

BoE meeting• 12 September

ECB meeting• 20 October

Greece, Legislative election• 6-7 November

BoJ meeting• 10-11 December

FOMC meeting• 25 July

ECB meeting• 22 August

CBE meeting• 17-18 September

FOMC meeting• 21 October

Canada, Federal election (date tbc)• 7 November

BoE meeting• 12 December

ECB meeting

• 29-30 JulyBoJ meeting

• 18-19 SeptemberBoJ meeting

• 24 OctoberECB meeting

• 14 NovemberCBE meeting

• 18-19 DecemberBoJ meeting

• 30-31 JulyFOMC meeting

• 19 SeptemberBoE meeting

• 27 OctoberArgentina, General election

• 19 DecemberBoE meeting

• 26 SeptemberCBE meeting

• 29-30 OctoberFOMC meeting

• 26 DecemberCBE meeting

• 31 OctoberBoJ meeting

Global Politics Global Economics Egypt Economics

Macro (Cont.’d)

Source: Central banks, UBS.

Main global events, Egyptian and international monetary policy committees’ schedule



Equity Strategy

Conditional Optimism

16




5

4 4

3 3

2

Interest ratecut

Inflation rateto stabilize

Tourism tosurpass

previouspeaks

Oil pricestabilizing

Generatingprimarysurplus

FDIsimproving

(quality overvolume)

5

4

3 3

2 2

Earningsgrowth

P/E re-rating Increasingtrading

liquidity

IPO/POPsuccessful re-

launch

EM flows(MSCI and

FTSErebalancing)

Real interestrates (lowpositive tonegative)

Conditional Optimism

Stepping into 2019, we think investors are more optimistic than not, but we believe this optimism will be conditioned upon certain catalysts, both on the macro and the stock market fronts. Indeed, we believe “conditional optimism” is in order. To gauge the impact of each catalyst, one needs to understand the interrelation between all catalysts, leaving us with too many scenarios to consider. Thus, we prefer to focus on the more salient factors that we think will have a strong impact on investors’ decisions when investing in Egypt in 2019.

• Below, we list the macro and stock market catalysts that we are tracking in 2019, with the strength of impact we assigned to each. We think an interest rate cut and strong earnings growth will have the strongest (positive) impact on EGX-listed stocks. But before digging deeper into sectors and companies, let’s first see where Egypt stands within global and regional markets.

Equity Strategy Amr Hussein Elalfy, MBA, CFA | Head of [email protected]

Note: Numbers denote the strength of impact (in our view) from 5 (the most influential) to 1 (the least influential).Source: SHUAA Securities Egypt.

Stock MarketMacro


17




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Note: The period under study is 6 years, current levels as of 8 January 2019.Source: Bloomberg.

EGX 30: Analysis and Target

In order to have a wider view about Egyptian equities valuation versus global and MENA markets, we compare on the right-hand charts the EGX 30 and other equity markets’ benchmarks valuation KPIs (a) relative to their own historical averages and (b) relative to the rest of the markets.

1) A cheap market: Based on a forward P/E, Egypt is considered the fifth cheapest market of all global markets under study and the third in the Arab world behind Oman and Dubai equity markets. EGX 30 is also trading at 22% discount to MSCI EM. EGX 30 is currently trading below its 6-year historical average.

2) A relatively high dividend payer market: With a c.4.0% forward dividend yield, Egypt is considered as one of the high yielding equity markets (18% above MSCI EM).

Ahmed Abdelnaby | Vice President, [email protected]

Equity Strategy (Cont.’d)

0.01.02.03.04.05.06.07.08.09.0

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Forward dividend yield by market

Forward P/E by market

Legend key of the charts on the right


18




OmanTurkey

UAE - DFM

Saudi Arabia

MSCI EM

UAE - ADX

Qatar

MSCI FM

Morocco

Tunisia

Egypt

0

1

2

3

4

5

6

9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22%

PB

V 2

01

9e

ROE 2019e

Qatar

UAE - ADX

Morocco

UAE - DFM

Saudi Arabia

Turkey

MSCI FM

Oman

Egypt

5

7

9

11

13

15

17

8% 13% 18% 23% 28% 33%

PER

20

19

e

EPSG (3-year CAGR "2018e - 2021e")

3) Highest earnings growth: With a 3-year earnings CAGR of 29%, Egypt is considered the highest market in MENA region in terms of earnings growth with a relatively lower P/E of 8.6x as depicted in the bottom chart to the left.

4) Highest return on equity: Egyptian equities exhibit the highest return on equity (ROE), coinciding with relatively low P/BV as depicted in the below chart to the right.

5) EGX 30 target – 18,300 (+40% expected total return): All of the above point to a considerable recovery in EGX 30 towards 18,300 by end of 2019. We base our target on two models:

• Multiples-based model – 18,200: Using a 5-year average forward P/E of 11.6x and 2019 EPS of the index based on analyst consensus earnings estimates, we reached a target of 18,200. We also conducted a sensitivity analysis to show this target’s sensitivity to changes in EPS and P/E. Using a ±10% change in EPS and ±1 standard deviation of P/E, we reached a low of 13,600 and a high of 23,400.

• Consensus PT-based model – 18,400: In this model, we used the index constituents’ current weights and their consensus price targets (note: we used the most recent market price if the stock had no coverage). This model yielded a target of 18,400.

Applying equal weights to both models, we reached our EGX 30 target of 18,300 (+37% upside) in addition to a 2019e dividend yield of c.4%, implying an expected total return in excess of 40%.



Source: Bloomberg.

2019 PER-based index target senestivity

1,411.0 1,567.7 1,724.5

9.6x 13,600 15,100 16,600

11.6x 16,300 18,200 20,000

13.6x 19,100 21,300 23,400

2019e EPS

20

19

e P

ER

± 1

SD

Source: SHUAA Securities Egypt.

Source: Bloomberg.

EGX 30 2019-end target

Historical forward P/E-sensitivity Consensus PT-based

18,400

18,300


19




What Really Pushed EGX 30’s Buttons in 2018?

• 2018’s negative performance was attributed to a P/E de-rating: Exploring the factors underlying EGX 30’s ups and downs in 2018, we can attribute the movement of Egypt’s benchmark EGX 30 total return (i.e. including dividends) to three main forces: (1) analyst earnings estimates as measured by forward earnings per share (EPS) for index components, (2) re-rating/de-rating as measured by a higher/lower forward price-to-earnings (P/E) ratio which is also partially affected by earnings estimates, and (3) dividend yield (DY). The below chart shows EGX 30 total return attribution analysis on an annual basis for the last eight years, where the -11.0% 2018 total return is linked to a P/E de-rating of -16.9% versus an upbeat earnings estimate of 3.7% and 2.2% DY.

EGX 30 annual total return attribution analysis (EGP)



-47.5%

59.0%

27.6%34.0%

-20.2%

80.3%

25.4%

-11.0%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

2011 2012 2013 2014 2015 2016 2017 2018

PER EPS DY EGX30 Index TRA



20





Relative Performance: Sectors vs. EGX 30

• Which sectors outperformed/underperformed EGX 30 in 2018? The below charts depict the relative performance of all 12 EGX sectors versus the EGX 30 throughout 2018 (taking 31

December 2017 as the base). A positive (negative) reading means the sector is outperforming (underperforming) the EGX 30. The three sectors that outperformed EGX 30 by a large margin

in 2018 were led by Travel & Leisure (outperforming by +39.2%), Industrial Goods & Services (outperforming by +28.6%), and Financial Services (outperforming by +16.8%). On the other

hand, the three worst performing sectors were Telecom (underperforming by 25.6%), Construction & Materials (underperforming by 22.5%), and Personal & Household Products

(underperforming by 12.3%).



-10%

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Health Care & Pharmaceuticals

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Industrial Goods & Services

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Personal & Household Produsts

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Construction & Materials

-5%

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Financial Services

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Basic Resources


21




73.0%

61.8%56.8%

54.4%

47.7%

40.4%

33.3% 32.0%27.9%



Analyst Ratings

To gauge the market sentiment, we look at analyst ratings of stocks (whether Buy, Hold, or Sell) for the overall market and for each sector over four different historical time frames (1Y, 6M, 3M, and current).

(1) Market-wise: Although most of the market remains uncovered by analysts (two-thirds), as a percentage of total stocks covered we see increasing Buy ratings and decreasing Sell and Hold ratings over the last year. The market slowdown has pushed many stocks below their price targets, rendering a higher number of stocks as Buys.

(2) Sector-wise: We note that the two Consumer sectors and Materials have seen an increasing trend of Buy ratings over the last year. Meanwhile, Real Estate, Materials, and Health Care exhibited the highest average upside potential based on analysts’ price targets.

0%

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ConsumerDiscretionary

ConsumerStaples

Energy &Utilities

Financials Health Care Industrials Materials Real Estate TelecomServices & IT

Buy Hold Sell Not Rated

23.3%

9.3%

3.0%64.4%

1 year ago


24.2%

9.3%

3.0%

63.6%

6 months ago


26.3%

6.8%

3.0%64.0%

3 months ago


28.8%

5.1%

2.5%

63.6%

Current


Aggregate market consensus investment ratings

Consensus investment ratings by sector

Upside potential by sector (based on consensus PTs)



22




0% 5% 10% 15% 20% 25% 30% 35%

COMI

EAST

SWDY

TMGH

EKHO

HRHO

ABUK

GTHE

JUFO

MNHD

CCAP

SKPC

ETEL

AMOC

OCDI

ESRS

QNBA

ORAS

PHDC

ISPH

EFID

HELI

PIOH

EMFD

EGTS

OIH

EGAL

PORT

IRON

ACGC

Weights @ Price Target Current Weights

-2.19%

-1.24%

-0.64%

-0.47%

-0.39%

-0.27%

-0.18%

-0.14%

-0.13%

-0.11%

-0.10%

-0.10%

-0.09%

-0.08%

-0.07%

-0.07%

0.03%

0.06%

0.09%

0.13%

0.14%

0.15%

0.19%

0.36%

0.43%

0.59%

0.80%

0.90%

1.06%

1.31%

-3% -2% -1% 0% 1% 2%

COMI

SWDY

CCAP

JUFO

EAST

EKHO

OIH

ETEL

ABUK

ESRS

EGAL

ISPH

EGTS

PORT

EFID

IRON

PIOH

AMOC

ACGC

EMFD

GTHE

QNBA

SKPC

ORAS

HELI

HRHO

PHDC

MNHD

TMGH

OCDI

Implied change in weights




What Composition Could EGX 30 Have by 2019-End?

If we assume that all 12-month price targets set by market analysts for the EGX 30 constituents are hit by end of 2019, what does this mean for the index composition?

• To answer this question, we compared the weights of EGX 30’s current constituents using current market prices versus their expected weights using consensus price targets. For the three EGX-constituent companies (namely AMOC, ISPH, and SWDY) that we are covering, we used our 12-month price targets. If a stock is not covered by any analyst, we simply assumed that it will not change (i.e. remain at the current price). We then calculated the expected changes in the weights if all index constituents hit their 12-month price targets set by analysts in the market.

• The first chart to the right depicts the current and target weights of all index constituents if the above-mentioned hypothesis materializes. Meanwhile, the second chart to the right depicts the changes in each constituent’s weight as a result.

• As suggested by the second chart, the two heavy-weight stocks COMI (-2.2%) and SWDY (-1.2%) will be the most negatively affected, while OCDI (+1.3%) and TMGH(+1.1%) are expected to see their weights increase the most, assuming all price targets are reached.

Changes in EGX 30 constituents’ weightsEGX 30 constituents’ weights (current vs. target)


23




Note: EGX Indices Committee usually uses the market data of the last trading day before the rebalance date which may cause some deviation from our expectations.

Source: Bloomberg, SHUAA Securities Egypt estimates. * As of 15 January 2019. ** Expected to take place on 3 February 2019. *** In the six months following each rebalance.



EGX 30 Rebalance Preview: The Widest Since 2012

• We expect nine stocks to be changed in the EGX 30 February 2019 rebalance as depicted

in the below two charts.

• Contrary to perception, over the past seven years, stocks removed (+9%) from EGX 30

performed better that those added (+4%) on average in the following six months.

29

.2%

7.0

%

6.7

%

5.6

%

5.2

%

3.8

%

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%

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%

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%

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%

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%

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%

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%

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%

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%

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%

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%

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%

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%

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%

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% 8.8

%

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%

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%

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%

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%

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%

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%

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%

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%

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%

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%

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%

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%

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%

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%

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%

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%

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%

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%

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%

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%

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%

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%

1.3

%

1.1

%

1.1

%

0.5

%

0.3

%

0.1

%

CO

MI

EA

ST

SW

DY

TM

GH

EK

HO

HR

HO

GT

HE

JUF

O

MN

HD

ET

EL

AM

OC

ES

RS

CC

AP

PH

DC

OC

DI

HE

LI

PIO

H

EM

FD

EG

TS

OIH

IRO

N

CIE

B

OR

WE

MT

IE

CIR

A

SR

WA

OR

HD

EG

CH

AC

AM

D

AIN

D

EGX 30 current components by weight *

EGX 30 expected components by weight **

Average total return post each rebalance ***

7-year average total return ***

4%

9%

Stocks added to EGX 30 Stocks removed from EGX 30

-50.0%

-30.0%

-10.0%

10.0%

30.0%

50.0%

70.0%

Feb

-201

2

Au

g-2

012

Feb

-201

3

Au

g-2

013

Feb

-201

4

Au

g-2

014

Feb

-201

5

Au

g-2

015

Feb

-201

6

Au

g-2

016

Feb

-201

7

Au

g-2

017

Feb

-201

8

Au

g-2

018

Stocks added to EGX 30 Stocks removed from EGX 30


24





Does Size Matter?

In order to distinguish between large-, medium-, and small-cap stocks, we look at the market capitalization of all EGX-listed stocks in EGP terms then compare them with our minimum size requirements per each segment as follows:

(1) Sorting: We sorted all stocks in a descending order from the largest to the lowest market cap.

(2) Cumulative coverage ratio: We calculated the “cumulative coverage ratio” (i.e. total cumulative market capitalization at each stock in the sorted list divided by market capitalization of all listed stocks).

(3) Large-cap stock definition: All stocks in the sorted list up to a 70% cumulative coverage ratio are considered large caps.

(4) Mid-cap stock definition: All stocks in the sorted list between 70% and 90% cumulative coverage ratios are considered mid-caps.

(5) Small-cap stock definition: All stocks in the sorted list above a 90% cumulative coverage ratio are considered small caps.

The table on the right illustrates our calculation methodology.


Large-, Mid-, Small-cap segments key states


Size Segment Company

Market

capitalization

(EGPmn)

Cumulative

coverage

ratio

# of stocks

Total market

capitalization

(EGPmn)

Average

market

capitalization

(EGPmn)Market Total 781,085 100% 218

Large-cap

COMI 88,166 11.29%

26 544,872 20,957

SWDY 40,189 16.43%QNBA 39,179 21.45%

… … …… … …ORHD 476 69.76%

Mid-cap

MNHD 8,172 70.80%

33 156,003 4,727… … …… … …EXPA 2,373 89.73%

Small-capSUCE 2,344 90.03%

159 80,210 504… … …… … …


25




• Performance: To measure the price performance of each size segment, we calculated the

historical cumulative monthly price performance of each stock within its size segment. We

rebalanced their price performance every three months to avoid size drift. Meanwhile, we

reconstituted large-, mid-, and small-cap stamps at the beginning of every calendar year to

account for changes in market capitalization. We then calculated the average price

performance for every size segment based on a cumulative basis given an initial

investment of EGP100 invested in the three different size segments versus EGX 30 starting

January 2010. The below chart depicts the growth of this initial investment in the three

different size segments versus EGX 30 during the past 9 years. Since 2010, mid-caps

(+116.4%) and small caps (+91.6%) have managed to outperform both large caps (+35.5%)

and EGX 30 (+77.3%), which includes many large caps itself.

• Valuation: The below charts depict the median P/E, P/BV, and dividend yield for large-, mid-

, and small-cap stocks versus EGX 30. Based on consensus estimates, small caps and mid-

caps appear cheaper in terms of P/E ratio with higher dividends yields compared to large

caps EGX 30.

-

5

10

15

20

2016 2017 TTM 2018e 2019e

L

M

S

EGX30

-

5

10

2016 2017 TTM 2018e 2019e

L

M

S

EGX30

Source: Bloomberg, SHUAA Securities Egypt research calculations.


Performance of stocks by size groupings



P/E ratio by size groupings

-

1

2

3

2016 2017 TTM 2018e 2019e

L

M

S

EGX30

P/BV ratio by size groupings

Dividend yield by size groupings135.48

216.37

191.58

177.33

EGP 50

EGP 100

EGP 150

EGP 200

EGP 250

Dec

-09

Ma

y-1

0

Oct

-10

Ma

r-1

1

Au

g-1

1

Jan

-12

Jun

-12

No

v-1

2

Ap

r-13

Sep

-13

Feb

-14

Jul-

14

Dec

-14

Ma

y-1

5

Oct

-15

Ma

r-1

6

Au

g-1

6

Jan

-17

Jun

-17

No

v-1

7

Ap

r-18

Sep

-18

The value of EGP100 invested since 2010 in the different segments

Large-Cap Mid-Cap Small-Cap EGX 30 index


26




Jan

-18

Feb

-18

Mar

-18

Ap

r-1

8

May

-18

Jun

-18

Jul-

18

Au

g-1

8

Sep

-18

Oct

-18

No

v-1

8

Dec

-18

- 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000

Individuals Institutions

Jan

-18

Feb

-18

Mar

-18

Ap

r-1

8

May

-18

Jun

-18

Jul-

18

Au

g-1

8

Sep

-18

Oct

-18

No

v-1

8

Dec

-18

(2,000)

(1,500)

(1,000)

(500)

-

500

1,000

1,500

2,000

Individuals InstitutionsJa

n-1

8

Feb

-18

Mar

-18

Ap

r-1

8

May

-18

Jun

-18

Jul-

18

Au

g-1

8

Sep

-18

Oct

-18

No

v-1

8

Dec

-18

0%10%20%30%40%50%60%70%80%90%

100%

Individuals Institutions

Jan

-18

Feb

-18

Mar

-18

Ap

r-1

8

May

-18

Jun

-18

Jul-

18

Au

g-1

8

Sep

-18

Oct

-18

No

v-1

8

Dec

-18

- 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000

Egyptians Arabs Foreigners

Jan

-18

Feb

-18

Mar

-18

Ap

r-1

8

May

-18

Jun

-18

Jul-

18

Au

g-1

8

Sep

-18

Oct

-18

No

v-1

8

Dec

-18

(2,500) (2,000) (1,500) (1,000)

(500) -

500 1,000 1,500 2,000 2,500 3,000


Jan

-18

Feb

-18

Mar

-18

Ap

r-1

8

May

-18

Jun

-18

Jul-

18

Au

g-1

8

Sep

-18

Oct

-18

No

v-1

8

Dec

-18

0%10%20%30%40%50%60%70%80%90%

100%


Trading by Investor Type

Contrary to perception that

foreign investors have been

selling Egyptian equities for

most of 2018, they ended

the year as net buyers!

(1) Foreigners closed 2018 as net buyers with EGP7.83bn net inflows, driven mainly by institutions.

(2) Egyptians ended the year as net sellers with EGP5.94bn net outflows, driven by individuals (net outflows of EGP3.10bn), despite being net buyers in four out of the last five months of 2018. This was mainly due to their heavy selling pressure in H1 2018.

(3) Arabs also closed 2018 as net sellers with EGP1.86bn net outflows, driven by individuals.



Trading values by nationality of investor Market share of trading by national of investor Net buying/selling by national of investor

Trading values by type of investor Market share of trading by type of investor Net buying/selling by type of investor

Note: All figures are in EGPmn.Source: EGX, SHUAA Securities Egypt. Source: EGX, SHUAA Securities Egypt.

Note: All figures are in EGPmn.Source: EGX, SHUAA Securities Egypt.

Note: All figures are in EGPmn.Source: EGX, SHUAA Securities Egypt. Source: EGX, SHUAA Securities Egypt.

Note: All figures are in EGPmn.Source: EGX, SHUAA Securities Egypt.


Sector Views

28




Consumer Discretionary

• Almost every company in the consumer discretionary sector has its own drivers and risks. However, we note that the companies we selected to analyze from the sector have shown a remarkable volume and revenue growth, except for two. Oriental Weavers Carpet (ORWE) has shown a decline in volume and a flattish revenue growth, while Arab Cotton Ginning Co. (ACGC) has experienced a marginally higher volume growth and a big hit to its revenue growth.

• On the cost side, the companies were able to show some degree of cost control, expanding their gross profit margins, again except for ORWE which slipped.

• It is generally hard to set an outlook that fits all companies in this diversified sector, which includes car manufacturers, tourism operators, and even education service providers. However, we think there will be more gainers than losers in 2019, given a general recovery and normalization of consumers’ purchasing power, less intense inflation, and an expected decline in interest rates. We also keep an eye on the next wave of subsidy cuts, which could weigh on companies' profitability.

Sector Views Mohamed Sobol | Equity [email protected]

Note: ACGC’s FY ends on 30 June 2018, and its sales are based on stand-alone financials. CIRA’s FY ends on 31 August 2018.Source: Company reports.

Changes in volume and sales during 9M 2018

-40%

-20%

0%

20%

40%

60%

-10%

0%

10%

20%

30%

40%

50%

60%

CIRA AUTO DSCW ACGC ORWE

% Chg. in Volume % Chg. in Sales (RHS)

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

ORWE AUTO DSCW CIRA ACGC

9M 2017 GPM 9M 2018 GPM

Gross profit margin (9M 2018 vs. 9M 2017)

Note: CIRA’s and ACGC's GPM based on FY2017/18 full year.Source: Company reports.

Top sector’s names by market cap

Neutral

Ticker Market

Cap

ADTV

6M Curr.

Last

PriceBeta

Cons.

PT

+/-

Potential

(USD

mn)

(USD

mn) (TC) YoY YTD High Low (TC) 2017 2018e 2019e 2017 2018e 2019e 2017 2018e 2019e 2017 2018e 2019e 2017 2018e 2019e

AUTO 309 0.3 EGP 5.06 (0.4) (1.6) 0.71 7.00 4.30 7.64 51.1% nm 9.8x 6.2x 13.8x 7.1x 5.6x 1.6x 1.3x 1.0x -19% 16% 20% na na naORWE 282 0.4 EGP 11.40 (35.3) 9.1 0.85 17.60 8.11 14.57 27.9% 7.4x 9.1x 7.3x 6.4x 6.3x 5.2x 1.0x 0.7x 0.7x 8% 8% 9% 9% 13% 13%RTVC 52 0.1 EGP 3.78 (2.1) 5.6 1.30 6.90 2.65 na na 3.2x na na 3.9x na na 0.2x na na 8% na na na na naKABO 29 0.1 EGP 1.13 (21.4) 1.4 1.04 2.33 1.01 na na 9.2x na na 11.5x na na 0.8x na na 9% na na na na naACGC 26 0.3 EGP 1.76 (64.6) (0.3) 0.97 5.94 1.60 3.50 98.6% 5.7x 2.9x 3.5x 7.8x 6.0x 5.5x 0.7x 0.3x 0.3x 13% 9% 8% 3% 14% 17%APSW 12 0.0 EGP 2.36 (16.0) 8.3 0.84 3.49 1.61 na na na na na na na na 1.0x na na -7% na na na na naSDTI 11 0.0 EGP 3.87 (35.5) 3.5 1.24 7.37 2.89 na na na na na na na na 0.6x na na -5% na na na na naPRCL 10 0.0 EGP 3.62 (44.4) 10.7 1.09 6.55 2.76 na na 79.2x na na 12.9x na na 0.8x na na 1% na na 4% na na

Sector (median)* 28 0.1 1.00 59.2% 7.4x 9.1x 6.2x 9.6x 6.3x 5.5x 0.8x 0.7x 0.7x 4% 9% 9% 4% 13% 15%

Price Change

(%)52-Week PER EV/EBITDA PBV ROE Div. Yield (%)

Note: As of 13 January 2019 prices; * +/- Potential is median, 2018 figures are actual for the companies with their financial years ended in June. Bold brown is SHUAA Securities Egypt, including its 12M PT.Source: Bloomberg.


29




Consumer Staples

• Consumer staples had a mixed year in 2018, with margins recording positive figures in H1 2018. However, they were overshadowed by subsidy cuts in H2 2018. On the positive side, the sector has not been hit much by FX risks as there was not any violent movements in the exchange rate. Also, volumes showed signs of resilience in face of shocks to consumer appetite.

• For 2019, we think margin expansion will be hindered by yet another wave of subsidy cuts, while improvement in volumes could be slow due to the same reasons. The sector is a play on local currency appreciation. While expectations of wild FX movements are off the table, aggressive weakness in the EGP will impact the sector notably.

• We think market interest in consumer names will depend on how their new product launches will perform in the new year. That said, we believe the best strategy to trade in the sector in 2019 is to buy the dips, as improvement will be fast and growth will stabilize quickly.

Sector Views (Cont.’d)

GPM of key consumer players

Mohamed Saad | Equity [email protected]

Source: Company reports.

0%

5%

10%

15%

20%

25%

30%

35%

Q4 2017 Q1 2018 Q2 2018 Q3 2018 TTM

DOMT OFLI JUFO

0%

5%

10%

15%

20%

25%

30%

35%

Q4 2017 Q1 2018 Q2 2018 Q3 2018 TTM

DOMT OFLI JUFO

EBITDA margin of key consumer players




Overweight

Ticker Market

Cap

ADTV

6M Curr.

Last

PriceBeta

Cons.

PT

+/-

Potential

(USD

mn)

(USD


EAST 2,105 0.9 EGP 16.77 (17.6) 3.1 0.90 30.13 14.60 21.92 30.7% 12.7x 8.9x 8.8x 5.6x 8.1x 6.6x 6.2x 5.0x 2.8x 66% 65% 43% 5% 4% 7%JUFO 603 0.7 EGP 11.48 (2.5) 2.0 0.96 13.99 8.50 12.59 9.7% 50.2x 24.0x 17.1x 12.2x 10.8x 8.9x 4.3x 4.1x 3.5x 9% 18% 22% 1% 2% 3%EFID 567 0.4 EGP 14.00 (22.2) - 0.47 21.99 12.60 18.16 29.7% 60.0x 31.9x 19.7x 27.7x 17.1x 12.6x 10.1x 7.2x 6.0x 18% 22% 33% 1% 1% 3%POUL 175 0.0 EGP 6.55 (22.9) 7.9 0.84 10.59 4.70 9.30 42.0% 10.9x 21.8x 13.1x 4.8x 5.6x 4.7x 3.2x 2.3x 2.0x 32% 11% 18% 1% 2% naOLFI 163 0.1 EGP 7.30 (37.8) (5.4) 0.48 12.80 6.76 11.48 57.3% 20.5x 12.2x 10.7x 13.1x 8.0x 6.9x 8.2x 4.4x 3.4x 47% 37% 34% 1% 4% 5%DOMT 157 0.1 EGP 9.97 0.7 (7.7) 0.76 13.00 8.72 13.30 33.4% 45.9x 16.5x 12.6x 17.5x 10.0x 8.4x 5.0x 4.1x 3.4x 12% 26% 28% na 2% 3%


ROE Div. Yield (%)Price Change

(%)52-Week PER EV/EBITDA PBV


30




Energy & Utilities

• In 2018, refineries’ profitability and operating margins expanded, which was mainly driven by higher

oil prices that grew 27% y/y to average USD69.76/bbl. During the year, Brent crude oil prices ranged

from USD50.77/bbl to 85.14/bbl, which led to high volatility in refineries’ operational performance.

This price volatility could be attributed mainly to political tensions and the US-China trade war woes.

• In 2019, the escalation of the US-China trade war seem to have stopped for the time being after the

90-day truce agreement in the last G20 meeting. Furthermore, the Organization of the Petroleum

Exporting Countries (OPEC) and its partners, including Russia, decided to cut oil production by

1.2mn barrels per day (b/d) to adjust for the slowdown in demand growth and to prevent

oversupply. The alliance will cut production in H1 2019. This drove oil prices to recover by the

beginning of 2019 to stabilize again above USD60/bbl. But traders will still be concerned about an

economic downturn over the coming months, which would likely hurt demand for oil and fuel

products. Another important factor that should be considered when studying Egyptian refineries is

the International Maritime Organization’s (IMO) regulations that will be applied starting from

January 2020. Those regulations aim to reduce the sulphur content in marine fuel. Therefore,

companies that operate in the refinery business should take serious steps to cope with the new

market condition and to improve their output products, thus conforming with global standards.

Otherwise, these companies’ margins will be slashed, and their profitability will be negatively

impacted.

• In light of its economic reform program that kicked off back in November 2016, the Egyptian

government will continue cutting subsidies on energy. The Egyptian Electricity Transmission Co.

(EETC) is reportedly planning to stop buying energy in the future in order to allow the private sector

to invest in projects aiming to produce and sell electricity directly to consumers. This deregulation

trend, combined with horizontal expansion in the real-estate sector and greenfield projects, will

enhance demand for services provided by the EGX-listed companies in the utilities sector, especially

electricity suppliers.

Sector Views (Cont.’d) AbdelRahman Wahba | Equity [email protected]


Neutral

Source: Bloomberg.

Brent crude oil price (2018-YTD, monthly)


3%

-5%

7% 8% 6%2%

-3%

3% 6%

-8%

-21%

-10%

12%

-

20

40

60

80

100

-30%

-20%

-10%

0%

10%

20%

30%USD/bbl Growth Rate (RHS) Brent Crude

Ticker Market

Cap

ADTV

6M Curr.

Last

PriceBeta

Cons.

PT

+/-

Potential

(USD

mn) (USD mn) (TC) YoY YTD High Low (TC) 2017 2018e 2019e 2017 2018e 2019e 2017 2018e 2019e 2017 2018e 2019e 2017 2018e 2019e

AMOC 468 0.7 EGP 6.49 (28.7) 4.0 0.90 12.75 5.75 9.30 38.1% 8.1x 10.2x 7.9x 6.1x 7.4x 5.6x 2.9x 4.1x 2.4x 40% 45% 30% 8% 7% 9%CCAP 411 4.6 EGP 3.78 182.1 6.2 1.13 4.14 1.22 3.95 4.6% nm nm nm nm 84.9x 13.9x nm na na na na na na na naMOIL 136 0.1 USD 0.33 (14.6) 4.4 0.93 0.58 0.31 na na 7.4x 5.0x 4.8x 7.1x 6.4x 6.1x 0.5x 0.3x 0.3x 7% 9% 8% na na naEGAS 97 0.0 EGP 72.61 (35.1) (0.8) 0.97 112.50 57.88 na na 50.1x na na 226.6x na na 2.7x na na 3% na na 1% na na


Price Change (%) 52-Week PER EV/EBITDA PBV ROE Div. Yield (%)


31




20.2% 19.9% 18.7% 18.5% 17.5% 17.2% 15.7% 15.7% 13.6% 12.9%

20.6% 20.5% 19.2% 19.1% 17.9% 17.7% 16.3% 16.3% 13.9% 13.3%

0.0%

10.0%

20.0%

30.0%

CIEB HDBK NBKE COMI QNBA FAIT SAUD EGBE CANA ADIB

Resulting CAR Current CAR


Banks' Exposure to Treasuries Based on 9M 2018



0%

25%

50%

75%

COMI ADIB SAUD QNBA HDBK EGBE FAIT NBKE CIEB CANA

Governmental Debt Instruments as % of Total Assets

Income of Governmental Debt Instruments as % of Total Interest Income

Current and resulting CAR % based on a 5% of Treasury holding reallocated to lending



Financials (Banks)

• Egyptian banks will be dealing with a game changer in 2019: a higher effective tax rate. To counter this, banks will be looking to avoid higher exposure to government debt securities. A new tax amendment concerning income from Treasuries is set to be implemented in 2019, pushing banks to reshuffle their assets towards lending and inter-bank assets.

• However, we do not expect the impact on banks’ profitability to be that violent since the proposed new tax amendment is not expected to be implemented retroactively. Based on our estimates and observation of certain banks’ assessment so far, the taxation may dent 2019 profitability by 5% on average. We think banks will try to limit their excess liquidity in view of expected weaker holding of Treasuries. Thus, deposits growth might slow down, and utilization rates should rise accordingly. Banks with high exposure to Treasuries might see their NIMs decoupling from their net profit margins, as higher yields on Treasuries will support NIMs, whereas the higher effective tax rate will dent net earnings.

• The perfect scenario for 2019 will be a slower-than-expected easing by the CBE. This will not hurt banks’ margins and will also be enough to drive demand for credit. We will look for banks with comfortable buffer above the CBE minimum CAR for 2019 (i.e. 12.5%), alongside with banks with below-average exposure to Treasuries in balance sheet terms.

Underweight

Ticker Market

Cap

ADTV

6M Curr.

Last

PriceBeta

Cons.

PT

+/-

Potential

(USD

mn)

(USD

mn) (TC) YoY YTD High Low (TC) 2017 2018e 2019e 2017 2018e 2019e 2017 2018e 2019e 2017 2018e 2019e

COMI 4,956 4.3 EGP 76.12 (4.8) 2.8 1.00 96.50 67.00 96.32 26.5% 14.0x 10.5x 8.6x 3.2x 2.6x 2.1x 27% 28% 28% 1% 2% 3%CIEB 717 0.7 EGP 41.30 (3.9) 0.7 0.65 53.00 39.00 56.04 35.7% 6.7x 6.4x 5.9x 2.4x 2.1x 1.8x 42% 41% 38% 5% 9% 9%FAIT 362 0.0 EGP 16.04 (3.7) 4.4 0.99 22.37 13.82 24.10 50.2% 3.4x 3.0x 2.8x 0.6x 0.5x 0.4x 20% 19% 17% 8% 10% 14%EGBE 240 0.1 USD 0.70 (23.2) (1.0) 0.56 1.01 0.68 0.87 24.5% 12.1x 10.9x 8.8x 1.5x 1.0x 0.9x 15% 12% 13% na na 2%SAUD 137 0.0 EGP 13.53 6.3 - 0.71 18.79 12.20 20.25 49.7% 3.5x 3.3x 2.8x 1.0x 0.7x 0.6x 32% 26% 24% na 6% 8%EXPA 132 0.0 EGP 8.70 (22.6) 4.2 0.89 15.00 7.77 20.90 140.2% 3.6x 3.5x 3.1x 0.7x 0.5x na 22% na na 13% na naADIB 127 0.1 EGP 11.35 (31.5) (0.9) 1.28 18.90 10.00 14.30 26.0% 4.9x 3.4x 2.7x 1.4x 0.8x 0.6x 33% 34% 31% na na na

Sector (median)* 240 0.1 0.89 50.4% 4.9x 3.5x 3.1x 1.4x 0.8x 0.7x 27% 27% 26% 6% 8% 8%


(%)52-Week PER PBV



32




Ticker Market

Cap

ADTV

6M Curr.

Last

PriceBeta

Cons.

PT

+/-

Potential

(USD

mn)

(USD

mn) (TC) YoY YTD High Low (TC) 2017 2018e 2019e 2017 2018e 2019e 2017 2018e 2019e 2017 2018e 2019e

HRHO 703 1.5 EGP 16.38 (5.5) 7.6 1.02 21.76 13.25 24.38 48.8% 11.8x 13.1x 10.7x 1.1x 0.9x 0.8x 9% 7% 8% 12% na naPIOH 335 1.0 EGP 6.42 (20.3) 4.7 1.07 10.93 5.40 8.95 39.4% 9.5x na na 1.0x na na 11% na na na na naOIH 170 0.8 EGP 0.58 (20.4) 0.3 1.22 0.92 0.51 na na 8.5x na na 0.8x na na 9% na na 14% na naNAHO 108 0.0 USD 0.31 (19.7) 3.6 0.63 0.60 0.30 na na 109.5x na na 0.6x na na 0% na na na na naBTFH 65 0.1 EGP 6.87 (52.3) 0.4 1.18 16.48 5.92 na na 233.6x na na 4.9x na na 2% na na na na naATLC 27 0.0 EGP 5.95 (19.8) (0.1) 1.00 8.50 4.20 8.10 36.1% 10.6x 6.6x 5.4x 2.3x 1.7x 1.6x 22% 25% 28% 6% 12% 13%AIND 19 0.6 EGP 0.70 (15.2) 2.7 1.10 1.12 0.60 na na nm na na 3.3x na na -64% na na na na na

Sector (median)* 108 0.6 1.07 41.4% 11.2x 9.8x 8.1x 1.1x 1.3x 1.2x 9% 16% 18% 12% 12% 13%

PER PBV ROE Div. Yield (%)Price Change

(%)52-Week

Financials (Non-Banks)

• Aggressive growth potential for the non-banking financial services (NBFS) segment is clear in view of the double-digit growth rates that have been seen. This is despite enduring one of the tightest monetary modes. Expectations of more loosening monetary conditions will be the perfect call. In contrast with banks, NBFS’s main drivers are volume rather than price (or rate); thus easing provides the segment with enough fuel to grow further.

• While active regulatory environment could be deemed as risk, we think new regulations will help put a lid on newcomers’ flow into the industry. This should leave the industry with established players with higher growth prospects. As a strong contributor to the Egyptian government’s financial inclusion initiative, NBFS’s operating environment–we think–will be supported well on the national level.

Sector Views (Cont.’d) Mohamed Saad | Equity [email protected]

Source: The Financial Regulatory Authority (FRA).

New contracts of leasing-microfinance balances

7.5 8.5

11.1

8.5 9.7

10.6

-

2.0

4.0

6.0

8.0

10.0

12.0

Q1 2018 Q2 2018 Q3 2018

EG

Pb

n

Leasing new contracts Microfinance balances (end of period)


Overweight



33




.6%

7.1

%

6.7

%

6.3

%

5.8

%

5.5

%

5.2

%

4.2

%

4.1

%

4.0

%

3.8

%

3.5

%

3.4

%

3.1

%

5.0%

Health Care

Demand for health care services in Egypt is backed by (1) favorable demographics with high growth rates in aging population and (2) a high percentage of disease incidences (i.e. morbidity rates), especially in chronic diseases. However, Egypt’s health care industry is quite underpenetrated as Egypt is considered one of the lowest MENA countries in terms of hospital beds (currently 1.3 bed per every 1,000 of people) and health care expenditure as a percentage of GDP (4.2% vs. a MENA average of 5.0%). Egypt’s new Universal Health Insurance Law should lead to a wider health care coverage and, hence, an increase in demand for all the industry’s output, be it pharmaceutical products, pharmaceuticals distribution, or health care services provided by hospitals.

• Hospitals: Although the EGX has a low number of players in this sector, mergers and acquisitions (M&A) seem to be the trend that will dominate the scene over the coming years. For example, Cleopatra Hospital Co. (CLHO)—the largest private hospital group in terms of number of patient beds—seeks to acquire more hospitals to benefit from synergies and economies of scale. Indeed, Nozha International Hospital (NINH), a small hospital, was an acquisition target by CLHO in mid-2018.

• Pharmaceuticals Producers: The main challenge that always faces pharmaceuticals producers is the government enforcement of pricing, which pressures margins. Although this risk started to ease lately after two rounds of movements in prices, the pharmaceuticals industry is probably the only one that still has price controls. We believe that there could be one more round of medicines prices hike, which should help improve drug manufacturers' profit margins further.

Sector Views (Cont.’d) Ahmed Abdelnaby | Vice President, [email protected]

Source: World Bank.

Health care expenditure as % of GDP

Pharmaceuticals Distributors: Although pharmaceuticals distribution is also regulated by the government, we expect that total pharma sales will continue to record double-digit growth rates as achieved in the past five years (5-year CAGR of +18.4%) to hit EGP112.5bn by 2022. This should help Ibnsina Pharama (ISPH), the only EGX-listed drug distributor, grow its revenues and market share accordingly.


Overweight

Ticker Market

Cap

ADTV

6M Curr.

Last

PriceBeta

Cons.

PT

+/-

Potential

(USD

mn)

(USD


CLHO 435 0.3 EGP 4.87 1.9 4.5 0.76 5.51 3.20 5.78 9.0% 9.5x 27.4x 22.9x 33.4x 20.4x 15.5x 0.7x 4.8x 4.0x 10% 18% 19% na na naPHAR 429 0.5 EGP 96.90 (34.3) (9.2) 0.36 152.50 96.90 119.60 23.4% 18.6x 11.8x 10.7x 11.2x 8.0x 7.1x 4.8x 3.1x 2.8x 30% 25% 25% 2% 5% 6%ISPH 415 0.3 EGP 10.29 19.7 1.4 0.61 12.80 7.40 13.20 36.5% 43.7x 25.1x 16.8x 18.0x 13.8x 10.3x 17.9x 8.9x 7.3x 47% 47% 48% na 2% 3%






34




Industrials

• Construction & Cables: Several catalysts are expected to have positive influences on contracting and cable companies: (1) increasing government spending in infrastructure and interconnection projects between Egypt and other countries, (2) exploitation of renewable resources and implementation of water treatment plans, and (3) interest rate cuts. All of the above might ultimately lead companies to secure more projects, adding to their existing backlog. Also, any devaluation in the EGP will be advantageous in this scenario for companies with foreign currency-denominated revenues. Major players in this field have a mixed backlog, a fair portion of which caters to Africa and the GCC. Yet, there is the risk of securing less projects or delaying current ones due to any economic slowdown in the GCC with the drop in oil prices. Similarly, local economic conditions present a risk as Egypt represents the bulk of this backlog, a good portion of which is related to government projects.

• Logistics: There has not been a clear direction concerning global trade activity for a while now. Over the past two years, the Baltic Dry Index (BDI) has been relatively volatile, reflecting a slightly contracted global economy and a tad decrease in commodity values. The presence of competition caused some companies to lower their service fees (in USD terms) to maintain current volumes. However, any devaluation of the EGP should support margins and increase USD-denominated

revenues. Meanwhile, the expected interest rate cut might negatively impact some of the logistics companies given their large cash balances. On the other hand, this policy unwraps an opportunity for the private sector to grow, combined with an EGP devaluation, that will altogether increase containerized trade volumes.


Source: Bloomberg.

Baltic Dry Index


10,000

15,000

20,000

25,000

30,000

35,000

Dec

-16

Jan

-17

Feb

-17

Mar

-17

Ap

r-1

7

May

-17

Jun

-17

Jul-

17

Au

g-1

7

Sep

-17

Oct

-17

No

v-1

7

Dec

-17

Jan

-18

Feb

-18

Mar

-18

Ap

r-1

8

May

-18

Jun

-18

Jul-

18

Au

g-1

8

Sep

-18

Oct

-18

No

v-1

8

Dec

-18

Sara Maher | Equity [email protected]

Neutral


Ticker Market

Cap

ADTV

6M Curr.

Last

PriceBeta

Cons.

PT

+/-

Potential

(USD

mn)

(USD


SWDY 2,291 1.4 EGP 18.80 29.8 4.6 1.41 25.85 13.50 20.60 7.2% 5.1x 9.2x 8.2x 4.9x 7.5x 6.5x 2.3x 2.5x 2.2x 47% 28% 27% 11% 6% 8%ORAS 769 0.2 EGP 118.04 (19.2) 0.0 0.80 172.00 108.00 198.50 68.2% 11.8x 5.4x 4.6x 3.7x 3.4x 3.3x 2.6x 1.5x 1.2x 26% 32% 28% na 6% 6%CSAG 140 0.2 EGP 12.54 (2.6) 3.4 1.14 17.34 7.00 19.00 51.5% 10.1x 9.7x 8.4x 65.5x nm nm 3.5x na 3.1x 38% 46% na 0% 5% 9%ELEC 49 0.3 EGP 1.24 36.3 (0.7) 0.87 1.28 0.76 na na 29.1x na na 10.5x na na 1.0x na na 4% na na na na naECAP 43 0.1 EGP 15.23 123.0 (1.5) 0.77 16.50 6.41 9.00 -40.9% 7.6x 15.7x 13.4x 3.8x 7.6x 7.1x 0.7x 1.5x 1.4x na na na 4% 2% 2%UEGC 25 0.2 EGP 0.64 (14.3) 14.6 0.92 0.80 0.53 na na 11.5x na na 7.0x na na 0.7x na na 6% na na na na naGSSC 22 0.0 EGP 40.28 (31.1) 0.9 1.03 75.96 35.50 65.00 61.4% 5.7x 4.4x 5.0x 3.7x na na 1.8x 1.5x 1.3x na 37% 27% 4% 6% 8%CERA 18 0.0 EGP 2.12 (22.6) 5.0 1.26 3.73 1.41 na na 14.4x na na 8.2x na na 1.7x na na 12% na na 3% na naGGCC 16 0.0 EGP 1.17 (37.3) 1.8 1.00 2.00 0.91 na na 6.0x na na 3.7x na na 1.2x na na 22% na na na na naETRS 14 0.1 EGP 8.20 (41.9) 5.7 1.06 15.96 5.49 na na 5.1x na na 21.0x na na na na na na na na 3% na na


Price Change



35




Materials

New gas discoveries in Egypt, which have been followed by an accelerated development spending, will eventually result in additional output. This should have a favorable impact on the materials producers as they increase their capacities to take advantage of the low processing costs and stable supply of feedstock.

• Fertilizers [Overweight]: Nitrogen fertilizers producers are expected to see higher selling prices in

2019 on the back of higher natural gas costs globally, the outage of Iranian capacities following the

US sanctions, and the stable growth in global demand. Given the stability of their feedstock cost,

Egyptian producers should enjoy higher margins and see an improvement in profitability in 2019.

Phosphate fertilizers producers, on the other hand, will not enjoy the same operating margins

stability due to the monthly amendment in sulfur and phosphate rock prices. We believe the main

value driver for phosphate producers in 2019 will be increasing the weight of Granulated Single

Super Phosphate (GSSP) exports as export selling prices are c.30% higher than local selling prices.

This will support local producers in generating higher margins.

• Olefins [Neutral]: Uncertainty of demand and the low-cost curve of naphtha crackers given low oil

prices could pressure petrochemicals prices in 2019. Meanwhile, operating margins could remain

stable due to the expected low prices of propane in Q1 2019 in light of lower demand and higher

production of US facilities that is expected to be exported outside the United States.


Neutral *

* Our view for the whole sector is Neutral, but we have a different view for each major industry within the sector.

-45%

13%

41%

-4%

-18%

-3%

-21% -23%

7%

25%19%

339

-60%

-40%

-20%

0%

20%

40%

60%

200

250

300

350

400

450

500

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 AverageCyclePrice

USD/ton Growth Rate (RHS) Granulated Urea Prices

Note: Urea prices are for the Middle East.Source: Bloomberg.

Granulated urea price (2018-YTD, monthly)

7.00

4.50

-

1.50

3.00

4.50

6.00

7.50

9.00

10.50

USD/MMBtu UK National Balancing Point Henry HubCost for Metals Industry Cost for Fertilizers Industry*

Local natural gas cost vs. global benchmarks

Note: Not all fertilizers companies secure natural gas at USD4.5/MMBtu as MFPC has a special pricing formula.Source: Bloomberg, SHUAA Securities Egypt.


36




• Metals [Neutral]: We expect Aluminum producers in Egypt to witness a tighter margin during the H2 2019, mainly due to the expected hike in electricity tariffs following the economic reform program that kicked off in November 2016. However, lifting the US sanctions on UC Rusal should support aluminum smelters’ margins, as the aluminum spread should expand again due to the entrance of new alumina capacities. In our view, local producers, e.g. Egypt Aluminum (EGAL), should depend on a renewable energy source of electricity to secure a considerable portion of their needs to overcome the high electricity costs. This, in our opinion, will be the strongest catalyst for any aluminum producer’s stock value as electricity represents a considerable part of the production costs. Meanwhile, the steel industry in Egypt was pressured by global trade tensions in H2 2018. Thus, local steel producers demand reducing natural gas cost and raising anti-dumping fees to 25%. If the Egyptian government agrees to reduce natural gas cost, this will be the strongest catalyst for the industry performance in the future. Otherwise, based on the status quo, we expect margins to decline in 2019 due to lower selling prices, in absence of any other positive surprise such as an interest rate cut which will bode well for heavily-indebted companies such as Ezz Steel (ESRS).



0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

200 600

1,000 1,400 1,800 2,200 2,600 3,000 3,400

USD/Ton Alumina price % of Aluminum base price Aluminum Alumina

Source: Bloomberg.

Aluminum and alumina price and spread (2018-YTD, monthly)


Ticker Market

Cap

ADTV

6M Curr.

Last

PriceBeta

Cons.

PT

+/-

Potential

(USD

mn) (USD mn) (TC) YoY YTD High Low (TC) 2017 2018e 2019e 2017 2018e 2019e 2017 2018e 2019e 2017 2018e 2019e 2017 2018e 2019e

ABUK 1,685 0.3 EGP 23.93 (1.6) 4.5 0.95 36.69 22.51 31.88 33.2% 9.4x 15.1x 10.9x 9.9x 9.4x 7.6x 5.0x 7.5x 5.1x 62% 42% 53% 1% 4% 7%EKHO 1,151 0.8 USD 1.12 27.7 4.7 0.57 1.23 0.87 1.42 26.5% 9.4x 13.7x 11.2x 6.0x 7.0x 5.1x 1.9x 2.3x 2.0x 25% 21% 24% 4% 5% 5%MFPC 964 0.1 EGP 75.43 (26.2) (2.3) 0.91 118.50 70.00 123.22 63.4% 37.8x 11.5x 6.9x 6.8x 5.0x 4.3x 1.8x 1.3x 1.2x 5% 12% 18% 0% 5% 7%ESRS 595 0.6 EGP 19.62 (6.3) 7.7 0.98 30.79 16.82 23.98 22.2% nm nm 98.1x 7.9x 6.1x 5.4x 1.8x 1.3x 1.2x -25% -14% 3% na na 1%EGAL 593 0.3 EGP 25.77 (43.0) 16.1 0.79 51.00 21.60 28.35 10.0% 2.4x 5.1x 7.0x 1.3x na 3.0x 0.5x 1.8x 1.1x 10% 26% 9% 10% 20% 9%SKPC 533 0.3 EGP 18.21 (29.1) 6.4 0.86 32.80 16.43 27.58 51.5% 11.8x 7.8x 7.7x 8.7x 5.5x 5.4x 4.0x 2.7x 2.5x 35% 35% 32% 7% 8% 9%EGCH 357 0.5 EGP 7.28 (7.8) 8.7 0.90 8.80 4.38 8.00 9.9% 36.1x 39.7x 63.3x 61.5x na 86.9x 0.9x 1.1x 1.3x 7% 3% 2% na na naIRON 304 0.5 EGP 5.58 (41.8) 4.3 1.30 9.70 4.10 na na nm nm na nm na na nm nm na nm nm na na na naSUCE 134 0.2 EGP 13.20 (44.7) 7.2 0.97 28.40 11.30 22.27 68.7% na 10.3x 14.0x 17.4x 2.8x 3.0x 0.8x 0.4x 0.4x -16% 5% 3% 9% 3% 15%ARCC 108 0.2 EGP 5.09 (36.7) 2.0 1.21 10.82 4.40 8.27 62.4% 13.9x 7.8x 9.2x 7.8x 3.9x 4.6x 2.2x 1.4x 1.3x 17% 18% 10% 15% 10% 6%SVCE 67 0.1 EGP 2.49 (52.8) 5.1 1.21 5.90 2.06 7.40 197.2% 102.2x na na 104.8x na na 0.7x na na 1% na na na na naACRO 48 0.0 EGP 26.29 (3.1) - 0.40 30.51 25.05 na na 6.1x na na 3.4x na na 1.3x na na 23% na na 4% na naEFIC 41 0.1 EGP 10.18 (44.7) 7.8 1.27 19.67 7.80 14.64 43.8% 8.2x 6.8x 4.4x 5.0x 4.0x 4.2x 1.1x 0.6x 0.6x 14% 9% 6% 3% 6% 5%


ROE Div. Yield (%)Price Change (%) 52-Week PER EV/EBITDA PBV


37





Note: Announced 2018 pre-sales (TMGH: EGP21.3bn, +62% y/y; MNHD: EGP5.5bn, +6.4% y/y).Source: Companies’ disclosures.

Sara Maher | Equity [email protected]

Pre-sales of key real estate developers


Real Estate

• Real Estate: In 2018, the sector witnessed continued record presales by some of the largest developers, more flexible payment plans, and several co-development agreements with the New Urban Communities Authority (NUCA). We see demand for first-hand properties due to more flexible payment terms versus what is offered in the secondary market, with a high portion targeting New Cairo because of its proximity to business districts. However, demand could slow because served segments are quite saturated, and developers may not offer longer installment schedules. Also, the scheduled subsidy cut by mid-2019 will likely drive prices and costs higher. Thus, we expect demand to slow further within such an inflationary environment.

• Hospitality: The outlook for hospitality is positive for 2019. This is supported by the market entry of international brands, improved security measures, Egypt hosting the CAF African Cup of Nations, and still being a cheap destination to foreigners.

• Commercial: Post the EGP floatation, foreign business interest concentrated in Eastern Cairoincreased. This interest is also expected to drive demand for the New Administrative Capital.

Neutral

(80%)

(30%)

78%

157%

23%5% 21%

98%

-100%

-50%

0%

50%

100%

150%

200%

-

5

10

15

20

EGTS PORT ORHD AMER OCDI MNHD PHDC TMGH

EGPbn

9M 2018 9M 2017 y/y (RHS)

Ticker Market

Cap

ADTV

6M Curr.

Last

PriceBeta

Cons.

PT

+/-

Potential

(USD

mn)

(USD


TMGH 1,254 0.9 EGP 10.89 8.0 10.1 0.95 14.90 8.70 17.06 56.6% 15.2x 14.7x 9.4x 10.3x 11.6x 9.7x 0.7x 0.7x 0.7x 5% 5% 6% 1% 2% 2%EMFD 804 0.5 EGP 3.18 (16.8) (2.8) 1.07 5.13 2.86 5.24 64.8% 7.4x 5.4x 4.8x 7.7x 8.0x 5.9x 1.5x 1.1x 0.9x 23% 21% 20% na 3% 6%HELI 476 1.2 EGP 19.17 (46.7) 5.7 1.22 40.00 14.70 34.92 82.2% 37.2x 34.2x 18.9x 29.8x 19.7x 11.9x 18.7x 13.6x 9.0x 48% 38% 52% 3% 4% 2%MNHD 462 0.7 EGP 6.90 (22.3) 2.5 1.21 12.34 6.18 12.48 80.8% 11.3x 8.5x 6.4x 9.0x 5.6x 4.3x 2.2x 2.5x 1.8x 47% 36% 33% 1% 1% 1%ORHD 455 0.9 EGP 7.36 50.5 4.5 1.14 7.90 3.69 11.82 60.6% 18.3x 20.3x 12.8x 11.0x 9.1x 8.7x 3.6x 3.7x 2.8x 21% 23% 24% na na naPHDC 381 1.5 EGP 2.22 (43.7) 1.8 1.15 5.74 1.94 4.79 115.5% 11.2x 5.5x 3.9x 11.9x 7.1x 5.0x 1.3x 0.7x 0.6x 12% 12% 15% na na naOCDI 271 0.7 EGP 14.18 (24.9) 5.3 1.12 30.19 12.56 32.43 128.7% 11.0x 6.6x 4.5x 11.0x 5.4x 3.4x 1.5x 1.0x 0.8x 15% 14% 18% na 2% 5%EGTS 104 0.8 EGP 1.78 10.4 1.8 1.31 2.55 1.42 2.18 22.8% 24.7x na 17.8x 26.9x na 19.0x 1.6x 2.0x 2.0x 7% -4% 8% na na naPORT 50 0.2 EGP 0.89 (51.8) 7.1 1.24 2.10 0.69 0.86 -3.5% 6.5x 5.0x 6.4x 4.5x 2.5x 2.9x 2.2x 0.8x 0.6x 38% 26% 24% 8% 7% 9%UNIT 49 0.0 EGP 3.86 (19.4) 4.9 0.97 5.20 2.70 na na 11.3x na na 8.5x na na 2.8x na na 28% na na na na naAMER 48 0.1 EGP 0.85 (48.3) 4.3 1.16 2.20 0.75 0.91 6.7% 16.2x 8.5x 8.5x 3.9x 1.5x 2.0x 0.8x 0.5x 0.4x 5% 5% 6% 3% na naACAMD 43 1.2 EGP 2.92 11.0 5.8 1.20 3.53 1.66 na na na na na na na na na na na na na na na na na


Price Change




38




29% 29% 28%30%

31%

14%17%

19%22%

26%

2014 2015 2016 2017 9M 2018

Fixed line Penetration rate

ADSL Penetration rate

109%104% 106% 107% 103%

29% 33% 34% 34% 38%

2014 2015 2016 2017 9M 2018

Voice Penetration rate

Data Penetration rate

Telecom, Media & Technology

• The year 2018 was somehow a bad one for mobile network operators (MNOs) in Egypt, given the levy on new mobile phone line purchases that was imposed in July 2018. This negatively impacted MNOs’ line sales, thus inhibiting mobile subscriber growth.

• Mobile voice penetration rate declined by 400bps in 9M 2018 to 103%. On the other hand, mobile data penetration rate increased by 400bps to 38%. Vodafone Egypt (VODE) still boasts the largest market share in Egypt’s mobile market with 40.5mn subs, followed by Orange Egypt (OREG) with 29.9mn subs and Etisalat Misr (EM) with 19.7mn subs. Meanwhile, Telecom Egypt (ETEL) was able to attract 3.6mn mobile subs since the launch of its mobile services, WE, back in September 2017.

• We note that the gap in the penetration rates between fixed line and ADSL is decreasing. Fiber access network capacity has reached 70% of households in 9M 2018 and is expected to reach 100% by 2022.

• We believe mobile data, along with ADSL, will continue drive growth in the telecom sector going forward. Further, the Egyptian Tax Authority is currently in talks with the four MNOs for the elimination of the levy on new mobile phone line purchases. If abolished, this would be a relief for the sector and will help resume volume growth in mobile. Also, MNOs are expected to provide fixed-line services through ETEL’s infrastructure. EM has already launched its fixed-line services, which although may intensify competition in the fixed-line segment will still benefit ETEL indirectly.

Sector Views (Cont.’d) Mohamed Sobol | Equity [email protected]

Source: Ministry of MCIT, Telecom Egypt reports.

Mobile voice & data penetration evolution

Source: Ministry of MCIT, Telecom Egypt reports.

Fixed line & ADSL penetration evolution


Overweight

Ticker Market

Cap

ADTV

6M Curr.

Last

PriceBeta

Cons.

PT

+/-

Potential

(USD

mn)

(USD


ETEL 1,326 0.6 EGP 13.92 2.9 9.8 0.92 17.50 9.80 16.71 20.0% 7.5x 6.6x 6.2x 7.2x 5.8x 5.5x 0.7x 0.7x 0.7x 10% 11% 11% 2% 4% 6%GTHE 925 3.3 EGP 3.51 (51.5) (5.6) 1.23 7.31 2.54 5.52 57.3% nm nm 7.8x 3.8x 3.0x 3.0x nm 2.8x nm na -24% 7% na 65% naRAYA 63 0.0 EGP 9.01 3.2 (0.4) 1.17 11.38 6.07 na na 22.2x na na 4.9x na na 0.9x na na 5% na na 2% na na

Sector (median)* 925 0.6 1.17 38.6% 14.9x 6.6x 7.0x 4.9x 4.4x 4.3x 0.8x 1.8x 0.7x 8% -7% 9% 2% 35% 6%





EGX Top Picks

SSE Model Portfolio

40




Note: Market prices are as of 13 January 2019.Source: Bloomberg, SHUAA Securities Egypt.

Our EGX Stock Calls in 2018

Throughout 2018 (specifically since inception of SHUAA Securities Egypt Research

Department in May 2018), we have been featuring in our flagship The Daily Beam

newsletter several stock calls that we thought are worth picking or avoiding, depending

on the situation. We look back at 27 stock calls that we shed light on during 2018.

• How did our 2018 stock calls do? The table on the right highlights the track record of our

stock calls versus the market’s two major benchmarks (EGX 30 and EGX 50), whether we

saw value, or the lack thereof, in these stocks. For each stock, we calculated the average

holding period “total” return (i.e. including cash dividends) versus EGX 30 and EGX 50.

On average, our track record indicates that our stock calls have outperformed both EGX

30 and EGX 50 by 11.0%. and 10.3%, respectively.

• Now what? In order to track our stock calls more scientifically, we decided to take this

further by launching our model portfolio to make it clearer for our clients to follow our

stock calls. We will be monitoring the model portfolio at all times, but we will generally

review its constituents monthly. Let’s see how we will do!

Track Record of Our Stock Calls from The Daily Beam

EGX Top Picks (Cont.’d) Amr Hussein Elalfy, MBA, CFA | Head of [email protected]

Call name Call date Call Rec. SSE EGX30Out/Under

performingEGX50E

Out/Under

performing

ESRS EY 10-May-18 Positive (31.3%) (21.0%) (10.3%) (25.0%) (6.3%)

ACAMD EY 14-Jun-18 Positive 11.5% (15.3%) 26.7% (18.2%) 29.6%

HELI EY 21-Jun-18 Positive (35.5%) (15.3%) (20.2%) (19.0%) (16.5%)

ISPH EY 24-Jun-18 Positive (9.7%) (16.4%) 6.7% (19.9%) 10.3%

POUL EY 11-Jul-18 Positive (2.2%) (14.1%) 11.9% (17.5%) 15.2%

CCAP EY 22-Jul-18 Positive 0.5% (11.3%) 11.8% (15.8%) 16.3%

FAIT EY 31-Jul-18 Positive (1.5%) (10.7%) 9.1% (12.8%) 11.3%

MTIE EY 2-Aug-18 Positive (17.9%) (12.8%) (5.1%) (14.6%) (3.3%)

AUTO EY 8-Aug-18 Positive (11.7%) (13.3%) 1.6% (14.9%) 3.3%

GTHE EY 3-Sep-18 Negative (7.9%) (13.8%) 5.9% (14.0%) 6.1%

ATLC EY 6-Sep-18 Positive 9.4% (13.2%) 22.6% (13.7%) 23.0%

ORWE EY 10-Sep-18 Positive 10.3% (13.2%) 23.4% (13.5%) 23.7%

DSCW EY 12-Sep-18 Positive (42.5%) (12.5%) (29.9%) (12.2%) (30.3%)

OIH EY 24-Sep-18 Positive 0.9% (4.2%) 5.0% 0.4% 0.5%

EGAL EY 26-Sep-18 Positive 23.8% (4.8%) 28.6% (1.1%) 24.9%

EGCH EY 3-Oct-18 Positive 44.7% (5.2%) 50.0% (0.7%) 45.4%

AFDI EY 4-Oct-18 Positive 8.9% (4.8%) 13.7% (0.8%) 9.8%

PHDC EY 17-Oct-18 Positive 2.8% (0.9%) 3.6% 4.4% (1.6%)

ELEC EY 18-Oct-18 Positive 29.6% (1.8%) 31.3% 3.3% 26.3%

SWDY EY 23-Oct-18 Positive 24.3% (0.6%) 24.8% 4.6% 19.6%

RAYA EY 30-Oct-18 Positive 27.6% 3.5% 24.1% 7.4% 20.2%

ORAS EY 7-Nov-18 Positive 1.0% 0.7% 0.3% 2.5% (1.5%)

UEGC EY 19-Nov-18 Positive 4.7% (3.1%) 7.9% (0.2%) 4.9%

GGCC EY 19-Nov-18 Positive 6.2% (3.1%) 9.3% (0.2%) 6.4%

UNIT EY 19-Nov-18 Positive 0.8% (3.1%) 3.9% (0.2%) 1.0%

EGSA EY 22-Nov-18 Positive (3.7%) (1.5%) (2.3%) (0.4%) (3.3%)

MPRC EY 27-Nov-18 Positive 46.2% 3.7% 42.5% 2.7% 43.5%

Average 11.0% 10.3%

Performance


41




Ticker D/E 17 (x) D/E LF (x)

ASCM 7.5 28.4

CCAP 5.0 4.5

AIND 4.8 3.6

ESRS 2.7 3.6

COSG 1.6 3.0

AFDI 2.1 2.4

AUTO 2.3 2.4

ORHD 2.3 2.2

CANA 2.3 2.1

HELI 1.7 1.9

Ticker ROE 18e (%) ROE 19e (%)

ABUK 42.0 53.2

HELI 38.1 52.1

EAST 44.1 43.1

CIEB 41.1 37.6

OLFI 37.4 34.4

MNHD 36.0 32.7

EFID 22.5 32.5

SKPC 35.4 32.2

ADIB 34.0 31.5

AMOC 45.0 30.0

Ticker DY 18e (%) DY 19e (%)

ACGC 13.6 17.0

SUCE 2.8 15.2

FAIT 9.8 13.9

ORWE 13.0 13.1

EGAL 18.1 11.9

PACH na 9.8

CIEB 8.9 9.2

AMOC 7.0 9.0

CSAG na 8.9

SKPC 8.2 8.6

Ticker PB 17 (x) PB LF (x)

RTVC 0.2 0.3

GMCI 0.4 0.4

AJWA 0.4 0.4

RREI 0.5 0.4

SVCE 0.7 0.4

MOIL 0.5 0.4

SDTI 0.6 0.4

SUCE 0.8 0.4

GOCO 1.0 0.5

EXPA 0.7 0.5

Ticker PE 18e (x) PE 19e (x)

ADIB 3.4 2.7

SAUD 3.3 2.8

FAIT 3.0 2.8

EXPA 3.5 3.1

CANA 4.0 3.5

ACGC 2.9 3.5

PHDC 5.5 3.9

EFIC 6.8 4.4

OCDI 6.6 4.5

ORAS 5.4 4.6

EGX Top Picks

One of our 20 EGX Top Picks.Source: Bloomberg, SHUAA Securities Egypt.

Equity Screens

• Twelve out of our 20 EGX Top Picks appeared in our equity screens: Before running

through the list of stocks that we prefer for 2019, we ran the Top 10 equity screens based

on six different metrics as shown in the accompanying tables. The six screens are: (1)

Cheapest by P/E, (2) Cheapest by P/BV, (3) Highest by dividend yield, (4) Highest by ROE,

(5) Most leveraged, and (6) Most liquid in terms of net cash. Interestingly, 12 of our 20 EGX

Top Picks showed up in those equity screens (shown in bold brown), namely:


Top 10 highly levered stocksTop 10 stocks by ROETop 10 dividend payers

Cheapest 10 stocks in terms of P/BVCheapest 10 stocks in terms of P/E

Top 10 stocks by net cash (EGPmn)

1. AMOC2. CIEB3. CLHO4. CSAG

5. EAST6. ESRS7. FAIT8. ORAS

9. ORHD10. ORWE11. SKPC12. PHDC

Note: Adjusted for recent cash dividends.

Ticker LFY Latest Filing

ABUK 4,378.2 4,157.0

EMFD 4,952.7 3,258.6

EAST 3,759.9 2,533.7

EGAL 2,925.0 2,056.9

SKPC 1,235.9 1,249.7

CLHO 655.2 763.1

OCDI 1,997.6 683.0

SUCE 347.2 621.7

GSSC 375.1 472.3

CSAG 361.7 384.6


42




20%

15% 15%

10% 10% 10%

5% 5% 5% 5%

Real Estate Financials(Non-Banks)

Materials Financials(Banks)

Health Care Industrials ConsumerDiscretionary

ConsumerStaples

Energy &Utilities

TelecomServices & IT

Launching Our EGX Model Portfolio

In this note, we are launching our model portfolio that we will be tracking throughout the year. The portfolio is made up of 20 stocks, with equal weights assigned to all stocks or 5% each. The 20 stock picks span all ten sectors with different allocations as shown on the right.

• Methodology: Our model portfolio uses a bottom-up method approach and the objective is to beat both key market indices, EGX 30 (free-float value-weighted) and EGX 50 (equal-weighted). To be fair enough, for each stock that we include in or exclude from our model portfolio, we will note the entry price as the opening price of the next trading day following our note of its inclusion.

• Characteristics: Based on median numbers, our model portfolio has an upside potential of 44.1%, a beta of 0.93, trading at 2018/2019 P/Es of 8.9x/7.8x, P/BVs of 1.7x/1.7x, and dividend yields of 6%/8%, respectively.

• While our stock picks included in the model portfolio are purely based on a bottom-up approach, we can still group them based on the following:

o 5 High Conviction: Stocks that we have high conviction for based on our valuation include ACAMD, CLHO, CSAG, ORAS, and TMGH.

o 4 High Dividend Plays: Stocks that sport above-average dividend yields include ATLC, CIEB, FAIT, and ORWE.

o 3 Oil Plays: Stocks that will benefit if and when oil prices firm higher include AMOC, MFPC, and SKPC.

o 3 Phoenix Rising from the Ashes: Stocks that we think have been hammered in the past but stand to recover including EAST, ESRS, and PHDC.

o 3 Wild Cards: Stocks that have await company-specific events to unlock value further including ISPH (legal case), OIH (North Korea and SRWA acquisition paying off), and ORHD (successful transformation into first-home market).

o 2 New Consumer Trends: Stocks that are riding the new fintech wave including ETEL (piggybacking on its network to offer financial services) and HRHO (NBFS growth).

EGX Top Picks (Cont.’d) Amr Hussein Elalfy, MBA, CFA | Head of [email protected]

Model portfolio sector allocation


AMOC

ATLC

CIEB

CLHO

CSAG

EAST

ETEL

FAIT

HRHO

ISPH

MFPC

ORAS

ORHD

ORWE

PHDC

SKPC

TMGH

0.0x

5.0x

10.0x

15.0x

20.0x

25.0x

0.0x 1.0x 2.0x 3.0x 4.0x 5.0x 6.0x 7.0x 8.0x

20

19

P/E

2019 P/BV

Model portfolio key valuation multiples

Note: ESRS’s 2019 P/E is 98.1x vs. P/BV of 1.2x; ACAMD and OIH have no consensus.Source: SHUAA Securities Egypt.


43




Our EGX Top Picks Summary Table

Note: As of 13 January 2019 prices; * +/- Potential is median. Bold brown is SHUAA Securities Egypt, including its 12M PT.Source: Bloomberg.

EGX Top Picks (Cont.’d)

Ticker Sector Market

Cap

ADTV

6M Curr.

Last

PriceBeta PT

+/-

Potential

(USD

mn)

(USD


ACAMD Real Estate 43 1.2 EGP 2.92 11.0 5.8 1.20 3.53 1.66 5.1 75.7% na na na na na na na na na na na na na na na

AMOC Energy & Utilities 468 0.7 EGP 6.49 (28.7) 4.0 0.90 12.75 5.75 9.3 43.3% 8.1x 5.6x 7.9x 4.9x 3.7x 5.6x 2.9x 2.3x 2.4x 40% 45% 30% 8% 7% 9%

ATLC Financials 27 0.0 EGP 5.95 (19.8) (0.1) 1.00 8.50 4.20 7.1 19.5% 10.6x 6.6x 5.4x na na na 2.3x 1.7x 1.6x 22% 25% 28% 6% 12% 13%

CIEB Financials 717 0.7 EGP 41.30 (3.9) 0.7 0.65 53.00 39.00 57.4 39.0% 6.7x 6.4x 5.9x na na na 2.4x 2.1x 1.8x 42% 41% 38% 5% 9% 9%

CLHO Health Care 435 0.3 EGP 4.87 1.9 4.5 0.76 5.51 3.20 5.8 18.7% 9.5x 27.4x 22.9x 33.4x 20.4x 15.5x 0.7x 4.8x 4.0x 10% 18% 19% na na na

CSAG Industrials 140 0.2 EGP 12.54 (2.6) 3.4 1.14 17.34 7.00 16.4 30.8% 10.1x 9.7x 8.4x 65.5x nm nm 3.5x na 3.1x 38% 46% na 0% 5% 9%

EAST Consumer Staples 2,105 0.9 EGP 16.77 (17.6) 3.1 0.90 30.13 14.60 21.0 25.2% 12.7x 8.9x 8.8x 5.6x 8.1x 6.6x 6.2x 5.0x 2.8x 66% 65% 43% 5% 4% 7%

ESRS Materials 595 0.6 EGP 19.62 (6.3) 7.7 0.98 30.79 16.82 24.0 22.3% nm nm 98.1x 7.9x 6.1x 5.4x 2.0x 2.3x 2.2x -25% -14% 3% na na 1%

ETEL Telecom Services & IT 1,326 0.6 EGP 13.92 2.9 9.8 0.92 17.50 9.80 17.7 27.2% 7.5x 6.6x 6.2x 7.2x 5.8x 5.5x 0.7x 0.7x 0.7x 10% 11% 11% 2% 4% 6%

FAIT Financials 362 0.0 EGP 16.04 (3.7) 4.4 0.99 22.37 13.82 25.3 57.7% 3.4x 3.0x 2.8x na na na 0.6x 0.5x 0.4x 20% 19% 17% 8% 10% 14%

HRHO Financials 703 1.5 EGP 16.38 (5.5) 7.6 1.02 21.76 13.25 23.0 40.4% 11.8x 13.1x 10.7x na na na 1.1x 0.9x 0.8x 9% 7% 8% 12% na na

ISPH Health Care 415 0.3 EGP 10.29 19.7 1.4 0.61 12.80 7.40 13.2 28.3% 43.7x 25.1x 16.8x 18.0x 13.8x 10.3x 17.9x 8.9x 7.3x 47% 47% 48% na 2% 3%

MFPC Materials 964 0.1 EGP 75.43 (26.2) (2.3) 0.91 118.50 70.00 123.0 63.1% 37.8x 11.5x 6.9x 6.8x 5.0x 4.3x 1.8x 1.3x 1.2x 5% 12% 18% 2% 5% 7%

OIH Financials 170 0.8 EGP 0.58 (20.4) 0.3 1.22 0.92 0.51 0.7 21.3% 8.5x na na na na na 0.8x na na 9% na na 14% na na

ORAS Industrials 769 0.2 EGP 118.04 (19.2) 0.0 0.80 172.00 108.00 187.0 58.4% 11.8x 5.4x 4.6x 3.7x 3.4x 3.3x 2.6x 1.5x 1.2x 26% 32% 28% na 6% 6%

ORHD Real Estate 455 0.9 EGP 7.36 50.5 4.5 1.14 7.90 3.69 11.9 61.7% 18.3x 20.3x 12.8x 11.0x 9.1x 8.7x 3.6x 3.7x 2.8x 21% 23% 24% na na na

ORWE Consumer Discretionary 282 0.4 EGP 11.40 (35.3) 9.1 0.85 17.60 8.11 14.2 24.6% 7.4x 9.1x 7.3x 6.4x 6.3x 5.2x 1.0x 0.7x 0.7x 8% 8% 9% 9% 13% 13%

PHDC Real Estate 381 1.5 EGP 2.22 (43.7) 1.8 1.15 5.74 1.94 4.8 116.2% 11.2x 5.5x 3.9x 11.9x 7.1x 5.0x 1.3x 0.7x 0.6x 12% 12% 15% na na na

SKPC Materials 533 0.3 EGP 18.21 (29.1) 6.4 0.86 32.80 16.43 27.6 51.6% 11.8x 7.8x 7.7x 8.7x 5.5x 5.4x 4.0x 2.7x 2.5x 35% 35% 32% 7% 8% 9%

TMGH Real Estate 1,254 0.9 EGP 10.89 8.0 10.1 0.95 14.90 8.70 17.0 56.1% 15.2x 14.7x 9.4x 10.3x 11.6x 9.7x 0.7x 0.7x 0.7x 5% 5% 6% 1% 2% 2%

Top Picks List (median)* 461 0.6 0.93 44.1% 10.9x 8.9x 7.8x 8.3x 6.3x 5.5x 2.0x 1.7x 1.7x 20% 21% 19% 6% 6% 8%

Div. Yield (%)PBV ROEPrice Change

(%)52-Week PER EV/EBITDA

44




Key Highlights

• A land bank waiting to be monetized: Arab Co. for Asset Management & Development (ACAMD) is a recent spin-off from the long-standing Arab Cotton Ginning Co. (ACGC), owning most of the real estate assets previously owned by ACGC. ACAMD has a land bank of 588,936 sqm spread all over the Delta region and Upper Egypt, such as Gharbia, Menofiya, Behaira, Kafr El-Sheikh, and Daqahlia in the former and Beni Suef, Minya, Fayoum, and Assiut in the latter. Most of these land plots are either on the Nile or close to the Nile, having been utilized historically for cotton ginning activity to facilitate transportation by river. However, the land bank is no longer utilized, and ACAMD’s management is working on a strategic plan to monetize it.

• Debt-free company trading at a deep discount: ACAMD’s balance sheet post spin-off is debt free with around EGP10mn in net cash. ACAMD’s book equity stood at EGP137mn because the land bank is recorded at cost. Adjusting for the land bank’s market value (according to our assumption) yields an adjusted net asset value (NAV) of EGP1.36bn. This compares to a current market cap of around EGP800mn, which is c.60% of our adjusted NAV and suggests a 70%+ upside potential.

• A 5-year plan to monetize its land bank: ACAMD’s management recently revealed a 5-year strategy to monetize its land bank based on two pillars. The first is mainly to provide some liquidity through the sale of a portion of its land bank. The second will be to develop the remaining land bank either by the company solely or through co-development agreements. ACAMD will start with the sale of a 19,000 sqm land plot in Daqahlia, which is expected to bring around EGP40-50mn. Cash proceeds from the sale are

earmarked for developing a 60,000 sqm land plot in Gharbia. If successful, we think this will kickstart the monetization of the company’s land bank.

• A diversified land bank: ACAMD’s land bank is mostly located in prime locations in the Nile Delta region in governorates that are often neglected by real estate developers that mainly focus on projects in Cairo. As such, the locations of ACAMD’s land plots should allow the company to offer distinctive real estate investment opportunities.

Valuation

• PT EGP5.13/share: We valued ACAMD using the adjusted book value approach. Our valuation is based on a 50% discount (an average of EGP2,290/sqm) to what we think is already depressed market price (EGP4,580/sqm) for the different land plots. This resulted in a PT of EGP5.13/share.

Risks

• Failure in delivering on the 5-year strategy.

• Taking too long to sell or develop the land bank.

• Any slowdown in the real estate market.

Not Rated PT: EGP5.13

Arab Co. for Asset Management & Development (ACAMD) / Real Estate

Time to Unlock the Value in Its Land Bank

EG

X T

op

Pic

ks Mohamed Sobol | Equity Analyst

[email protected]

Note: Multiples are based on year-end values.Source: Bloomberg.

Last Price (EGP) 2.92

52 Week Range (EGP) 1.661 - 3.53

6M-ADVT (EGPmn) 20.87 Market Cap (EGPmn) 773

No. of Shares O/S (mn) / Free float 264.8 / 82.1%

FY ended 30 Jun. 2014 2015 2016

from

4/4/2018

EGPmn to 30/9/2018

Revenues -- -- -- 0.6

YoY growth na na na na

Gross profit -- -- -- 0.3

Margin % na na na 61.8%

EBITDA -- -- -- (1.9)

Margin % na na na na

Net income -- -- -- (1.9)

Margin % na na na na

P/E na na na naEV/EBITDA na na na na

Dividend yield na na na na

ROE na na na na

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

-120%

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

Volume (mn), Right ACAMD EGX30 Index


45




Key Highlights

• Historically strong performance marred by recent lower margins: Alexandria Mineral Oils Co. (AMOC) has witnessed a strong operational performance over the last couple of years, driven by the EGP flotation, higher oil prices, and a better product mix. Over those years, AMOC’s ROAE averaged 42%, but more recently profitability, and hence gross margin, was pressured, weighing further on the stock to trade at 8.0x forward earnings.

• Recent actions to improve results in H2: AMOC has signed a cooperation agreement with Middle East Oil Refining Co. (MIDOR) with commercial and technical terms, under which AMOC will utilize MIDOR’s technology to ensure that its products conform with global standards. Moreover, AMOC’s management said it will use gas oil substitutes to attain global specifications at a lower cost. We expect the impact of these actions to reflect on H2 FY2018/19 results, leading to improved performance and wider margins.

• Better cash management: As part of its cash management strategy, AMOC started to engage in refining crude oil at third-party facilities. AMOC uses part of its excess cash to buy crude oil from EGPC at international prices, it refines it at third-party labs, then it sells the refined derivatives to EGPC at international prices as well.

• A vertical integration strategy to penetrate new markets:AMOC has acquired an additional stake in Alexandria Wax Products Co. (which markets the waxes products overseas), thus increasing its ownership from 40% to 82% (after selling 10% of AMOC’s shares to New Smart for Industrial Investments). With management control, AMOC will further penetrate existing markets and develop new ones in the

future. In September 2017, AMOC signed a contract with Petromin Corporation for mixing and packing c.10,000tpa of lubricant oils as an initial stage to be increased to 50,000tpa in the future.

Valuation

• 12M PT EGP9.30/share: To value AMOC, we discounted FCFFs at an average WACC of 18.0%, resulting in a fair value of EGP7.65/share, a 12-month price target (PT) of EGP9.30/share. We believe the stock has been oversold in view of AMOC’s Q1 earnings miss. Our valuation excludes the new project which, if implemented, would further add EGP2.16/share to fair value and our 12M PT would be EGP11.93/share.

Risks

• AMOC’s low bargaining power as EGPC is the sole feedstock supplier and the main output buyer. Therefore, any interruptions of the feedstock supply and any modification of feedstock type from the EGPC side could hurt AMOC’s operations. Also any unfavorable change in the contractual agreements between EGPC and AMOC will drag the stock value.

• The entrance of Chinese lubricant suppliers in the Egyptian market could harm demand.

• Volatility of oil prices on the back of world trade war.

OverweightHigh Risk

12M PT: EGP9.30(Set on 28 October 2018)

Alexandria Mineral Oils Co. (AMOC) / Energy (Initiation Report)

The Value of Continuous Evolution

EG

X T

op

Pic

ks AbdelRahman Wahba | Equity Analyst

[email protected]



52 Week Range (EGP) 5.75 - 12.75

6M-ADVT (EGPmn) 12.22

Market Cap (EGPmn) 8,382

No. of Shares O/S (mn) / Free float 1,291.5 / 41.1%

FY ended 30 Jun. 2015 2016 2017 2018

EGPmn

Revenues 6,428.8 4,375.6 9,589.7 14,033.2

YoY growth (31.9%) 119.2% 46.3%

Gross profit 566.3 625.4 1,311.9 2,077.2

Margin % 8.8% 14.3% 13.7% 14.8%

EBITDA 475.4 514.2 1,146.8 1,915.1

Margin % 7.4% 11.8% 12.0% 13.6%

Net income 340.3 435.4 1,100.5 1,487.4

Margin % 5.3% 10.0% 11.5% 10.6%

P/E 4.8x 5.8x 8.1x 10.2x

EV/EBITDA 1.4x 2.9x 6.1x 7.4x

Dividend yield 15.8% 18.6% 8.2% 7.3%

ROE 13.8% 18.0% 40.0% 45.0%

0.0

2.0

4.0

6.0

8.0

10.0

12.0

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

Volume (mn), Right AMOC EGX30 Index

https://www.dropbox.com/s/vik4rpp39hqtecf/181028 AMOC Initiation - En.pdf?dl=0


46




Key Highlights

• Trading at below IPO price despite cheap valuation:Historically, AT Lease (ATLC) has suffered from a legacy of bad market conditions and an illiquid stock. This eventually led the stock to be heavily sold off trading below its IPO price. The stock trades at very low valuation multiples, well below other peers’ despite exhibiting strong fundamentals. ATLC trades at a P/BV of 1.8x and 2018e P/E of 6.4x.

• High dividend yield and an improved industry outlook: Our positive view on ATLC as a promising pick for 2019 is based on two factors:

o An expected robust dividend yield, based on the management’s guidance for 2018, suggesting the delivery of EGP70mn in earnings (we assumed EGP67mn on an annualized basis for 9M 2018). Based on the 77% payout ratio of last year, we would expect a DPS of EGP0.65/share, implying a dividend yield in excess of 11% which is almost double the EGX 30 dividend yield of 6.0% for 2018.

o Pining hopes on industry updates for 2019, as the market participants look forward to the resumption of an interrupted easing cycle. In many ways, an interest rate cut will bode well for financial leasing players generally—ATLC included—since demand for capex financing would flourish as the cost of borrowing retreats.

Valuation

• PT EGP7.11/share: We valued ATLC using the justified price to book value and excess return models, which averaged a PT of EGP7.11/share.

Risks

• Illiquidity engulfing the stock performance.

• Higher interest rates for a longer term could strangle demand for capex lending, thus inhibiting growth.

AT Lease (ATLC) / Financials (Non Banks)

A High Dividend Yield, Undervalued Play

EG

X T

op

Pic

ks





52 Week Range (EGP) 4.2 - 8.5

6M-ADVT (0mn) 0.22 Market Cap (0mn) 476


FY ended 31 Dec. 2014 2015 2016 2017

EGPmn

Total Operating Revenues 432.9 424.2 467.1 670.6

YoY growth (2.0%) 10.1% 43.5%

Total Cost of Revenues (372.3) (361.5) (395.5) (561.4)

YoY growth (2.9%) 9.4% 42.0%

Gross Profit 60.6 62.7 71.7 109.1

Margin % 14.0% 14.8% 15.3% 16.3%

Net income 21.2 38.8 49.0 58.8

YoY growth 83.5% 26.1% 20.0%

P/E 0.0x 0.0x 0.0x 10.6xP/B 0.0x 0.0x 0.0x 2.3x

Dividend yield nm nm nm 5.5%

ROE 9.6% 17.2% 20.2% 22.3%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

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-30%

-20%

-10%

0%

10%

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30%

Volume (mn), Right ATLC EGX30 Index


47




Key Highlights

• Boasting the highest ROE and ROA in the sector: Credit Agricole – Egypt (CIEB) has been able to deliver strong profitability indicators, unrivaled by peers, standing out during the EGP flotation and beyond up until now. Despite lagging behind the sector in terms of growth, CIEB managed to outpace the sector in terms of ROE and ROA.

• Profitability to normalize, converging towards the sector’s norms: We think the bank’s selectivity of its asset mix will continue to be beneficiary for a limited time only, as normalization will start weakening its asset yields. However, we still think CIEB’s profitability and the sector’s norms will converge slowly during the next two years.

• The bank will have time to adjust its balance sheet as high interest rates ease: The majority of CIEB’s loan book is dominated by working capital financing, which contributed massively to the bank’s profitability. Interest rates were hiked by a cumulative 700bps since the EGP flotation before being cut early last year by 200bps. While possibilities of a rate cut are becoming stronger for 2019, we still think the pace of easing will be slow. Hence, we believe the bank will have time to adjust its balance sheet, mitigating the impact of yield normalization.

• One of the banks least impacted by the possible new tax treatment of income from Treasuries: CIEB has not been heavily exposed to government Treasuries which currently represent 29% of its total assets versus a 33% average of the listed peers. In return, CIEB’s interest income is currently 36%-dominated by Treasuries, just below the 37% average of listed peers. Hence, we think CIEB would be among the least vulnerable to the possible amendment in the tax treatment of income from Treasuries in 2019.

• Above-average dividend yield: CIEB is a decent dividend play, with a lucrative payout ratio standing recently at 60%. Based on our 2018 earnings estimates, CIEB’s dividend yield is c.10%, well above the EGX 30’s dividend yield of c.6%.

Valuation

• PT EGP57.4/share: We had valued CIEB using a justified price-to-book value approach, considering the margin normalization stage. We reached a PT of EGP57.4/share.

Risks

• Aggressive easing, leading to a faster-than-expected normalization.

• Weaker growth for an extended period of time, hindering the bank’s earnings as interest rate cuts become more frequent.

Credit Agricole – EGYPT (CIEB) / Financials (Banks)

A Story of Wise Growth

EG

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op

Pic

ks Mohamed Saad | Equity Analyst

[email protected]




52 Week Range (EGP) 39 - 53

6M-ADVT (EGPmn) 13.26 Market Cap (EGPmn) 12,841


FY ended 31 Dec. 2014 2015 2016 2017

EGPmn

Net Interest Income 1,605.5 1,605.5 2,115.3 2,796.8

YoY growth 0.0% 31.7% 32.2%

Non Interest Income 669.6 685.1 732.7 986.7

YoY growth 2.3% 6.9% 34.7%

Total Banking Income 2,275.1 2,290.7 2,848.0 3,783.5

YoY growth 0.7% 24.3% 32.8%

Net income 1,037.4 1,037.9 1,353.6 1,955.2

YoY growth 0.1% 30.4% 44.4%

P/E 5.0x 6.2x 8.3x 6.7xP/B 1.8x 1.9x 2.8x 2.4x

Dividend yield 0.0% 6.8% 5.4% 4.8%

ROE 35.7% 32.5% 36.2% 41.8%

0.0

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Volume (mn), Right CIEB EGX30 Index


48




Key Highlights

• Potential growth in a defensive sector: Cleopatra Hospital Co. (CLHO) is the largest private hospitals group in Egypt by number of beds. The defensive nature of the health care sector along with favorable demographics and Egypt’s high morbidity rates should all support CLHO's underlying business going forward and unleash a wave of growth opportunities. Egypt’s new comprehensive health insurance law should lead to wider health care coverage, and hence increase demand for healthcare services in general, which makes the group’s future look even brighter.

• Synergies from economies of scale: CLHO is now running one unified entity instead of owning independent scattered hospitals after putting into action a strategic plan for expansion and integration. As the last implementation phase of this ambitious plan is coming to an end, profit margins began to widen.

• A distant leader in terms of size: With patients’ beds currently totaling 643, CLHO enjoys a substantial gap versus its nearest competitor Saudi German which operates 300 patients’ beds.

• Growth further fueled by M&A: An organic and inorganic growth strategy has been devised, targeting robust growth via six major channels: (1) launching a polyclinic model, (2) expanding existing hospital capacities, (3) acquiring new operating hospitals; currently the management is targeting El-Katib Hospital as well as the signing of an acquisition agreement for a sixth hospital in east Cairo, (4) expanding outside Cairo, (5) acquiring greenfield hospitals, and (6) setting up new specialized companies under the group’s umbrella, e.g. CHG Pharma to manage the group’s

pharmacies.

• Key catalysts: CLHO’s essential catalysts are:

1. Successful implementation of all organic and inorganic expansion plans.

2. Successful inauguration of the ten polyclinics it targets over the coming five years.

3. Achieving full synergy between all hospitals (existing and newly acquired).

Valuation

• 12M PT EGP5.78/share: Our DCF model yielded a fair value of EGP5.60/share while our multiples valuation model yielded EGP5.96/share. We set our 12M PT at the average of both models, reaching at 12M PT of EGP5.78/share.

Risks

• Competition challenges in acquiring new hospitals may increase the cost of acquisitions (e.g. El-Katib Hospital has reportedly received another acquisition offer from an Arab investment group).

• Any changes in acquisition legalities or taxation environment.

• Any change in anti-trust rules set out by the Egyptian government.

• Any increase in the cost of operations due to an inflationary environment.

OverweightLow Risk

12M PT: EGP5.78(Set on 30 December 2018)

Cleopatra Hospital Co. (CLHO) / Health Care (Initiation Report)

A Winning Game of Synergy and Expansion

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ks Ahmed Abdelnaby | Vice President, Research

[email protected]






FY ended 31 Dec. 2014 2015 2016 2017

EGPmn

Revenues 290.3 411.5 864.4 1,126.8

YoY growth 41.8% 110.1% 30.3%

Gross profit 92.2 149.0 278.4 376.4

Margin % 31.8% 36.2% 32.2% 33.4%

EBITDA 68.7 104.9 173.8 213.4

Margin % 23.7% 25.5% 20.1% 18.9%

Net income 43.8 66.8 76.3 105.7

Margin % 15.1% 16.2% 8.8% 9.4%

P/E na na 4.7x 9.5xEV/EBITDA na na 2.5x 33.4x

Dividend yield na na na na

ROE 64.7% 51.1% 18.1% 9.6%

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https://www.dropbox.com/s/gerv2axxi1mpcv6/181230 CLHO Initiation - En.pdf?dl=0


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Key Highlights

• It’s all about its investments: Canal Shipping Agencies’ (CSAG) revenue growth does not often adequately cover the company’s operational costs in view of inconsistent growth, leading to soft margins. The stock represents a case of its own, as CSAG’s bottom line always surpasses its top line in view of weak core business revenues and lush investment income from associates. Thus, the key value of CSAG is not attached to its core business lines, as growth and margins alone cannot carry the business. CSAG’s share in income from associates contributes the most to the company’s profitability. Indeed, CSAG’s value stems from its investments in Port Said Container & Cargo Handling (PSCCH) – a 20% stake – and Damietta Container & Cargo Handling (DCCH) – a 20% stake. Both companies received a substantial boost from the EGP flotation, as their top line is essentially USD-denominated. This boost had spilled over CSAG’s earnings which grew significantly between FY2016/17 and FY2017/18.

• Drivers of CSAG’s value: We believe CSAG’s value will be unlocked in the future by the following:

o A stable stream of income from PSCCH and DCCH, trickling down to CSAG’s bottom line.

o DCCH was on the 23-company public offerings program (POP). While POP has stalled, albeit temporarily, the reintroduction of the program will encourage thoughts of re-rating DCCH, since it will be on track for a stake float. This will filter through to CSAG’s value.

o Exposure to PSCCH and DCCH serves CSAG as a natural hedge against a weaker EGP.

Valuation

• PT EGP16.4/share: We valued CSAG using the adjusted book value model after revaluing its stakes at PSCCH and DCCH, using a DCF model. We reached a PT of EGP16.4/share, where DCCH and PSCCH contributed 49% and 29% to our PT, respectively, while the remaining 22% accounted for CSAG’s book value.

Risks

• Any appreciation in the EGP will harm CSAG’s income from associates.

• A slowdown in the global trade flow.

Canal Shipping Agencies (CSAG) / Industrials

Value Knocks, Stakes Answer

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52 Week Range (EGP) 7 - 17.34



FY ended 30 Jun. 2015 2016 2017 2018

EGPmn

Revenues 56.8 60.8 65.8 86.1

YoY growth 4.7% 7.1% 8.2% 108.2%

Gross profit 6.5 8.1 15.0 24.8

Margin % 11.5% 13.3% 22.9% 28.8%

EBITDA (20.4) (17.7) 18.2 1.4

Margin % (36.0%) (29.1%) 27.6% 1.6%

Net income 39.5 54.6 155.2 271.2

Margin % 69.5% 89.8% 235.8% 315.0%

P/E 44.0x 17.8x 10.1x 9.7xEV/EBITDA nm nm 65.5x nm

Dividend yield 1.8% 3.3% 0.5% 4.8%

ROE 18.7% 23.2% 38.3% 46%

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Key Highlights

• A monopoly tobacco producer: Eastern Company (EAST) enjoys a monopoly position in the Egyptian cigarettes market. The company produces c.94% of the total cigarettes output in Egypt. International tobacco companies (e.g. PMIand BAT) in Egypt cannot manufacture on their own due to a difficulty of obtaining a license to manufacture tobacco products. None of these companies possesses a market share above 40% to be eligible for attaining a license. However, collectively, they hold a c.25% market share. So, EAST produces for them under toll-manufacturing agreements renewable every seven years. According to these agreements, international companies provide EAST with the raw materials required for the production of cigarettes while being charged a fee of USD5.8 per 1,000 cigs.

• A generous dividend payer: EAST has been paying out its shareholders a decent portion of its profits. The company’s average payout ratio over the last five years was c.60%, with a dividend yield of more than 7%, making it one of the top dividend payers on the EGX. Going forward, we believe the company will extend this trend of above-average payout ratios, given that (1) the company is operating in a defensive industry which could weather any disruptions in the economy, (2) no major capex is required down the road, (3) the government’s indirect stake in EAST stands at 55% through the Chemical Industries Holding Company (CIHC) of which interest is served by keeping a high payout ratio, (4) it boasts a strong cash position, with little or no debt at all.

• Further room for higher product prices: EAST still has room to raise its ex-factory prices over the coming years, which—if achieved—will likely expand the company’s profit margins.

• A candidate for the government’s POP: EAST is planned to be the first state-owned company to kick off the government’s public offerings program (POP) with a sale of a 4.5% stake to private investors, thus reducing CIHC’s stake to 50.5%, low enough to still maintain majority. The price at

which the stake will be sold may drive EAST’s price higher.

Valuation

• PT EGP21/share: We value EAST using a relative valuation (i.e. multiples) approach. We believe EAST is cheap relative to its peers, trading at a P/E of only 9.5x (based on FY2018/19 earnings), a 22% discount to a global median forward P/E in 2019 of 12.2x. This implies a PT of EGP21/share for EAST.

Risks

• Unfavorable renewal of the licensing agreements.

• Inability to raise ex-factory prices.

• Increased raw tobacco prices worldwide.

• Decreased payout ratios by the company.

Eastern Company (EAST) / Consumer Staples

A Monopoly Player with a High Dividend Yield

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Not Rated PT: EGP21



52 Week Range (EGP) 14.6 - 30.133



FY ended 30 Jun. 2015 2016 2017 2018

EGPmn

Revenues 7,057.7 7,652.9 10,541.0 13,410.9

YoY growth 16.1% 8.4% 38.5% 38.5%

Gross profit 2,195.3 2,348.9 4,139.9 5,177.3

Margin % 30.8% 30.3% 39.3% 38.6%

EBITDA 2,298.0 2,465.9 4,131.8 5,004.7

Margin % 32.6% 32.2% 39.2% 37.3%

Net income 1,272.4 1,475.9 2,978.4 4,240.6

Margin % 18.1% 19.4% 28.3% 31.6%

P/E 5.5x 8.0x 12.7x 8.9xEV/EBITDA 3.1x 4.5x 5.6x 8.1x

Dividend yield 6.2% 4.2% 4.8% 4.4%

ROE 26.4% 26.3% 65.6% 65.2%

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Key Highlights

• Potential improvement in ERM to drive ESRS’s profitability and value: Ezz Steel’s (ESRS) subsidiary Ezz Steel Rolling Mills’ (ERM) has secured EGP2.58bn short-term debt facilities to finance its working capital. The main purpose of this loan is to finance ERM’s working capital and utilize its DRI unit at Ain Al-Sokha. Thus, Ezz Flat Steel’s (EFS) future utilization rates could be boosted after resolving the working capital shortage of ERM’s DRI unit which is expected to operate at full capacity by 2019.

• Ensuring a low feedstock cost is a plus: Any reduction in natural gas costs would represent a major upside. Over the last month, local steel producers and the Chamber of Metal Industries demanded that the government reduces the cost of natural gas for the steel industry and raises anti-dumping fees for steel products to 25%. Satisfying these demands would allow the DRI units to achieve higher operating margins and would reflect positively on ESRS’s profitability.

• Sustained cash flows to support resumption of dividend payments: For ESRS to sustain healthy cash flows and hence be able to resume paying dividends to its shareholders, there are three catalysts that could serve as indicator:

1. Stable natural gas supply and price due to recent gas discoveries in Egypt.

2. Declining interest rates once the Central Bank of Egypt resumes its easing cycle.

3. New tariffs on steel imports, if approved by the government, would enhance the selling prices and improve the operating margins of ESRS.

Valuation

• PT EGP24/share: ESRS’s stock currently trades at 2018/2019 EV/EBITDA of 6.0x/5.3x. However, the improvement of EFS’s and ERM’s utilization rates should drive profitability higher. As long as interest rates are declining, we believe ESRS will re-rate over time. We believe ESRS’s consensus PT of EGP24/share is sensible, with operational recovery representing an upside risk.

Risks

• A slowdown in the global economy would harm ESRS’s operations as it pressures selling prices.

• The delay of the full utilization of EFS’s facilities will pose a key challenge.

• Any increase in interest rates will hurt profitability.

Not Rated Consensus PT: EGP24

Ezz Steel (ESRS) / Materials

The Gradual Transformation

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52 Week Range (EGP) 16.82 - 30.79



FY ended 31 Dec. 2014 2015 2016 2017

EGPmn

Revenues 19,397.8 16,641.2 23,189.3 41,741.9

YoY growth (14.2%) 39.3% 80.0%

Gross profit 690.5 1,108.0 2,512.5 4,335.1

Margin % 3.6% 6.7% 10.8% 10.4%

EBITDA 633.7 1,094.9 2,444.4 4,343.9

Margin % 3.3% 6.6% 10.5% 10.4%

Net income (696.6) (418.0) 162.5 (1,580.2)

Margin % (3.6%) (2.5%) 0.7% (3.8%)

P/E nm nm 59.4x nmEV/EBITDA 33.7x 17.3x 13.0x 7.9x

Dividend yield -- -- -- --

ROE -13.3% -8.7% 1.6% -25.0%

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52




Key Highlights

• A fully-integrated telecom operator: Telecom Egypt’s (ETEL) portfolio covers fixed-line, mobile, data, and infrastructure. ETEL’s fully-owned TE Data is the largest internet service provider (ISP) in Egypt with a market share of over 75%. Also, the mobile business of ETEL is addressed directly through its We mobile operation and indirectly through its 44.95% stake in Vodafone Egypt, the country’s largest and most profitable mobile operator. Moreover, ETEL is the sole fiber optic network provider in Egypt, so it stands to benefit from the rollout of its high-speed nationwide network, with data transmission further driving revenue growth which will serve its own needs as well as other telecom providers’.

• The “go-to” infrastructure provider in Egypt: As a de factofixed-line monopoly in Egypt, ETEL’s client base has recently started to reverse its growth trend to the upside. This has been reflected in higher revenues from voice (enterprise segment), data (home and enterprise segments), and domestic wholesale. Furthermore, ETEL’s new mobile operation should also boost revenue growth further, albeit marginally. Preliminary subs figures are already above market expectations. Having Egypt’s only international gateway that can be used by any other operator, ETEL is indeed the country’s gateway to the outside world. Egypt’s mobile network operators are expected to offer fixed-line services through ETEL’s infrastructure, which is likely to serve the company’s interest through deal agreements.

• Growth to be driven by data: Given Egypt’s fast-growing youth-concentrated population of 100mn+ people, ETEL’s growth will draw more on data than voice. Fixed-line revenues will depend on ETEL’s network roll-out to the new urban communities (e.g. gated communities), further driving

data revenues along the way. However, we believe the ultimate revenue driver for ETEL will be the way they utilize their infrastructure to benefit off of the telecom/media convergence. Indeed, we see telecom and media converging soon in Egypt, and we think ETEL is well positioned to take advantage of this trend which is evolving on the back of government support and network infrastructure, which should eventually pave the way for the company’s move into the media business (e.g. content production).

Valuation

• PT EGP17.7/share: Based on EV/EBITDA multiples, we valued ETEL at EGP17.7/share.

Risks

• A slower-than-expected revenue growth or narrowing margins will weigh on profitability.

• Heavy debts piling upon ETEL’s balance sheet.

Telecom Egypt (ETEL) / Telecom Services

A Universal Business Model with a Telecom Infrastructure Twist

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FY ended 31 Dec. 2014 2015 2016 2017

EGPmn

Revenues 12,157.5 12,184.2 13,950.0 18,567.3

YoY growth 0.2% 14.5% 33.1%

Gross profit 5,370.7 5,064.1 6,030.4 7,352.5

Margin % 44.2% 41.6% 43.2% 39.6%

EBITDA 3,841.0 3,442.0 3,801.0 5,184.0

Margin % 31.6% 28.2% 27.2% 27.9%

Net income 1,416.7 2,997.4 2,670.3 3,150.4

Margin % 11.7% 24.6% 19.1% 17.0%


Dividend yield 1.9% 13.3% 2.2% 1.9%

ROE 5.3% 10.3% 9.0% 10.3%

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Key Highlights

• Recently-proposed tax treatment to be mitigated over time:Sentiment towards banks has been shifting in light of the recently-proposed tax treatment that is expected to dent banks’ profitability to different degrees. The only mitigating factor in this taxation story is the coordination between the Ministry of Finance and the Federation of Egyptian Banks(FEB) not to apply the tax treatment retroactively. That said, we think banks are going to have another good year in 2019 before normalization begins in full-fledged mode in 2020 and beyond. Normalization will come in many forms, topped by a quicker pace of monetary easing as well as more painful impact from implementing the proposed tax treatment.

• Undervalued despite ability to absorb expected shocks: We believe FAIT is clearly undervalued despite boasting a balance sheet structure capable of absorbing upcoming heat from the abovementioned proposed tax treatment. During 9M 2018, FAIT managed to reduce its exposure to Treasuries by 3% (in monetary terms), with its balance sheet growth reallocated to inter-bank assets. In addition, FAIT’s interest income used to be largely dominated by income from governmental debt securities back in 2016 (a c.80% of total interest income). However, 9M 2018 results showed Treasuries income cooling down to represent only 30% of FAIT’s total interest income, one of the lowest among peers. Indeed, management measured the impact of applying the new draft of the tax amendment in FY 2019, and they arrived at EGP170mn, representing c.6% of our bottom-line estimates for 2019.

• Low cost of funding and a strong net FX position: FAIT enjoys a low funding mix, noting that a significant portion (38%) of the bank’s deposits is denominated in USD, on which

the bank pays cheaper costs. Low funding costs help FAIT offset the negatives of low-yielding assets. In addition, the bank has a strong net foreign position, which helped it score hefty FX gains following the EGP flotation. Thus, a weaker EGP will bode well for FAIT.

Valuation

• PT EGP25.3/share: FAIT trades at such depressed multiples (an annualized P/E of c.2x, P/BV of c.0.5x) as the bank’s aversion of lending has been harming its ROE (c.21%), close to the bank’s COE. We had valued FAIT using the justified price to book value and excess return methods, reaching an average PT of EGP25.3/share.

Risks

• Weaker lending activities for a longer period.

• A stronger EGP causing damage to the bank’s large net long FX balance.

• Faster-than-expected deterioration of the bank’s yields.

Faisal Islamic Bank – EGYPT (FAIT) / Financials (Banks)

Too Cheap to Ignore

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52 Week Range (EGP) 13.82 - 22.37



FY ended 31 Dec. 2014 2015 2016 2017

EGPmn

Net Interest Income 1,637.3 1,903.3 2,282.2 2,946.0

YoY growth 16.2% 19.9% 29.1%

Non Interest Income 53.2 110.1 1,986.8 316.9

YoY growth 107.1% 1,704.7% (84.1%)

Total Banking Income 1,690.4 2,013.4 4,269.0 3,262.9

YoY growth 19.1% 112.0% (23.6%)

Net income 623.3 753.8 2,887.4 1,722.8

YoY growth 20.9% 283.0% (40.3%)

P/E 2.5x 2.1x 1.6x 3.4xP/B 0.4x 0.4x 0.6x 0.6x

Dividend yield 0.0% 82.6% 6.1% 8.0%

ROE 16.8% 18.8% 45.5% 19.5%

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Key Highlights

• A successful transformation into NBFS is key: EFG Hermes Holding’s (HRHO) stock performance in 2018 has been overshadowed by a genuine bearish sentiment that spilled over the entire market. 9M 2018 financial results appeared to be weak when compared to 2017 due to the base effect as it included the sale of Credit Libanais’s stake. High operating costs created yet another headwind to HRHO’s profitability, especially during H1 2018. That said, we view the drop in HRHO’s market price as opportunity, considering there is room for wider margins and hence better returns. But the key would be a successful transformation towards NBFS.

• NBFS contribution to double by 2021: According to management guidance, the objective is for the NBFS segment to contribute 50% to revenues by 2021. Through 9M 2018, the segment accounted for 25% of HRHO’s top line, with the management targeting 30% for 2018.

• High opex is due to NBFS expansion: The growth in HRHO’s opex has pressured operating margins, despite strong revenues growth from different vehicles, such as Tanmeyah, EFG Hermes Leasing, and valU. The surge in opex could be attributed to expansion in the NBFS on a wider geographic penetration. However, as a positive take from Q3 2018 results, we saw a 2% retreat in operating expenses sequentially, with operating margin improving by 100bps y/y and 300bps q/q.

• Improving margins and an interest rate cut to drive growth:Our positive take on HRHO for 2019 is based on:

o Earnings are expected to boast a strong-footed growth rate, in absence of the base effect seen in 2018.

o Improving operating margins as seen in Q3 2018, in light of

more cost control.

o Further growth in NBFS contribution to the top line, especially as the probability of an interest rate cut becomes stronger, thus boosting demand for services offered by the segment.

Valuation

• PT EGP23/share: HRHO trades at a P/BV of 0.8x. While trading below book value might seem sensible given that HRHO’s ROE is currently low (c.10.8% in 9M 2018, adjusted for certain assets not generating yields on an annual basis), one has to consider the business model transformation in play. Indeed, HRHO’s management is targeting an ROE in the range of 15% by 2021. Using a justified price to book value approach, and in view of the anticipated business model transformation, we estimate HRHO’s JPV at 1.3x, translating into a PT of EGP23/share.

Risks

• Continuous turmoil in emerging and frontier markets inflecting damage on HRHO’s IB business.

• Higher interest rates for a longer term, leading to flickering growth of the NBFS segment.

• Failure to control operating costs, delaying improvement in operating margins.

EFG Hermes Holding (HRHO) / Financials (Non-Banks)

An Eye on Transformation

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Not Rated PT: EGP23



52 Week Range (EGP) 13.25 - 21.76



FY ended 31 Dec. 2014 2015 2016 2017

EGPmn

Total Operating Revenues 2,611.8 2,595.0 4,306.1 4,358.3

YoY growth (0.6%) 65.9% 1.2%

Total Operating Costs (1,781.8) (1,834.3) (2,492.1) (2,981.7)

YoY growth 2.9% 35.9% 19.6%

Total Operating Income 830.0 760.7 1,814.0 1,376.6

YoY growth (8.3%) 138.4% (24.1%)

Net income 537.8 461.4 1,414.2 1,226.8

YoY growth (14.2%) 206.5% (13.3%)

P/E 12.4x 9.4x 8.9x 11.8xP/B 0.7x 0.4x 0.9x 1.1x

Dividend yield nm nm nm 11.7%

ROE 5.9% 4.6% 10.3% 9.0%

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Key Highlights

• A drug distributor in a sweet spot: Ibnsina Pharma (ISPH) was established in 2001 as a pharmaceutical distribution company to meet the needs of retailers (i.e. pharmacies) by securing products from medicine manufacturers (i.e. drug makers). The company has a complete control over its distribution value chain process. ISPH takes orders from retailers and executes them drawing on 350+ suppliers before being processed in ISPH’s 57 operational sites. The company is benefiting from the defensive nature of the pharmaceutical industry, the robust growth within the Egyptian pharma market and the industry’s high barriers to entry.

• Industry growth to continue, fueled by recently-introduced health insurance law: The pharmaceuticals industry in Egypt has been growing rapidly over the past couple of years. It grew at a five-year CAGR (2012-2017) of 18.4% to EGP51bn, with a double-digit growth every year from 2013 to 2017. We expect that total pharma sales in Egypt will extend this high growth trajectory to hit EGP112.5bn by 2022, backed by Egypt’s new Universal Health Insurance Law currently being implemented. Therefore, we see ISPH benefiting from the solid growth in the industry.

• Expanding market share further by 2022: We expect ISPH will be able to grow its market share from a current 20% to 25% by 2022, translating into EGP28.23bn worth of gross sales in 2022, implying a five-year CAGR of 24%.

• Margins to improve on a better product mix: The industry is highly regulated by the government, leaving an 8% gross profit margin for distributors, which was 7% in early 2016. ISPH’s gross profit margin in the last two years has fluctuated

between 7.7% and 8.4%. We forecast that ISPH’s gross profit margin will improve to stabilize at 8.7% by 2020 on favorable cash discounts from suppliers and more focus on unregulated margins products and services.

Valuation

• 12M PT EGP13.20/share: We valued ISPH using a five-year DCF valuation model, including two stages: a high-growth period through 2022 followed by a stable-growth terminal period. We reached a 12M PT of EGP13.20/share.

Risks

• More depreciation in EGP, which could lower the volume produced and distributed in the market.

• ISPH losing the legal anti-trust case and having to pay a fine larger than EGP1bn.

• The emergence of online retail pharmacy chains, disrupting ISPH’s and other incumbents’ market shares in light of less reliance on intermediaries.

OverweightModerate Risk

12M PT: EGP13.20(Set on 25 November 2018)

Ibnsina Pharma (ISPH) / Health Care (Initiation Report)

A Clean Bill of Health

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FY ended 31 Dec. 2014 2015 2016 2017

EGPmn

Revenues 4,197.3 5,326.0 7,202.5 9,586.3

YoY growth 26.9% 35.2% 33.1%

Gross profit 307.6 394.5 565.6 826.4

Margin % 7.3% 7.4% 7.9% 8.6%

EBITDA 116.0 150.3 229.1 407.4

Margin % 2.8% 2.8% 3.2% 4.2%

Net income 37.5 57.4 101.7 170.1

Margin % 0.9% 1.1% 1.4% 1.8%

P/E na 68.0x 38.3x 43.7xEV/EBITDA -- 27.0x 17.3x 18.0x

Dividend yield -- 1.0% 1.7% 0.0%

ROE 34.1% 31.8% 36.2% 46.7%

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https://www.dropbox.com/s/tbnois581g5wdnx/181125 ISPH Initiation En.pdf?dl=0


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Key Highlights

• Abundance of feedstock supply bodes well for operating margins: Misr Fertilizers Production Co. “MOPCO” (MFPC) could benefit from new discoveries of natural gas fields in Egypt as maintaining the current feedstock supply guarantees no interruption in operations. Also, the stability of feedstock prices could be ensured which would sustain MOPCO’s high operating margins.

• Favorable feedstock pricing is a plus: MOPCO boasts one of the high profitability ratios relative to its global peers (9M 2018 gross margin was 65% vs. a global peers’ average of 51.5%), thanks to its favorable pricing of feedstock (i.e. natural gas).

• A weak EGP and high oil price – two positive drivers: A weaker EGP and a stronger oil price should benefit MOPCO’s margins since its exports are priced in USD while some costs are in local currency.

• New local urea capacity launches would be positive for MOPCO: The entrance of new urea capacities in Egypt should bode well for MOPCO as its local quota can decrease, thus directing more of its sales to the high-price export market. This will enhance MOPCO’s profitability and, in turn, its value.

Valuation

• PT EGP123/share: MFPC’s stock currently trades at a 2018 P/E of 11.5x and 2018/2019 EV/EBITDA of 5.3x/4.3x. However, any increase in feedstock cost or local quota will negatively affect MFPC’s value. Consensus PT stands at EGP123/share.

Risks

• Decline in coal and natural gas prices will pressure selling urea prices and thus MOPCO’s operating margins.

• Natural gas supply shortage can disrupt production.

• Current high financing costs in Egypt makes it costly to invest in new expansionary projects.

• Further hikes in feedstock prices could negatively impact profitability margins.

• MOPCO is highly leveraged (debt-to-equity of 93% at end of September 2018), but any slowdown in global tightening would be beneficial.

• Any measures taken by the Egyptian government to ban exports to meet local demand would be a negative due to the large gap between local and export prices (export prices are 50%+ higher than local prices).

• Issues between Agrium Canada and the Egyptian government concerning the current quota and MOPCO’s supply.


Misr Fertilizers Production Co. (MFPC) / Materials

Operating on Wide Margins

EG

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[email protected]



52 Week Range (EGP) 70 - 118.5




FY ended 31 Dec. 2014 2015 2016 2017

EGPmn

Revenues 1,043.1 617.3 2,372.1 7,397.6

YoY growth (40.8%) 284.3% 211.9%

Gross profit 647.5 431.0 1,507.9 4,878.0

Margin % 62.1% 69.8% 63.6% 65.9%

EBITDA 551.7 319.0 1,428.3 4,705.9

Margin % 52.9% 51.7% 60.2% 63.6%

Net income 37.5 309.5 709.9 674.8

Margin % 3.6% 50.1% 29.9% 9.1%

P/E na 7.0x 10.1x 37.8x

EV/EBITDA -- 29.2x 13.8x 6.8x

Dividend yield -- -- -- --

ROE 0.7% 6.1% 5.7% 5.0%

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57




Key Highlights

• Market downturn and negative sentiment pressuring the stock: Orascom Investment Holding (OIH) seemed to have taken a harsh punishment in 2018, as the stock closed the year near a multi-month low. This slump was partially triggered by bad market conditions, yet it is noticeable how sentiment towards OIH is so jittery. OIH’s main concerns do not exactly revolve around value. After all, this is a company that trades below book value (P/B of 0.56x) and near its par value (EGP0.42/share). The primary concerns, however, revolve around the unpredictability of OIH’s outer environment, be it legal cases or a problematic situation like the one OIH has had for a long time with Koryolink in North Korea.

• Solid cash position: Total cash as per OIH’s balance sheet amounted to EGP3.36bn (EGP0.64/share) as of 30 September 2018. In net terms, OIH’s net cash hit EGP1.96bn (EGP0.37/share). Yet, these figures do not reflect the acquisition of Sarwa Capital’s (SRWA) stake.

• A new business model: OIH’s strategic shift from telecommunication towards the financial sector is yet to bear fruit as Beltone Financial’s (BTFH) performance has not been that outstanding. However, in view of the recent acquisition of a 30% stake in SRWA, OIH now has some skin in Egypt’s NBFS game. We think SRWA’s aggressive growth prospects will certainly improve OIH’s profitability going forward. Also, any recovery of SRWA’s stock price will help re-rate OIH’s.

• Koryolink is OIH’s wild card: A series of positive updates over the state of Koryolink, including a recent ban lift by the United Nations Council of Security, should help support sentiment. Meanwhile, any real positive actions regarding repatriation of dividends will serve as a main catalyst.

Valuation

• PT EGP0.70/share: OIH has no consensus PT, but based on our back-of-the-envelope adjusted book value of OIH, we set a PT of EGP0.70/share. This includes our valuation of OIH’s 30% stake in SRWA and excludes its book value investment in Koryolink.

Risks

• Disappointments emerging on the Koryolink front.

• OIH’s attempt to acquire Nile Sugar could drag its value in view of excess sugar supply and difficulties facing sugar producers in the last year.

Orascom Investment Holding (OIH) / Financials (Non-Banks)

With Cash Comes Adventure

EG

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[email protected]




52 Week Range (EGP) 0.512 - 0.92



FY ended 31 Dec. 2014 2015 2016 2017

EGPmn

Revenues 258.4 291.4 538.4 1,561.5

YoY growth 12.8% 84.7% 190.0%

Gross profit 92.2 91.7 228.7 686.1

Margin % 35.7% 31.5% 42.5% 43.9%

EBITDA (518.7) 769.6 (75.2) 384.7

Margin % (44.8%) 371.9% (23.5%) 24.6%

Net income (61.9) (3,857.8) 860.0 446.2

Margin % (24.0%) (1,323.8%) 159.7% 28.6%

P/E nm nm 5.1x 8.5xP/B nm 1.4x 0.9x 0.8x

Dividend yield 0.0% 0.0% 13.6% 13.9%

ROE -0.8% nm 17.2% 9.1%

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Volume (mn), Right OIH EGX30 Index


58




Key Highlights

• A multi-sector top-notch global contractor: Orascom Construction (ORAS) operates in different sectors spanning infrastructure, commercial, and industrial fields, which allows the company to dodge any slowdown in one sector. More importantly, ORAS’s exposure to different sectors provides it with more opportunities to exploit. A prime example is ORAS’s position to benefit from Egypt’s infrastructure improvement plan. ORAS has had previous experience in the power sector (renewable energy power projects), the water sector (water desalination and treatment plants), transportation (metro lines), and roads and bridges projects. This gives ORAS a competitive edge in securing such projects. Indeed, infrastructure projects represented 67% of its backlog by end of June 2018.

• Backlog dominated by Egypt, benefiting off the country’s infrastructure boom: ORAS has operations in Egypt, USA, Saudi Arabia, Algeria, and others. The percentage of Egypt’s contribution to ORAS’s backlog has been increasing over the last three years as it has been taking advantage of Egypt’s infrastructure boom. Egypt’s contribution to backlog has leapt from 49% in 2015 to 70% by end of June 2018.

• Still healthy backlog despite recent slippage: Although ORAS’s backlog has been slipping over the last three years, we believe that the company’s current backlog level is still very comfortable, standing at USD4.2bn as of 30 September 2018 (USD1.5bn was added in 9M 2018, the same level a year earlier). We believe the historical decline in backlog was due to the company becoming more selective in its choice of projects after incurring losses in legacy projects (namely IFCoand Natgasoline). Also, part of the decline was due to the

devaluation of the Egyptian pound where c.40% of the projects were priced in EGP.

Valuation

• PT EGP187/share: ORAS is considered cheap at only 7.1x TTM earnings compared to a peers’ median of 12.3x. Assuming ORAS trades at its peers’ median, we arrived at a fair value of EGP219/share. However, ORAS’s forward P/E is 4.6x, 32% below its historical average forward P/E of 6.7x. At its historical forward P/E, ORAS’s fair value would be 156/share. We set our PT as the average of both fair values, reaching a PT of EGP187/share.

Risks

1. Any slowdown in Egypt’s economic indicators, since it may slow down execution of infrastructure projects and ORAS’s new awards consequently.

2. Any global economic slowdown, echoing sluggish oil prices, in countries, especially oil exporters, where ORAS operates.

3. The majority of ORAS’s projects carry a concentration risk, i.e. infrastructure projects.

4. Any slowdown in receivables collection can harm ORAS’s cash management.

Orascom Construction (ORAS) / Industrials

A Large Contractor Under the Radar

EG

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ks Ahmed Abdelnaby | Vice President, Research

[email protected]

Not Rated PT: EGP187



52 Week Range (EGP) 108 - 172



FY ended 31 Dec. 2014 2015 2016 2017

USDmn

Revenues na 3,882.4 4,033.1 3,678.7

YoY growth na 3.9% (8.8%)

Gross profit na (158.1) 247.1 361.9

Margin % na (4.1%) 6.1% 9.8%

EBITDA na (314.6) 99.0 212.9

Margin % na (8.1%) 2.5% 5.8%

Net income na (347.8) 48.7 78.5

Margin % na (9.0%) 1.2% 2.1%

P/E na nm 13.4x 11.8xEV/EBITDA -- nm 4.6x 3.7x

Dividend yield -- na na na

ROE na -71.8% 19.0% 25.5%

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Volume (mn), Right ORAS EGX30 Index


59





52 Week Range (EGP) 3.69 - 7.898



FY ended 31 Dec. 2014 2015 2016 2017

EGPmn

Revenues 1,434.6 1,772.6 1,455.4 2,603.0

YoY growth 23.6% (17.9%) 78.8%

Gross profit 236.4 600.5 214.6 767.5

Margin % 16.5% 33.9% 14.7% 29.5%

EBITDA 290.2 691.1 296.6 807.3

Margin % 20.2% 39.0% 20.4% 31.0%

Net income 100.0 228.9 (377.5) 288.4

Margin % 7.0% 12.9% (25.9%) 11.1%

P/E 41.8x 6.3x nm 18.3xEV/EBITDA -- 6.3x 18.5x 11.0x

Dividend yield 0.0% 0.0% 0.0% 0.0%

ROE 4.0% 8.5% -24.0% 21.4%

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Volume (mn), Right ORHD EGX30 Index

Key Highlights

• Diversification from a pure hospitality play into real estate development: Orascom Development Egypt (ORHD), the largest subsidiary of Orascom Development Holding (ODH), can be counted among the real estate developers that are recently trying to diversify their business from high concentration on hospitality to real estate development. ORHD’s hospitality platform includes 24 hotels with a total of 4,918 rooms within four operating destinations: El-Gouna on the Red Sea Coast, Taba Heights in the Sinai Peninsula, and Makadi in Hurghada in addition to a hotel in El-Fayoum. In December 2018, the company signed an agreement with Thomas Cook through a hotel subsidiary to develop Thomas Cook’s newest hotel brands and introduce them to the Middle East. The total investment cost for the development and branding of these hotels is c.EGP200mn, and they are expected to operate by summer 2019 in El-Gouna.

• Marketing campaigns support hotel occupancy in El-Gouna:ORHD’s management selected a different approach to making El-Gouna a hub for entertainment through sponsoring El-Gouna Film Festival. The sponsorship of the festival helped the group’s hotels witness occupancy rates reach 100%.

• Launching a new housing project in West Cairo: As for the real estate development segment, ORHD has recently tapped into the first-home market with their full official launch of their new 1,000-feddan (4.2mn sqm) project in the Sixth of October City (O-West) scheduled for Q1 2019. This project is expected to achieve residential sales totaling approximately EGP77bn over a period of eight years. The company’s land bank currently stands at 45.7mn sqm.

• Deleveraging its balance sheet through selective divestiture and redeployment in new regions: ORHD has recently concluded the sale of two hotels and a land plot in the Makadi destination, and it is in the process of closing the sale of their third hotel. Proceeds from these sales, along with part of the excess cash flow from operations, will be channeled towards reducing the company’s loans and credit facilities, thus lowering leverage. ORHD is also planning to acquire a land plot in North Coast to capture a chunk of the demand pie offered by the Mediterranean Sea.

Valuation

• PT EGP11.9/share: CBRE has recently valued El-Gouna’s 17 hotels and the 22.9mn sqm undeveloped land at USD2.1bn or 42x its current book value. Also, ORHD’s consensus price target is EGP11.9/share.

Risks

• Despite the positive performance exhibited by the tourism industry in 2018, any security issues usually affect all industry players dramatically, causing a temporary slowdown in occupancy rates which narrows their margins.

• Any slowdown in the real estate market, especially in the high-end segment on which ORHD focuses.

Not Rated Consensus PT: EGP11.9

Orascom Development Egypt (ORHD) / Real Estate

Going Beyond the Red Sea

EG

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ks Sara Maher | Equity Analyst

[email protected]



60




Key Highlights

• An export-focused vertical-horizontal integration business model: Oriental Weavers Carpet (ORWE) is the largest carpet manufacturer in Egypt with an 85% market share. The company operates through a vertical-horizontal integration business model. ORWE exports more than half of its total production to major markets worldwide. Its largest export destinations are North America (c.38% of revenues) and Europe (c.20% of revenues). This heightened exporting activity has helped the company benefit from the EGP floatation.

• Low oil prices to support margin expansion: Polypropylene (PP) is the major component in ORWE’s cost structure, making up c.32% of its cost. PP’s value is directly linked to oil prices; hence, the recent drop in oil prices (down from USD85/bbl to USD60/bbl) bodes well for ORWE’s margins. Indeed, the company has suffered from expensive PP during 9M 2018, which narrowed its gross profit margin by more than 3%. Going forward, we can expect margins to recover as oil prices have cooled down.

• Local sales to offset exports’ slight weakness: ORWE’s management expects 2-3% lower export sales for the full year of 2018, given strong competition from Turkish and Chinese carpet players in the short term. However, the company has increased its price range last September in local markets to partially offset lower export sales.

• A high yielding stock: ORWE’s payout ratio in the last three years averaged a remarkable c.95%. This implies a dividend yield of c.13% based on 2018 earnings, a very rich yield.

Valuation

• PT EGP14.2/share: ORWE currently trades below its book value (P/BV of 0.6x). With a PT of EGP14.2/share based on Bloomberg consensus.

Risks

• Higher-than-expected oil prices, which in turn will push PP prices up.

• A more resilient competition from international carpet players.

• A decrease in the payout ratio from average levels.

• Weak purchasing power in the local market.


Oriental Weavers Carpet (ORWE) / Consumer Discretionary

Benefiting Off Low Oil Prices

EG

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[email protected]



52 Week Range (EGP) 8.11 - 17.6



FY ended 31 Dec. 2014 2015 2016 2017

EGPmn

Revenues 5,664.3 5,875.1 6,779.2 10,173.9

YoY growth 3.7% 15.4% 50.1%

Gross profit 636.6 666.4 1,011.0 1,286.8

Margin % 11.2% 11.3% 14.9% 12.6%

EBITDA 721.3 706.8 1,261.3 1,440.0

Margin % 12.7% 12.0% 18.6% 14.2%

Net income 367.1 356.3 484.2 683.3

Margin % 6.5% 6.1% 7.1% 6.7%


Dividend yield 4.4% 8.0% 10.6% 9.2%

ROE 9.4% 8.4% 5.7% 8.2%

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Volume (mn), Right ORWE EGX30 Index


61




Key Highlights

• A huge land bank, three-quarters of which is undeveloped: Palm Hills Developments (PHDC) has a diversified land bank of 40.8mn sqm, including 31.5mn sqm (77%) that are undeveloped. PHDC’s portfolio consists of 29 first- and second-home projects spread over prime locations in Western and Eastern Cairo in addition to the North Coast and the Red Sea Coast. Also, PHDC is currently working on a plan to launch a co-development project in Alexandria, scheduled for Q1 2019.

• Recently-launched Badya fueling pre-sales growth: In May 2018, PHDC launched the first phase (1A) of its largest integrated project Badya, spanning over 3,000 feddans (12.6mn sqm) in Western Cairo, which includes 2,688 units. By 30 September 2018, it had achieved pre-sales of EGP4.5bn (c.45% of 9M 2018 total sales). The project will be developed in the 2018-2038 period with expected total deliveries of 32,319 units.

• Commercial sales to contribute to top-line growth: Commercial sales surged 183% y/y to EGP1.4bn in 9M 2018. This impressive growth was driven by the sale of PK2 Mall in East Cairo, retail outlets in Hacienda Bay’s Lake Yard, commercial units in VGK and The Lane Malls, as well as clinics in Hale Town (previously known as Palm Hills Medical Clinics).

• An improving leverage profile: Speaking of PHDC’s high-leverage balance sheet which was a persistent theme for a long time, the management has so far called for four capital increases since 2010, totaling some EGP4.49bn. This, in our view, was in an attempt to recalibrate PHDC’s debt-loaded balance sheet and to partially finance new land acquisitions. Also, great efforts are being made by the management to

raise cash from securitization by discounting a considerable part of receivables to secure a sustainable cash flow source for operations and existing debt settlement, as part of its deleveraging plans. PHDC is currently in the process of further securitization worth c.EGP1bn. Also, the expected easing cycle of CBE’s monetary policy in H1 2019 might boost PHDC’s profitability in view of its relatively high financial leverage.

Valuation

• PT EGP4.8/share: We believe PHDC’s stock value has already priced in most of the company’s risks, especially leverage. The latest EGP1.5bn capital increase by the company should also improve its leverage ratios and help finance its projects. Thus, at current levels, we see the risk-reward ratio of PHDC as favorable in the long run scenario. At 5.4x, PHDC is trading 45% below its forward P/E 5-year average of 9.8x. The stock’s consensus target price is EGP4.8/share.

Risks

• Any slowdown in the deleveraging plan.

• Any delay in monetary policy easing.

• Any slowdown in real estate market, especially in the high-end segment.


Palm Hills Developments (PHDC) / Real Estate

All Risks Priced In; Worth Holding for the Long Term

EG

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[email protected]



52 Week Range (EGP) 1.937 - 5.742



FY ended 31 Dec. 2014 2015 2016 2017

EGPmn

Revenues 2,106.1 3,641.7 5,630.6 6,603.5

YoY growth 72.9% 54.6% 17.3%

Gross profit 705.4 1,150.0 1,679.2 2,103.3

Margin % 33.5% 31.6% 29.8% 31.9%

EBITDA 397.4 654.1 1,030.0 1,363.4

Margin % 18.9% 18.0% 18.3% 20.6%

Net income 353.3 915.6 639.8 805.6

Margin % 16.8% 25.1% 11.4% 12.2%


Dividend yield 0.0% 6.0% 0.0% 0.0%

ROE 8.6% 14.2% 9.6% 12.5%

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62




Key Highlights

• Macro and micro factors to drive value: We think Sidi Kerir Petrochemicals Co. (SKPC) enjoys some catalysts on the macro and the micro levels. A weaker EGP and a stronger oil price should benefit SKPC’s margins since the company’s entire output is priced in USD while some of its costs are in local currency.

• Abundant natural gas to support its PP project: SKPC is also looking to leverage the new discoveries of natural gas fields in Egypt. SKPC wants to establish a new polypropylene (PP) project with a capacity of 450,000 tons per annum at an estimated investment cost of USD1.2bn. According to the available information and our industry insights, we believe this PP project will likely be value accretive and thus have a favorable impact on SKPC’s value.

• Unlocking value of Ethydco and better corporate governance with potential SPO: Furthermore, we think a successful IPO of SKPC’s 20%-owned subsidiary Egyptian Ethylene & Derivatives Co. (Ethydco) – one of the 23 companies slated in the Egyptian government’s public offerings program (POP) – will further unlock value. Also, SKPC itself is amongst the 23-company POP. Floating an additional stake should help enhance SKPC’s corporate governance, in our opinion.

Valuation

• PT EGP27.6/share: SKPC’s stock currently trades at 2018 P/E of 7.8.x and EV/EBITDA of 5.5x. However, any decrease in feedstock cost (albeit improbable) will re-rate SKPC’s stock. Consensus PT stands at EGP27.6/share, implying a 2018 P/E of 11.8x.

Risks

• Further hikes in feedstock prices would hurt profitability.

• Feedstock supply interruptions from GASCO would harm utilization rates and in turn SKPC’s operating profits.

• Any expansion in global polyethylene supply capacities would pressure selling prices and operating margins.

• Current high financing costs in Egypt makes it costly to invest in new expansionary projects.

• Any unplanned delays in maintenance schedules can harm earnings.

• Any new cracker processing capacities added to the market could reduce SKPC and Ethydco’s market share (e.g. the entrance of Carbon Holding).


Sidi Kerir Petrochemicals Co. (SKPC) / Materials

Leveraging New Gas Discoveries

EG

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[email protected]



52 Week Range (EGP) 16.43 - 32.8




FY ended 31 Dec. 2014 2015 2016 2017

EGPmn

Revenues 2,980.0 2,787.9 3,421.9 4,995.2

YoY growth (6.4%) 22.7% 46.0%

Gross profit 1,406.9 1,087.0 1,057.5 1,468.4

Margin % 47.2% 39.0% 30.9% 29.4%

EBITDA 1,404.6 1,080.7 1,039.6 1,390.9

Margin % 47.1% 38.8% 30.4% 27.8%

Net income 996.6 842.4 1,427.5 1,131.7

Margin % 33.4% 30.2% 41.7% 22.7%

P/E 5.6x 7.1x 6.3x 11.8x

EV/EBITDA 2.8x 4.6x 7.1x 8.7x

Dividend yield 13.3% 15.8% 10.7% 7.0%

ROE 37.1% 32.9% 44.6% 34.5%

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Key Highlights

• Egypt’s leading and largest property developer: Talaat Moustafa Group Holding (TMGH), Egypt's biggest publicly-traded property developer, owns a land bank of 45.4mn sqm and holds a strong track record of over 30 years in housing and real estate development. It is considered one of the first few developers that introduced the concept of gated communities to the Egyptian housing market. Amongst the group’s development projects are Al-Rabwa, West of Cairo, stretching over 505 feddans, Al-Rehab City, East of Cairo, spread over c.2,400 feddans, and Madinaty project spanning over 8,000 feddans of land, making it the biggest all-inclusive enclosed city in the Middle East. Since inception, TMGH delivered c.90,000 units, which is considered the highest cumulative deliveries by a single MENA developer.

• New project to fuel pre-sales growth further: Celia, TMGH’s new development that was recently launched in the New Administrative Capital, is a project spread over 500 feddans. TMGH achieved pre-sales of EGP12bn since its launch in June 2018 (56% of TMGH’s total pre-sales for 2018). Indeed, TMGH has achieved record pre-sales of EGP21.3bn in 2018 (+62% y/y), exceeding its target by 52%.

• A play on revering tourism throughout Egypt: TMGH has also developed four large scale luxury hotels: Nile Plaza in Cairo, San Stefano in Alexandria, Four Seasons Sharm El-Sheikh – all managed by the internationally reputable Four Seasons chain, in addition to Kempinski Nile Hotel in Cairo. Hospitality and other recurring income segments (accounting for c.30% of revenues and 42% of EBITDA) are in a remarkably beneficial position after the EGP floatation, as Egypt became a cheap tourism destination, translating into higher demands and occupancy rates.

• A multi-segment strategic plan: TMGH is planning to continue targeting (1) robust growth in sales, (2) building up on their recurring income portfolio (with 40-45% of gross profit by 2020), (3) monetizing non-core assets by divesting schools in Al-Rehab and Madinaty to GEMS Education (as an exclusive operator) and EFG Hermes Holding (HRHO), and (4) acquisition of new land plots.

• A virtually unlevered balance sheet: TMGH’s balance sheet is relatively unlevered, with debt-to-equity ratio of around 15%, with most of the company’s debt attributable to the hospitality and other recurring income segments and backed by stable, growing cash flow streams.

Valuation

• PT EGP17/share: At 13.1x, TMGH is trading 12% below its forward P/E 5-year average of 14.8x. The stock’s consensus target price is EGP17/share.

Risks

• Any slowdown in real estate market, especially in the high-end segment.

• Any increase in operation costs due to inflationary environment.

• Intensifying competition from small real estate developers.


Talaat Moustafa Group (TMGH) / Real Estate

Maintaining the Strongest Footprint

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FY ended 31 Dec. 2014 2015 2016 2017

EGPmn

Revenues 5,270.8 6,180.4 6,550.1 8,534.3

YoY growth 17.3% 6.0% 30.3%

Gross profit 1,594.8 2,128.7 2,390.3 3,118.8

Margin % 30.3% 34.4% 36.5% 36.5%

EBITDA 1,205.7 1,815.9 1,876.6 2,450.2

Margin % 22.9% 29.4% 28.6% 28.7%

Net income 681.8 762.3 826.5 1,326.8

Margin % 12.9% 12.3% 12.6% 15.5%


Dividend yield 0.8% 1.2% 0.8% 0.8%

ROE 2.5% 2.8% 2.9% 4.8%

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Volume (mn), Right TMGH EGX30 Index


64SHUAA Research

Contact Details

+(202) 16331143, Bank Zone, 5th Settlement,

New Cairo, First Abu Dhabi Bank Building (6th Floor)Cairo, Egypt

Disclaimer

This document has been issued by SHUAA Securities Egypt for informational purposes only. This document is not and should not be construed as an offer or the solicitation of an offer to purchase or subscribe or sell any investment or subscribe to anyinvestment management or advisory service. SHUAA Securities Egypt has based this document on information obtained from sources it believes to be reliable. It makes no guarantee, representation or warranty as to its accuracy or completeness and acceptsno responsibility or liability in respect thereof or for any reliance placed by any person on such information. Accordingly, no representation or warranty, express or implied, is or will be made and no responsibility or liability is or will be accepted by SHUAASecurities Egypt or by any of its respective officers, employees, agents or affiliates in relation to the accuracy, completeness or fairness of the information or opinions contained herein or any other written or oral information made available to any interestedparty or its advisers and any such liability is expressly disclaimed. All opinions expressed herein are subject to change without notice. This document may not be reproduced or circulated without the prior written consent of SHUAA Securities Egypt. SHUAASecurities Egypt is regulated by the Financial Regulatory Authority under license number 91.

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