Forex Spot Rates as of July 27^th, 2011

USD/AED

3.6731

USD/BHD

0.3770

USD/CHF

0.8017

USD/EGP

5.9569

USD/EUR

1.4455

USD/GBP

1.6377

USD/ILS

3.4060

USD/JOD

0.7088

USD/JPY

77.8150

USD/KWD

0.2730

USD/MAD

7.8453

USD/OMR

0.3850

USD/QAR

3.6410

USD/SAR

3.7501

USD/TND

1.3669

Company

Shareholder

Position

Action

No. of Shares

Egyptian Financial & Industrial

Misr Financial Investment

Related Parties

Bought

13,706

Gulf Canadian Real Estate Investment Co.

Soliman Ahmed Said

Board Member

Sold

35,500

Ismailia Development & Real Estate Co.

Ismailia Misr Arabian Poultry

Board Member

Sold

924,251

Orascom Hotels and Development

Orascom Development Holding (AG)

Board Member

Bought

850

Report

Main Highlights

Mobinil

2Q2011 Results

Net loss in 2Q2011, on new tax regime, Recommendation: Under Review

(Sally Gerges, July 27^th)

·          Recommendation: Under Review, Target Price: Under Review

·          We were disappointed by Mobinil’s EBITDA and bottom line performance in 2Q2011, which missed Beltone’s and consensus estimates, significantly, although revenues surpassed our expectations. EBITDA came in 4.0% lower than our forecast, due to higher than expected SG&A expenses (10% above our expectations), leading to a weaker than foreseen recovery in the EBITDA margin. Net income (before the application of the new tax regime) came in 53% lower than our estimate, on the back of higher than expected interest, depreciation and amortisation charges. There were no FX losses in 2Q2011.

·          Even though net subscriber additions were weaker than expected, the better than estimated recovery in ARPU led to revenues exceeding our forecast for 2Q2011 by 4.3%. Mobinil’s q-o-q revenue performance in 2Q2011 was stronger than Vodafone Egypt’s (4.0% q-o-q top-line growth for Vodafone versus 7.7% for Mobinil), despite Vodafone Egypt being stronger on net subscriber additions in 2Q2011, implying low-end subscriber acquisition on the latter’s part.

·          The application of the new tax regime, increasing the corporate tax rate from 20% to 25% (effective beginning of July 2011 and applicable to FY2011’s earnings), was not the major reason for the notable pressure on Mobinil’s net income in 2Q2011, since its impact was only minimal (approximately EGP15 million in additional taxes). The application of the 25% tax rate, instead of 20%, on the original tax base for Mobinil’s deferred taxes’ account on the balance sheet, was the main reason behind the pressure on the company’s profits (approximately EGP173 million in additional taxes in 2Q2011). This amount is non-recurring, as its impact was booked as a one-off item in 2Q2011 (accounting for 92% of the negative tax effect on net profit). Hence, the influence from the increased tax rate on net profit, going forward, will be a result of its implementation on earnings only.

·          We foresee the impact of boycotting campaigns against Mobinil to be evident in 3Q2011, as they broke out during July 2011, and, hence, are irrelevant in terms of their effect on 2Q2011 results.

• We place Mobinil ‘Under Review,’ until we update our forecasts: We expect Mobinil to fall short of our 2011 year-end estimates for EBITDA and net income, given the higher than foreseen operational expenditure and taxes in 1H2011. Accordingly, we opt to place Mobinil ‘Under Review’ currently, until we revise our forecasts for the operator.

Emirates NBD

2Q2011 Results

2Q2011 results: Improving indicators, yet loan growth and asset quality still raise our concern

(Nancy Fahmy, July 27^th)

·          Recommendation: Reduce, Target price: AED4.10, Upside: 1%

·          Emirates NBD’s 2Q2011 results come with a number of positive aspects demonstrated in the improving profitability q-o-q and y-o-y;  quarterly rise in margins; recovering investment income; improving asset quality and provisions coverage; high efficiency, strong capital adequacy and adequate liquidity. All these positive factors compensated for the q-o-q and y-o-y drop in fees and commissions and stagnant loan growth. Overall, we believe that ENBD is still struggling to achieve loan growth, avoid further deterioration in asset quality and reach an adequate provisions coverage. The sale of Network International (NI) triggered considerable interest in ENBD’s shares in 1Q2011. However, we do not see enough triggers, going forward, for the stock price.

·          Outlook: We believe that ENBD will deliver stable margins over the next three years, followed by a gradual pick-up. We estimate that the bank will witness 13% CAGR in non-interest income. We project that the cost-to-income ratio for the bank will remain in the 35 - 38% range over the next five years. We forecast that the NPL ratio would peak to 15% by early 2012, after which it would stabilise and then level off, gradually, as the loan portfolio grows.

·          Challenges & risks: Growth and asset quality are the two key challenges that currently face ENBD, especially given the bank’s concentration in Dubai.

Blom Bank

2Q2011 results

Positive on strong balance sheet growth

(David Mikhail, July 27^th)

·          Recommendation: Buy, Target price: USD11.60, Upside: 34%

·          Blom Bank had a solid 2Q2011, despite weak growth in net interest income. The main positive was the strong growth in Blom’s loan book, which is managing to find growth where its competitor, Bank Audi, is struggling. Margins were sustained and efficiency was in its historical range. Non-interest income’s contribution to operating income increased versus 2Q2010, which is one area Blom trails Audi in. All in all, the results are more or less in line with expectations, and we retain our positive stance on the lender.

·          We forecast that the bank’s NIMs will fluctuate around 2.5%, and we expect net interest income will grow by a CAGR of 10% over five years, a product of an 11% CAGR in both assets and deposits over the same time period.

·          Similar to Bank Audi, the market is applying a steep discount to the shares on the domestic geopolitical risk, as well as the unexciting prospects for domestic credit growth. Also, like Audi, Blom is exposed to non-negligible Syrian and Egyptian systemic risks.

Industries Qatar

Initiation of Coverage

Beneath complexity lies hidden value, Recommendation: Add

(Allen Sandeep & Omar Taha, July 26^th)

·          Recommendation: Add, Upside of 23.7% from current market price, Target price: QAR 173.3 per share

·          Each of IQ’s segments portrays a solid fundamental story; with room for more value: Helped mainly by the inherently strong supply-chain (with significantly low-cash costs), and with the advantage of being exposed to high-growth products/markets, IQ’s growth story seems to be on track, offering a good investment opportunity.

·          Gas continuity to ensure sustainability of Qapco’s competitive edge in the long run: What makes Qapco stand out amongst its peers, Saudi Arabian peers in specific, is the guaranteed continuity of ethane, which is sourced at a low cost of USD1.7/mmBtu (2010). Qatar’s Natgas reserves, estimated at 25.7tcm, should last for another 600 years. The advantage of Qapco being able to continue sourcing cheap ethane and a tighter market keeping polyethylene (PE) prices high through 2015 should ensure above-average margin sustainability for the segment.

·          Qafco’s short-term fundamentals are solid, but expect price consolidation beyond 2012: We are bullish on the fertiliser segment’s extraordinary high margins being sustained through to 2012, on account of the continued surge in Urea / Ammonia prices, putting the group in a favourable position, owing to its low-cost structure. However, we foresee global oversupply of urea and ammonia, offsetting demand, on account of the massive capacities, mainly from China, which will come on stream by the end of 2015.

·          IQ to also benefit, significantly, from QS’s local steel exposure in the medium term: QS would unearth strong returns during 2011 - 2015, benefiting mainly from its exposure to Qatar and Saudi Arabia. With both economies put together, expected to spend an approximate USD460 billion on infrastructure over the next five to six years, and with QS’s new capacity (QS-II) to further tap these markets, we expect maximum cash flow accretion for IQ through steel during 2011 - 2015.

Fawaz AbdulAziz Al Hokair (Al Hokair)

1Q2011/2012 Results Note

Al Hokair registers remarkable y-o-y growth in 1Q2011-2012 net profit, raising our fair value by 12 pct, Maintain Add

(Ahmed Khalil, July 21^st)

·          Recommendation: Add, Current Price: SAR49.00, Target Price: SAR55.00, Upside:12.2%

·          We like Al Hokair’s first quarter results. Al Hokair’s performance in 1Q2011/2012 is remarkable, given that the first quarter (ending June 30th) has, historically, been the company’s weakest quarter. Al Hokair’s net profit  of SAR81.7 million, during the quarter, beat our estimate of SAR59.0 million by 38.5% and the consensus estimate of SAR59.9 million by 36.2%. Sales at SAR724.7 million, also beat our estimate of SAR590 million by 22.8% and the consensus estimate of SAR614.5 million by 17.9%.

·          Al Hokair is a different company than it was two years ago. The company has been very active in expanding the business beyond its comfort zone in Saudi Arabia, by venturing into high growth virgin markets including Egypt and Kazakhstan. These markets have enormous pent-up demand, inherently low levels of retail space per capita and, thus, significantly higher sales per square metre (Al Hokair’s sales per sqm in Kazakhstan is at least 2.0x that in Saudi Arabia). And this is clearly paying off for Al Hokair.

·          We anticipate a historic second quarter in terms of sales and net profit for Al Hokair (which ends September 30th, 2011), since the second quarter is usually the company’s strongest (on average, 2nd quarter sales and net profits represent 35% and 55% of Al Hokair’s full year, respectively).

Bank Audi

2Q2011 Results Note

2Q2011 profitability strong despite geopolitically driven provisioning, Maintain Buy

(David Mikhail, July 21^st)

·          Recommendation: Buy, Target price: USD9.76, Upside: 34%

·          Bank Audi’s 2Q2011 performance was in line with expectations. Profitability was lifted by solid growth in interest income and investment income, despite the higher-than-expected provisioning. The bank is taking preemptive steps to mitigate any possible loan quality deterioration in its Egyptian or Syrian subsidiaries. We think this is prudent practice, and will likely continue in varying degrees through FY2011.

·          We forecast that the bank’s NIMs will fluctuate within the 2.2 - 2.3% and net interest income will grow by a CAGR of 11% over five years, a product of a 8% CAGRs in both assets and deposits over the same period. 

·          The market is applying a steep discount to the shares on the domestic geopolitical risk, as well as the unexciting prospects for domestic credit growth. Audi is also exposed to Syrian and Egyptian systemic risks as well (the countries that will lead balance sheet growth going forward). We fully recognise these concerns as legitimate and have them in our target price.

Qatar Islamic Bank (QIB)

2Q2011 Results Note

Impressive save for asset growth, Maintain Buy

(David Mikhail, July 20^th)

·          Recommendation: Buy, Target price: QAR99.80, Upside: 27%

·          QIB had a solid 2Q2011 set of results. Profitability was strong on high financing income and thicker margins, though some provision reversals helped. We remain concerned about asset growth, however, as the financing book was stagnant over the quarter after falling sharply in 1Q2011, which is doubly perplexing after management said during the first quarter that FY2011 should witness strong growth in the financing book. The wind down of Islamic operations in conventional banks has seemingly not helped QIB yet, though we think this will start to be witnessed in FY2012.

·          We believe that QIB will deliver slightly compressed margins over the next two years because of higher competition and regulatory caps on retail lending rates. We expect that QIB will grow its net financing income by a five-year CAGR of 14% through a 14% CAGR on the balance sheet over the same period. As QIB expands its branch network, we expect to see upticks in the cost-to-income ratio, which will settle in the 30% range.

·          Growth may be undermined if the shift in demand coming from QCB’s Islamic banking directive is weak, that is, if large corporates choose to start borrowing conventionally to avoid transferring accounts to another bank. Two quarters of negative or stagnant growth do not serve to reduce these concerns.

National Bank of Abu Dhabi (NBAD)

2Q2011 Results Note

A strong set of results, still our top pick in the UAE, Maintain Buy

(Nancy Fahmy, July 20^th)

·          Recommendation: Buy, Target price: AED14.10, Upside: 28%

·          NBAD posted AED1,026 million in net income for 2Q2011, up 11% q-o-q, on stable margins, higher investment income and lower booked provisions. Meanwhile, 2Q2011 net income remained flat y-o-y despite the growth in net interest and non-interest income, due to the higher booked provisions and expenses. The bottom line surpassed our estimates (AED960 million) and consensus estimates (AED958 million). The healthy loan growth, stable margins and strong investment income growth are amongst the positive aspects worth noting in the results. On the relatively negative side, however, non-performing loans rose 11% q-o-q; yet, provisions coverage remained adequate.

·          We believe that NBAD would deliver stable margins over the next five years, and achieve a five-year CAGR of 7.7% in net interest income through a reasonable 8% CAGR in the balance sheet over the same period. We estimate that the bank would witness an 11% CAGR in non-interest income, which is achievable, given the lower base witnessed in 2010. We project that the bank’s cost-to-income ratio will rise, slightly, over the next five years, but should remain at a very efficient level, below 32%. We forecast that the NPL ratio would peak to 3.3% by early 2012, after which it would stabilise and then level off, gradually, as the loan portfolio grows.

·          Similar to peers, asset quality and growth pose a risk for NBAD, albeit at a much smaller scale.

National Company for Maize Products (NCMP)

Initiation of Coverage

NCMP: An a-maize-ing consumer story, Initiate with a Buy

(Hamed Hesham & Ahmed Khalil, July 20^th)

·          NCMP is the sole producer of fructose in Egypt and the MENA region, which is used as a sweetener and a cheaper substitute for sugar by carbonated soft drinks (CSD) producers.

·          NCMP operates in a capital intensive industry, with high barriers to entry, as certain products require a shelf test of 18 - 24 months before being used.

·          NCMP has the opportunity to venture into numerous other corn by-products at a minimal incremental capex (NCMP will add Sorbitol to its product mix starting August 2011 at a cost of EGP33.0 million).

·          NCMP is trading at an EV/tonne of c.EGP1,500, versus its replacement cost of c.EGP3,000 per tonne, implying that the stock is trading at a 50% discount to its replacement value.

·          NCMP is cheap versus peers, as it is trading at a P/E FY11e and FY12f of 6.5x and 5.2x, respectively (versus an average of 10.5x and 10.2x for its peers, respectively), and an EV/EBITDA FY11e and FY12f of 4.3x and 3.5, respectively (versus an average of 6.3x and 6.1x for its peers, respectively).

·          Risks and concerns: Vulnerability to corn prices, as corn constitutes over 75% of total COGS; Bargaining power of buyers: Fructose 55 caters only to CSD producers, and Pepsi and Coca Cola are NCMP’s two largest customers, taking in a combined 70% of fructose 55 sales; NCMP cannot raise its fructose 55 selling price above that of sugar, as it will be more economical for its clients to use sugar instead; NCMP does not hedge against its corn and FX exposures (corn is 75% of COGS, all of which is  sourced from the US).

·          We initiate coverage on NCMP with a target price of EGP26.05 per share and a ‘BUY’ recommendation

Mobile Telecom Company (Zain Saudi)

2Q2011 Results Note

Net loss narrowing in 2Q2011 on improvement in gross margins, maintain Sell

(Sally Gerges, July 20^th)

·          Recommendation: Sell, Target Price: SAR7.35, Upside: 14.8%

·          Revenues in line with our estimate, net loss better than expected

·          We are not impressed by Zain Saudi’s 2Q2011 top-line performance, which came in line with our expectations, but we like the faster than expected narrowing in its net loss, on the back of notable q-o-q improvement in gross margins in 2Q2011. The company’s reported revenues in 2Q2011 came in 1.4% below our estimate of SAR1,728 million, while its net loss was 15.0% lower than our forecast loss of SAR537 million for 2Q2011.

·          The fall in the net loss versus 1Q2011 is attributed to the decrease in the operator’s cost of services, from 52% of revenues in 1Q2011 to 46% in 2Q2011, leading to a notable 600 bps recovery in gross margin (54% in 2Q2011 compared to 48% in 1Q2011). We suspect that this improvement in margins was due to the increase in on-net traffic (resulting from the expansion of Zain Saudi’s network and the growth in its subscriber base). Network expansion should have reduced dependence on national roaming on competing operators’ networks causing, ultimately, a drop in national roaming costs.

Doha Bank

2Q2011 Results Note

Doha Bank 2Q2011 results beat estimates, some weaknesses show, albeit share price is attractive, Assign Buy

(Nancy Fahmy, July 20^th)

·          Recommendation: Buy, Target price: QAR64.80, Upside: 27%

·          Doha Bank’s 2Q2011 net income grew 13% y-o-y, mainly on lower booked provisions, accompanied by higher net interest and investment income. On a quarterly basis, net income dropped on margin squeeze, lower investment income and falling efficiency, despite the drop in booked provisions. The results beat our estimates and consensus estimates, because we have been expecting a more adverse effect on the bank’s profitability, with the implementation of the circular governing personal lending that was imposed on Qatari banks. 

·          For 2011, we forecast loan growth of 5% and a shrinkage of 5% in customer deposits. Our five-year CAGR stands at 7% for loans and deposits. We foresee slower net interest and non-interest income growth, on the back of the new personal lending regulations in 2011 compared to 2010, followed by a gradual pick-up. We foresee some deterioration in asset quality in 2011, with the NPL ratio reaching a peak of 4.5% in 2011 and coverage reaching 92%.

·          Balance sheet and profitability growth are the two key challenges facing the bank currently, especially with the new changes in the regulatory environment. However, we believe that these challenges have been already priced in, and the bank offers a decent upside compared to peers. 

Etihad Etisalat (Mobily)

2Q2011 Results Note

Mobily: Impressive top-line and profitability in 2Q2011, beating estimates, maintain Buy

(Sally Gerges, July 20^th)

·          Recommendation: Buy, Target Price: SAR76.25, Upside: 40.0%

·          Mobily continues to impress us and beat our estimates, delivering a strong set of results in 2Q2011, with a notable improvement in profitability, on the back of stronger top-line and EBITDA performance versus 1Q2011 (which was impacted negatively by seasonality).

·          Mobily kept on capitalising on the business segments which have a high-growth potential in the Saudi Arabian youth-dominated market, namely data (mobile broadband) and postpaid, which led to the operator’s robust performance in 2Q2011.

·          The boost in data transmission, MoUs and smartphone sales was the main driver behind the strong revenue performance in 2Q2011. Smartphone sales are most likely fuelling growth in the postpaid segment.

·          Mobily has not declared subscriber numbers, leading to a lack of visibility on the operator’s capacity to face competition from STC and Zain Saudi on acquisition of net subscriber additions in 2Q2011. Nonetheless, we expect Mobily to carry on its aggressive competition on revenue share, which we believe is more important at this point, as we view no threat to its number two position from Zain Saudi, after having gained strong footing in the market.

·          We expect Mobily to continue at a similarly strong pace in the next two quarters, foreseeing the strongest operational performance for the year to occur in 4Q2011, in which the Hajj season takes place.

Nominal GDP release,
Qatar / 1Q2011

Economic Note

Qatar Economics: Hydrocarbon sector fuels 1Q2011 nominal GDP growth

(Mohamed Rahmy, July 18^th)

·          Nominal GDP reaches QAR141.84 billion in 1Q2011: Nominal GDP in Qatar reached QAR141.84 billion in 1Q2011, rising 28.4% y-o-y and 12.2% q-o-q, according to new data released by the Qatar Statistics Authority (QSA). As newly revised quarterly GDP data goes back to 1Q2010 only, comparison with 4Q2010 growth rate is not possible, although on a quarterly basis, 1Q2011 nominal GDP registered its highest level of growth when compared to 7% q-o-q and 9% q-o-q, witnessed in 4Q2010 and 3Q2010, respectively.

·          Growth emanated largely from a notable acceleration in nominal hydrocarbon GDP: Hydrocarbon GDP reached QAR81.1 billion, accelerating 19.8% q-o-q in 1Q2011 compared to 8.5% q-o-q in 4Q2010, respectively. QSA did not disclose the breakdown of hydrocarbon GDP. However, buoyed by higher hydrocarbon prices during the quarter, as well as higher output of LNG and condensates, it is no surprise that the sector, which continues to dominate Qatar’s nominal GDP (more than 50% of total GDP), contributed the most to 1Q2011 nominal growth (10.6% of the aggregate 12.2% quarterly growth).

·          Non-hydrocarbon sector growth decelerates: Non-hydrocarbon nominal GDP reached QAR60.7 billion in 1Q2011, slowing down to 3.4% q-o-q compared to 5.3% q-o-q in 4Q2010. The transport (largely linked with the LNG industry) and communications sector stood out as the biggest contributor to nominal non-hydrocarbon GDP in 1Q2011, rising 15% q-o-q to QAR5.3 billion after contracting 6.9% in 4Q2010.

·          Qatar on track to reach 2011 nominal GDP target: The release of the 1Q2011 GDP indicates that Qatar is well on its way to achieve our 2011 nominal GDP forecast target of QAR555.6 billion, from QAR463.5 billion in 2010.

Ezzsteel - Valuation Update, EZDK - Initiation of Coverage

THE Steel Company of Egypt: Buy ezzsteel, Add EZDK

(Omar Taha & Allen Sandeep, July 18^th)

·          ezzsteel – Valuation Update: Recommendation: Buy, Target Price: EGP13.12, Upside: 28.6%

·          IRAX – Initiation of Coverage: Recommendation: Add, Target Price: EGP644.28, Upside: 18.8%

·          Egypt’s organic housing demand to support the local rebar market, ezzsteel to benefit

·          In the wake of lackluster performance on the macro front, we expect the Egyptian steel industry to witness a contraction of 15 - 20%, y-o-y, during FY2011.

·          Import buffer to protect local producers, namely ezz branded products: Imports usually account for c.15 - 20% of the market, or c.2 - 2.5 mtpa, which has acted, historically, as a buffer for local producers, against sporadic contractions in demand.

·          Consensus not expecting earnings growth this year, while we disagree: We are more bullish than consensus on the group’s expected performance this year, expecting earnings to grow by 37% and 38% during FY2011 for ezzsteel and EZDK, respectively, while consensus is estimating a decline of 19% and 39%, respectively.

·          Market pricing below replacement cost, recommend to ‘Buy’ ezzsteel and ‘Add’ EZDK: Given the limited downside on ezzsteel’s operations after the revolution, we believe the market is  over-discounting the group’s assets. On a replacement cost basis, we see ESRS trading at a 35% discount and EZDK at a 37% discount, to their values of EGP15.22 and EGP952.65, respectively.

Banque Saudi Fransi

2Q2011 Results Note

Net income supported by higher margins on retail lending and controlled expenses

(Fawad Siddiqui, July 14^th)

·          Recommendation: Add, Target Price: SAR54.00, Upside: 26.5%

·          The bank’s profitability increased 2.1% y-o-y and 7.8% q-o-q due to an increase in banking activity, which resulted in higher interest income during 2QFY11. Lending portfolio witnessed a nominal increase of 3.7% y-o-y and 1.3% q-o-q. However, BSFR witnessed substantial growth in lending during 1Q2011, on the back of higher retail lending. Deposits witnessed healthy growth of 8.4% y-o-y and 4.1% q-o-q, as the bank increased its branch network to capture more retail deposits. The bank increased its investment portfolio by 35.3% y-o-y and 16.9% q-o-q; thus, interest income is expected to remain strong in the coming quarters. Margins witnessed an improvement of 10bps over the last quarter due to increased retail lending. 

·          We believe BSFR has performed better than other mid-tier banks in Saudi Arabia, in terms of capturing the retail market share with increased branch network, where the bank posted growth of 29.2% in retail lending in 2010, compared to industry growth of 9.2%. We expect healthy improvement in the bank’s overall interest income and net interest margin, as BSFR has increased its retail lending activity and investment portfolio. NIM’s are expected to show an improvement of 20bps over the next two years.

·          With the increased branch network, administrative expenses are expected to remain high for the bank. The NPL ratio might witness an increase in the medium-term, given the increased retail lending.

Saudi British Bank 

2Q2011 Results Note

Higher non-interest income & lower expenses increase bottom-line; Lending grows on retail

(Fawad Siddiqui, July 14^th)

·          Recommendation: Add, Target Price: SAR49.41, Upside: 13.6%

·          Non-interest income provided significant support to the bottom-line, increasing 36.5% y-o-y and 15.2% q-o-q. Furthermore, operating expenses declined 44.9% y-o-y, on account of the decline in provisions. Balance sheet grew 7.6% y-o-y and 2.7% q-o-q as the bank increased its lending activity (6.8% y-o-y, 4.7% q-o-q) and deposit base (5.4% y-o-y, 2.4% q-o-q). Net interest income grew 7.3% q-o-q, supported by the increase in the bank’s lending activity. 2011 is expected to be a rebound for the bank as loan provisioning declines. We believe lending growth has mainly come from the retail side as the bank increased its branch network to 111 as of March 2011, to take advantage of retail lending opportunities in the market.

·          The bank’s ROAE is expected to remain strong in the medium term  in the range of 17 - 18%, on account of the higher fee income and lower provisions. The cost-to-income ratio is expected to witness a decline and range between 33 - 36% in the medium term, due to the improved operating income, on the back of the network expansion and increased focus on retail operations. We expect advances and deposits growth to remain high in the medium term, as the bank aggressively expands its core banking activities.

·          If the bank is not able to witness growth in the retail segment with the increased branch network, we might not witness the expected decline in the cost-to-income ratio. Compeitition with other mid-tier banks within the retail segment will be a challenge for the bank, as other players have started capturing higher shares of retail business through their increased branch networks.

Saudi Hollandi Bank

2Q2011 Results Note

Lending activity picks up q-o-q; Profitability jumps on higher non-interest income

(Fawad Siddiqui, July 14^th)

·          Recommendation: Buy, Target Price: SAR40.22, Upside: 35.0%

·          Profitability increased 5.1% y-o-y and 10.6% q-o-q, on the back of higher non-interest income and decline in the bank’s operating expenses. Loans and advances witnessed a q-o-q increase of 6.0% as the bank focuses on increasing its lending activity after a continuous effort to decrease large corporate exposures which resulted in a decline in the bank’s lending activity over the past few quarters. Similarly, customer deposits increased 3.1% q-o-q as the bank attracted deposits to cater to its increased lending activity.

·          The bank’s ROAE is expected to remain healthy in the range of 16 - 18%. Loans and advances are projected to grow in the range of 7 -10% in medium term, after the poor performance over the last few quarters, where the bank was focusing on reducing large corporate exposures. Deposits growth is expected to follow lending growth for the bank and remain in the range of 7 - 9% in the medium term.

·          The bank is currently undergoing management restructuring, which is expected to put pressure on the bank’s performance over the short-term. The RBS stake sale might be a bottleneck to long-term strategy implementation. Low interest margins are expected to keep the bank’s profitability under pressure.

Al Rajhi Bank

2Q2011 Results Note

Financing growth boosts special commissions & lower provisions supports bottom line

(Fawad Siddiqui, July 14^th)

·          Recommendation: Add, Target Price: SAR80.32, Upside: 7.5%

·          The bank’s profitability increased on higher banking income, backed by increased lending activity  ,which grew 2.9% q-o-q and 8.0% y-o-y. Deposits witnessed q-o-q growth of 3.7% and y-o-y growth of 23.3%, mainly in the interest-free category. The bank’s net interest margins were supported by higher interest-free deposits, where margins increased by 10bps over 1QFY11. Non-funded income remained stable, with a y-o-y increase of 0.4% and a q-o-q decline of 0.6%. Total operating expenses witnessed a q-o-q decline of 2.3%, and a y-o-y decline of 1.0% during 2QFY11.

·          Outlook for the bank remains positive, on account of the low cost-to-income ratio, strong Islamic banking franchise and high composition of interest-free deposits. The bank’s cost-to-income ratio is expected to witness a decline in the medium term, and range between 20 - 22%, due to the increase in core banking income. Net financing margins are expected to remain stable, as we expect the composition of deposits to remain consistent in the medium term, with interest-free deposits dominating the deposits base. We are projecting deposits growth of 15 - 20% in FY11.

·          Mid-tier banks in Saudi Arabia have started posting healthy growth in retail business. If this continues, Al-Rajhi’s market share will erode gradually, and result in decreased financing margins for the bank.

Riyad Bank

2Q2011 Results Note

Improved quarter on quarter performance, on account of higher margins and lower expenses, Recommendation: Add

(Fawad Siddiqui, July 14^th)

·          Recommendation: Add, Target Price: SAR29.60, Upside: 19.1%

·          Net income grew 12.8% q-o-q, on account of the decline in operating expenses (6.6% q-o-q), and the increase in operating income (8.4% q-o-q). However, net income declined 6.6% y-o-y due to the y-o-y increase, of 16.1%, in operating expenses, attributable to the bank’s increased branch network. Net Interest income witnessed q-o-q growth of 8.4% and y-o-y growth of 3.8%, on account of the increase in lending portfolio (5.6% y-o-y, 1.1% q-o-q), investment portfolio (21.1% y-o-y, 2.2% q-o-q) ,and higher interest margins (1QFY11: 2.6%, 2QFY11: 2.7%). The bank’s retail lending grew by 16.9% during FY10, a trend that we believe had continued in 1HFY11, resulting in the higher interest margins. 

·          We expect margins to witness an increase of 10 - 30 bps over the medium term, due to the bank’s higher retail lending activity. The cost-to-income ratio is estimated to remain high in the range of 37 - 40%, given the large branch network, of 240. As of December 2010, consumer loans accounted for 19.8% of gross loans for Riyad Bank, compared to an industry average of 25.6%. Thus, there is potential to achieve higher penetration in the retail segment, and achieve higher interest margins, in view of the vast branch network, of 240, and the bank’s focus on this segment. Riyad Bank’s stock provides the highest dividend yield in the Saudi Arabian banking sector, 6.4% for FY2011e.

·          The bank is operating at a relatively high cost-to-income ratio, expected to record 34.2% by end of FY11, which might hold back the bank’s profitability. Interest income represents around 70% of the bank’s total income. Thus, if margins do not witness an improvement, profitability will remain under pressure.  

First Gulf Bank (FGB) 2Q2011 Results Note

A strong set of 2Q2011 results, despite the unsurprising drop in fees and commissions, Maintain target price, Assign Add

(Nancy Fahmy, July 14^th)

·          Recommendation: Add, Target price: AED21.80, Upside: 23%

·          First Gulf Bank’s 2Q2011 results come with a number of positive aspects demonstrated in the strong margins, improving asset quality and provisions coverage; high efficiency, high capital adequacy ratio, and adequate liquidity. All these positive factors compensated for the 28% q-o-q and 18% y-o-y drop in fees and commissions due to regulatory changes in retail lending implemented recently by the UAE Central Bank. FGB remains to be one of our top picks in the UAE. We believe that the bank is trading at a significant discount, given its ROAE.  

·          We believe that FGB will deliver stable margins over the next five years, and grow the net interest income by a five-year CAGR of 9% through a reasonable 10% CAGR in the balance sheet over the same period. We estimate that the bank will witness 6% CAGR in its non-interest income, which is achievable, given the lower base witnessed in 2010. We project that the bank’s cost-to-income ratio will rise, slightly, over the next five years, but should remain at a very efficient level, below 25%. We forecast that the NPL ratio would peak at 6% by early 2012, after which it would stabilise and then level off, gradually, as the loan portfolio grows.

·          FGB might face asset quality difficulties over the next four to five years, due to its high retail and real estate exposure (around 65%). 

National Bank of Kuwait (NBK)

2Q2011 Results Note

Profitability slumps on heavy provisioning, banking operations show tired growth, Maintain Hold

(David Mikhail, July 13^th)

·          Recommendation: Hold, Target Price: KWD1.12, Upside: -2%

·          NBK’s 2Q2011 profitability sank on high provisioning, and the loan book continued its flattish growth, though the latter was expected. Asset quality, however, already high, continued to improve, and provisioning continued to cover the delinquent loans by over two times. The bank’s conservatism is largely justified on the economic uncertainties plaguing the region and specifically its operations in Egypt. However, the bank is on track to producing the weakest return on equity in FY11 in at least seven fiscal years, so we, accordingly, adjust downwards our FY11 profitability estimates.

·          Outlook: We forecast that NBK will deliver NIMs consistent with the recent historical levels at around 3.5%, while growing its balance sheet by a CAGR of 9% and net interest income by a CAGR of 10%. Loans and deposits will grow at CAGRs of 9% and 8%, respectively, after the development plan hits the bank’s books. We project that the cost-to-income ratio for the bank will stay around 32%, and we see the NPL ratio peaking at the end of 2011 at just under 1.7%.

·          Challenges & Risks: The political stalemate between the government and Parliament on the development plan is clearly taking its toll on the bank. NBK, easily the most dominant bank in the gulf country, is living our expectations of stagnant or negative asset growth.

Alinma Bank

2Q2011 Results Note

Strong balance sheet growth backs profitability

(Fawad Siddiqui, July 12^th)

·          Recommendation: Sell, Target Price: SAR6.54, Downside: 34.6% 

·          Alinma Bank witnessed exceptional growth in its balance sheet, given the bank’s growth strategy, which resulted in higher profitability from core banking operations.

·          The bank’s ROAE is expected to remain in the range of 2 - 5% in the medium term as the bank is in the establishment phase. We expect advances and deposits growth to remain high in the medium term, as the bank expands its core banking activities.

·          Deposits growth is expected to record 50 – 60% in 2011, whilst advances growth is estimated to be 35 – 40%. 2011 – 2015 CAGR is estimated to be 18% for loans, and 28% for deposits. We expect margins to witness a healthy increase in the medium term as the bank builds its financing portfolio and registers growth in interest-free deposits.

·          We believe the bank will have difficulties achieving reasonable profitability in the medium term due to the relatively small operations and non-existent non-interest income.

SAMBA

2Q2011 Results Note

Profits negatively impacted by muted growth and low non interest income, upgrade to Buy on recent price drop

(Fawad Siddiqui, July 12^th)

·          Recommendation: Buy, Target Price: SAR66.95, Upside: 35.3%

·          SAMBA Financial Group delivered a weak set of results due to a drop in both non-interest and interest income. Non-interest income witnessed a y-o-y decline of 11.8% and a q-o-q decline of 20.5%, on account of the lower banking activity and reduced investment portfolio.

·          Interest income witnessed a decline of 5.8% y-o-y, but it improved q-o-q by 6.0%, as the bank increased its lending activity by 1.3% during 2QFY11. Operating expenses provided support to the bottom line with a y-o-y decline of 3.5% and a q-o-q decline of 7.7%, on account of lower provisions.

·          The bank increased its investment portfolio by 8.6% q-o-q and 4.0% y-o-y, which is expected to provide support to both interest and non-interest income, going forward. The bank’s efficiency has deteriorated, slightly, due to the lower operating income. 

·          Outlook: The bank is not aggressive in increasing its lending activity. Thus, we expect slower growth compared to peers.

·          Risks: Asset growth is expected to remain low for the bank as the bank has been following a conservative growth strategy. We believe this will have an impact on the bank’s profitability, in terms of lower interest income.

Egypt Inflation Monitor -June 2011

Annual urban headline inflation stabilises at 11.8 percent in June 2011 as the economic slowdown dilutes embedded inflationary pressures

(Nada Farid, July 11^th)

·          On an annual basis, urban headline inflation stabilised at 11.8% in June 2011, same as in May 2011, as the economic slowdown took its toll on domestic consumption.

·          We had undermined the impact of the political instability on Egypt’s consumption patterns and, consequently, on inflation. We had expected that with the weakening of the Egyptian currency, and in tandem with global food price increases, inflationary pressures would intensify in Egypt in May and June.

·          Annual core inflation increased, slightly, to 8.9% in June 2011 from 8.8% in May 2011. On a monthly basis, core inflation (which excludes volatile food items and regulated items) has actually decelerated from 0.5% in May 2011 to 0.45% in June 2011, indicating that volatile food items have led the monthly headline inflation in June 2011.

·          During the next six months, we expect annual inflation to ease or at least stabilise at the current levels, as we expect more protests, demonstrations and strikes, as we approach this critical political phase in Egypt of Parliamentary and Presidential elections, which will, in turn, affect consumption and investment negatively. Having said that, we believe August to be an exception, on the back of the month of Ramadan, which usually witnesses higher consumption patterns.

·          Provided that Egypt witnesses more political stability and clarity in 1H2012, we expect inflation to pick up, in tandem with the increasing global food prices and the depreciated currency, coupled with the already existing structural problems and bottlenecks.

·          It is unlikely to see the Central Bank of Egypt (CBE) tightening its monetary policy in its upcoming Monetary Policy Committee (MPC) meeting on July 21st. Egypt’s fragile recovery and weak growth prospects and, in turn, subdued inflation during the next six months provide no justification for raising policy rates at the moment.

Olympic Group (OG)

Flashnote

Electrolux to acquire OG at EGP40.60

(Hamed Hesham & Ahmed Khalil, July 11^th)

·          Recommendation: Accept offer, deal Price: EGP40.60, Upside: 12.8%

·          We believe the deal is positive for OG, its shareholders, and the market in general.

·          As part of the deal, Electrolux will sell OG’s ownership in Namaa and B-Tech to Paradise Capital. The prices at which Namaa and B-Tech will be sold back to OG are EGP13.88 and EGP3.44 per share, respectively. Those are the same prices agreed upon under the pre-revolution deal, which were the closing prices as of the October 10th trading session. As of yesterday, July 10th, 2011, Namaa closed at EGP11.26 (23.3% discount from the deal price), while B-Tech closed at EGP2.77 (24.2% discount from the deal price).

·          The unchanged prices of Namaa and B-Tech imply that the discount from the pre-revolution deal price is due to a drop in the white goods segment valuation (currently at EGP23.28, down from EGP27.98).

·          Once the deal is finalised, OG will launch a mandatory tender offer to buy 100% of Delta for Engineering Industries (IDEAL), at a price per share of EGP21.40. According to OG management, OG owns c.99% of IDEAL’s shares; hence, the company will be tendering for the remaining 1%.

·          The deal is expected to be finalised by end of July / early August, 2011.

Net International Reserves Watch

Egypt - June 2011

NIR shed USD659 million in June 2011, on narrowing BOP deficit & declining dollarisation

(Nada Farid, July 7^th)

·          Egypt’s net international reserves (NIR) reached USD26.6 billion by end - June 2011, shedding USD659 million since end - May 2011, thereby recording its lowest level since April 2007.

·          The loss of USD0.66 billion in NIR during June 2011 is in line with our expectations. We had forecast the balance of payments (BoP) deficit to narrow slightly in June 2011, reducing the financing requirement from NIR.

·          The loss of USD0.66 billion in June 2011 signals a continued improvement in NIR contraction from previous months. This improvement reflects a rebound in Egypt’s sources of foreign exchange, namely exports and tourism, and is an indication of easing pressure on demand for foreign exchange during May and June 2011.

·          With the complete depletion in unofficial reserves, Egypt will have to depend entirely on NIR to finance the foreign currency gap, whether related to the BoP deficit or increased dollarisation in the banking system.

·          During 1HFY11/12, we expect a total of USD14 billion in additional demand for foreign currency. However, we believe the CBE will only use up to USD5 billion from its NIR in 1HFY11/12 to fill in the foreign currency gap. Consequently, we anticipate Egypt’s NIR will stand at USD20 billion by end FY11/12.

·          By end- FY11/12, we forecast Egypt’s NIR to stand at USD20 billion.

·          Egypt’s import cover fell to five months of imports by end - June 2011 from 6.9 months by end- April 2011 and 8.5 months by end- December 2010, exactly in line with our expectations.

Quarterly Strategy

3Q2011 Strategy Note - Egypt & GCC

Selectivity at a time of high uncertainty

(Radwa El Swaify & Samah Dissi, July 7^th)

Overweight Qatar, Saudi Arabia and Abu Dhabi, with emphasis on banks and petrochemicals

·          Qatar’s real growth outlook over the medium-term will largely be fuelled by robust government-led investments.

·          We assign Saudi Arabia an overweight recommendation, with a focus on banks, whose earnings will pick-up in FY2011 on improved asset quality, and on petrochemicals.

·          We are positive on the energy sector and banks within Abu Dhabi, where hydrocarbon wealth and infrastructure spending fuel growth.

Neutral/Hold Dubai and Oman

·          Real growth is rebounding in Dubai as it benefits from the ongoing global economic recovery, but challenges facing the property sector and the ongoing restructuring of Dubai debt will continue to weigh down investor sentiment.

·          With regard to Oman, higher oil production will continue to drive economic growth. The government will focus on diversifying away from oil and gas, and public spending should increase to meet public demands and increase employment.

Underweight Egypt and Kuwait

·          We recommend underweight on Egypt, since the market performance will continue to be highly correlated to the political scene, and on the back of the high volatility expected close to Parliamentary elections, by the end of September 2011.

·          We recommend an Underweight on Kuwait on the back of weak earnings potential in 2011 and multiples that are amongst the highest in the region.

Jarir Marketing Company (Jarir)

2Q2011 Results Note

Electronics continue to boost sales and net profit growth

(Ahmed Khalil & Hamed Hesham, July 7^th)

·          Recommendation: Add, Target Price: SAR190.00, Upside: 10.3%

·          Jarir continues to impress us and beat our estimates, delivering strong numbers, with 2Q2011 sales being the highest ever in the company’s history, despite the 2nd quarter being a seasonal low for Jarir.

·          Going forward, we expect Jarir will continue to reap the benefits of its expansion plan and stronger spending patterns in Saudi Arabia (26% of Saudi Arabia’s total spending in 2011 will be dedicated to the education sector, as well as employee training), as well as in the GCC.   

·          Despite the minimal upside potential, we see Jarir as a low-risk play into the lucrative Saudi Arabian consumer story, with limited downside risks and further growth to be driven by new store openings and higher spending patterns in Saudi Arabia and in the GCC.

Qatar National Bank (QNB) 2Q2011 Results Note 

All star 2Q11 performance on booming balance sheet, Maintain Add

(David Mikhail & Nancy Fahmy, July 6^th)

·          Recommendation: Add, Target price: QAR163.70, Upside: 14%

·          QNB has delivered an exceptional quarter. Notwithstanding the higher-than-expected provisioning, profitability rose on higher efficiency and higher interest, fee and commission, and investment income. 

·          We retain our target price of QAR163.70 and reiterate our “Add” recommendation. The stock is currently trading at P/E FY11f of 13.7x, and P/B FY11f of 2.3x.

·          Our DECF target price discounts a net profit CAGR of 17% over the next five years. We estimate a bottom line growth of 17.5% for 2011 and 16% for 2012.

·          For 2011, we forecast 15% loan growth and 25% deposits growth. Islamic deposits, which typically make up 15% of total deposits will be phased out by year-end due to the new regulations in the sector.

·          We believe that QNB’s profitability will be pared slightly in 2012, compared to the previous years, on the absence of Islamic banking business (Islamic business comprised 13% of QNB’s profits in 2010). However, we see only a mild impact from the personal lending circular on the bank, as the segment only comprises 10% of the total loan book, of which 60% is directed to VIPs or non-salaried retail lending, which is unaffected by the new regulation.

MoneScope: Egypt

Monetary aggregates in May 2011 reflect a slight rebound in confidence levels

(Nada Farid & David Mikhail, July 6^th)

·          Broad money supply (M2) annual growth picked up, slightly, in May 2011 to reach 10.98%, as growth in local currency demand, time and savings deposits increased. M2’s annual growth has been decelerating since February 2011 from 12.2% to reach 10.8% in April 2011, albeit it is still at a healthy level compared to the single digits of 2009 and early 2010.

·          Monetary aggregates in May 2011 reflect a slight rebound in confidence levels, whereby growth in money in circulation outside the banking system has eased for the first time since January 2011, growing by 25.8% y-o-y, down from 26.6% y-o-y in April 2011.

·          Total deposits have increased by 8.4% y-o-y and by 0.6% m-o-m in May 2011, after growing by 8.1% y-o-y and contracting by 0.3% m-o-m in April 2011.

·          Growth in domestic credit continues to decelerate, reaching 16.4% y-o-y in May 2011, down from an annual growth of 17.7% in April 2011, on the back of a slowdown in claims on the government, public business and households.

·          As banks in Egypt cautiously and selectively lend to their key clients, we foresee marginal balance sheet growth in the rest of 2011 (in the range of 3%), helped by the strong growth witnessed in 1Q2011.

Telecom Egypt

Valuation Update

Bundling for Survival, Target price cut to EGP19.61, Maintain Buy

(Sally Gerges, July 4^th)

·          Recommendation: Buy, Target Price: EGP19.61, Upside: 31.5%

·          Bundling to add flavour to a saturated market: We foresee bundling to be the key stimulus for the Egyptian market’s growth, going forward, given the saturation in the mobile market (with penetration exceeding the 100% level), the significant untapped potential in broadband and the notable opportunity that could arise from cross selling of mobile, fixed and broadband services.

·          Telecom Egypt is best positioned to capitalise on the bundling opportunity.

·          The MVNO proposition yields a minimal upside, of 1.8%, to our current valuation.

·          Telecom Egypt should pursue the MVNO model, owing to larger risks from abandoning it: Despite the insignificant value accretion, we still believe Telecom Egypt should work towards becoming a full-fledged telecom operator, in order to be better equipped to compete in the market’s new battlefield, namely bundling, as well as to shield its strong broadband market share.

MoneScope: Saudi Arabia

Healthy monetary indicators in May 2011 signal a sustained economic pick-up

(Nada Farid & Fawad Siddiqui, July 4^th)

·          Saudi Arabia’s broad money supply (M3) continues to grow y-o-y at an accelerated pace, albeit slowing down slightly to 16% in May 2011 from 17.2% in April 2011 to reach SAR1.175 trillion, on the back of a slowdown in growth in demand deposits and other quasi monetary deposits. On a monthly basis, M3 contracted by 0.1%. We believe the slight annual slowdown in M3 growth and the monthly contraction in M3 in May 2011 to be a one-off event.

·          Saudi Arabia continues to strengthen its foreign asset position, with net foreign assets (NFA) growing at a record high of 15.5% y-o-y in May 2011 through increasing SAMA’s foreign currency and deposits abroad by a record 26% y-o-y and its investments in foreign securities by 12% y-o-y in May 2011.

·          Growth in bank credit to the private sector increased to 7.1% in May 2011, the highest since May 2009. Growth in bank credit to the private sector has been picking up steadily since the beginning of 2011, averaging 6.3% YTD. This signals a healthy pick-up in the economy and reflects increased confidence levels that have encouraged banks to start lending again.

·          Despite the significant growth in money supply in April and May 2011, inflationary pressures remain relatively subdued. Saudi Arabia’s annual inflation slowed to 4.6% in May 2011, down from 4.8% in April 2011, way below the peak in August 2010 of 6.1%.

·          We believe that Saudi banks’ NPL ratios have peaked and their aggressive provisioning cycle has come to an end, and are now ready for growth; thus, we expect improved profitability and higher dividends for 2011. Credit growth has been relatively weak for the sector as a whole YTD on slower corporate lending. Therefore, we favour more-retail focused banks, since they have higher growth prospects.