Stories In Focus
Egypt's EGP60 billion new Suez Canal waterway to be funded through five-year debt certificates
Prime Minister (PM) Ibrahim Mehlab announced in a conference on Thursday that Egypt's EGP60 billion new Suez Canal waterway will be funded through five-year debt certificates issued by Egyptian banks to the public. The decision was taken in a meeting attended by President Sisi, CBE Governor Ramez, PM Mehleb and a number of ministers, including the ministers of international cooperation, finance, and investment, earlier on Thursday. The investment certificates will be issued to Egyptians only, in EGP for citizens working inside the country and in USD for those working abroad. Interest rates were set at 12% on the EGP-denominated certificates at 3% for the USD-denominated ones. Interest on both certificates will be paid quarterly. This is 100 bps to 150 bps higher than prevailing rates on bank CDs of similar tenors. Mehleb said the certificates will be made available to the public for subscription after one week (starting August 24). The certificates will be issued by the three state-owned banks on behalf of the Suez Canal Authority and will be backed by the Ministry of Finance. Ramez said it may be extended to include other private Egyptian banks if need be. Ramez plans to hold a meeting with the head of the public and Egyptian private banks to discuss the possibility of filling in any uncovered funding needs through a syndicated loan. Issuance of new certificates may be ceased before the total EGP60 billion is collected to introduce alternative funding means.
HRHO 2Q2014 results: Strong set of results driven by robust IB arm performance, commercial bank lags
EFG-Hermes (HRHO EY, Price: EGP18.30, Consensus FV: EGP16.68, Hold, Consensus P/E2014e: 21.4x) released its 2Q2014 results. Group net profit came in at EGP188 million, up from EGP119 million in 1Q2014 (+58%) and versus a net loss of EGP80 million in 2Q2013. Net operating profit for the group reached EGP331 million, up 48% q-o-q and more than doubled y-o-y. . Total operating revenue from the IB arm reached EGP442 million in 2Q2014, up 146% y-o-y and 79% q-o-q (+92% y-o-y, +39.7% q-o-q excluding a one-off EGP97 million gain from the group’s sale of part of the stake in SODIC). The commercial bank performance was weak for the second consecutive quarter. Operating income came in at USD43.0 million, down 8.7% y-o-y and 6.9% q-o-q, while net income came in at USD11.6 million, down 34.5% y-o-y and 25.6% q-o-q, the lowest since 4Q2012. Profitability ratios came under pressure, with ROAE hitting 8.3% in 2Q2014, down from 13.1% in 2Q2013 and 9.3% in 1Q2014. ROAA hit 0.6%, down from 0.9% in 2Q2013 and 0.7% in 1Q2013. On the balance sheet side, loans grew 13.7% y-o-y and 3.1% q-o-q to USD2.75 billion and deposits 5.6% y-o-y and 1.7% q-o-q to USD7.41 billion. Asset quality metrics deteriorated over the quarter, where the bank’s NPL ratio hit 3.5% up from 3.3% in March 2014 and provisions coverage 79.9% down from 86.1% in March 2014. Revenue to the group from the commercial bank amounted to EGP305 million, down 6.4% y-o-y and 3.8% q-o-q, while earnings amounted to EGP41 million, down 49.2% y-o-y and 30.5% q-o-q.
EFG-Hermes 2Q2014 results reconfirm our thesis that ROE has bottomed-up last year (ROAE 2Q2014: 6.9%, 2Q2013: 2.1%) following the early signs seen in 1Q2014. Driven by healthy growth seen across all divisions, the IB arm has led the growth for the first time since the commercial bank’s acquisition in 2010, where revenue from the IB arm accounted for 59% of the group’s revenue (53% excluding one-offs) and 78% of bottom line. Higher executions across all-but-one small market drove brokerage income by robust 80% y-o-y and 19% q-o-q to EGP137 million. Income from AM more than doubled to EGP83 million and that from the IB division quadrupled sequentially to EGP44 million (versus nil in 2Q2013) with five transactions closed in the quarter including two IPOs. Operating expenses for the IB came were up 18.2% y-o-y and 39.0% q-o-q on a rise in variab le costs as revenue picked up, invalidating management’s EGP500 million opex target for the year. This comes in line with management’s guidance for a “revenue pickup” scenario, under which the employee expenses-to-operating revenue ratio becomes more relevant. The quarter’s employee expenses-to-operating revenue hit 39% in 2Q2014 (64% on normalized basis) down from 73% in 2Q2013 – therefore getting close to management’s 50% target. Non-employee expenses are down 11% y-o-y and up 32% q-o-q to EGP49 million bringing opex expenses to EGP85 million in 1H2014, down 22% y-o-y.
Oriental Weavers 2Q2014 results: Revenue broadly in line, bottom line misses on FX loss and tax surcharge
Oriental Weavers (ORWE EY, Price: 45.98, FV: EGP50.55, Hold, P/E FY14e: 11.3x) reported relatively fair 2Q2014 results despite increased challenges during the quarter. Revenue reached EGP1,429 million, up 3.3% y-o-y and 0.9% q-o-q, broadly in line with our estimate and that of consensus. Revenue was supported by a strong 10.6% y-o-y growth in the local market. On a quarterly basis, local sales declined 1.7%, which we believe relates to price discounts during the quarter offered to compensate for typically slow demand caused by the end of year exam season. Export markets performed poorly in 2Q2014, mainly due to slower-than-expected recovery in the US and escalating security situation in Arab countries (i.e. Libya and Iraq). Gross profit stood at EGP173 million, translating to a GPM of 12.1%, improving from 10.9% in 2Q013 but narrowing from 14.5% in 1Q20 14. The quarterly contraction in GPM is due to seasonality factors as 1Q GPM is typically the strongest during the year. Net profit reached EGP97 million in 2Q2014, down 1.8% y-o-y and 32.4% q-o-q, missing our estimates and consensus’ on a EGP15 million FX loss related to MAC’s USD-denominated debt as well as OWI’s receivables. Furthermore, the bottom line was impacted by the 5% tax surcharge implemented for three years, starting January 2014. The tax surcharge of 1Q2014 has been accounted for in 2Q2014, further inflating the tax level. We believe management will continue to focus on high-margin products, especially in export markets, to compensate for the export rebate system amendment. Locally, management has cut the target of new stores for 2014 to 15 from 20 given the delay caused by lengthy procedural works.
Raya 2Q2014 results: Stable annual growth with compression in margin
Raya released 2Q2014 results, posting revenue of EGP934 million, up 18.5% y-o-y and 11.0% q-o-q, mainly driven by growth across most segments. Gross profit stood at EGP107 million, implying a GPM of 11.4% versus 13.6% in 2Q2013 and 11.2% in 1Q2014. The annual contraction in GPM is likely due to the increase in the number of workers by 26% resulting in a hike in wages, especially in the IT segment. Net profit came in at EGP6 million, down 75.3% y-o-y on higher interest expense and taxes, but up 89.4% q-o-q from EGP3 million. This translates to a NPM of 0.6% versus 2.8% in 2Q2013 and 0.3% in 1Q2014. Going forward, we expect strong revenue growth to continue as the company sustains its trade division, the largest contributor to the top line at 72%, and starts operations at its newly established restaurant-management arm. The increasing contribution o f smaller segments including smart buildings, recycling, contact centers, and transportation should continue to reflect positively on the company’s performance and profitability in the foreseeable future.
Centamin 2Q2014 results: A weak set of results with bottom line down 79% y-o-y, 47% q-o-q
Centamin (CEY LN, Price: GBP 66.501, Consensus FV: GBP74.52, Hold, Consensus P/E 2014e: 9.4x) released 2Q2014 results, with a top line figure of USD103 million, flat q-o-q and down 24% y-o-y, reflecting 13% lower gold production volumes and a 5% drop in average sales price to USD1,291/ounce. Cash cost came in 5% higher q-o-q, 13% y-o-y to USD783/ounce. Gross profit dropped 70% y-o-y, with the gross profit margin witnessing severe compression to 17.9% from 45.9% in 2Q2013. The bottom line plunged 79% y-o-y and 47% q-o-q to USD11.3 million. Management expects plant throughput and average grade to increase during the remainder of the year and reiterate 2014 guidance at 240,000 ounces and USD700 cash cost per ounce, supported by the successful commissioning activities of the stage four plant expansion and above-target productivity levels at the processing operations. On the legal developments in Egypt, the company has stated that the Supreme Administrative Court appeal and diesel fuel court case are both ongoing and operations are unaffected. Centamin should benefit from a new investment law that restricts the capacity of third parties to challenge any contractual agreement between the Egyptian government and investors. The company announced a USD0.0087/share interim cash dividend.
Egypt government denies fertilizer companies export licenses
Egyptian Fertilizer Company, Alexfert, and MOPCO have not been granted an export license renewal due to failing to provide the government with contracted fertilizer volumes for two consecutive months, Al Borsa newspaper reported. Free zone companies have only supplied 14% last month of the volumes agreed with the government and 10% this month. To address the shortage of fertilizer supplies, the government released a portion of its strategic supply (estimated at 112,000 tons) to farmers with cultivated lands and will hold a meeting with the aforementioned companies by the end of this week.
EK Holding 2Q2014 results: A mixed set of results; consolidated net income almost halved
EK Holding (EKHO EY, Price: USD 1.05, Consensus FV: USD 1.25, Add, Consensus P/E FY2014e: 11.6x) released 2Q2014 unaudited results, with net attributable income coming in at USD11.6 million, down 44.8% y-o-y. Consolidated revenue recorded USD128.2 million, up 12.2% y-o-y. Gross profit stood at USD52.5 million, down 21% q-o-q, yielding a 400 bps q-o-q compression in GPM to 41%. Management attribute the drop in bottom line figures to one offs last year such as the divestment of Nile Takaful, capital gains, and dividends from affiliates. With one-offs adjusted for, normalized net attributable income yields a 15% y-o-y increase.
Revenue for the fertilizer and petrochemical segment revenues fell 14% y-o-y to USD67 million (c. 52% of revenues) due to a drop in international urea prices and challenges in procuring natural gas supply, which resulted in below-par utilization rates, 34 days of outages, and unscheduled work stoppages. Accordingly, fertilizer volumes sold were down 12.9% y-o-y and the GPM margin fell 1,400 bps y-o-y to 34%. Overall, exports accounted for 71.8% of total fertilizer volumes and 31% of total petrochemical revenue. Figures were slightly ameliorated by improved performance at the company's petrochemicals arm Sprea Misr, which saw a 27% y-o-y increase in the top line and 19% y-o-y hike in the bottom line. The energy and energy-related segment continued to show the most robust performance, with revenue growth of 113.3% y-o-y to USD53.3 million (c. 42 % of revenues) on steady oil operations and positive effects of energy reforms. The GPM, however, was down 700 bps y-o-y on higher operating costs.
Qalaa Holdings 1Q2014: First consolidated results since transformation reflect improved operations, overshadowed by several-below-the-line items
Qalaa Holdings (CCAP EY, Price: EGP4.56, Consensus FV: EGP4.00, Hold) released 1Q2014 results — its first consolidated financial statements since the completion of the capital increase and the transformation into an investment company. Overall, results marked y-o-y improvements on the operational level compared to pro-forma 1Q2013 results, driven primarily by stronger profitability at the cement, energy, and mining segments and the transportation segment turning losses to profits. However, the agrifoods business was the worst performer. On the bottom line level, the company posted widening net losses after minority, mainly on higher financing expenses, discontinued operations charges, and lower FX gains.
Consolidated revenues grew 14% y-o-y to EGP1,366.9 million from pro-forma revenues of EGP 1,203.6 million in the same quarter of last year. Gross profit rose 46% to EGP 238.1 million, implying a gross profit margin of 17.4%, up 390 bps y-o-y. The group managed to significantly reduce its recurring SG&A and operating expenses by 35% to 15% of revenue compared to 26% a year earlier, with EBITDA recording a positive EGP29 million versus a negative EGP125.9 million a year ago despite booking a non-recurring SG&A expense related to the transformation amounting to EGP29.6 million. Net financing expenses grew 22% to EGP187.5 million, FX gains dropped 79% to EGP13.4 million, and the group booked charges related to discontinued operations amounting to EGP97.2 million — double the figure recorded in the comparative period last year. These factors pressured the bottom line, masking the y-o-y operational improvement, resulting in a net loss after minority of EGP231.9 million, widening 7% y-o-y. Total debt stood at EGP11.3 billion, implying a debt to equity of 0.86x in 1Q2014.
OTMT 2Q2014 EAS results: Surprise-free quarter; net profit hit annually on higher taxes in North Korea
OTMT (OTMT EY, Price: EGP1.31, Consensus FV: EGP0.60, Sell) released 2Q2014 EAS results with revenue at EGP862 million, up 18.9% y-o-y and 10.1% q-o-q, driven mainly by strong revenues from Koryolink, which surged 36.1% y-o-y and 7.8% q-o-q. Revenues from Koryolink accounted for 76.5% of total consolidated revenues. Gross profit in 2Q2014 totaled EGP619 million, up 21.0% y-o-y and 13.3% q-o-q. This implies a GPM of 71.9% versus 70.6% in 2Q2013 and 69.8% in 1Q2014. EBITDA for the quarter came in at EGP476 million, rising 55.4% y-o-y and 5.6% q-o-q, implying an EBITDA margin of 55.2%, up from 42.2% in 2Q2013 but down from 57.6% in 1Q2014. The annual improvement in the margin is a result of a better sales mix and good opex optimization. The company incurred a loss of EGP19 million from its 5% stake in Mobinil in 2Q2014. Net income reached EGP268 million, d own 27.8% y-o-y but up 8.6% q-o-q. The annual decrease is a result of higher taxes paid in the current quarter as a result of ending the tax exemption agreement signed with the North Korean government.
Al Nour Party decides to run for 50% of individual seats in upcoming parliament (Al Shorouk)
Egypt’s unemployment rate falls to 13.3% in 2Q2014 from 13.4% in 1Q2014, according to CAPMAS (Al Ahram)
President Sisi embarks upon a new strategy to develop and improve education in Egypt; to set an appropriate salary for teachers, reduce number of students per class, changes syllabus (Al Ahram)
Cabinet approves nine companies to execute phase one of the national project for roads launched by President Sisi in his electoral campaign; the project will be implemented in partnership with the Ministry of Transport’s Authority for Roads and Bridges, the Ministry of Housing, and the Ministry of Defense (Al Shorouk)
Power plants in Egypt experienced 300 attacks in July 2014, says Prime Minister Mehleb (Al Shorouk)
Governorates across Egypt begin implementing EGP3.6 billion in projects that the Ministry of Local Development has allocated for them (Al Masry Al Youm)
Central Bank of Egypt forms a committee to oversee the implementation of the maximum wage at public banks (Al Mal)
Ministry of Trade and Industry currently devising a new national strategy to develop SME projects (Al Ahram)
Plans to build five power plants with a total capacity of 4000 MW and USD3.7 billion in investments are underway, says Head of Holding Company for Electricity (Al Mal)
Ministry of Supply to invest additional EGP1 billion in SIIC during FY2014/15 as part of its EGP1.4 billion development plan to develop SIIC’s plants and increase production capacity to 2 million tons/annum (Al Borsa)
National Bank of Egypt studies financing 400 of its clients in SME lending worth EGP2 billion; the bank targets growing its SME lending portfolio from its current EGP12.5 billion to EGP15 billion by the end of June 2015 (Al Borsa)
Eastern Tobacco denies signing partnerships agreements with Russia’s Agrocom Group (Company release)
EIPICO donates EGP5 million to Long Live Egypt Fund (Al Ahram)
Mina Pharmaceuticals 2Q2014 results: Net profit reaches EGP20.9 million, up 10% y-o-y and 10% q-o-q (EGX)
Misr Qena Cement 2Q2014 results: Bottom line up 43% y-o-y to EGP92.6 million on 42% y-o-y increase in sales revenue, mainly driven by 29% increase in selling price and 10% growth in volumes (Company release)
Alexandria Minerals Oil Company (AMOC) to hold a board meeting today to approve 1H2014 results and proposed distributions (EGX)
Bank Audi, Faisal Islamic Bank, Egyptian Gulf Bank and Al Mashreq approve lending EGP830 million of the EGP2.4 billion syndicated loan to PHD; EGP645 million of the loan slated to repay outstanding debt, balance will be used to finance five projects under development (Al Shorouk)
Stories In Focus
Saudi Foreign ownership rules to be published in less than two weeks
The Saudi Capital Market Authority may publish rules for foreign financial institutions to invest in the Kingdom’s stock market in less than two weeks, Asharq al-Awsat quoted unnamed sources as saying. The regulator will not allow foreign ownership in companies investing in Muslim holy cities of Mecca and Medina, said the sources. Government-controlled companies may have lower foreign ownership limits than private companies, they added.
Jarir Marketing opens a new 2,500 sqm branch in Abu Dhabi with total investment exceeding SAR12 million, marking the forth of seven branches planned for 2014; financial impact to be reflected starting 3Q2014 (Tadawul)
Bahri announces the transfer of Virgo Star to its ownership as part of the July 21 announcement relating to merging the Vela fleet and operations with Bahri; financial impact to be reflected starting 3Q2014 (Tadawul)
Yamama Cement signs two investment portfolios agreements with Audi Capital and Jadwa Investment to be financed internally (Tadawul)
SABIC is currently upgrading its cracker in Teeside, UK to use shale gas-based feedstock, to be completed in 2016; cracker will enable it to produce olefins and derivatives at competitive prices (Bloomberg)
Stories In Focus
Rising Abu Dhabi property prices don't pose risk to the emirate’s banks: Fitch
Abu Dhabi bank performance has improved in line with the strengthening of the local and Dubai economies, Fitch Ratings said. Abu Dhabi banks’ NPLs have declined to a five-year low and provisioning is at a six-year high, although asset quality issues remain, said Fitch. The rating agency added that the recent surge in residential real estate prices in the emirate (17% in 1H2014 according to Jones Lang Lasalle) does not pose a serious risk to banks. Unlike the 2008 boom, the current run-up in prices is not reliant on leverage and is backed by stronger fundamentals. The authorities are also more attuned to the risks from rising house prices. Rising rents and a buoyant economy are pushing up inflation, which is forecast to average 5% in 2016, according to Fitch.
Fitch affirms Abu Dhabi long-term foreign, local currency issuer default ratings at AA
Fitch Ratings has affirmed Abu Dhabi’s long-term foreign and local currency issuer default ratings (IDR) at AA, with a stable outlook. The ratings on Abu Dhabi’s senior unsecured foreign and local currency bonds have also been affirmed at AA. The short-term foreign currency IDR has been affirmed at F1+. The UAE country ceiling has been affirmed at AA+, with Fitch noting that the ceiling also applies to the Ras Al Khaimah emirate.
Dubai Economic Council signs MOU with DuPont, one of the leading market-driven science companies (Zawya Dow Jones)
Air Arabia to start flights to Chittagong, Bangladesh, from Ras Al Khaimah starting September 2 (Bloomberg)
MSCI adds Mesaieed Petrochemical to MSCI Emerging Markets Index (Bloomberg)
Mazaya Qatar 2Q2014 preliminary results: Net income grows 2.9x to QAR32.51 million, from QAR8.38 million in 2Q2013 and 45.3% from QAR22.37 million in 1Q2014; annual increase due to surge in construction revenue (Company release)