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A turbulent summer for the Egyptian equities market




Malek Bou-Diab Lead Portfolio Manager



Andy Gboka Portfolio Manager

The Egyptian stock exchange experi- enced a very turbulent summer. June, July and August witnessed hefty cor- rections with the EGX30 breaking through a succession of resistance levels and booking a 17.5% cumulative loss. Our conservative positioning and prompt portfolio adjustments allowed

marketing and sales know-how. In particular, Palm Hills Develop- ment is pursuing this approach which allows it to avoid taking too much land price risk on its balance sheet. Its counterparty Madinet Nasr Housing and Development (MNHD) benefits from the know- how to extract value from its huge land bank booked on the balance sheet at the 1970s acquisition cost.

New sales figures in the sector remain strong as supply at around 20'000 units/year is limited, the country benefits from favorable de-

us to soften the blow on the portfolio. Nevertheless, after such a hef-

ty correction, a reassessment of the Egypt investment case was due. Is the investment-driven economic recovery still actual? Do corpo- rates see the benefits of the recovery coming? The market is abuzz with negative top-down views and the shadow of China looms large over the EM space, a mood contrasting with the more positive pic- ture we discovered after several meetings with local corporates last month.

Booming commercial banks: ROE guidance above 35%

Commercial banks offer little justification for the summer sell-off as they remain healthy, confident and highly profitable. A view shared by the IMF during its September visit to the country. Best in class Commercial International Bank (CIB, 2016 P/B 2.2) is on track to deliver 25% loan growth this year and a ROE around 30%. Both figu- res for 2016 are guided at around 35%. Management sees no syste- matic deterioration in the credit environment and believes that USD supply remains adequate for their customers' current growth requi- rements.

Credit Agricole Egypt (2016 P/B 1.6) expects ROE levels over 30% this year and above 35% in 2016. The bank was successful in reducing its cost/income ratio from 48% in 2012 to 34% this year. Guided loan growth is less aggressive at 15% with a focus on the infrastructure space where it can leverage on the know-how of the French mother bank. The latter views the Egyptian retail market as highly i nteresting with only 10% of the population owning a bank account and an average of 23'000 inhabitants per bank branch in comparison with Mexico at 8'200.

Even cheaper but with admittedly less quality is Housing Develop- ment Bank (2016 P/B 1.1). The partly state owned bank seems to be awakening from its post revolution hibernation with ROE levels touching on the 20% from the usual 10% and net income growth above 100% this year. Its dividend yield is expected to jump from 7% to over 10% in 2015. Growth plans in underserved tier II cities are being reignited as well as a mortgage pilot project supported by the central bank of Egypt.

Real estate: down to earth again

Real-estate names enjoyed a tremendous rally from Q4 2013 until March this year with many stocks more than doubling in value. The sector was driven by the assumption that real-estate investments will gain the favor of Egyptians in the current inflationary environ- ment. The wake-up call was very painful as stocks lost in excess of 50% this summer. Corporates we met are more realistic in their as- sumptions, seeing price increases in line with inflation at best, enough to protect margins form increasing construction costs. A new and interesting model of co-development is arising between land bank rich corporates and ones with strong development,

mographics and the desire of many families to leave crowded cen- tral Cairo for the gated communities increasingly fitted with all the necessary commercial areas, schools, offices space, etc. At prices ba- rely matching book value (with land booked at historical costs) the sector definitely offers value but suffers from stigmas related to post 2011 revolution issues and the latest correction. We would see the introduction of dividends as helpful to anchor valuations for a sector with rather complex financial reporting but it might only be a longer-term management objective.

The consumer space: overcrowded with investors, some excep- tions …

If there are companies where management only takes investor meetings in large groups because of high demand then they cer- tainly operate in the fast moving consumer goods (FMCG) or health- care space. It seems that the idea that EM consumers can spend endlessly on FMCG whatever economic conditions are has survived the latest correction in the EM space. The strong meetings atten- dance is reflected in the high valuations (2016 P/E in the 25-30 ran- ge) and we are uncomfortable with both. Juhayna, the dairy produ- cing company, provides a glimpse of the difficulties that can arise for these 'defensives': volume growth just started to recover after too aggressive price increases last year and increasing competition. Capacity utilization remains behind initial investment plans. Admit- tedly margins are better because of lower powder milk prices this year but this is a one off effect and more certainty on volume growth despite increasing competition is critical to long-term value creation.

Ghabbour Auto (2016 P/E 8.5), the largest automotive dealer (Hyun- dai, Mazda, Geely and Bajaj) was a victim of the summer sell-off (-50% at the height of the correction) on the assumption that the company suffers from the current FX shortage. Management indi- cated that they are able to source their FX needs given the size of their business and close relationship with banks. The company is facing a margin issue in its car business as European carmakers be- nefit from lower import duties as free trade agreements kick-in. The strategy is to continue investing in local production and benefit from eventual government incentives for creating jobs in the auto manufacturing sector which would allow it to recover margins. The- re are promising indications that the government will move in that direction when the VAT law is issued which should provide substan- tial upside.

Industrials: tread with caution

Large gas consumers such as Ezz Steel continue to suffer from the gas shortage. Capacity utilization is low leading to bottom line los- ses. Admittedly, losses are narrowing lately and management is more optimistic on future gas deliveries for 2016 as FRSU vessels are


put in place for LNG imports and new gas fields come on stream in 2017. We still need to better understand the impact of global steel overcapacity on the Egyptian market and the profitability of the Ezz Steel DRI plant, a project which was initiated at a time of cheap and plentiful gas in the country. The discovery of the supergiant Zohr gas filed by ENI may well lay some of those worries to rest.

On the other side of the spectrum, El Sewedy Electric (2016 P/E 8.8) seems on track to reach the EGP 1 bn net income mark, the best per- formance ever recorded by the company. It proved its technical worth by implementing in collaboration with Siemens 650 MW of capacity in a record time of 6 months. This noticeable achievement on a con- tinent starved of electricity puts the company in a different league and bodes very well for the future projects backlog in the region.

Conclusion

Our company meetings indicate that the investment led recovery in Egypt is still underway and many corporates are set to benefit, ad- mittedly with a lag for some. Management teams shared our sur- prise at the hefty correction on the market this summer. Some local investors might have been unrealistic in their expectations of the recovery. The indiscriminate negative sentiment towards the EM space and leveraged GCC buyers have certainly not helped. At these valuation levels, with expected improvements to the top-down pic- ture and proactive management teams we increasingly see interest- ing investment opportunities in the market. When risk appetite lacks, opportunities arise and it is the dilemma investors have to overcome in that market.


FUND FACTS


Investment Advisor Custodian Bank Date of Launch Legal Form

Approved for Distribution


Volume as at 09/30/2015 Benchmark

NAV Calculation Management Fee ISIN Number Security Number

Bloomberg

Bellevue Asset Management

RBC Investor Services, Luxembourg June 30, 2009

Luxembourg UCITS IV SICAV

Luxembourg, Germany, Switzerland, Austria, Spain, UK

EUR 72.5 mn

DJ African Titans 50 Daily 'Forward Pricing' 1.6%

LU0433847240 10264484

BBAFOBE LX Equity


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