Inflation may have more than tripled since 2005, but the economy seems to be holding its own
The Cairo and Alexandria Stock Exchanges (CASE)'s benchmark CASE-30 Index recorded a welcome 7% jump in December after months of sideway trading that saw the index recording meager changes between 0.5% and 2%.
Boosting the market lately has been the success of the privatization process, capped by the sale of the Bank of Alexandria at $1.6 billion, or six times its book value. As the government continues to restructure itself as well as the economy, Minister of Finance and Insurance Youssef Boutros-Ghali announced that proceeds from the Bank of Alex sale will be primarily used to repay some of more than LE 10 billion in public-sector debts: LE 7.8 billion will go to public-sector banks National Bank of Egypt and Banque Misr, while the balance is owed to private banks.
As figures for the first quarter of the 2006-07 fiscal year trickle in, major indicators are looking good: The economy grew 7.1% compared to 6.2% last year, exports surged 34% by the end of the three-month period ending September 30, compared to a 29% increase during the same period 2005, and foreign direct investment increased 66% for the quarter due to the improvement of the investment climate and monetary policy stability.
Still, the Central Bank of Egypt's Monetary Policy Committee met for the second time on December 14 to raise its key overnight-deposit and lending rates by 0.25%, to settle at 8.75% and 10.75%, respectively. This follows a previous hike of 0.5% made in early November. The rate hikes are one of the CBE's primary mechanisms for curbing inflation, which jumped to 11.8% in October 2006, up from 3.1% in December 2005.
The CBE claims its figures indicate the economy's ability to weather the inflationary spike and its fundamental strength. Officials point in particular to foreign reserves, which hit $24.9 billion at the end of November 2006 compared to $21.21 billion in November 2005.
Standard & Poor (S&P)'s annual report affirms CBE's optimism in the economy. Also based on Egypt's strong economic figures, successful structural and banking sector reform, the report affirmed the agency's BB+ foreign currency and BBB- local-currency long-term sovereign credit ratings for the country. The B foreign currency and A-3 local currency short-term ratings were also affirmed with a stable outlook. As credit-rating agencies such as S&P are independent businesses whose ratings are based on their own research and analysis, their confidence in the stability of Egypt's economic outlook should be comforting.
Telecoms
Telecom giant Orascom Telecom (OT, bt100 number 1, ticker: ORTE) and subsidiary Mobinil (bt100 number 6, ticker: EMOB) were 10% and 12% higher through our reporting period, respectively.
It was no surprise last month that OT stepped up with an offer to bid for Saudi Arabia's third mobile license, expected to be launched in 2007. OT is bidding as part of a consortium with Saudi investors, with preliminary estimates of 5 million subscribers. Meanwhile, OT's global subsidiaries continue to grow, posting a subscriber base of 50 million by the end of November, up from 46.5 million in September 2006 and 30 million in September 2005, supporting the stock towards the end of the reporting period. The Sawiris-owned telecommunications giant is expecting to net 100 million subscribers by 2009.
In other news, Hong Kong-based Hutchison Telecom, in which OT has a 19.3% stake, has put its 67% stake in its Indian operation, Hutchison Essar (HE), on the auction block. Valued at $14 billion, the transaction is expected to be one of the largest sales ever in the global telecom industry.
At press time, UK-based Vodafone was reportedly considering making a bid in excess of $13.5 billion. While India's Reliance Communications is expected to make an offer of their own, analysts believe that rumors of a bid from OT are overheated, given that the company is unlikely to be able to raise the funds.
OT does stand to benefit from the HE sale through its 19.3% stake in HWG, although it was not clear at press time if the Egypt-based operator would distribute the capital gains as dividends or reinvest them in its other operations.
In Algeria, OT signed an agreement to purchase an additional 1.21% indirect stake in its Algerian mobile operator Orascom Telecom Algeria (OTA) for $61 million from individual investors. In October, OT had bought 7.91% of OTA from the Emirates International Investment Company. Following its latest bid, OT's stake in the 10-million-subscriber operator will be 96.81%.
Meanwhile, Egyptian subsidiary Mobinil announced its active subscriber base had hit the 8.1 million mark, an increase of 894,000 since September 2006. Rival Vodafone Egypt (Vodafone, bt100 number 5, ticker: VODE) had reported a total 8 million active subscribers in December, showing an increase of only 200,000, which analysts suggest goes to indicate Mobinil's success in solving its high churn rate, which had seen many subscribers switching service providers.
Nevertheless, Vodafone last reported a 12-month rolling blended average revenue per user (ARPU) of LE 966 in the quarter ending September 2006. Vodafone stock value moved 2% higher, coming close to LE 100 mid-month, but ultimately closed the reporting period 1% lower. Vodafone Europe bought a 4.69% stake in Vodafone Egypt, buying 11.7 million shares at LE 100 per share.
Telecom Egypt (TE, bt100 number 3, ticker: ETEL) is currently negotiating with a group of Saudi investors to establish a fixed-line telecommunication company in Saudi Arabia. TE officials announced that five Saudi companies have expressed an interest in bidding for the second fixed-line license in the country. It is worth noting that there will also be an offer for bids for a third mobile-network license in Saudi Arabia in 2007.
Finance
After releasing its nine-month consolidated results, which showed a more than two-fold increase in its net profits to LE 525 million in mid-November, EFG-Hermes (EFG, bt100 number 26, ticker: HRHO) climbed 8%, closing the reporting period at LE 42.75.
The regional investment bank recently launched its online-trading service in Egypt and is waiting for approval from the Capital Market Authority to begin margin trading. The company has been expanding its activities regionally as well, with operations in the UAE and Saudi Arabia.
Also climbing 8% during our reporting period was Commercial International Bank (CIB, bt100 number 13, ticker: COMI), closing at LE 58. The bank had been one of the contenders for the government's 80% stake BOA, but pulled out at the last minute, announcing that it had other plans to expand regionally, starting with establishing CIB Algeria. National Socit Gnrale Bank (NSGB, bt100 number 23) finalized its merger with Misr International Bank (MIBank, bt100 number 21, ticker: MIBA) during the reporting period, which saw the stock come under profit-taking selling pressures, leaving it more than 2% lower at LE 45.
Construction and Real Estate
Sinai Cement (bt100 number 45, ticker: SCEM) announced plans for an additional $85 million production line producing 600,000 tons per year of white cement and 1.5 million tons of grey cement per year starting December 2008. Currently, Sinai Cement produces 450,000 tons of white cement per year and 1.5 million tons of grey cement per year, and supplemented with the new production line is expected to reach 3 million tons of grey cement and 1 million tons of white cement per year by 2008.
Misr Beni Suef Cement (MBSC, bt100 number 48) signed a contract with France's Polysius to build a second production line at its factory. The new line will be ready in 22-24 months' time and will produce 5,000 tons of clinker a day. MBSC now has a capacity of 1.4 million tons a year.
Despite these developments, cement stocks fared poorly during our reporting period. MBSC closed the period flat at LE 110, Suez Cement (SUCE, bt100 number 11) dropped 2.4% and Misr Qena Cement (MCQE, bt100 number 46) closed almost 6% lower.
Orascom Construction Industries (OCI, bt 100 number 2, ticker: OCIC) recorded a 7% increase to LE 263 as rumors were confirmed that it would be selling a 20% stake of its Nile Valley Gas Company to Citadel Group subsidiary Arab Company for Engineering.
Steel producers Ezz Steel Rebars (bt100 number 9, ticker: ESRS) and El-Ezz National Iron and Steel (IRAX, bt100 number 4), both closed the reporting period more than 1% lower at LE 55.76 and LE 963.47, respectively. News reports had revealed that IRAX recorded nine-month net profits worth LE 1.5 billion, 12% lower than the LE 1.7 billion it had hit in September 2005.
Recently making its way onto the auction block was Medinet Nasr Housing and Development (bt100 number 85, ticker: MNHD), drawing an offer for a 40% stake at LE 110 per share from Beltone Investment and Orascom Hotels and Development (OHD, bt100 number 32, ticker: ORHD). The deal is estimated to be worth LE 704 million, with Beltone Investment Group holding a 69.53% stake, Beltone Capital Holding for Financial Investments 10% and OHD holding the balance.
The consortium's offer for 40% comes after its failure to bid for a full stake in the state-owned real estate developer. As the deal was completed, the group had managed to grab only 26.37% of Nasr City Housing.
OHD, whose recent extraordinary general meeting approved an increase in authorized capital to LE 5 billion, revealed its intentions to acquire a 51% controlling stake in Garana Touristic Group through an equity swap for OHD shares in a deal valued at LE 235 million. The company also announced that it has established partnership with an unnamed international real estate developer to build low-income housing on an 8.4 million square meter plot of land in Cairo's Sixth of October city.
In other real-estate news, Sixth of October Development and Investment Company (SODIC, bt100 number 76, ticker: OCDI) have agreed to a merger with Palm Hills Development, a deal the company expects will make it the fourteenth-largest to be listed on the CASE.
With the beginning of a new year, investors are still hoping for a rally across the board, usually characteristic of this time of year. We can expect that the privatization process will carry on as will sector reforms such as those that have seen the number of banks operating in the country shrink to 30, down from 67 in 2004. With the market's efficiency enhanced and more investment instruments making their debut in the market other than the safe yet low-yielding bank accounts 2007 holds promises for high levels of activity, new listings and possibly new records.
By Fatima El-Saadani
© Business Today Egypt 2007
