The global financial crisis spooked consumers, hammered exports and weighed on real estate. But as the last fiscal year came to a close, things started looking up.
Last year was a difficult one for the global economy, and despite Egypt's many positive domestic attributes, most notably its high liquidity and lack of personal debt -- the economy slowed sharply during the end of 2008 and the first quarter of 2009. In an encouraging sign, though, it recovered throughout the rest of the year. This steady rebound in demand was reflected in most companies' quarterly results.
Overall, while 2009 was a more difficult year than many companies had faced in some time, it did focus the minds of management teams on their core businesses. Looking forward, that focus should lead to better long-term performance.
Banking and Financial Services
Conservative banking practices over the last few years, from the Central Bank of Egypt and within the banking sector itself, led to Egyptian banks maintaining high liquidity, while deposits in most banks grew strongly.
After some concern in late 2008 and early 2009, the strength of Egypt's economy was underpinned by high levels of liquidity that allowed the economy to recover from the post-Lehman global shock in 3Q2008.
Egyptian banks reported higher profits in 2009 but with lower profitability, which is reflected by a lower return on average equity (ROAE). Commerical International Bank (CIB) succeeded in maintaining its net interest margin and improving the cost-to-income ratio. The bank's asset quality and provisions coverage remained high. Nationale Société Générale Bank (NSGB) and Crédit Agricole Egypt (CAE) achieved higher margins, but their efficiency ratio dropped, while both banks' asset quality improved.
Banks in Egypt scored higher capital adequacy ratios, in preparation for the second phase of banking sector reform and Basel II implementation. Egyptian banks, contrary to their peers in the MENA region, continued to show high liquidity ratios and low utilization levels.
In general, Egyptian banks reported slower balance sheet growth in 2009, but with higher liquidity positions. CIB, NSGB and CAE demonstrated higher balance sheet growth than the rest of the sector. CAE achieved the highest growth in lending at 17.5% and NSGB scored the highest growth in deposits with a gain of 18.5%. CIB achieved the highest ROAE at 24.1%, return on average assets with 2.5%, margins at 3.9%, efficiency of 34.3%, and provisions coverage of 199%.
In 2009, Islamic banks in Egypt, especially Al Baraka Bank Egypt (rebranded from Egyptian Saudi Finance Bank) and National Development Bank of Egypt (majority owned by Abu Dhabi Islamic Bank) have been working on their turnaround, and preparing for an aggressive re-branding with the improvement in the quality of services and product offerings. The result of these efforts has started to show in 1Q2010. It is notable that both banks continue to post losses or demonstrate weak profitability.
Consumer Goods
The rush of negative news at the end of 3Q2008 had a profound effect on the psyche of consumers across the world, Egypt included. Wall-to-wall coverage of the immense pressure on the banking system led consumers everywhere to rein in spending, with the local effect being that economic growth fell from over 7% annually to around 3.5% within a few weeks.
A similar trend in Egypt has two main causes: Consumers postponed buying in anticipation of falling prices and low levels of leverage in Egypt created a "wait and see" mentality among consumers.
However, there was a gradual recovery in consumer sentiment throughout 2009, as was seen in car demand and other consumer goods. Oriental Weavers (ORWE) showed a double-digit growth in local sales in 2009, GB Auto saw a good end to the year, Eastern Tobacco's demand was relatively inelastic and Arafa Holding held up.
Exports
In 1H2009, determining the outlook for individual company performance was difficult, and we were constantly revising our forecasts to account for new developments. But in 2H2009, we believe that we could see a strong recovery trend in the local market as consumers realized that price cuts would not be as significant as they had expected, and therefore started buying the necessary goods that they had postponed purchasing.
Recovery was uneven, however, as many of the Egyptian consumer goods companies are exposed to export markets, and the recovery in the US and European markets was not as strong in the latter part of 2009. Companies like ORWE have shown double-digit growth in local sales throughout 2009, while reporting a constant decline in exports to the US and Europe. Although exports account for most of ORWE's sales, local sales managed to bring the company's overall growth to a near flat level.
Local demand was much stronger than the demand for exports in 2009, especially during 2H2009. Automotive sales started weakly in 1Q2009 for GB Auto but amazingly picked up by 3Q2009 and were almost back to pre-crisis levels by 4Q2009. We also saw Eastern Tobacco play defensive, showing normal year-on-year growth as demand for cigarettes and tobacco products was not affected by the crisis. We expect companies exposed to strong local demand to continue benefiting more than export oriented companies, at least in the short term.
Telecoms
Telecoms had slower top line and subscriber growth and experienced pressure on their margins due to intensifying competition between the three mobile players Mobinil, Vodafone Egypt and Etisalat Egypt as well as the sole fixed-line operator, Telecom Egypt (TE).
Telecoms focused on cost-optimization programs in 2009 to mitigate tightening margins. Consequently, bottom-line performance came under pressure, with companies recording slower year-on-year growth versus 2008. One exception to this trend is TE, which realized a robust annual increase of 9.4% to LE 3.1 billion in 2009, on the back of lower finance costs (due to debt repayment) and the growth in investment income from Vodafone Egypt.
Nonetheless, the prevailing fixed-to-mobile substitution trend, together with aggressive promotional offers by mobile operators during the second half of 2009, continued to put pressure on TE's voice revenues, leading to a 1.5% annual decline in total revenues to LE 9.96 billion. Moreover, TE adopted a tighter credit policy in 2009, in order to clean up its fixed subscriber base, which resulted in the loss of 2.1 million subscribers during the year, ending with a subscriber base of 9.6 million.
TE, which has full exposure to fixed, mobile and internet services in Egypt, sustained its monopoly over the fixed line market in 2009, after the National Telecommunications Regulatory Authority (NTRA) postponed the offering of the country's second fixed-line license indefinitely. On the other hand, the NTRA opened up the market for competition on fixed services for the first time in 2009, through the issuance of two triple-play licenses that include the provision of value-added services (data and video), but not voice services, which will continue to be provided by Telecom Egypt.
Orascom Telecom (OT) experienced a sharp drop in its bottom-line in 2009, falling by 25% to LE 1.85 billion, due to a rough operational environment in Algeria, OT's largest operation. This is a result of the events that occurred in Algeria after the football match with Egypt, which led ultimately to a negative sentiment against Djezzy (the Algerian operation), a loss of market share and the booking of losses from damages suffered. Moreover, local currency devaluation in two of its major operations, Algeria and Pakistan, also contributed to a weak earnings performance for OT in 2009.
A fiercely competitive mobile market, with significant tariff reductions and promotional offers made by mobile operators, hurt Mobinil's performance. Its 8% increase to LE 10.8 billion in revenues in 2009 was weaker than the 21.3% annual growth in the top-line in 2008. Consequently, Mobinil's net profits were also impacted, witnessing a modest 3.4% annual increase to LE 2 billion in 2009. On the other hand, Mobinil was capable of maintaining its earnings before interest, taxes, depreciation and amortization (EBITDA) margin at 47% in 2009, mainly due to cost-cutting measures undertaken during the year, and despite extensive marketing efforts that accompanied the aggressive promotion campaigns.
Meanwhile, Mobinil maintained market leadership with a 45.8% market share at the end of 2009, despite the escalating competition in the mobile market from its strong rival, Vodafone Egypt, and the third entrant, Etisalat, which had a mobile subscriber base of 6.7 million and a market share of 12.1% in December 2009.
Vodafone Egypt, which was delisted from the Egyptian Exchange in 2007 and is 45% owned by Telecom Egypt, acquired more mobile subscribers in 2009 than its rival Mobinil, adding 5.7 million subscribers in 2009 and attaining a subscriber base of 23.3 million by the end of the year. Vodafone Egypt now has a 42.1% market share.
Building Materials, Construction and Power
Globally integrated commodity markets such as fertilizers, steel and copper had a tough year, but companies targeting the Egyptian construction industry benefitted from increased volumes, as a resilient market caused cement consumption to increase 24%, and steel consumption 41%.
A combination of young demographics and a relatively underdeveloped infrastructure puts Egypt amongst the most attractive countries for investment in the medium term, and boosts private participation in government-initiated PPP projects.
Orascom Construction Industries's (OCI) initiative to establish a 50/50 joint venture with Morgan Stanley to invest in infrastructure projects in the Middle East and Africa, we believe, will allow OCI to capitalize on the continued need for infrastructure in Egypt and the MENA region. Such funding permits OCI to focus on project execution rather than on raising additional debt to finance such long-term projects, which can extend beyond 20 years.
The Supreme Council on Energy in Egypt has set a target of generating 20% of electricity from renewable energy by 2020. This target includes 12% specifically from wind energy, translating into a total of 7,200 MW. To achieve the required targets for wind energy generation the government stated that 66.7% of the annual generation capacity required from wind energy (400 MW) will come from the private sector, with the remaining 200 MW to be supplied by the New and Renewable Energy Authority. So far, the government has backed 365 MW worth of wind energy generation.
While Ezz Steel is primarily a steel maker that caters to the local construction industry, its pricing power is strongly correlated to global steel pricing, and it is therefore dependent on steel demand in China, Russia, Brazil, India and other emerging markets to drive prices upwards. In 2009, Ezz Steel reported weak numbers as a direct result of the company's decision to shut down EFS, the subsidiary that sold a majority of its flat steel (used for industrial production) to export markets. Margins were squeezed as the average selling price stood at LE 3,067 per ton, down from an average of LE 5,244 per ton. Fixed cost losses from the closure of EFS should be reversed in 2010, allowing Ezz Steel to benefit fully from the ongoing construction activity in Egypt.
OCI has now become a global fertilizer producer, responsible for approximately 5 million tons of nitrogen fertilizer. Benefiting from low feedstock prices in Egypt, OCI is at a competitive advantage to a majority of global producers, which are exposed to fluctuations in the natural gas market. However, with fertilizer pricing being dependent on global supply and demand, weather and grain prices, OCI is exposed to a volatile pricing environment.
In 2009, OCI witnessed an overall quarter-on-quarter improvement in its nitrogen fertilizer markets, as prices recovered somewhat after the steep decline in the commodities markets at the end of 2008. The advantage of cheaper feedstock prices in North Africa allowed OCI to retain its impressive EBITDA margins of around 63%, while global marginal producers saw a strain in their profitability levels. Construction activity in OCI's key markets in the MENA region continued to grow, having won $3.2 billion (LE 18 billion) in new project awards in 2009.
Demand for power and an integrated solutions provider to build such power generation capacity allowed El Sewedy Cables to expand into a wide range of electrical products, such as cables, transformers, wind energy and meters. However, regional competition has pressured profitability for many cable producers and has left them exposed to the volatile nature of the global metals markets, namely copper and aluminum.
For 2009, El Sewedy's growth continued to be driven by its cables segment, with the electrical products growth limited thus far. Competition in regional markets and in Egypt continue to support its profitability, which resulted in a stable gross profit per ton of LE 5,000. We are still wary of the movement in copper prices, which could require El Sewedy to take on additional debt to finance its working capital.
Real Estate
The real estate sector is recov-ering from the 2008 slowdown with new contracts exceeding cancellations. Given the sound fundamentals for demand, real estate prices remained intact from 2009 to date, and are expected to remain so throughout the remainder of 2010. With affordability being one of the major issues related to the real estate sector in Egypt, several high-end real estate developers such as Palm Hills Development (PHD) and Sixth of October Development and Investment Company (SODIC) targeted the high-middle income segment by providing smaller-sized units at more affordable prices.
Moreover, real estate developers have been increasingly venturing into the retail, commercial and hospitality sectors as a means of obtaining steady and recurring revenue streams.
PHD witnessed a 70% year-on-year decline in cancellations in 1Q2010, which totaled LE 186.6 million, while new reservations and contracts stood at LE 1.3 billion in 1Q2010 against LE 939.6 million in 1Q2009. Furthermore, PHD launched new developments in 2009 where units had a starting price of LE 500,000, compared to an average of LE 1.7 million in 2008, targeting the higher-middle income segment.
As a means to obtain a source of recurring income, PHD acquired a 52% stake in MACOR for Securities Investment Company (subsequently increased to 60%), which holds minority stakes in a group of hotels. Through this acquisition, PHD plans to grow its inventory of hotel rooms from 762 to 1,150 by 2012. The company also plans to expand on its retail inventory through the development of a shopping mall in East Cairo, followed by another in West Cairo.
Similarly, SODIC witnessed an improvement in its year-on-year sales as it closed 1Q2010 with approximately LE 710 million in sales compared to LE 260 million in sales in 1Q2009. Sales have been driven mainly by the launch of a mixed-use block within Westown, named Forty West, in addition to a mini-business park, The Polygon.
SODIC plans to continue launching sub-projects in Westown during 2010, which will include a shopping mall and other mixed-use projects, followed by similar sub-projects in Eastown during 2H2010. Through the launch of these projects, SODIC will be able to secure a sustainable cash flow by renting its retail and commercial facilities.
Talaat Moustafa Group Holding (TMG) targets a wide range of segments from high to mid-income in its projects. Thus we believe that the company is less susceptible to risk than most high-end real estate developers.
However, TMG sold real estate units worth LE 1.2 billion in 1Q2010, compared to LE 436 million in 1Q2009, due to improved market conditions and the company's strategy to restart its marketing efforts to boost sales. Moreover, the company's landmark project, Madinaty, is a mega mixed-use project, which will include commercial, retail, educational and hospitality facilities.
This should provide TMG with recurring revenues, in addition to its current revenue streams coming from Al Rehab City (a mixed-use development) and its hotel operations.
By Beltone Financial
© Business Today Egypt 2010
