It's not just the August weather, but also the government and corporate stocks that are heating things up
During the summer vacation season, like the rest of the country, people in power often take their annual leave all in one go, letting important decisions wait -- usually until sometime in September. This means summer is typically a good time to relax: business is slow and busy CEOs can rest (relatively) securely in the knowledge that there are fewer pressing matters demanding their attention.
Unfortunately, this summer is different. This is mainly due to the announcement of several restructuring programs that affect entire sectors, including those involved in import-export.
The restructuring -- which aims to stimulate the economy post-downturn -- began with the dissolution of the Capital Market Authority (CMA) and other non-banking supervisory entities, to make way for the Egyptian Financial Supervisory Authority (EFSA). On July 1, EFSA was declared the sole non-banking financial supervisory entity, overseeing the capital market along with insurance, real estate financing, financial leasing, IPOs and any future non-banking financial instrument.
The authority's first decision was to reject France Telecom's tender offer to acquire 100% of Mobinil listed shares, on the basis that minority shareholders should receive the price set by the international arbitration court rather than market price, which is significantly less.
Dairy is the other sector expected to change dramatically within the coming months. The Standards and Quality Authority has announced that all 400 locally registered dairy producers will be obliged to implement 36 new European Union quality monitoring systems and standards, although no time frame has been set. These standards will span the entire production process -- from raw milk to packaging of the final product. Expect announcements of new investments within the coming months.
Other macro economic announcements include an extension of the ban on cement exports until October 2010, and the lifting of an export ban on rice, rice fragments and broken rice kernel. However, an export fee of LE 2,000 per ton has been placed on rice exports (up from LE 1,000 per ton pre-ban) while exported rice fragments and broken kernels will be subject to a LE 300-per-ton fee. Commodity imports are still under scrutiny -- and have generated a new round of controversy -- after the Ministry of Agriculture discovered shipments of inedible corn and wheat. Repeated violations of imported food safety standards have seen the idea of banning imports from some countries, particularly Ukraine, floated in local media.
For both the EGX and its listed companies, this month has been all about change, as companies announced a slew of short and medium-term plans, structural changes and upcoming IPOs.
The Changing EGX
The EGX signed a memorandum of understanding with China's Shenzhen Stock Exchange that will facilitate the exchange of knowledge and expertise between the two bodies.
Main areas of cooperation will include information exchange on regulatory frameworks, staff swaps and joint research projects, studies and seminars. Other areas of cooperation include the possibility of offshore listing for both new and traded financial instruments. In addition, the EGX board has amended the way it calculates the EGX 70 index to take into account the effect of corporate actions such as dividend announcements on stock prices.
In terms of EGX restructuring, a presidential decree took effect July 1, regarding 'provision violations' within the EGX legal framework. Minister of Investment Mahmoud Mohieldin says that the presidential decree makes the EGX responsible for detecting, monitoring and taking corrective action in case of stock market violations, thus ensuring market efficiency and transparency. The EGX will be authorized to form committees to investigate listed securities, trading practices and memberships. Previously, these responsibilities fell to the CMA.
As a result of the decree, the prime minister will now appoint the chairman and deputy chairman of the EGX. The rest of the board will be composed of a representative for the Central Bank of Egypt (CBE) selected by the CBE Governor, three members representing security trading companies, one representative for the custodian banks elected by the Banks' Union's board of directors, and two representatives of listed companies not operating in security trading, one of which will represent SMEs.
The decree also stipulates that the chairman of the EGX report any key developments, influential events, violations or breaches by entities operating in the securities market, directly to the chairman of the General Authority for Financial Control.
EGX 30, EGX 70
The EGX 30 and EGX 70 indices have been giving investors mixed signals about what to expect for the rest of the year. The confusion began after listed companies announced their 2Q2009 and FY2008-09 results. Most reported losses, with a surprise few reporting profits.
In terms of index movement, the EGX 30 has been fluctuating strongly since the start of the reporting period (starting June 21) -- dropping from 6,000 points to 5,500, then rising to 6,000 again, but dropping to a period low 5,200 points. At press time, the EGX 30 was once again on the rise and had reached 5,800 in the session ending July 20.
The EGX 70 has been showing similar instability, dropping from 675 points to an all-period low of 589, then rising to 640 before dropping to 610. At press time, the index was gathering momentum, ending at 650 points.
The summer season, Ramadan, both Eid holidays, Christmas and New Year are behind these fluctuations; the quick succession of holidays is making it difficult to forecast financial performance for listed companies over the remainder of 2009. The fact that the EGX 30 all-period low was toward the end of the reporting period, while the EGX 70 all-period low fell at the beginning indicates that over the coming three to four months, stock traders are expecting the top 30 listed companies to suffer more than the 70 subsequent ones -- with the EGX 30 curve taking a downward turn as the EGX 70 gains momentum.
Banking
In terms of stock prices, the banking sector was outperforming the EGX 30 and EGX 70 until July 8. The banking index had been on the rise since the start of the reporting period, reaching an all-period high of 1,168 on July 2. Since then, the index has dropped significantly, reaching an all-period low of 1,000 points on July 13. At press time, the index was regaining momentum, ending the reporting period at 1,100 points.
In terms of listed banks' announcements, Actis private equity said it will pay $244 million (LE 1.37 billion) to become the biggest shareholder in Commercial International Bank (CIB, COMI.CA, bt100 number 15) through the acquisition of 27.3 million GDRs from a syndicate of investors led by Ripplewood Holding LLC. These GDRs represent 50% of Ripplewood's stake in CIB and 9.33% of the bank's listed shares.
NSGB (NSGB.CA, bt100 number 19) has announced that it will increase issued capital to LE 3.32 billion -- up from LE 3.02 billion -- through the issue of 30 million shares in the form of a 1:10 stock dividend. Shareholder structure remains unchanged with NSGB France holding 77.17% of local operations.
Meanwhile, Bank of Alexandria (BALX.CA, bt100 number 23) has announced that it is working on two feasibility studies regarding the establishment of two insurance companies as a joint project with Tazor Bahraini Company. The studies are still awaiting initial approval.
Based on how the sector index is performing and the nature of announcements by the three highest ranked banks on the bt100, it is evident that banks are starting to prepare their financial structures and strategic positioning to fully utilize opportunities that could materialize in the remaining months of 2009.
Real Estate
The real estate sector has not been performing up to its usual standards during this time of year -- when Arab and locals investors start buying up property for summer use. The index has been on an overall downward trend throughout the reporting period, starting at a high of 1,093 points and ending at 1,043. Like the EGX 30 index, which had two major dips, the real estate sector's second dip fell through the 1,000-point barrier to record an all-period low of 938.
In terms of company news, Talaat Moustafa Group (TMG, TMGH.CA, bt100 number 10) doesn't know whether it should laugh or cry. Bad news came from the nation's highest religious authority, Grand Mufti of Egypt Ali Gomaa, who concurred with the Supreme Court's decision to execute Hesham Talaat Moustafa, the company's former CEO who was convicted of murder. An appeal was sent to the president, requesting presidential pardon on the execution decision. The company's good news is the near completion of the first phase of its star project, Madinaty, and higher-than-expected sale of residential and commercial units.
Palm Hills Development (PHDC.CA, bt100 number 43) has announced a 0.5:1 stock dividend, effectively raising its capital by 50% to just under LE 1.4 billion. Meanwhile, SODIC (OCDI.CA, bt100 number 87) announced that its investment budget until the end of 2010 would be LE 2 billion. Phase three of SODIC's flagship Allegria project commenced during 2Q2009, while phases one and two should be ready for delivery by 4Q2010.
Analyzing the real estate sector index is quite difficult due to TMG's large influence on the sector's performance. Out of the 25 actively traded real estate companies on the EGX, five are 100% owned (directly or indirectly) by TMG Holding. In addition, of the eight real estate companies listed on the 2009 bt100 list, only Palm Hills Development and SODIC are not owned by TMG. So, with the confusion surrounding the execution and investors' decision to freeze their TMG stock portfolio -- the stock price gained LE 0.01 per share over the reporting period -- the sector index was bound to slide.
Travel and Leisure
The travel and leisure sector has been behaving similarly to real estate, albeit with a much more pronounced fluctuation between highs and lows. The all-period high came at the start of the reporting period -- 840 points -- while the low was at the session ending July 13, where the index dropped to 690 points -- its second dip of the period. At press time, the sector was showing recovery, standing at 786 points.
In terms of company news, Swiss-based Orascom Development Holding (ODHN.CA, bt100 number 22) announced that it has started operations on a mega development project in Morocco covering 15 million square meters of Shebika Valley, 300 kilometers from Agadir. Phase one will see the development of five million square meters, hosting 1,850 residential and 2,500 hotel units. The agreement was signed in 2007 with the Moroccan government. Moroccan investment company Gestion Depot et des Caisse owns 35% of the project.
Remco Touristic Villages' (RTVC.CA, bt100 number 56) board of director's announced the acquisition of 1.11 million shares, of a requested 3 million, as treasury at prices ranging from LE 6.70 to LE 7.06 per share. Despite this, the company's stock price decreased from LE 7.24 to LE 6.50 per share during the reporting period, making the acquisition somewhat pointless. The remaining eight companies appearing on the bt100 have not reported any significant news regarding their operations or strategies.
One of the main reasons behind the significant downward slope of the travel and leisure sector index is that the summer season has been effectively cut short with Ramadan coming during August 2009.
However, forecasts point to the sector witnessing a significant boost during the month of Ramadan as Arabs flock to spend the Holy month in Egypt to enjoy entertainment and a lifestyle not permitted in their more restrictive countries.
New IPOs
Uncharacteristically for this time of the year, a whole host of private, as well as listed, entities have announced plans to increase public ownership of their capital. These announcements have created anticipation among stock investors, contributing to the massive fluctuation seen in the EGX 30 and EGX 70 indices.
First up is the FMCG and related industries sector. Regina Food Industries declared that it would go public after Ramadan, with 45 million shares at a par value of LE 1 per share. Cairo Investment Holding is currently restructuring Regina in preparation for the IPO. If successful, 75% of Regina will be in free float and will effectively double the company's capital to LE 60 million. Cairo Investment Holding is also restructuring four small FMCG companies. Still unclear is whether these companies will be listed on the EGX (if their raised capital is more than LE 25 million) or Nilex, the SME stock exchange.
The banking sector has also seen several IPO announcements. Bank of Alexandria is in discussions with the government regarding the sale of the latter's 20% stake in the bank. Also considering IPOs are United Bank and Arab African International Bank, which plan to float 60% of their respective companies by no later than 2011. Meanwhile, the CBE has launched the second phase of its banking restructuring program. Spanning four years, the aim of the program is to restructure specialized public banks in preparation for the sale of CBE's share in these banks via IPO.
Economy Bytes
Macroeconomic news and forecasts -- including GDP forecasts, inflation and urban inflation rates, tax income and a change in overnight loan and deposit rates -- have been quite positive at 2009's halfway point.
The CBE released its first realistic forecast of 2009 GDP, estimating growth of between 3% and 4% -- down almost 2% on 2008 and at least 1% less than predicted at the start of the year.
The Central Agency for Public Mobilization and Statistics has announced that the nation's inflation rate stands at an annualized 9.8% as of May, down 1.4% from April and 4.2% in January. Urban inflation dropped to 10% in June, down from 10.2% in May. The CBE also announced that it had reduced overnight deposit and lending rates by 0.5% to settle at 9% and 10.5% respectively, with the discount rate dropping 0.5% to 9%. The CBE announced that international reserves had topped $31.2 billion (LE 171 billion) in May, an increase of 0.1% over April.
On the tax front, the Tax Authority announced that its revenues reached LE 145.5 billion during FY2008/09, an increase of 20% over FY2007/08.
By Tamer Hafez
© Business Today Egypt 2009
