As the year comes to a close, an erratic stock market makes it difficult to plan for 2010
The end is near. The end of the year, that is, not the end of chaos in local markets. After a relatively stable preceding period and a growing sense of direction, last month was erratic to say the least, with few hints to guide investors as they attempt to predict company and market movements in 2010.
Despite the volatility of the EGX, 2010 is shaping up well on the economic front: The Ministry of Trade and Industry (MTI) is now forecasting a 5% GDP growth rate for the coming year based on strong numbers in non-petroleum exports. According to the MTI, during the first three quarters of 2009, exports of agricultural products increased 64%, cotton and textiles 31% and leather-based products 17% on 2008 levels. Overall non-petroleum exports grew 11% to $1.36 billion (LE 7.5 billion).
The MTI was heavily engaged in export promotion last month: The ministry announced it will auction 15 new rice export licenses, ending the rice export ban that began March 2008. Earlier in November, a Chinese trade delegation visited Egypt's International Trade Center to discuss the possibility of importing food commodities and fertilizer from Egypt.
The Consumer Protection Authority (CPA) has been busy regulating the goods market and tackling fraudulent practices. The CPA announced last month that it had confiscated 218,000 tons of expired food products and an assortment of 95,000 items including clothing, spare parts, electrical appliances and make-up that had been smuggled into Egypt. In the construction sector, the CPA also confiscated 24 tons of cement that was being sold on the black market at an inflated price.
Unfortunately, this level of organization seems to be missing from the stock exchange as erratic index movements, diverse company news and conflicting trends in critical sectors such as banking, financial services and telecoms are pushing investors to focus on short-term gains.
EGX and Indices
After last month's suspension of 29 listed companies -- at press time 18 had yet to be cleared for trading -- some are inching closer to the deadline for being de-listed from the exchange. Of these, four undisclosed companies accused brokerage firms of conspiring to speculate with their stocks by spreading rumors of stock splits or increases in issued capital. As a result of the accusations, Maged Shawky, chairman of the EGX, announced that six small and medium sized brokerages were under investigation for price fixing and market manipulation. The four companies that made the accusations remain suspended.
These developments prompted the EGX Board to announce amendments to listing regulations. The first change stipulates that if a company wishes to issue capital, its average net profits over three years must not be less than 5% of the capital that the company plans to issue.
The board also set new standards on stocks' par values versus number of stocks issued to ensure that any company board member does not hold less than 0.05% of a company's traded capital.
The EGX 30 fell significantly last month, starting the period at just over 7,000 points, heading up to 7,250 by October 26, before ending the period at 6,654. The major collapse occurred between the trading sessions on October 27 (7,250 points) and November 5 (6,550 points). Only a small spike emerged between November 5 and 11, with the index rising from 6,550 to 6,850 points. This spike represented the reporting period's profit making sessions.
The EGX 70 had a smoother curve, with fewer spikes than the EGX 30 at the start and end of the reporting period. The index still followed a downward trend, though, starting the period at 872 points and ending it at 752, with an all-period low of 728 during the September 5 trading session. The EGX 70's fall started on October 25, two trading sessions ahead of the EGX 30. A spike towards the end of the period saw the index rise from 728 to 780 points, with the session ending on November 10.
The EGX 100 showed more resilience, although it began to collapse from October 26, reaching an all-period low of 1,155 points on November 5. The peak towards the end of the period saw the index rise from 1,155 to 1,228 points. This profitable upturn, like that of the EGX 70, ended on November 10, after which the index witnessed a smooth downward curve.
For the first time since the EGX 70 and EGX 100 were created, their performance essentially matched that of the EGX 30 throughout a whole reporting period. The only difference was during the trading sessions from October 21 to 26, when the EGX 30 spiked from 7,062 to 7,250 points, while there was negligible change in the other two indices. This spike, coming just before all three indices fell, points to a surge in trading volume rather than a significant increase in stock prices. The other difference was that the decline after mid-period peaks on the EGX 30 amounted to 2.9%, compared with 2.1% and 2.2% decreases in the EGX 30 and EGX 70, respectively.
Banking
The banking sector is not doing well at all, with several banks -- Barclays Bank, Arab Banking Institution, Arab African International Bank, Arab Bank, Commercial International Bank and Mashreq Bank -- ordered by the Central Bank of Egypt to freeze a total of LE 745 million in cash assets for 24 months. The decision comes after these six banks provided loans to several subsidiaries of Al Kharafi Group in local currency, collateralized by their foreign currency accounts. The CBE took the decision based on currency fluctuations the deals were exposed to.
The banking sector index fluctuated significantly during the reporting period, starting at 1,294 points and ending at 1,309. The all-period low (1,266 points) was on November 3 -- two days before EGX indices bottomed out -- while the all-period high (1,337 points) was on November 11.
Credit Agricole (CIEB.CA, bt100 number 39) obtained approval from the Egyptian Financial Services Authority (EFSA) to acquire 99.98% of Egyptian Real Estate Financing, although the price has yet to be determined. During the first nine months of 2009, Credit Agricole's net profits topped LE 256 million, down from LE 312 million for the same period in 2008.
CIB (COMI.CA, bt100 number 15) announced that it would increase issued and paid in capital by LE 250 million to LE 2.95 billion. This increase will be dedicated to the bank's employees as part of CIB's incentive programs, through which employees can own up to 5% of the bank's capital; the previous limit was 3%. CIB's consolidated net profits for the first nine months of 2009 topped LE 1.32 billion, comparable to LE 1.31 billion during the first nine months of 2008.
NSGB (NSGB.CA, bt100 number 19) announced LE 791.5 million net profits for the first nine months of 2009, down from LE 828.5 million during the same period in 2008. Net profits for the bank's third quarter fell 20% on 2008, to LE 224 million. Despite the significant drop, 70% of company share transactions during the nine months amounted to LE 828.5 million in investor profit.
HSBC (HSBC.CA, bt100 number 26) reported net profits of LE 931.9 million up from LE 882.8 million during the same period in 2008. Barclays Bank (CBIB.CA, bt100 number 38) recorded net profits of LE 170.6 million up from LE 140 million in 2008.
Overall, the banking sector has been unstable, with most banks recording lower net profits for the first three quarters of this year and the Central Bank tightening its reign over banking operations. The banking index (representing listed banks) reflects investor uncertainty, fluctuating widely with no obvious trend.
Financial Services
In terms of stock prices, the financial services sector is still the voice of sanity, mimicking the EGX 30, 70 and 100, with the exception that its all-period low (844 points) occurred two days before that of the three main indices. The sector's mid-period peak, however, was more extreme than that of EGX 30, 70 and 100, and the fall that followed was equally sharp. The sector started the period at 933 points and ended it at 836.
In company news, Egyptian Kuwaiti Holding (EKHO.CA, bt100 number 32) announced that it had obtained initial approvals from the Industrial Development Authority (IDA) to establish a phosphate fertilizer production facility. Details of this facility will be announced once approval is finalized. The company announced net profits of $125.97 million (LE 692.8 million) for the first nine months of 2009, up from $108.92 million (LE 599 million) in 2008. Interestingly, integrated energy company Tri Ocean, an EKHO subsidiary, was the main contributor to this increase in net profits, generating LE 300 million. This significant contribution was the result of Tri-Ocean selling one of its own subsidiaries, Egyptian Company for Flat Glass Production, for LE 483 million and then moving LE 176 million to a provisions account; the rest contributed to the company's net profit.
In other financial news, EFG-Hermes (HRHO.CA, bt100 number 37) recorded net profits for the first nine months of 2009 amounting to LE 474.6 million, up from LE 462.5 million in the same period 2008. The company also announced that it had signed a contract with the Egyptian Company for Mobile Services (Mobinil, EMOB.CA, bt100 number 8) to become a consultant on issuing local bonds. EFG-Hermes denied rumors that it intends to acquire a controlling stake in Audi Bank.
Naeem Holding (NAHO.CA, bt100 number 91) announced net losses for the first three quarters of 2009 amounting to $4.3 million (LE 23.5 million) compared with net profits of $20.2 million (LE 111.2 million) for the same period in 2008. The company also announced 5,837,000 new treasury shares at a par value of $1 per share, effectively reducing its capital by LE 32.1 million. Naeem also announced that it would resume acquiring its own stock on the open market until it has regained 4.9% of the listed 320 million shares.
On the operational front, Naeem said that it plans to sell 35% of Arabia Online, 15% of which will go to employees of the company. This will leave Naeem with a 51% controlling stake, down from its current 80%, while Hesham Tawfik, chairman of Arabia, will reduce his personal share from 14% to 20%. Naeem is expected to present another request to the EFSA to allow it to establish a gold investment fund. Its first attempt, with the fund capital set at LE 500 million, was rejected in May this year.
The financial services sector is performing on a par with the main market indices, but if it is to become the main sector catapulting the local economy through 2010, it should be ahead of the market, not running with it.
Telecom
The price war between mobile providers continued last month, with Telecom Egypt (TE, ETEL.CA bt100 number 7) also pushing its landline services. This war has yet to reach the legal realms, so far remaining confined to marketing campaigns.
Also, the National Telecom Regulatory Authority has announced that two triple play licenses are up for grabs, heating up competition and putting pressure on TE's monopoly. Concerns over regulation and monitoring of the advanced services are causing telecom investors to question how successful the triple play licenses will be. These doubts are exercising downward pressure on the telecom index.
The telecom stock index reflected the overall state of the sector, dropping continuously over the reporting period. It started the period at 627 points, ending at 554.
The first company expected to go after a triple-play license is Orascom Telecom (OT, ORTE.CA, bt100 number 1). OT announced that its net profits for the first three quarters of 2009 were LE 2.39 billion, up slightly on LE 2.24 billion in 2008. The company's 3Q2009 net profits topped LE 1.1 billion up on LE 776.9 million in 3Q2008. OT has also undergone a management change with the promotion of Khaled Bishara from his role as operations director for Orascom Telecom Holding to a board member and vice managing director under Naguib Sawiris, chairman and managing director of OT Holding.
Raya Holding (RAYA.CA) is the second company expected to go after a triple-play license. The company announced net profits for the first nine months of 2009 of LE 25.2 million down from LE 41 million in 2008. As a result of the drop, the company's board decided to re-introduce the offering of stock options to employees and top management. The move is intended to raise confidence in the company's performance. Raya also signed an agreement with Coca Cola to act as an outsourcer for the beverage company's business-to-business service center dubbed Coca Cola Cares, which provides services to current and future retailers of the brand.
The third party expected to bid for a triple-play license is Mobinil. The company recorded LE 1.46 billion of profits in the first nine months of the year, a slight increase on LE 1.41 billion last year.
With its the fixed-line monopoly, TE reported nine-month net profits of LE 2.58 billion compared with LE 2.19 billion in 2008.
The telecoms sector (whether listed or un-listed) is in disarray. While it is unlikely that major players will go bankrupt, they are facing a new era of telecommunications with the introduction of triple-play services. At the same time they are fighting an all-out war over local market share as fixed and mobile line markets inch toward saturation. This is not a good sign for most investors.
Economy Bytes
On the macro level, urban inflation is already heading up: jumping to an annualized 13.3% during October 2009, up from 10.8% in September on the back of rising food prices. The CBE kept the overnight deposit and lending rates unchanged at 8.25% and 9.75%, respectively. Net international reserves reached $34 billion (LE 187 billion) in October compared to $33.5 billion (LE 184 billion) in September.
By Tamer Hafez
© Business Today Egypt 2009
