Egypt Book - June 2016

PRIME INVESTMENT RESEARCH

INVESTORS’ CONFIDENCE… THE MISSING PIECE OF THE PUZZLE

EGYPT BOOK JUNE 2016

Contents

Executive Summary …………………………………………………………………………………………..……...3 Global Snapshot ………………………………………………………….........................................…….5 Macro Economy ……………………………………………......................................…………..…...…..8 Stock Market Focus ……………………………………………......................................………….....21 Real Estate Sector ……………………………....................................……………………..........…..25 Sixth of October for Development and Investment (SODIC)…………….….……………………………………...28 Palm Hills Development Company ……………………………………………………………………………………………..31 Emaar Misr for Development ……………………………………………………………………………………………………..34

Banking & Financial Sector …………………………………………………………………………………..….38 Commercial International Bank (CIB)……………….………………………………………………………………………….44 Housing And Development Bank (HDBK) …………………………………………………………………………………….46 Credit Agricole Egypt ………………………………………………………………………………………………………………….48 Export Development Bank of Egypt …………………………………………………………………………………………….50 Abu Dhabi Islamic Bank (ADIB) …………………………………………………………………………………………….……..52 EFG Hermes ………………………………………………………………………………………………………………………………..54

Power & Contracting Sector …………………………………………………………………………………….58 El Sewedy Electric ……………………………………………………………………………………………………………………….60 Orascom Construction ………………………………………………………………………………………………………………..62

Building Materials …………………………………………………………………………………………………..66 Cement ……………………………………………………………………..……………………………………………………………66 Suez Cement ………………………………………………………………………………………………………………………………70 Misr Cement Qena ……………………………………………………………………………………………………………………..72 Arabian Cement ………………………………………………………………………………………………………………………….74 Sinai Cement ………………………………………………………………………………………………………………………………76 South Valley Cement ………………………………………………………………………………………………………………….78 Steel ………………………………………………………………………………………………..……………………………………..80 Ezz Steel ……………………………………………………………………………………………………………………………………..84

Petrochemicals ………………………………………………………………………………………………………..88 Sidi Kreir Petrochemicals …………………………………………………………………………………………………………….90

Food and Beverages Sector ……………………………………………………………………………………..94 Sugar ……………………………………………………………………………………………………………………………………..94 Delta Sugar Co. …………………………………………………………………………………………………………………………..98 Dairy …………………………………………………………………………………………………………………………………….100 Juhayna Food Industries …………………………………………………………………………………………………………..102

Telecommunications …………………………………………………………………………………….……….107 Telecom Egypt ………………………………………………………………………………………………………………………….109

Personal & Household Products – Textiles ……………………………………………………………..112 Oriental Weavers ……………………………………………………………………………………………………………………..114

Industrial Goods – Automotive …………………………………………..…………………………….…..117 GB Auto …………………………………………………………………………………………………………………………………….118


EGYPT BOOK CONTENTS

2


EGYPT BOOK EXECUTIVE SUMMARY

3

Global activity is still subdued… While advanced economies showed a mild economic growth in 2015, emerging and developing economies, from the other hand, witnessed a decline for the fifth year in a row taking the global economic growth down to 3.1% in 2015 from 3.4% in 2014. global economic outlook is yet still affected by the slowdown in the Chi-nese economy that could rather be described as a naturalization stage rather than a recession indicating a sustained decrease in commodity prices accompanied with the still falling oil and energy prices. Moreover, monetary policies in emerging economies are to be further affected by the tightening trend in the USA con-tractionary policy. What after the devaluation? After taking the long awaited decision of devaluing the Egyptian local currency by the monetary authority in mid-March 2016, the corner stone of boosting the economy - now - is regaining the investors’ confidence back, as consumption is expected to get exhausted in accordance with the ascetic procedures planned by the government as well as climbing up inflation rates; the government from the other side, is to slowdown its expenditures and investments on the back of escalating budget deficit and ballooning public debt. The deci-sion of the devaluation is - supposed - to increase the government’s inflows of foreign currency in term of increasing exports proceeds, tourism revenues and FDIs; however, as the international trade is affected by the global economic slowdown and as tourism is affected by the recent insecurity incidents, the remaining playing card to ease the foreign currency crunch is to attract the inflows of FDIs. The decision of the devaluation is considered a necessary step but not sufficient, other procedures must be considered in terms of applying the delayed reforms, the most important of which is amending the investment law and putting a definite frame-work for the repatriation process; other wise, the overoptimistic targets set by the government for the up-coming fiscal year in terms of achieving 5.2% real GDP growth rate and 9.8% fiscal deficit will not materialize. Moreover, no further devaluation is expected to take place, at least in the short run, in our view that, if the one big devaluation, that took place two months ago, did not help in eliminating the FX risk, attracting FDIs and boosting exports, then no other further devaluation will do, as devaluing the local currency now will incur costs outweighing its benefits in terms of escalating inflation rates by the time of the holy month of Ramadan and paying the country’s pending dues; in addition, this will push the market and speculators back into the stage of “wait & see”, a feature that was highly criticized in the preceding CBE management that used to de-value the local currency gradually. EGX is Undervalued… The slowdown in China’s economy growth rate weighed negatively on global markets during 2015. Therefore, 2015 was a tough year for the majority of global markets. After a strong performance during 2014, Egypt’s stock market witnessed very weak performance in 2015, where EGX30 recorded a sharp drop of 22%. How-ever, 2015 was a record year for EGX in terms of trading value, new listed companies, value of IPOs, and ac-quisition deals. Under these challenges, there were stocks outperformed EGX30. Out of the stocks covered in this paper, Credit Agricole recorded the best performance during 2015 with an annual return of 33%, followed by Misr Cement Qena with an annual return of 22%. We see the current levels of EGX30 represent cheap prices, as the index is currently traded at P/E ratio of 12.78x, while MSCI for Emerging Markets is traded at P/E ratio of 13.84x. In addition, estimated forward P/E2016 for EGX30 stands at 9.5x compared to 12.15x for MSCI EM, according to Bloomberg estimates. All of forward multiples and ratios, that are depicted in the next sec-tions, come in favor of EGX30 over Morgan Stanley Index for Emerging Markets. What do we need to recover…? However, the current FX squeeze in Egypt, coupled with the delayed reforms, as mentioned earlier, offset the attractiveness of the Egyptian stock market. In our point of view, investors’ confidence is the corner stone for recovery during the next period. This confidence will be regained through, creating repatriation mechanism for foreign investors, accelerating the implementation of fiscal reforms, issuance of previously announced laws, and more transparency.

What do we prefer…? We are bullish on the real estate sector, putting the sector on the top of our preferred sectors. In light of the economic challenges that Egypt faces, in combination with restrictions, real estate is the best tool to hedge inflation. However, the soaring land prices and accordingly units selling prices represent a major threat for the demand and developers’ margins. Banking and financial services sector comes in the second rank on our list. Financial services industry is used to head the economy recovery. Meanwhile, Egypt’s banking system enjoys high liquidity, due to the slowdown in economic activity, putting the sector on a “stand by” mode to capitalize on promising opportunity with the economic recovery. However, the increasing interest rates, as a result of increasing inflation rates, may discourage private investments. Power and contracting sector to benefit from Egypt’s energy shortage and severe need for infrastructure projects, but the government’s ability to secure required financing remains to be the main issue. Although, building materials sector, as a result, will benefit from the boom in real estate sector and power and contracting sector, energy is the dominant in this sector. Due to its strong defensive nature, Food and Beverage sector is one of the essential sectors that must be rep-resented in the investors’ portfolio. However, producers who rely on imported raw material are exposed to significant FX risk. Worth mentioning that, we believe Discounted Cash Flow (DCF) valuation method may show F&B stocks overvalued, but the defensive nature of the sector justifies trading of these stocks at high multiples. Automotive sector is expected to witness a tough year (2016), due to the FX shortage. At the time that textiles sector benefiting from the domestic strong demand and the ability to pass increase in cost of production to end consumers, EGP devaluation may not be enough to boost exports on the back of more cur-rency devaluation of strong competitors.

It is worth mentioning that, security selection is not less important than sector allocation. In some cases, like

the Egyptian case, security selection may come before the sector allocation, in terms of importance. Addition-

ally, although there are stocks seem to be not good investment opportunity backed by Top-Down analysis, the

Bottom-Up analysis showed them as good opportunities. Therefore, we applied both approaches, seeking for

the best available opportunities in the Egyptian market as depicted in the next sections.


EGYPT BOOK EXECUTIVE SUMMARY

4

2015 witnessed a subdued global economic activity with real growth rate of around 3.1% y-o-y compared to 3.4% the year before. Growth in emerging and developing economies (accounting for over 70% of global growth) - de-clined for the fifth consecutive year reaching 3.9% down from 4.6% in 2014 , while growth in advanced economies showed a mild recovery up from 1.83% in 2014 reaching 1.88% in 2015. Global outlook is mainly influenced by: The gradual slowdown and rebalancing of economic activity in China away from investment and manufacturing toward consumption and services… Given China’s important role in global trade and capital flow as it represents 15% of the world’s GDP, any bumps along the way could have worldwide substantial spillover effects, especially on emerging and developing econo-mies. Overall growth in China is evolving; estimates for 2015 are recording growth rate of around 6.9% down from 7.3% and 7.7% in 2014 and 2013, respectively; though the Chinese economy is growing, yet, the faster slowdown in imports and exports, in part reflecting weaker investment and manufacturing activity. These developments, together with market concerns about the future performance of the Chinese economy, are having spillovers to other economies through trade channels and weaker commodity prices, as well as through dimin-ishing confidence and increasing volatility in financial markets. Lower prices for energy and other commodities... Price of barrel of oil has recently hit USD 50, the highest level since November 2015. Previous year has witnessed a drop in Brent crude prices by 35% compared to a drop of 48% the year before. Although the slight pick up in oil prices, increases in pro-duction by Organization of the Petroleum Exporting Countries (OPEC) members is seemed to be sustained, moreover oil production is exposed to extra increase when Iran is to reproduce it; accordingly, bringing its prices down again - or at least leaving it around the range of USD 50s for the medium run. Futures markets are already suggesting only modest increases in prices in 2016 and 2017. Prices of other commodities, have fallen as well. The previously mentioned transition in the Chi-nese economy indicates a normalization stage rather than a slowdown, which further support the continuity of low levels of commodity prices. Lower oil prices are exhausting the fiscal positions of fuel exporters and weigh on their growth prospects (i.e. KSA has registered USD 95bn as budget deficit in 2015, as oil represents around 88% of its budget revenues). Though a decline in oil prices driven by higher oil supply should support global demand in consumption and manufacturing , in current circumstances several factors have offset the positive impact of lower oil prices. First, in order to smooth the shock, oil exporters followed aggressive procedures entailing a sizable reduction in their domestic demand. Sec-ond, pledging oil prices has had a notable impact on investment in oil and gas extraction, also subtracting from global aggregate demand. Finally, the pickup in consumption in oil importers has so far been somewhat weaker than what would have been suggested, possibly reflecting continued deleveraging in some of these economies. Limited pass-through of price declines to consumers may also have been a factor in several emerging market and developing economies (The case of the Egyptian economy). A gradual tightening in monetary policy in the United States in the context of a resilient U.S. recovery as several other major advanced economy central banks continue to ease monetary policy. Monetary easing in the euro area and Japan is proceeding broadly as previously envisaged, while in December 2015 the U.S. Federal Reserve lifted the federal funds rate from the zero lower bound. Overall, financial conditions within advanced economies remain very accommodative. Prospects of a gradual increase in policy interest rates in the United States as well as bouts of financial volatility amid concerns about emerging market growth prospects have contributed to tighter external financial conditions, declining capital flows, and further currency depreciations in many emerging market economies. Headline inflation has broadly moved sideways in most countries, but with renewed declines in commodity prices and weakness in global manufacturing weighing on traded goods’ prices it is likely to soften again. Core inflation rates remain well below inflation objectives in advanced economies. Mixed inflation developments in emerging market economies reflect the conflicting implications of weak domestic demand and lower commodity prices versus marked currency depreciations over the past year.


EGYPT BOOK GLOBAL SNAP SHOT

5

ANNUAL OUTPUT GROWTH RATE

SOURCE: IMF

-6

-4

-2

0

2

4

6

8

10

12

14

16

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

%

World Advanced Economies Emerging Economies China

50

100

150

200

250

300

Jan

-06

Ma

y-0

6

Se

p-0

6

Jan

-07

Ma

y-0

7

Se

p-0

7

Jan

-08

Ma

y-0

8

Se

p-0

8

Jan

-09

Ma

y-0

9

Se

p-0

9

Jan

-10

Ma

y-1

0

Se

p-1

0

Jan

-11

Ma

y-1

1

Se

p-1

1

Jan

-12

Ma

y-1

2

Se

p-1

2

Jan

-13

Ma

y-1

3

Se

p-1

3

Jan

-14

Ma

y-1

4

Se

p-1

4

Jan

-15

Ma

y-1

5

Se

p-1

5

Jan

-16

20

05

= 1

00

Food and Beverage Price Index

Agricultural Raw Materials Index

Metals Price Index, includes Copper, Aluminum, Iron Ore, Tin, Nickel, Zinc, Lead, and Uranium Price Indices

Fuel (Energy) Index, includes Crude oil (petroleum), Natural Gas, and Coal Price Indices

COMMODITY PRICE INDICES (2005 IS THE BASE YEAR)

SOURCE: IMF


EGYPT BOOK GLOBAL SNAP SHOT

6

While major advanced economies central banks continue to ease monetary policy, United States, from the other side, is gradually tightening its monetary policy... Monetary easing in the euro area and Japan is proceeding broadly, while in December 2015 the U.S. Federal Reserve lifted the federal funds rate from the zero lower bound. Prospects of a gradual increase in policy interest rates in the United States as well as bouts of financial volatility amid concerns about emerging market growth prospects have contributed to tighter external financial conditions, declining capital flows, and further currency depreciations in many emerging market economies.

US. 1 YEAR T-BILL RATES

SOURCE: BLOOMBERG

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

5/29

/20

14

6/2

9/2

014

7/29

/20

14

8/2

9/2

014

9/2

9/2

014

10/2

9/2

014

11/2

9/2

014

12/2

9/2

014

1/29

/20

15

2/28

/20

15

3/31

/20

15

4/3

0/2

015

5/31

/20

15

6/3

0/2

015

7/31

/20

15

8/3

1/20

15

9/3

0/2

015

10/3

1/20

15

11/3

0/2

015

12/3

1/20

15

1/31

/20

16

2/29

/20

16

3/31

/20

16

4/3

0/2

016

%


EGYPT BOOK

7

This Page has been left Intentionally Blank

EGYPT’S MACRO OVERVIEW The Egyptian economy has seen four years of sluggish economic growth revolving around 2% with inching up unem-ployment rate reaching a peak of 13.4% in FY14 compared to average of 9% before the 25th of January revolution. Fiscal deficit is sustaining a record of two-digits figure reaching its highest of 13.5% in FY13 compared to an average of 7% before 2011 revolution, pushing public debt to balloon towards almost 88% of the country’s GDP. The coun-try’s external position is still suffering chronic difficulties on the back of domestic turmoil and unfavorable global economic environment, draining the country’s foreign international reserves after reaching a level of USD 36bn by the end of FY10 to an average of USD 16bn - barely covering three months of imports.

ECONOMIC GROWTH DOUBLED TO 4.2% IN FY15 AFTER FOUR YEARS OF SLUGGISH GROWTH... Political and economic environments have changed by the beginning of FY15 following the victory of the elected president Abdel Fattah El Sisi in May 2014 who approved the adoption of economic consolidating reforms. More-over, the political transition process came to an end with the election of the House of Representatives in December 2015. The economy started to recover in FY15, as investments started to inch up recording 8.6% y-o-y real growth rate (compared to 1.7% and –4.7% in FY14 and FY13, respectively) with 23% y-o-y increase in private investments and 30% y-o-y increase in government investments, accompanied by increasing the foreign component by 55% y-o-y and composing around 20% of total investments. On the other hand, FY15 witnessed a scaled up spending by the government that increased by 7% in FY15 com-pared to 6.6% in FY14 driven mainly by its aggressive spending in infrastructure and mega projects (which explains a huge part of the increase in investments) as well as undertaking important measures to restore macroeconomic stability by rationalizing its subsidies program and public wages in addition to amendments in the taxing system. Such measures have squeezed consumption in FY15 that showed the slowest real growth rate since 2011 amount-ing to 2.8% compared to an average of 6% in the preceding three years that witnessed both expansionary fiscal and monetary policies favoring consumption in terms of increasing wages as well as cutting interest rates. The slow down in consumption growth in FY15 came on the back of the first round of partial lifting up of subsidies and in-creasing energy prices by around 30% in addition to the successive devaluations of the Egyptian pound by around 12% throughout the year that led to increasing the costs of importation that did not manage to be offset by the fall in international food and oil prices, as well as increasing sales taxes on some goods (namely alcohol and cigarettes), pushing inflation rate for FY15 to hit 11% compared to 10.1% and 6.9% in FY14 and FY13 respectively. The Egyptian economy seen four years of sluggish economic growth revolving around 2% with inching up unemploy-ment rate reaching 12.7% by the end of FY15 down from a peak of 13.4% in FY14 compared to average of 9% before the 25th of January revolution. Fiscal deficit has recorded two-digits figure reaching 11.5% in FY15 down from 12.1% and 13.5% in FY14 and FY13, respectively; pushing public debt to balloon towards almost 88% of the country’s GDP. The country’s external position is still suffering chronic difficulties in terms of widening trade deficit recording 13% of GDP, fragile services balance on the back of aggressively fluctuating tourism revenues and st issues that have not been successfully tackled despite an increase of the fiscal revenue from a widened tax base and subsidy reforms, public debt has reached 88% as percentage of GDP in FY15, sustained borrowing by the gov-ernment is yet to crowd up the market causing rates hikes, acting as another investment averse obstacling and hin-dering it. However, preliminary figures for the first half of FY16 indicate that the economic uptick has faded somewhat, mainly due to the foreign exchange shortages that stifled production, and undermined Egypt’s competitiveness, due to the deterioration in the main sources of the foreign currency such as tourism revenues that mainly got negatively af-fected by the recent insecurity incidents after the Russian metro jet crash in Sinai in October 2015, the decrease in international trade passing through Suez Canal on the back of pledging international oil prices and the global reces-sion, stepping back remittances as they started leaking from the banking system to the parallel market, cautious approach of FDIs, as well as slowing down in GCCs aid after reaching a peak of USD 12.5bn in FY14, in addition to switching its form from cash and in-kind grants to liabilities at the CBE and FDIs. As a result reserves got exhausted revolving around USD 16bn (barely covering 4 months of imports) down from its pre-2011 level of USD 36bn. Accordingly, the Central Bank of Egypt (CBE) has moved towards adopting a more flexible exchange rate manage-ment regime in mid-March 2016 through devaluing its local currency by 14% reaching EGP 8.85/USD up from EGP 7.83/USD, a step that came after a series of procedures aiming at alleviating pressures on the external accounts and partially resolving a binding constraint on economic activity. Other key challenges facing the government at the macroeconomic level are: reducing high inflation escalating to-wards two-digits figure reaching 11% in FY15, bringing down youth unemployment reaching 13.4% by the end of FY15, improving energy management, dealing with a structural fiscal deficit that recoded on of the highest world-wide inching to 11.5% in FY15 down from 12.1% and 13.5% in FY14 and FY13, respectively; as well as resolving other public debt issues that have not been successfully tackled despite an increase of the fiscal revenue from a widened tax base and subsidy reforms, public debt has reached 88% as percentage of GDP in FY15, sustained borrowing by the government is yet to crowd up the market causing rates hikes, acting as another investment averse obstacling and hindering it.


EGYPT BOOK MACRO ECONOMY

8

PRIVATE VS. PUBLIC IMPLEMENTED INVESTMENTS WITH FY15 WITNESSING A PICK-UP IN TOTAL INVESTMENTS AS % OF GDP

SOURCE: MINISTRY OF PLANNING

127142 154 146 155

191

105 8793

96

110

143

19.50%

17.10%

16.37%

14.34%

13.83%

14.37%

10.00%

11.00%

12.00%

13.00%

14.00%

15.00%

16.00%

17.00%

18.00%

19.00%

20.00%

0

50

100

150

200

250

300

350

400

FY10 FY11 FY12a FY13a FY14a FY15a

EGP

billi

on

Private sector implemented investments Public sector implemented investments

Total investments as % of GDP (right axis)

In addition, interest rates were hiked by 100 bps at the beginning of the previous fiscal year. At the same time employment rates, though recovered, it did with a slow pace; unemployment rate reached 12.7% at the end of FY15 compared to 13.3% in the same period a year be-fore. Net exports deteriorated at a slower rate in FY15 (1.88%) when compared to FY14 that witnessed a mas-sive deterioration rate of 29.4%. The slow down in wors-ening the net exports figure was triggered mainly by the fall in international food and oil prices. As such, growth rebounded to 4.2% in FY15, double the growth during the preceding four years and compared to an average of 6% in the five years pre-January 2011 revolution.

YET, CHALLENGES REMAIN; ATTRIBUTED MAINLY TO FOR-

EIGN EXCHANGE CRUNCH... Preliminary figures for the first half of FY16 indicate that the economic uptick has faded somewhat, mainly due to the foreign exchange shortages that stifled pro-duction, and undermined Egypt’s competitiveness, adding to the delay in legislative and investment re-forms which explains country’s inability to transfer USD 100bn of signed MOUs in March 2015 Egypt Economic Development Conference (EEDC) into executed invest-ment contracts. The shortfall in foreign currency came due to the dete-rioration in its main sources such as tourism revenues that mainly got negatively affected by the recent inse-curity incidents after the Russian metro jet crash in Sinai in October 2015 after reaching USD 7.3bn by the end of FY15 up from USD 5bn the year before, yet such revenues did not manage to reach the pre-January revolution levels of above USD 10bn a year, the de-crease in international trade passing through Suez Canal on the back of pledging international oil prices and the global slowdown, stepping back remittances (after registering USD 19.3bn in FY 15) as they started leaking from the banking system to the parallel market, cautious approach of FDIs especially in the oil and gas sector due to their pending backlogs that reached USD 3.4bn by now down from a peak of over USD 6bn in FY13, which further plunged the industrial sector into energy supply shortages, as well as slowing down in GCCs aid after reaching a peak of USD 12.5bn in FY14, in addition to switching its form from cash and in-kind grants to liabilities at the CBE and FDIs. As a result re-serves got exhausted revolving around USD 16bn down from its pre-2011 level of USD 36bn.



9

81%

12%

15%

-9%Household Consumption

Government Consumption

Investments

Net Exports

GDP COMPONENTS BREAKDOWN (AS OF FY15)


EGYPT’S MAIN FOREIGN CURRENCY RESOURCES (AS OF FY15)

SOURCE: CBE

Petroleum Exports8.7

Non-Petroleum Exports

13.4

Suez Canal Dues, 5.4

Tourism Revenues, 7.4

Remittances of Egyptians Working

Abroad 19.3

FDIs, 6.4

Started to decline in Q1FY16 due to deterioratingeconomic conditions in GCCs

suffering from FX &energy shortages as well as deteriorating security conditions in their importing markets.

Decreasing on the back of aging fields and pledging int'l oil prices

Negatively affected by global recession & declining oil prices

Approaching cautiously due to

delayed reforms & overvalued

EGP

Falling on the back of travelling bans after the Russian Metro jet crash

Figures are in USD billion

7.1%7.2%

4.7%5.1%

1.8%

2.2% 2.1%

2.2%

4.2%

0%

1%

2%

3%

4%

5%

6%

7%

8%

-

2

4

6

8

10

12

14

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

US

D b

illi

on

Tourism Revenues Net FDIs GDP growth rate (right axis)

FDIS, TOURISM REVENUES GDP GROWTH RATE

SOURCE: CBE & MINISTRY OF PLANNING

ACCORDINGLY, THE CENTRAL BANK OF EGYPT (CBE) HAS MOVED TOWARDS ADOPTING A MORE FLEXIBLE EXCHANGE RATE MANAGEMENT REGIME IN MID-MARCH 2016... After defending the domestic currency through a gradual devaluation ranging between 5-20 piaster, accompanied with the issuance of 3 years CDs with 12.5% interest rates by the three main public banks in November 2015 and a 50bps hike in lending and depositing CBE rates in December 2015; the new CBE board decided on March 14, 2016 to devalue the local currency by 14% reaching EGP 8.95/USD up from EGP 7.83/USD, a step that came after (and followed as well by) a series of procedures aiming at alleviating pressures on the external accounts and par-tially resolving a binding constraint on economic activity; such procedures that took the form of:

On March 8th, the CBE canceled the caps on deposits and withdrawals for individuals and companies that import essential goods, while keeping the caps imposed on corporate that import other goods and in an attempt to curb the dollar rates in the black market.

At the same month, the three big public banks NBE, Banque Misr and Banque du Caire issued Belady USD-denominated CDs, granting yields of 5.75%, 5.25% and 4.25% for the 7, 5 and 3 years maturities; such certifi-cates were said to attract around USD 150mn.

In addition, and by the time of the big devaluation, that took place in the mid of March, the National Bank of Egypt and Banque Misr issued two-month only available certificate of deposit granting 15% annually that is to be sold in US dollars and then converted to Egyptian pounds, NBE has further extended selling these cer-tificates by now. The two banks have also issued treasuries call option to foreign investors that hedge them against weakness in EGP.

The CBE has further hiked rates by another 150bps in March 2016 targeting fighting the jumps in inflation rates on the back of the devaluation.



10

7.25

7.75

8.25

8.75

9.25

9.75

10.25

10.75

11.25

11.75

Jun

-13

Jul-

13

Au

g-1

3

Se

p-1

3

Oc

t-1

3

No

v-1

3

De

c-1

3

Jan

-14

Fe

b-1

4

Ma

r-1

4

Ap

r-1

4

Ma

y-1

4

Jun

-14

Jul-

14

Au

g-1

4

Se

p-1

4

Oc

t-1

4

No

v-1

4

De

c-1

4

Jan

-15

Fe

b-1

5

Ma

r-1

5

Ap

r-1

5

Ma

y-1

5

Jun

-15

Jul-

15

Au

g-1

5

Se

p-1

5

Oc

t-1

5

No

v-1

5

De

c-1

5

Jan

-16

Fe

b-1

6

Ma

r-1

6

Ap

r-1

6

%

overnight deposit rate overnight lending rate rate of the CBE’s main operation

CBE RATES

SOURCE: CBE AND PRIME ESTIMATES

CONFIDENCE IN THE ECONOMY IS IN A CRITICAL POSITION ONCE AGAIN… Based on the previously mentioned incidents, risks are being alerted and confidence in the Egyptian economy is relatively fading out again; credit default swaps (CDS) are continuously rising since the Russian metro jet crash in Sinai crossing 480bps. On the other hand, though Fitch maintained its credit rating for Egypt at ‘B’ and the coun-try’s outlook at ‘stable’, recent report published by S&P has downgraded Egypt outlook to ’negative’ from 'stable', indicating that rating downgrade is possible within the next six months to two years. Such outlook downgrading came on the back of pledging the country’s foreign reserves, slow down in GCC foreign aid, fiscal difficulties and rising political risk.



11

2011 2012 2013 2014 2015 2016

Rating Outlook Rating Outlook Rating Outlook Rating Outlook Rating Outlook Rating Outlook

S&P

1-Feb BB+ Negative 10-Feb B Negative 9-May CCC+ Stable 15-May B- Positive 15-May B- Negative

10-Mar BB- Negative 25-Jun B Negative 15-Nov B- Stable 13-Nov B- Stable

18-Oct B+ Negative 23-Aug B Negative

24-Nov B Negative 24-Dec B- Negative

Fitch

28-Jan BB+ Negative 15-Jun B+ Negative 30-Jan B Negative 3-Jan B- Stable 30-May B Stable

3-Feb BB Negative 5-Jul B- Negative 19-Dec B Stable

30-Dec BB- Negative

Moody's

31-Jan Ba2 Negative 12-Jan B3 Negative 20-Oct Caa1 Stable 7-Apr B3 Stable

16-Mar Ba3 Negative 18-Jan B2 Negative

27-Oct B1 Negative 21-Mar Caa1 Negative

21-Dec B2 Negative

EGYPT’S CDS

SOURCE: REUTERS

EGYPT’S RATING HISTORY

SOURCE: VARIOUS NEWS

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bp

s

25th of January Revolution

Mohamed Morsi was elected as the country's President

30th of June Revolution

Abdel Fattah Al Sisi was elected as the country's President

The Russian Metrojet crash



12

A RED ZONED BUDGET DEFICIT FIGURE...

Before January 2011 revolution, the government has managed to take steady steps in reducing fiscal deficits, keep-ing it in the safe range of one digit unit. The political instability and the sluggish economic performance after then led to shooting fiscal deficit figures that reached 13.7% and 12.8% in FY13 and FY14 respectively on the back of ag-gressive spending by the government in investment projects to compensate the slowdown in private investments, the stimulus packages that were invested to develop infrastructure, apply minimum wage rates, and achieve sus-tainable development and the high bill of subsidies and social benefits. While budget revenues kept its steady pace due to the cash and in-kind grants received by GCCs (amounting to EGP95 billion in FY14), this couldn’t contain the increase in expenditures.

By the beginning of FY15, the Egyptian government has designed a five-year macroeconomic policy framework, one of its targets was achieving greater efficiency in government spending in parallel with a planned reduction of fiscal deficit to near 8-9% of GDP and the government debt to range within 80-85% of GDP. Accordingly, several fiscal reforms were announced to be implemented in the medium run on both the revenues and the expenditures schemes (some of which have been already implemented, while the others are in the process of implementation):

Revenues reforms are supposed to focus on increasing the tax base rather than increasing it through enhancing the methods of tax collection as well as creating incentives for the informal sector to join the formal one, the most im-portant revenues reforms included 1) Slashing Income Tax: through the decision of unifying Egypt’s income tax on both individuals and corporate to a maximum of 22.5% starting from January 2015 and lasting for 10 years instead 25% tax rate for those earning above EGP 250,000 till EGP 1mn and instead of 30% tax rate for those earning above EGP 1mn (25% for the highest bracket and the additional temporary 5% on corporate and individuals earning more than EGP 1mn per year). 2) Increasing corporate taxes on companies operating in the new free and economic zones from 10% to the recently applied unified tax of 22.5%. 3) Increasing Sales tax on some goods: namely, alcohol and cigarettes. 4) Real Estate Tax: been negotiated since 2008 and was applied in January 2015 on residential units whose value is higher than EGP 2mn. 5) Value added tax (VAT): is supposed to replace the current sales tax regime and is expected to be fairer to taxpayers, allowing an immediate refund on capital goods, applying a unified tax rate and extending to a wider range of goods and services, however, such tax is suffering from a continuing delay of ap-plication.

Expenditures reforms from the other side, focused on spending cuts and government savings as well as more effi-cient allocation of the government’s resources, the most important of which are 1) Lifting Up Energy Subsidies: the corner stone of expenditures reforms, already took place at the beginning of FY15 when energy and fuel prices in-creased by around 30%, a complete lifting up of energy subsidies is planned to take place within the upcoming 3-5 years. 2) Food Subsidies Card System: through using the card system for distributing bread and subsidized goods. 3) BOT and PPP investment projects: to expand participation of the private sector in infrastructure projects to reduce the pressure on the government’s budget. 4) Wage Bill Controls: after being doubled within three years between FY11 and FY14 from EGP 96.2bn to EGP 178.5bn leading to a further increase in the government’s budget deficit, further steps are taken to control such increase. However, cash deficit for FY15 has been pulled away from its targeted level re-cording EGP 268bn and representing 11.5% as percentage of GDP opposed to its target of EGP 240bn and 10% of GDP, on the back of achieving EGP 465bn as total revenues - down 15% from its targeted level - triggered mainly by achieving a level of tax revenues below its targeted level by more than 16%, on the other hand, EGP 733bn were re-corded as total expenditures (down 7% from its targeted level) mainly on the back of the decrease in international oil and food prices.

6.90%8.10%

9.80%10.6%

13.7%

12.1%11.5%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

-400

-200

0

200

400

600

800

1000

1200

1400

FY09a FY10a FY11a FY12a FY13a FY14a FY15

EGP

bill

ion

Total Revenues (EGP bn) Total Expenditures (EGP bn)

Cash Deficit (EGP bn) Overall Deficit/ GDP (%)

GOVERNMENT’S BUDGET DEFICIT

SOURCE: MINISTRY OF FINANCE

EGYPT’S MACRO OUTLOOK

GDP GROWTH RATE IS TO RECORD A DISAPPOINTING FIGURE FOR FY15/16 WITH CAUTIOUS OPTIMISTIC OUTLOOK FOR THE SHORT AND MEDIUM RUN

Squeezed Consumption on the Back of Economic Stress… As inflation rates are climbing up on the back of the jumps in import prices, monetary policy is getting tighter and unemployment is still remaining high while real wages are turning into negatives, we cannot expect a major pick up in consumption real growth rate, we see it to be around 3.15% in FY16 (worth mentioning that consumption grew by 3.4% y-o-y in 1H FY16 compared to 4.3% when compared to the same period a year before). Consumption is to further slow down in the medium run with real growth rate barely exceeding 3% due to the price hikes that are expected to take place by the beginning of the new fiscal year after applying the planned second phase of lifting up energy subsides as well as applying the VAT, on the other hand the y-o-y growth rate of wages and salaries targeted in the new budget of FY17 is only 4.5% opposed to 10% and 12% in FY15 and FY14, respectively.

Government Consumption is Still Compensating the Slowdown in Investments… We see government consump-tion real growth rate for the current fiscal year is to remain high around 6.1% to compensate the still slowly recov-ering private investments (worth mentioning that government consumption grew by 4.3% y-o-y in 1H FY16 com-pared to 10.9% when compared to the same period a year before). We assume that government spending growth rate is to slow down in the medium run to tackle down its public debt and narrow its budget deficit on the condi-tion that private investments are to take the lead back again starting form FY17/18 in our view, with increased foreign component.

Investments are Still Growing Slowly, Crowded Out by the Government Investments... Though investments grew by 8.6% in FY15, it showed a declining trend throughout the year due to the increasing difficulties faced by the private sector mainly in terms of foreign currency shortages, energy supply problems, monetary tightening and delayed reforms. Because obstacles faced by inves-tors are still persisting, we see investment to grow at a slower rate for the current fiscal year when compared with the previous one at 3.8%. Though we expect a soon pick up in the short and medium run on the back of a relatively flexible monetary policy, the newly gas discoveries expected to con-tain the escalating demand on energy, as well as setting up the Egyptian Parliament that we hope to enforce the already delayed legislative reforms aiming at boosting investments.

Net Exports are Deteriorating Despite EGP Devaluation and Pledging Commodity Prices… Despite gradual depre-ciation during last fiscal year (of about 12%) as well as the big one witnessed in the second half of the current fiscal year, we believe exports of goods and services would slightly decline by 3% during this year for the following reasons: 1) Petroleum exports, especially natural gas, will decline as domestic consumption grows aggressively, while production stagnates as foreign oil companies approach Egypt cautiously in the current period, despite the new gas discoveries that are not expected to add to the country’s exports before FY18. On the other hand the fall in international oil prices are to further decrease the proceeds of its exports; 2) Non Petroleum goods exports face several supply constraints in the short term that would hinder it from responding elastically to the depreciation of the pound. The main constrains are energy and foreign currency availability as well as deteriorating security condi-tions in the most important markets importing Egyptian exports; 3) Exports of services would fall due to the plunge in tourism after the Russian plane crash witnessed in October 2015, as many countries issued travel restrictions on flights heading Egypt.



-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2013/14 2014/15 2015/2016

Real GDP growth rate (Y-o-Y) Real private investments growth rate (Y-o-Y)

Real public investments growth rate (Y-o-Y)

PRIVATE VS. PUBLIC IMPLEMENTED INVESTMENTS REAL GROWTH RATE


13

Imports will also decline, in our view, albeit with a smaller magnitude, by 0.5% during the current fiscal year on the back of the fall in oil and food prices, though expected to inch up in EGP terms in Q4 of the current fiscal year on the back of the recent local currency devaluation. All in all, we see net exports at EGP –167bn wors-ening by 6% when compared with the year be-fore.

At the sector level, few sectors exceeding GDP growth rate in FY15 subsided in 1HFY16, we mainly refer to tour-ism activities, Suez canal and manufacturing; while building and constructions and real estate kept on growing; mining, from the other hand, is still suffering.

Suez Canal: after growing by 6.7% y-o-y in FY15, Suez Canal growth rate for 1HFY16 slowed down to reach 1.8% compared to 7.2% in the same period a year before, however we must notice that such positive growth was recorded in EGP terms but looking at it in USD terms will show a decline by 7.4% for the same half, such differ-ential is attributed to the devaluation of the EGP. We further expect an increase in y-o-y growth rate for the current fiscal year in terms of EGP by 2.2% on the back of the devaluation of the local currency that took place at the second half of the current fiscal year, however we expect a decline in Suez Canal revenues in terms of USD by 8.5%.

Manufacturing (excluding oil refining): showed a growth of 5% y-o-y in FY15, however due to the previously mentioned difficulties faced by the industrial sector its growth declined by 1.1% in the first half of the current fiscal year compared to a growth of 12.1% when compared with the same half a year before. We expect its annual growth for the current year not to exceed 1.5%. However, worth mentioning that oil refining has shown a positive growth of 2% in 1HFY16 compared to negative rates in the same period in the previous four years.

Building and Construction: is considered now a growth leading sector due to the aggressive government spending in infrastructure projects, we expect it to grow by more than 10% for the current fiscal year compared to 9.7% in FY15, the sector’s figures for the first half of FY16 have already shown a growth of 10.7% compared to 9.5% in 1HFY15.

Real Estate: showed a growth of 4.5% in 1HFY16 compared to 2.7% in the same period a year before, real es-tate sector is expected to grow by 4.6% in FY16 compared to 2.7% in FY15, the growth in such sector is attrib-uted mainly to the increase in its demand “the real as well as the unreal ones”, as people are increasingly switching their funds to this sector to keep their purchasing power and hedge it against escalating inflation rates.

Communication: maintained the 1HFY15 growth rate of around 5.8% in 1HFY16, we expect this growth rate to be sustained in the medium run.

Electricity: has shown a noticeable jump in 1HFY16 of 8.6% compared to 3.9% in the same half of FY15 on the back of the new projects (especially FDIs) in the sector. We see growth rate for the sector in FY16 to be 8.5% compared to 4% in FY15.

Mining: though we expected a slight pick up in the mining sector to be felt this year on the back of the new discoveries in Zohr field, its recent records for 1HFY16 shown a decline of 4.1% compared to a decline of 5.7% in the same half a year before, we revised down our expectations concerning the mining sector’s growth rate to be –3.1% compared to our previous expectations of 4.5%.

We expect GDP to show 3.7% growth in FY16 and 3.9% in FY17 due to the expected slow down in consumption, exhausting trade balance deficit, slowly growing investments with cautious approach of FDIs, with government consumption showing resilience.



14

-30%

-25%

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-5%

0%

5%

10%

15%

FY12a FY13a FY14a FY15a FY16f FY17f FY18f

Real GDP growth rate Private Consumption Government Consumption

Investment Net Exports Exports

Imports

GDP COMPONENTS GROWTH RATE

SOURCE: MINISTRY OF PLANNING & PRIME ESTIMATES

A DEEP DETERIORATION IN CURRENT ACCOUNT IS TO BE CAUTIONED BY BUFFERED FINANCIAL AND CAPITAL ACCOUNTS ON THE BACK OF RECEIVED EXTERNAL FINANCIAL SUPPORT AND SLIGHTLY INCHING UP FDIS…. Pledging international oil prices, insecurity incidents, foreign currency shortages, devaluation of the local currency, deteriorating economic conditions and energy supply problems have all sunk their effects on Egypt’s foreign balance. Trade balance for FY15 showed a deficit of USD 38.8bn attributed to USD 60.8bn imports payments (of which USD 12.4bn are oil imports) while exports proceeds have registered only USD 22bn (of which USD 8.7bn are oil exports), as oil imports represent only 20% of the country’s imports, the decrease in international oil prices together with the recent imposed tariffs and import restrictions will not manage to offset the increase in importation costs attributed to the devaluation of the Egyptian Pound, the negative effect of the devaluation in terms of increasing importation costs will not be aggressively felt before the next fiscal year as the current fiscal year has almost come at end wit-nessing around 43% decrease in oil prices, our estimates concerning imports payments for FY17 are revised up from USD 63bn to USD 68.37bn post the one big devaluation that took place in March 2016. On the other hand, we expect a tiny increase in exports proceeds that are supposed to, theoretically , increase in terms of quantity as they are now cheaper, however, the global recession as well as the still deteriorating security conditions in some of the most important exports markets for Egyptian product such as Yemen, Iraq and Libya will hinder Egyptian exports to respond elastically to the devaluation. All in all our expectations for trade deficit for FY16 is still around USD 39bn but is revised up from USD 40.6bn to USD 45.96bn for FY17. However, as devaluing the local currency is ex-pected to attract more FDIs, especially in the oil sector and in accordance with the production of Zohr natural gas field, we expect trade deficit to noticeably narrow by FY19 and further turning the country back again into a net oil exporter starting from FY20.

1HFY16 figures for the services balance showed a decline by 45.5% to register USD 2.2bn compared to USD 4.1bn in the same half a year before on the back of deteriorating tourism and Suez Canal revenues by 32.5% and 7.3% respec-tively. A further decline in these revenues is expected to continue for the rest of the current fiscal year on the back of the current insecurity incidents witnessed in the country especially after the Russian plane crash that occurred last October as well as the global recession and the fall in international oil prices that are to affect the flow of trade passing through the Suez Canal. We see tourism revenues and Suez Canal revenues for FY16 to be around USD 4.9bn and USD 5.1bn respectively compared to USD 7.37bn and USD 5.36bn for FY15.

On the other hand, transfers fell by 30.7% from USD 11.9bn in 1HFY15 to USD 8.3bn in 1HFY16. While official trans-fers decreased - at no surprise - by 98.7%, private transfers is continuously falling due to the widening spread be-tween the official and the black market exchange rate that hit around 14% that half pushing Egyptians working abroad to transfer their funds in channels other than the banking system; private transfers fell by around 11.73% to register USD 8.28bn compared to USD 9.38bn in the same half of the previous year, a continuing decline in private remittances is expected as the spread between the official and the parallel exchange rates widened to almost 25%, we see it at USD 17.1bn in FY16 compared to USD 21.9bn in FY15.



15

Agricultural, Irrigation & Fishing

11%

Extractions13%

Manufacturing (Excluding Oil

Refining)

12%

Oil Refining4%

Construction & Building

5%

Wholesale & Retail Trade

13%

Financial Intermediaries &

Supporting Services

4%

Toursim2%

Real Estate9%

General Government11%

Others14%

Suez Canal2%

GDP BREAKDOWN BY SECTOR (AS OF FY15)


-3.2%

2.2% 4.9%1.3%

-42.3%

4.2% 4.5% 4.9%

-5.7%

12.2%

3.9%7.2%

43.7%

9.5%5.5% 2.7%

-4.1% -1.1%

8.6%1.8%

-15.0%

10.7%5.8% 4.5%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

Mining Manufacturing (excluding oil

refining)

Electricity Suez Canal Tourism Activities Building & Construction

Communication Real Estate

1H FY14 1H FY15 1H FY16

MAIN SECTORS’ SEMI ANNUAL REAL GROWTH RATE




Official transfers are expected to slightly pick up after the recently announced USD 2.5bn that are to be received from KSA in the form of grant. Accordingly, we expect official transfers to record USD 3bn for the current fiscal year, opposed to USD 2.7bn and USD 12bn in FY15 and FY14 respectively. Accordingly, we expect current account deficit to deepen reaching USD 15.9bn in FY16 compared to USD 12.1bn in FY15, such deterioration is to be partially offset by around USD 16bn inflows to the capital and financial account, attributed mainly to inching up FDIs, though the increase is considered tiny after last year’s March Investment Sum-mit at Sharm El Sheikh that witnessed USD 100bn of MOUs, we see FDIs in FY16 to reach USD 7bn up from USD 6.34bn in FY15. From the other hand, financial account is expected to buffer on the back of the acquired - as well as the still pending and negotiable - external financial aid in the form of liabilities at the central bank that registered around USD 1.48bn in 1HFY16 compared to an outflow of USD 525mn in the same half a year before after receiving around USD 1bn form the African Development Bank and the Afiexim Bank in December 2015, a figure that we ex-pect to further increase for FY16 to reach USD 4.3bn after recording the USD 900mn received in February 2016 from China development bank, USD 2bn from UAE to be received by the end of the current month, USD 1bn as pending loan from the World Bank as well as USD 500mn from Afrexim Bank (are expected to be received soon after the parliament has approved the government’s economic program). In sum, We expect Egypt’s Balance of Payments (BOP) to register an overall deficit of USD 907mn in FY16 com-pared to a surplus of USD 3.7bn in FY15.

NO FURTHER EXCHANGE RATE-EGP DEPRECIATION ANTICIPATED - AT LEAST IN THE SHORT RUN… The inflows of the previously mentioned external financial support are to boost Egypt’s international reserves reach-ing around USD 22bn by the end of FY16, covering around four month of imports and cushioning the expected for-eign currency outflows taking place by the beginning of the next fiscal year in terms of repaying USD 1bn Qatari deposit and USD 800mn to Paris Club, in addition to USD 3.3bn in the form of pending backlogs to foreign oil com-panies are to be paid by end-2016. Devaluing the local currency now will incur costs outweighing its benefits in terms of escalating inflation rates by the time of the holy month of Ramadan and paying the country’s pending dues; in addition, this will push the market and speculators back into the stage of “wait & see”, a feature that was highly criticized in the preceding CBE man-agement that used to devalue the local currency gradually. If the one big devaluation, that took place two months ago, did not help in eliminating the FX risk, attracting FDIs and boosting exports, then no other further devalua-tion will do, in our view.

-50

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0

10

20

FY13 FY14 FY15 FY16f FY17f FY18f

USD

bill

ion

Trade Balance Services (Net)Suez Canal dues Travel (Tourism Revenues)Remittances of Egyptians Working abroad Direct Investment in Egypt (net) (FDI)Liabilities at the CBE Balance of Current AccountBalance of Capital & Financial Account Overall BoP

EGYPT’S EXTERNAL SECTOR

SOURCE: CBE AND PRIME ESTIMATES

16



ESCALATING INFLATION RATES Inflation rates are expected to climb on the back of increas-ing importation costs after devaluing the local currency com-bined with the austerity procedures expected to take place starting from the next fiscal year aiming at curbing the gov-ernment budget deficit through lifting up energy subsidies, raising taxes and electricity prices, as well as the application of the VAT. Our expectations for CPI inflation for FY16 is 10.2% and 11.5% for FY17.

INFLATION TARGETING THROUGH MONETARY POLICY CAN ONLY LAST FOR A SHORT TIME, IN OUR VIEW…

The CBE has been adopting a tight monetary policy aiming at curbing increasing inflation rates from one side, and from the other side, rates are keeping on increasing, crowded out by the government borrowing that reached a “never seen” rates before, i.e. rates on 1-year T-bills, 5-years T-bonds and 10-years T-bonds have crossed the 14%, 15.5% and 17% levels recently, respectively. In addition the newly introduced products by the public banks have lead a wave of increasing rates. Corridor rates have already increased by 200 bps since the beginning of the current fiscal year, 50 bps of which have been raised in December and 150 bps have been raised in March.

However, such contractionary policy is to further deepen the government’s debt services (composing alone more than 25% of the government's expenditures), widen its budget deficit and acts as an investment averse hindering the main objectives of the recent decision taken by the monetary authority in terms of devaluing the Egyptian Pound to attract FDIs and boost the level of local investments and to widen the tax base aiming at curbing the gov-ernment’s budget deficit.

We expect monetary policy to stabilize its rates in the first half of the new fiscal year and to get loose in the sec-ond half on condition that inflationary pressures arising from the second round effects of the devaluation and ascetic procedures taking place on the 1st of July 2016 are contained.

NEW BOARD, YET SAME OVER OPTIMISTIC, UNACHIEVABLE BUDGET IN OUR VIEW … The targeted level for budget deficit for FY16 set by the government amounting to EGP 242bn and representing around 8.9% as percentage of GDP has proved to be unrealistic as preliminary estimates announced by the govern-ment are prevailing around 11.5% as percentage of budget deficit from GDP in accordance with the slowdown in domestic and global business activities negatively affecting tax revenues and property income especially, those com-ing from companies and authorities working in the oil sector as well as the fall in Suez Canal revenues; in addition to the delay in budget’s consolidation reforms, namely the value added tax (VAT).

Accordingly, we see budget revenues for FY16 at only EGP 502bn compared to EGP 622bn targeted by the govern-ment for the current fiscal year (34% higher than its record a year before).

We further, expect a fall in budget expenditures for FY16 below its projected level of EGP 865bn by around 6.3%, triggered mainly to pledging international oil and commodity prices. We see it at EGP 814bn.

In sum, we see budget deficit at EGP 312bn accounting for 11.5% of GDP and is not to record a one-digit figure before FY18.

The new targeted budget levels for FY17 set by the new board of the ministry of finance are yet still over optimistic and unachievable, in our view, budgeted overall deficit as percentage of GDP is 9.8% assuming 5.2% as real GDP growth rate, opposed to our estimates of 10.8% and 3.9%, respectively, for FY17; as the still pending investment and legislative reforms as well as the foreign currency crunch are deepening the downside risk of slowing produc-tion.

11.0%

8.7%

6.9%

10.1%11.0%

10.2%

11.5%10.8%

0%

2%

4%

6%

8%

10%

12%

14%

FY11a FY12a FY13a FY14a FY15a FY16f FY17f FY18f

CPI Inflation, Annual Average %

AVERAGE CPI INFLATION

SOURCE: CAPMAS AND PRIME ESTIMATES

17



Revenues are budgeted to reach EGP 631bn in FY17 compared to a budgeted figure of EGP 622bn for FY16 (recent figures for revenues in the first 8 months of FY16 have shown only EGP 253bn), 64% of budgeted revenues are in the form of tax revenues amounting EGP 433.3bn (EGP 40bn of which are assumed to be raised from the applica-tion of the VAT) while 20% are in the form of property income amounting to EGP 99bn. We see such figures are somehow overestimated, we see total budget revenues to revolve around EGP 555bn, EGP 396bn of which are tax revenues and EGP 87.3bn are property income as the global recession and the fall in international oil prices are to affect Suez Canal and oil sector revenues (representing around 7% and 12% of the government’s revenues, respectively, either in the form of tax revenues or property income). Moreover, the decrease in business activity due to the previously mentioned obstacles are to reduce taxes on corporate profits on companies by around EGP 8bn from its projected figure. In addition, the government has postponed the collection of taxes from tourism companies due to the difficulties faced by the sector which will affect tax revenues negatively.

On the other hand, expenditures are budgeted to record a figure of EGP 936bn in FY17 compared to a budgeted figure of EGP 864.5bn in FY16 (recent figures for expenditures in the first 8 months of FY16 have registered EGP 466bn). A blatant remark concerning the projected expenditures in the upcoming fiscal year is the increase of interest payments by 20% y-o-y to reach EGP 292bn up from EGP 244bn in FY16 to increase its portion from total expenditures from 26% to 31% indicating how critical the situation is concerning the government’s public debt, which is expected to exceed 90% as percentage of GDP in FY17 by its turn, moreover, debt service of external debt is expected to come higher in EGP terms than last year on the back of a weaker pound. Another remark is the projected slowdown in compensation to employees annual growth rate that is planned to increase by only 4.5% in FY17 compared to 10% and 12% in FY15 and FY14, respectively. Subsidies from the other side are planned to decrease by around 9% down from EGP 231bn in FY16 (EGP 61bn of which are oil subsidies) to EGP 210bn in FY17 (EGP 35bn of which are oil subsidies) on the back of the expected second round of lifting up of energy subsi-dies as well as the decrease in international oil and food prices (i.e. USD 40 is the assumed price for the barrel of oil for FY17 compared to USD 70 assumed in FY16 budget). In addition, EGP 107bn are projected as government’s investments for FY17 up from EGP 74bn budgeted in FY16 with an increase of 45% that we see unachievable in accordance with the government’s escalating public debt. We see government expenditures for FY17 at EGP 903bn. All in all we expect government’s budget deficit for FY17 to be EGP 348bn accounting for 10.8% of GDP opposed to the government target of EGP 305bn and 9.8% of GDP.

Fiscal sector (Year End June) FY14a FY15a FY16b FY16e FY17f FY18f FY17b

Total Revenues (EGP bn) 456.79 465.24 622.3 501.9 555.4 624.2 631.1

Tax Revenues 260.3 305.96 422.4 348.7 396.6 452.4 433.3

Grants 95.86 25.44 2.2 6.2 5.6 2.2 2.2

Property Income 57 81.46 126.4 85.5 87.3 98.3 99.3

Other Revenues 43.63 52.39 71.3 61.5 66.2 71.4 96.2

Total Expenditures (EGP bn) 701.5 733.35 864.56 814.3 903.9 974.5 936.09

Compensation of Employees 178.59 198.47 218.1 218.3 228.1 250.9 228.1

Purchases of Goods and Services 27.25 31.28 41.4 40.2 46.2 50.8 40.0

Interest 173.15 193.01 244.04 239.16 294.8 330.1 292.52

Subsidies and Social Benefits 228.58 198.57 231.22 194.2 197.8 185.2 210.32

Purchases of Non-Financial Assets 52.88 61.75 74.96 66.10 69.41 76.35 107.01

Other Expenditures 41.4 50.28 54.80 56.31 67.57 81.09 58.10

Cash Deficit (EGP bn) (244.7) (268.1) (242.3) (312.4) (348.57) (350.34) (305.0)

Overall Deficit/ GDP (%) 12.1% 11.5% 8.9% 11.5% 10.8% 9.4% 9.4%

b: Government Budget

f: Prime Forecasts

18

SOURCE: MOF AND PRIME ESTIMATES



19

Compensation of Employees

23%Purchases of Goods

and

Services8%Interest

Payment20%

Subsidies28%

Purchases of Non-Financial

Assets

13%

Other Expenditurs

8%


27%

Purchases of Goods and

Services

4%

Interest Payment

26%

Subsidies27%


Assets

9%

Other Expenditurs

7%


24% Purchases of Goods

and

Services4%Interest

Payment31%

Subsidies23%


Assets

12%

Other Expenditurs

6%

FY10 FY17B FY15

Tax Revenues66%

Grants5%

Property Income18%

Other Revenues11%

Tax Revenues64%

Grants2%

Property Income

20%

Other Revenues

14%

Tax Revenues69%

Grants0%

Property Income

16%

Other Revenues

15%

FY10 FY17B FY15

BUDGET EXPENDITURES BREAKDOWN

SOURCE: MINISTRY OF FINANCE

BUDGET REVENUES BREAKDOWN


EGYPT BOOK

20



EGYPT BOOK STOCK MARKET FOCUS

21

The Egyptian stock market was not away of the challenges that the Egyptian economy faced, either domestically

or globally, after recording a strong performance during 2014, year of 2015 witnessed a sharp drop of 22% in

EGX30. Morgan Stanley Index for Emerging Markets dropped by 17% during 2015, while MSC index for Egypt

dropped by 25%. Meanwhile, other emerging markets witnessed more aggressive declines like; Greece, Brazil,

Columbia, Peru, Turkey and South Africa, that dropped by 64%, 44%, 44%, 32%, 32% and 27%, respectively.

However, backed by the 94% rally in the Egyptian stock market performance over 2012-2014, despite the political instability over that period, Egyptian stock market came in the third position among emerging market with an increase of 45% over 2012-2015. Also, 2015 witnessed the second highest trading value of EGP 117bn, post 2011 revolution, following 2014. In addition, 2015 witnessed a considerable number of 15 new listed companies, with a total capital of EGP 6bn, which is the highest since 2008. In addition, during 2015 EGX came in the first position among regional peers, in terms of value of IPOs of EGP 6.2bn. Furthermore, the highest number of acquisition deals of 11 since 2009 was implemented in 2015, with a total value of EGP 16bn. Accordingly, we believe the weak performance during 2015 was stemmed mainly from the investors’ negative sentiment, which witnessed a dramatic change during 2014-2015. As it moved from very positive during 2H2014, to moderate in 1Q2015, until it was significantly deteriorated with the beginning of April 2015. After the presiden-tial elections mid 2014, a state of extreme optimism dominated the Egyptian market, especially with the prepara-tion for Economic Summit in Sharm El-Shiekh. In 1Q2015, the new income taxes in capital market eased the posi-tive sentiment. After the summit, the continuity of lack of liquidity in the Egyptian market, which was a result of shortage of foreign currency and along waited queue of repatriations, and the delay in implementing summit’s projects and MOUs, due to the bureaucracy and inefficiency of laws and administrative body of the government, converted the sentiment into negative, leading the market to ignore any positive news.

SOURCE: BLOOMBERG

MSC INDEX FOR EMERGING MARKETS IN USD - 2015



22

EGX30 is currently traded at P/E ratio of 12.78x, while MSCI for emerging markets is traded at P/E ratio of 13.84x.

This indicates that, EGX represents a good opportunity among its emerging peers at current levels. In addition, esti-

mated P/E2016 for EGX30 stands at 9.5x compared to 12.15x for MSCI EM, according to Bloomberg estimates.

0.00

1,000.00

2,000.00

3,000.00

4,000.00

5,000.00

6,000.00

7,000.00

8,000.00

9,000.00

10,000.00

11,000.00

Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15

EGX30

Economic Reforms through Subsidy

Phase out & New taxes for Capital

Market

Suez Canal Certificates

6.8% real GDP

growth in 1Q14/15

Fitch upgraded

Egypt’s rating from

B- to B

Terrorism Action in Karam El Qawdes

Economic Conference

Yemen War

Russian Plane Crash

in Sinai

EGP Devaluation by EGP 0.2

MPC cut rates by 50

bps

Moody’s upgraded

Egypt’s rating from Caa1 to B3

Cancellation of

Parliamentary Elections

Capital gain Taxes were put on hold

S&P Revised Up

Egypt’s outlook to

Positive

Fitch affirmed Egypt’s

rating at B

Egypt inaugurated Suez Canal

Project

Ismail is new PM

S&P Revised Down Egypt’s

outlook to Stable

Tarek Amer

News about loans from WB &

AfDB

SISI President

Announcement of amendments to Investment law and Income Tax law

SOURCE: BLOOMBERG, PRIME RESEARCH

Major Events & EGX30 Performance

SOURCE: BLOOMBERG, PRIME RESEARCH

Stock Annual Change

Correla-tion

1 Year Beta

Excess Re-turn

Required Re-turn

Alpha R-Squared

CIEB 33% 0.28 0.27 55% 1% 32% 8%

COMI -1% 0.88 1.00 20% -21% 20% 77%

MCQE 22% 0.15 0.13 44% 5% 17% 2%

EMFD 0% 0.59 0.86 22% -17% 17% 35%

ORAS 0% 0.62 0.83 22% -16% 16% 39%

EXPA 2% 0.45 0.46 24% -5% 7% 20%

SWDY -10% 0.65 0.81 12% -16% 6% 43%

PHDC -27% 0.85 1.36 -6% -32% 5% 72%

AUTO -24% 0.52 1.08 -2% -24% 0% 27%

HDBK -9% 0.41 0.49 13% -6% -3% 16%

OCDI -34% 0.87 1.30 -13% -31% -3% 75%

HRHO -35% 0.88 1.32 -14% -31% -4% 77%

ESRS -36% 0.76 1.30 -14% -31% -5% 58%

JUFO -15% 0.44 0.56 6% -8% -7% 20%

SKPC -16% 0.56 0.54 6% -8% -8% 31%

ORWE -32% 0.60 0.91 -10% -19% -13% 36%

SVCE -43% 0.77 1.23 -21% -29% -14% 60%

SCEM -23% 0.38 0.54 -1% -8% -15% 14%

ADIB -32% 0.57 0.79 -10% -15% -17% 33%

ETEL -45% 0.70 0.82 -24% -16% -29% 48%

ARCC -39% 0.41 0.48 -18% -6% -34% 17%

SUGR -28% 0.05 0.07 -6% 7% -35% 0%

SUCE -41% 0.05 0.07 -20% 7% -48% 0%



23

As we mentioned earlier, EGX30 dropped by 22% during 2015. In order to test the performance of the sectors covered in this paper, but in a different way, we followed hypothetical scenario, where we used 2015 Average yield on 1-Year T-bill (RF), 1-Year Statistical Beta (ß), and actual market return of –22% (RM), as inputs in Capi-tal Asset Pricing Model (CAPM) to reach the required return, or in other words, what should the return of each stock stand at in light of these actual variables. Using EGX30 as our bench mark, Credit Agricole Egypt (CIEB) recorded the highest Alpha of 32% during 2015, followed by COMI with Alpha of 20%.

SOURCE: PRIME RESEARCH


EGYPT BOOK

24



EGYPT BOOK REAL ESTATE SECTOR

25

... AND LOW MORTGAGE PENETRATION

SOURCE: BMI

LOW URBANIZATION RATE IN EGYPT

SOURCE: BMI

POPULATION AND GROWTH RATE

SOURCE: WORLD BANK

Historically, a number of investments showed a natural hedge against inflation. Real estate is one of those invest-

ments. Viewing real estate as one of the best alternative to hedge inflation can be attributed mainly to two factors; 1)

prices of real estate properties increase over time, leading to increase the resale value of the property. 2) Real estate

can also be used to generate rental income. With the value of the property being on the rising trend with inflation over

time, also the rental value tenants pay can also grow over time. These features of investment property lead either the

income generated or the value of property to keep pace with the general rise in prices across the country.

The advantage of selecting real estate investment as a tool for

inflation hedging is manifested in the current circumstances

that Egypt’s economic environment faces. Egypt is facing a

significant inflationary pressure, due to mainly the FX crisis in

the country, which enforced the CBE to devaluate the Egyptian

pound to unprecedented levels, led recent interest rates hikes

to be unfeasible from the investors’ perspective. The unavail-

ability of foreign currency, coupled with restrictions imposed

on transferring funds outside the country, made real estate

and stock market the best tools to hedge inflation. Further-

more, current high volatility of Egypt’s stock market over the

recent years pushed real estate investment to be the best

available tool to hedge against inflation.

In addition, Egypt’s real estate sector enjoys additional advan-tage besides the aforementioned one. Demand for real estate in Egypt is characterized to be a real demand. This real demand is based on the fact that; Egypt has the largest population in MENA region, which also grows annually by 2%. As a result, the Egyptian real estate market witnesses a shortage of supply, especially in low and middle income categories. With around one million marriage per annum, about 67.7% of the popula-tion below 34 years. This guarantees the continuity of a strong demand for real estate. With the largest population in the region, Egypt recorded one

of the lowest urbanization rates in MENA region. As urbaniza-

tion rate in Egypt came in at 43%, compared to 87% and 82% in

Lebanon and KSA, respectively. This low rate with expectation

of increasing disposal income supports demand for real estate.

Recently, Egypt’s president announced a plan for allocating

new homes in new cities for the residents of slums. This will

help in developing residential communities outside Cairo, cre-

ating strong demand in these areas.

Mortgage market is one of the industry’s growth drivers in

Egypt, as the contribution of Mortgage market to the Egyptian

real estate sector is very tiny. Mortgage penetration rate in

Egypt of 0.23%, is one of the lowest rates in the region, as

depicted in the chart. CBE issued a decree to further increase

mortgage penetration, easing requirements and raising the cap

for funding. And hence, this will create a positive effect on

demand, especially from middle and low income classes. As the

CBE’s initiatives target mainly low and middle income classes,

where they will be provided with loans at low interest rates.

In sum, the continuous devaluation of the Egyptian pound will continue fuelling Real Estate demand in Cairo for the coming years. While devaluation is expected to impact the residential and hospitality segment positively, it is expected to put strain on the tenants in the retail and office segment as many of them pay the rent in dollar while their revenues are earned in EGP. While the residential segment of the New Cairo saw completion of 600 units, there were no major completion in 6th of October city during the 1Q2016, according to JLL Quarterly review. Total existing units stood at 114 thousand units not showing much growth since FY2015. The trend of declining prices continued in 1Q2016 across all segments except apartments in New Cairo, whose prices increased by 7% y-o-y. Prices of Villas in New Cairo declined by 12% over the same period. Apartments in 6th of October showed a 3% decrease and standalone units also showed 10% decrease y-o-y. However, q-o-q basis, apartments in New Cairo increased by 4% and apartments in sixth of October city declined by 1%. Over the same period, Villas in New Cairo and 6th of October declined by 9% and 12%, respec-tively.

1Q2016 did not witness the completion of any additional retail space, due to which the current supply stood at

1.3mn sqm. Completion of the Capital Mall in Heliopolis is expected to add 45,000 sqm of GLA by the end of

FY2016. Further delays are expected to the opening of Mall of Egypt (150K sqm), hence the project has been pushed

out to 2017. Rental rates have increased 10% YoY but remained unchanged at USD 1600 per sqm q-o-q little down-

ward pressure as rentals appear to peak. Vacancy rates declined to 14% from 17% a year earlier but are largely un-

changed on a q-o-q basis.



26

85

105113 114

0

20

40

60

80

100

120

2013 2014 2015 Q12016

Current Supply

Un

its

(00

0)

28

4 3

0

5

10

15

20

25

30

2016 2017 2018

Future Supply

Un

its

(00

0)

SUPPLY OF RESIDENTIAL UNITS CONSTANT FUTURE SUPPLY TO SLOW DOWN IN 2017

SOURCE: JIL SOURCE: JIL

LIMITED SUPPLY GROWTH HISTORICALLY STRONG EXPECTED GLA SUPPLY TO MEET STRONG DEMAND




Cairo’s office supply reached approximately 941k sqm GLA, with an addition of approximately 20k sqm with the

completion of Citadel Plaza in the Mokattam Area. Average rents per sqm increased by 11% y-o-y in West Cairo but

decreased by 4% in New Cairo Sector 1 over the same period. While in Central Cairo and New Cairo Sector 2, aver-

age rents remained unchanged on y-o-y basis. Vacancy rate dropped from 33% to 29% y-o-y on the back of limited

new supply. Although vacancies are still high, this decline of 4% is considered as positive for the office segment.

27

LIMITED NEW SUPPLY BROUGHT DOWN VACANCY STRONG GROWTH IN FUTURE SUPPLY




28

We set SODIC’s FV at EGP 16.6/share; 48.2% upside potential, with “Strong Buy” rating: Using the Sum of the Parts method (SoTPs), where we applied DCF valuation method for the 11 launched projects and the recently signed Co-Development with Heliopolis Housing, we recommend “Strong Buy” for SODIC, at a FV of EGP16.78/share, implying an upside potential of 48.2%. SODIC is one of our top picks within the real estate sector, as the company enjoys strong brand equity with significant clients’ loy-alty. This came as a result of the impressive track record of the company, as well as its abide to the delivery time schedule, at the time when most local developers delayed their delivery time schedules due to the political conditions in the country. In addition, the company will be executing its strategy towards achieving further sustainable growth into the future, focusing in particular on building up its recurring income port-folio. Fast growing land bank, strong track record and well diversified portfolio: The growth and development of the SODIC land bank has been at the heart of the perform-ance and strategy of the company over the past two decades. SODIC’s focus and ef-forts towards expanding its project portfolio has paid off in FY2015. Total of 3.3 million sqm of land was added to SODIC’s land bank in FY2015, bringing the total undeveloped land bank to 6.1mn sqm. SODIC enjoys a very well diversified portfolio right from resi-dential units to offices and retail. Even within the residential portfolio, SODIC caters to a very wide range of customers with its projects ranging from residential family units, general residential, high end apartments and secondary home. The company plans to execute EGP 45 –50bn worth of ventures over the next five years and will act to ex-pand their land bank whilst diversifying into locations in more coastal and secondary city locations.

Mega Co-Development project in East Cairo: SODIC inked a Co-development agree-ment with Heliopolis Housing and Development Company to develop 655 acres (2.75mn sqm) in East Cairo. SODIC will be entitled to 70% of revenue and will perform the master planning, designing, marketing & sales and construction. The project will enhance Sodic land bank, especially in East Cairo, with no associated land liability.

However, our main concern is; SODIC currently have 6.1mn sqm of undeveloped land. Out of this 2.7mn sqm is a co-development with Heliopolis housing. Acquiring new land bank will cost higher to SODIC due to increasing land prices. This puts SODIC at a disadvantaged position as other players have already acquired huge land bank at lower prices.

Strong off-plan sales: The off-plan sales of SODIC grew from EGP 2.5bn in FY2013 to EGP 4.4bn in FY2015, annual growth of 33%. From strong line-up of launches of big projects such as Villette, Eastown residence and Courtyards in the coming years, we see off-plan sales of SODIC to remain strong in coming years. Net Contracted Sales in FY2016 and FY2017 is forecasted to be EGP 4.1bn and EGP 4.5bn, respectively. Villette is expected to contribute to 41% of total Contracted Sales of EGP 4.1bn in FY2016. Launch of the Co-Development with Heliopolis Housing and Development Co. by the end of 2016 is expected to drive Contracted Sales further in FY2017.

SIXTH OF OCTOBER FOR DEVELOPMENT AND INVESTMENT.. Healthy Land Bank Replenishment, with Diversified Projects Portfolio...

“STRONG BUY” MARKET PRICE EGP 11.32 FAIR VALUE EGP 16.78 POTENTIAL 48.2% UPSIDE

INVESTMENT GRADE “GROWTH”

Stock Data Outstanding Shares [in mn] 338.9 Mkt. Cap [in mn] 3,514.5 Bloomberg – Reuters OCDI EY / OCDI.CA 52-WEEKS LOW/HIGH EGP 6.56 – EGP 13.38 DAILY AVG TURNOVER (IN MN) 1.59

Ownership Abanumay Family 13% Olayan Saudi Investment Co. 13% Ripplewood Advisors L.L.C 9% Rashed Al Rashed & Sons Co. 5% EFG-Hermes 4% Norges Bank 4% Juma Al Majid Investments L.L.C 3% Free Float & Others 49%

Source: Bloomberg

0

1

2

3

4

5

6

Auto EGX 30 - Rebased

Company Profile

SODIC was incorporated in 1996 and has since become one of Egypt’s leading real estate develop-

ment companies. Headquartered in Cairo and

listed on the Egyptian stock exchange, – under-pinned by a goal from the leaders of the business seeking to develop a residential neighbourhood on the outer west region of Cairo. The initial phase of SODIC development through the decade spanning from 1996 to 2005. Sodic was a pioneer in the area of ‘New Urban Community’ in property devel-opment and developed a first of its kind residential

community - Beverly Hills – with a size exceeding

1.7mn sqm of land that has now become home to over 2,900 families.

02468

101214

OCDI EGX 30-rebased

All Prices are as of 31 May 2016



29

Project nearing completion leads to decline in Revenue: Top-line declined by 34.2% y-o-

y from EGP 284mn in 1Q2015 to EGP 187mn in 1Q2016. The slump in Revenue is due to

the decline in the number of units delivered by the Company in 1Q2016. SODIC delivered

101 units in 1Q2016 as compared to 108 units in 1Q2015. Decline in delivered units is

because delivery of Allegria and Katameya Plaza is nearing completion, while delivery in

Eastown will show effect from 2Q2016. The Net Profit for 1Q2016 declined by 32.0% to

EGP 51mn from EGP 75mn in 1Q2015. This was primarily due to decline in delivery and

higher costs. Net Profit Margin, which was 26.4% in 1Q2015, has improved to 27.3% in

1Q2016, an increase of 0.9%, primarily due to decline in taxes.

Strong sales backlog: SODIC sales backlog in terms of sold but undelivered units amount to EGP 9bn. Along with the strong expected off plan sales in the coming years SODIC`s backlog will maintain revenues throughout 2020 with healthy and resilient margins.

Maintained Delivery Path: FY2015 revenue increased by 7.7% yoy compared to 3.1% y-o-y growth in FY2014 from sustainable delivery momentum. West Cairo projects dominate units delivery by 94% out of the 721 units delivered. From FY2016 to FY2020, SODIC will deliver c.3,900 units from its existing projects. Sum of 49% of the expected delivered units are from Eastown Residences, totalling 1,902 units. Westown Residence is expected to deliver about 751 units. Villette and Courtyard Westown delivery will reach 698 and 357 units, respectively. The strong delivery commitment from launched projects and expected delivery from the unlaunched projects will drive the SODIC Top line to increase to EGP 2.47bn in FY2018 from EGP 1.47bn in 2015.



30

Financial Statements … Historical & Forecast

SOURCE: SODIC, PRIME

Income Statement Brief Hist. Forecast In EGP Mn 2015 2016F 2017F 2018F

Revenues 1,471 1,424 1,487 2,474 Change 8% -3% 4% 66%

Cost of Operations 862 839 845 1,441 Change -3% -2.7% 0.7% 70.5%

Gross Profit 609 585 642 1,033 EBITDA 408 401 449 812 NPAT 321 323 384 706

Balance Sheet Brief Hist. Forecast

In EGP Mn 2015 2016F 2017F 2018F

Cash & Cash Equivalent 2,016 1,895 3,053 4,811 Net Receivables 6,886 8,171 7,878 7,723

WIP 7,036 7,680 8,790 9,852 Other Current Assets 554 506 513 518

Total Current Assets 16,493 18,252 20,234 22,904

Net PPE 136 125 115 106 Other LT-Assets 129 35 356 354

Total Long Term Assets 265 160 471 460

Total Assets 16,758 18,412 20,705 23,363

Liabilities

STD - incl CPLTD 173 135 126 119 Accounts Payable 1,766 1,928 2,841 4,085

Customers’ Advance Payment 8,914 10,522 12,514 13,921 Other Current Liabilities 71 71 71 71

Total Current Liabilities 10,925 12,656 15,552 18,196

LTD 2,446 2,047 1,064 377 Other Long Term liabilities 1 1 1 1

Total Long Term Liabilities 2,447 2,048 1,065 378

Total Liabilities 13,372 14,704 16,617 18,574

Equity

Paid-in-Capital 1,356 1,356 1,356 1,356 Reserves 1,637 1,648 1,656 1,675

RE 93 93 93 93

Total Equity 3,386 3,709 4,088 4,789

Margins & Ratios

2015 2016F 2017F 2018F

GPM 41.4% 41.1% 43.2% 41.8% EBITDA Margin 28% 28% 30% 33%

NPM 22% 23% 26% 29% EPS 0.9 0.9 1.1 2.0 P/E 12.3x 12.3x 10.3x 5.6x

BV/S 10 11 12 14 P/BV 1.1x 1.0x 0.9x 0.8x

Debt/Equity 0.77x 0.59 0.29 0.10



31

We set PHDC’s FV at EGP 3.64/share; 46% upside potential, with “Strong Buy” rating: Using the Sum of the Parts (SoTPs) DCF valuation for launched projects and existing hotels, we recommend “Strong Buy” for PHDC, at a FV of EGP 3.64/share, implying an upside potential of 46%. PHDC is also one of our top picks within the real estate sector.

Financial restructuring pays off: PHD succeeded to overcome the liquidity squeeze which disrupted operations over the past years, through securing different financ-ing channels. Post the 2011 revolution, the major shareholder MMID supported the company with shareholders’ loans totaling EGP 562mn as at the end of FY14. In addition, during 2014, PHD succeeded to increase paid-in capital by EGP 600mn and secured a syndicated loan of EGP 2.4bn. In 2015 capital was increased by EGP 1.65bn. As a result, the company’s performance improved significantly during the year and was able to regain clients’ confidence. PHD posted construction spending of EGP 350mn in 2013 which was more than tripled in 2014 to reach EGP 1.1bn. Accordingly, PHD succeeded to increase its deliveries from an average of 330 units in 2011 and 2012 to 981 units in 2014. Moreover, cancelation rate declined to 9.2% of 2014 reservations, down from 225%, 170% and 21% in 2011, 2012 and 2013 respectively, reflecting improved clients’ sentiment. In addition, the company diversified its target clients base, through targeting upper middle income segment besides its main target the high end income segment. PHDC is well positioned, supported by litigation free land bank complemented by sound commercial strategy: PHDC succeeded to solve all legal disputes regarding its land bank, as four land plots in New Cairo, 6th of October and Al Alamain were either returned or settled through reconciliation. Currently the company`s land bank stands at 27.1 million Sqm, of which 9mn sqm is under development, 12.7mn sqm is raw land, 2.1mn sqm is completed projects and 3.2mn sqm is Co-development land.

PHD initiated an ambitious commercial real estate development strategy to build and operate mixed use projects in order to diversify revenue stream, generate more recurring income and minimize high revenue contribution from residential projects. The company plans to roll out a number of community malls, neighbor-hood malls and commercial offices. PHD also owns 60% of Maccor which owns and operates Novotel October Hotel, Mercure Ismailia Hotel and Novotel Sharm El Sheikh Hotel.

However, our main concern on PHDC is that; PHD highly focuses on the upper class and upper middle class which might be adversely affected as the economic growth slowdown.

Massive Co-Development Projects in pipeline once agreement finalised: In addi-tion to the signed Co-development project with MNHD, additional 10,000 Feddans in West Cairo and 500 Feddans in East Cairo will be developed with the govern-ment on revenue sharing basis, with low initial investment and low associated land liabilities, once the MOUs turns to definitive agreements. It has been re-ported that, the government may cancel the MoU signed with PHD for “October Oasis", the 10,000 feddans project, but the company denied such action.

PALM HILLS DEVELOPMENT COMPANY... Well Positioned with Considerable Land Bank Size...

“STRONG BUY” MARKET PRICE EGP 2.50 FAIR VALUE EGP 3.64 POTENTIAL 46% UPSIDE


Stock Data Outstanding Shares [in mn] 2172.3 Mkt. Cap [in mn] 5,365.6 Bloomberg – Reuters PHDC EY /PHDC.CA 52-WEEKS LOW/HIGH EGP 1.77 – EGP 3.15 DAILY AVG TURNOVER (IN MN) 12.3

Ownership M & Mfor Investment and Development 42.5% Other 2.1% Free Float 55.4%

Source: Bloomberg

0

1

2

3

4

5

6


00.5

11.5

22.5

33.5

PHDC EGX 30-rebased

Company Profile Palm Hills Developments (PHD) is one of the largest real estate developers in Egypt. PHD focuses on developing midsize residential pro-jects mainly in new urban communities of Cairo. Launched projects include villas (Detached Vil-las, Town Houses and Twin Houses), residential apartments or both. The company’s residential units are marketed to upper class and middle class, positioning Palm Hills as one of the lead-ing luxury developer in the country. PHD’s main residential developments are located in West-ern Cairo (Sixth of October and Sheikh Zayed), Eastern Cairo (The Fifth Settlement and New Cairo) and Egypt`s Northern Coast. Since inau-guration, PHD delivered 4,401 units.




32

Record Quarterly Pre Sales: Palm Hills reported a record Pre Sales (New Sales) of EGP 2.2bn in 1Q2016, a growth of 62% y-o-y, recording the highest quarterly New Sales since inception. 1Q 2016 Pre Sales has surpassed the previous record of EGP 2bn achieved in 3Q 2015. The stunning double digit growth stemmed from the strong demand for the Company’s units, whether from launched projects or from existing inventory, coupled with successful sales and marketing campaigns for higher unit prices. The total number of units sold in 1Q2016 was 567, 32% higher than 1Q2015 due to strong Pre Sales in Palm Valley, Capital Garden, Golf Extension as well as the North Coast.

In Q12016, PHD changed its accounting method, which resulted in lower margins. Under the New Accounting method, Net Profit of PHD declined by 43% yoy. Apart from the change in accounting method, expiration of the tax exempt status and higher minority interest resulted in this decline. However, PHD reported revenue of EGP 1.07bn, a growth of 44% yoy, backed by strong pace of construction and deliveries. PHD delivered 377 units in 1Q2016, a growth of 47% y-o-y.



33



Revenues 3,561 4,393 4,878 3,901 Change 69% 23% 11% -20%

Cost of Operations 2,362 2,848 3,161 2,529 Change 21% 11% -20% -40%

Gross Profit 1,198 1,545 1,715 1,372 EBITDA 770 1,025 1,125 1,014 NPAT 1,031 691 758 682


In EGP Mn 2015 2016F 2017F 2018F

Cash & Cash Equivalent 966 877 1,108 1,410 Net Receivables 3,075 4,027 4,422 4,111

WIP 0 0 0 0 Other Current Assets 7,340 3,552 1,935 1,904


Net PPE 335 326 316 307 Other LT-Assets 7,149 5,980 6,322 5,690

Total Long Term Assets 7,483 6,305 6,639 5,998

Total Assets 18,864 14,762 14,103 13,423

Liabilities

STD - incl CPLTD 929 644 954 1,121 Accounts Payable 407 421 430 438

Customers’ Advance Payment 6,170 2,952 1,952 952 Other Current Liabilities 953 817 832 908


LTD 3,335 2,162 1,376 406 Other Long Term liabilities 486 495 505 515

Total Long Term Liabilities 3,821 2,657 1,881 922


Equity

Paid-in-Capital 4,345 4,345 4,345 4,345 Reserves 1,109 1,109 1,109 1,109

RE 860 1,496 2,224 3,180

Total Equity 6,584 7,270 8,053 9,083

Margins & Ratios

2015 2016F 2017F 2018F

GPM 34% 35% 35% 35% EBITDA Margin 22% 23% 23% 26%

NPM 29% 16% 16% 17% EPS 0.47 0.31 0.34 0.31 P/E 5.3x 8.0x 7.3x 8.1x

BV/S 2.9 3.2 3.5 3.9 P/BV 0.9x 0.8x 0.7x 0.6x

Debt/Equity 0.65x 0.39x 0.29x 0.17x

SOURCE: PHDC, PRIME



34

We set EMFD’s FV at EGP 3.94/share; 67% upside potential, with “Strong Buy” rating: Using the Sum of the Parts (SoTPs) DCF valuation for launched projects, we recommend “Strong Buy” for EMFD, at a FV of EGP 3.94/share, implying an upside potential of 67%. Although our estimated FV of Emaar, implies an upside potential, above current market price, that is higher than that of Palm Hills, we prefer PHD over EMFD. Emaar targets mainly high income segment in general and ultra high end segment in some projects. The majority of demand for real estate units within these segments is mainly for investment purposes, which is the most affected one at the times of economic slowdown. While, after realizing this point due to the tough years that the company faced post 2011, PHDC widened its clients base through targeting upper middle income segment, where the real demand for real estate units is stronger than that of high end segment. Large Land Bank, strong brand name and regional expertise: EMFD posses a land bank of 15.3mn Sqm distributed over three major projects in the North Coast, East-ern and Central Cairo regions alongside a separate undeveloped land plot in Cairo`s west axis. Emaar Misr is a member of Emaar Group which was established in 1997. Since establishment, the company has developed several well-known master planned projects including Downtown Dubai, Burj Khalifa, Armani Hotel in Dubai, Arabian Ranches, The Address, BLVD Heights, Dubai Marina, and Emirates Living. Headquartered in UAE, Emaar Properties is now a leading real estate developer in the MENA region. EMFD was established in 2005 as a joint venture between Emaar Properties and Artoc Group for Investment and Development. In 2007, Emaar prop-erties acquired the full ownership of the company by purchasing shares from Artoc Group. Emaar Misr develops premium quality master-planned real estate properties target-ing the higher income segments of Egyptians. The management of the company opines that, increasing level of disposable income will create more demand for luxu-rious projects in the coming years. As the product of the company is catered to-wards the wealthy segment, the selling price of the company is also very high. Ap-proximately 43% of the customers of the company earn monthly income between EGP 45,000 to EGP 65,000 and 30% of the customers earn above EGP 65,000 per month. As the customers of the company are only the wealthy segment, the com-pany runs concentration risk. In the down cycle of the economy, demand for luxuri-ous products typically decrease. Prime location: EMFD`s three major projects enjoy strategic locations. UpTown Cairo (UTC) is located with close proximity to the city center but elevated 200 me-ters above the sea level. Marassi is located in one of the sweat spots of the Mediter-ranean North Coast, while Mivida is strategically located near the popular area of New Cairo and the second ring road.

EMFD plans to retain control of the majority of its commercial properties for the foreseeable future. By maintaining this control of commercial assets, the company will be able to adapt to changing real estate market conditions, with the goal of maximizing revenue streams and sustainable stable cash flows with an adaptive approach. As of 1Q2015, the company has an area of 5,961 sqm under general lease agreements across its projects. The planned commercial projects include UTC Retail, Mivida Retail and Marassi Retail in the Retail segment. Emaar Misr also plans to offer quality resorts in the hospitality segment with its UTC Hotel, Marina Hotel and Mivida Hotel projects.

EMAAR MISR FOR DEVELOPMENT... The High End Target is the Main Concern…



Stock Data Outstanding Shares [in mn] 4,619.3 Mkt. Cap [in mn] 10,855.4 Bloomberg – Reuters EMFD EY / EMFD.CA 52-WEEKS LOW/HIGH EGP 1.88– EGP 4.08 DAILY AVG TURNOVER (IN MN) 6.3

Ownership EMAAR Properties 85.3% Other 3.8% Free Float 10.9%

Source: Bloomberg

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EMFD EGX 30-rebased

Company Profile Positioned as a premier real estate develop-ment company in Egypt and recognized as an offspring of Emaar Properties UAE, Emaar Misr has a diverse portfolio of assets with particular focus on the area of developing premier life-style communities in strategically selected su-perior venues. Three major projects alongside a separate plot of undeveloped land make up the company`s portfolio. The projects span the North Coast area alongside the Eastern, West-ern and Central Cairo regions. Emaar is a re-nowned and highly regarded name in the Mid-dle Eastern development market and beyond. This strong reputation and track record pro-vides Emaar Misr with a significant competitive advantage not only in name but also in infra-structure, skills and logistics. Emaar has a vast breadth of experience and expertise in real estate development within the MENA region.




35

Net profit of Emaar grew by 47.4% from EGP 173mn in 1Q2015 to EGP 254mn in 1Q2016. Net profit margin improved significantly from 23.0% from 1Q2015 to 42.6% in 1Q2016. Apart from the improved operating margins, the increase in net profit margin is attributed to higher interest income from deposits as well as EGP 69mn interest earned from held to maturity investments. Emaar Misr reported revenue of EGP 597mn in 1Q2016, 20.5% lower than 1Q2015 revenue of EGP 751mn. The decline in the Revenue was due to significant decline in revenue from the Marassi and Mivida projects. 1Q2016 Gross Profit Margin (GPM) was higher at 40.6% as compared to the Gross Profit margin of 30.4% in 1Q2015. Gross Profit margins of all the three projects increased significantly. The operating profit in 1Q2016 stood at EGP 151mn, 5.3% higher than the operating profit margin of 20.0% in 1Q2015.



36



Revenues 3,237 2,898 3,046 2,891 Change 24.3% -10.5% 5.1% -5.1%

Cost of Operations 2,259 1,649 1,738 1,688 Change 24% -6.6% -23% 2.4%

Gross Profit 978 1,249 1,308 1,202 EBITDA 580 848 865 711 NPAT 854 708 786 762


In EGP Mn 2015 2016F 2017F 2018F

Cash & Cash Equivalent 2,093 3,884 5,940 9,117 Net Receivables 1,381 3,233 4,694 5,673

Other Current Assets 12,427 12,196 14,162 16,795


Net PPE 511 643 707 778 Other LT-Assets 1,102 257 267 278

Total Long Term Assets 1,613 900 974 1,056

Total Assets 17,514 20,212 25,770 32,641

Liabilities

STD - incl CPLTD 395 695 600 495 Accounts Payable 2,153 2,868 4,367 6,373

Customers’ Advance Payment 7,330 10,384 13,941 18,320 Other Current Liabilities 255 271 276 282


LTD 630 372 177 0 Other Long Term liabilities 12 0 0 0

Total Long Term Liabilities 642 372 177 0


Equity

Paid-in-Capital 4,619 4,619 4,619 4,619 RE 839 1,603 2,390 3,152

Total Equity 6,740 5,623 6,410 7,171

Margins & Ratios

2015 2016F 2017F 2018F

GPM 30.2% 43.1% 42.9% 41.6% EBITDA Margin 17.9% 29.3% 28.4% 24.6%

NPM 26.4% 24.4% 25.8% 26.3% EPS 0.18 0.15 0.17 0.16 P/E 12.8x 15.4x 13.9x 14.3x

BV/S 1.46 1.22 1.39 1.55 P/BV 1.6x 1.9x 1.7x 1.5x


SOURCE: EMFD, PRIME


EGYPT BOOK

37



EGYPT BOOK BANKING & FINANCIAL SECTOR

38

The performance of the banking and financial services is an accurate reflection of the economic situation of the

country. Egyptian economy has been struggling with dropping foreign currency reserves opposed to rising FX needs

due to the country’s heavy rely on imports. As a result, the Central Bank of Egypt is continuously issuing new regula-

tions in order to preserve the scarce foreign currency and meet the local market needs smoothing the functions of

the banking sector. The continuous issuance of aggressive regulations is aiming at developing the banking sector

making it more dynamic and developed; however, the banks are changing their strategies and future plans in order

to abide by these new regulations.

The CBE’s recent regulations include:

17 April,2016

23 March,2016

22 March,2016

With the intention of introducing the application of Basel III in the Egyptian banking sector, CBE

has introduced a new Capital Conservation Buffer of 0.625%, to be implemented starting Janu-

ary 2016, raising the minimum Tier1 ratio to reach 6.625% compared with 6% and the CAR ratio

(Capital Adequacy Ratio) to 10.625% compared with the current 10%. It is worth mentioning

that, this new regulation has to come into effect immediately and will be gradually raised annu-

ally in order to reach 2.5% increase in Capital Conservative Buffer attaining 8.5% required mini-

mum Tier1 ratio and 12.5% required CAR ratio by January 2019, as presented in the table be-

New Capital requirements Jan-2016 Jan-2017 Jan-2018 Jan-2019

Going Concern Capital 4.5% 4.5% 4.5% 4.5%

Capital Conservative buffer 0.625% 1.250% 1.875% 2.5%

Additional tier 1 capital 1.5% 1.5% 1.5% 1.5%

Minimum tier 1 capital 6.625% 7.25% 7.875% 8.5%

Tier 2 Capital 4% 4% 4% 4%

Minimum CAR ratio 10.625% 11.250% 11.875% 12.5%

The CBE issued a circular limiting the time period of banks’ chairmen to 9 consecutive or incon-

secutive years in a bank. If this new regulation is valid on one of the banks chairmen, then it will

be is executed once the financials of 2016 are stated or in the next Assembly General Meeting.

In a circular published on the 11th of January 2016, CBE has decided new and higher risk-weighting scheme for the concentrated loans portfolios. According to the new measures, a) If the ratio of loans provided for the top 50 clients to the total loans portfolio came in be-tween 50% and 70% of bank’s Tier1 Capital, then the risky-weight applied would be 200% and b) if it was more than 70%, the risky-weight applied should be 300%. Banks are allowed to comply with this measure within one year. In March 22nd, the CBE has clarified this regu-lation by saying that the top 50 clients are based on calculated credit facilities granted and not the facilities which they are authorized to have. In addition the risky weight applied should only be applied on the amount exceeding Tier1 Capital.

For personal loans CBE indicated that; monthly installment should not exceed 35% of the individual’s monthly salary after taxes, and mortgage loans could reach 40% of individual’s monthly net salary. However on the circular of March 22nd that, the monthly income should be calculated based on the validation process by the board of any bank, besides if the al-lowable limit was passed, limits of the individual’s credit cards should not be lifted up in future, with no effect at the current time. In addition, bankers can extend their personal credit limits to 50% of their monthly salaries; and banks should monitor their corporate clients who provide loans for retail clients, making sure that those institutions abide with the above mentioned limits.



39

24 February,2016

22 February, 2016

11 January,2016

One of the catalysts for this sector is that, the banking sector in Egypt is still emerging with low penetration rate.

The density ratio in Egypt reached 23.1k as at the end of FY2015. This means that; one banking unit in Egypt covers

23.1 thousand people. However, this number does not reflect the actual figures of banks’ clients. As the majority of

Egyptian population still have no banking accounts. This can be attributed mainly to the absence of the banking cul-

ture among the Egyptian society. And hence, expanding clients’ base within the banking sector will enable the banks

to capture growth opportunities.

CBE interpreted Small and Medium Enterprises as those companies whose annual revenues

range between EGP 1mn and 20mn. The CBE started to focus more on enhancing access to

finance for SMEs, which were disadvantaged in the past. The banking system has been

mainly catering the large privileged corporations and for that reason the CBE plans to in-

crease SME lending by 20% of total lending over the coming 4 years accumulating EGP

200bn of funds. As an incentive to banks, the SME lending will be deducted from the banks’

10% reserve requirements at the CBE, and SMEs should be economically successful for

helping in solving the unemployment crisis. However, on the circular of the 22nd of March

the CBE was more accurate in defining SMEs for the medium enterprises to have a capital

between 5mn and 10mn for industrial companies and capital with 3m to 5mn to all the non

industrial companies. Moreover, banks should closely monitor the SMEs applying the I-

Score procedures when providing credit facilities for the SMEs.

The CBE launched a mortgage initiative in February 2014 with a total value of EGP 10bn that

allow banks to lend low-income and middle-income segments at 7% and 8% interest rate respec-

tively in order to provide people with low and middle income houses that does not exceed EGP

500k in new urban communities. In February 24, 2016 this mortgage initiative included high

middle class, which will be provided by mortgage loans at 9.50% to finance housing units that

can reach up to 950k.

In addition to the circular of the 11th of January, 2016 for providing SMEs with credit facilities

with low interest, the CBE has added to his regulations the medium enterprises working in both

industrial and agricultural sector providing them with medium and long term credit facilities in

order to finance their Capex expenditures with interest rates of 7%.

The Central Bank of Egypt announced firmer concentration limits for corporate lending, decreas-

ing the lending limit of a single obligor from 20% to 15% of banks’ Tier-1 Capital, whereas the

limit of a company and its affiliates and subsidiaries were cut from 25% to 20%. Egypt’s banks

will have a 3 years grace period to comply with these new measures.

Penetration Indicators Jun-12 Jun-13 Jun-14 Jun-15

No. of Banks in Egypt 40 40 40 40

No. of Branches 3,610 3,651 3,712 3,768

Population in thousand/Banking unit 22.7 22.9 23.0 23.1

No. of Debit Cards 11,284,042 12,677,275 13,910,065 16,242,941

No. of Credit Cards 1,798,968 2,100,471 2,333,636 2,575,011

No. of ATMs 5,489 6,283 6,870 7,856

SOURCE: CBE



40

Due to economic slowdown and lack of implemented investments, deposits at Egypt’s financial system were growing significantly, recording a CAGR of 14.1% over the period from FY09/10 to FY14/15, reaching 1,934bn at the end of February 2016. As at the end of June 2015, banks’ deposits saw a double digit growth rate of 21.4%, Y-o-Y, to reach EGP 1,740bn. The increasing trend in the banks’ deposits was fueled by the growing Non-Governmental de-posits, which grew by 18.6%, Y-o-Y, to register EGP 1,488bn by the end of June 2015.

On the other hand, in FY14/15, total loans provided by the banks witnessed a double digit growth rate of 22% for the first time Since FY10/11. Loans to Deposits ratio, for the whole sector, dropped sharply from 51.5% in FY09/10 to 41% in FY14/15. From the following table, we can see that, although loans provided for private sector have been growing, the percentage of private sector’s loans to total loans dropped significantly from 93.43% in FY12/13 to 87.21% at the end of February 2016. On the other hand, governmental loans to total loans increased from 6.57% in FY12/13 to 12.79% at the end of February 2016 due to the infrastructural projects of the government accompanied with slowdown in lending activity for the private sector. However, the drop in the contribution of the private sector reflects the slowdown in lending activities. This support our view that, the slowdown in private sector’s investments is the main reason behind the slowdown in lending market, and thus the liquidity is already available in the Egyptian banking system but the government’s expansions in lending market is not enough for the banking sector to flourish.

Furthermore, Public sector banks, that capture the lion share of investments in T-Bills with a contribution of 50%,

increased their investments by EGP 20bn, registering an annual growth rate of 11%. Moreover, total investments in

treasury bills reported on the banks’ financial statements grew by 20%, Y-o-Y, in FY14/15 to reach EGP 416bn, repre-

senting 24% of the total deposits at banks. The rising trend in banks’ investments in treasury bills is depicted in the

following table recording 443bn in February 2016 compared to 416bn in FY2015.

Banks’ Deposits (in EGP mn) FY11/12 FY12/13 FY13/14 FY14/15 Dec-15 Feb-16

Non-Governmental 908,070 1,063,832 1,254,882 1,488,006 1,615,135 1,631,375

change 7.1% 17.2% 18.0% 18.6%

Governmental 118,616 126,987 178,846 252,152 299,417 303,083

change 1.2% 7.1% 40.8% 41.0%

Total Deposits 1,026,686 1,190,819 1,433,728 1,740,158 1,923,515 1,934,458

change 6.4% 16.0% 20.4% 21.4%

SOURCE: CBE

Banks’ Loans (in EGP mn) FY12/13 FY13/14 FY14/15 Dec-15 Feb-16 for Government 35,780 40,802 66,421 100,718 102,289

% of Total Loans 6.57% 6.99% 9.31% 12.80% 12.79% change 6.50% 14.04% 62.79%

for Private Sector 509,113 543,264 647,240 685,937 697,466

% of Total Loans 93.43% 93.01% 90.69% 87.20% 87.21% change 8.80% 6.71% 19.14%

Total Loans 544,893 584,066 713,661 786,655 799,755

change 8.30% 7.19% 22.19%

LOANS/DEPOSITS 45.80% 40.70% 41.00% 41.09% 41.34%

SOURCE: CBE

T-Bills Portfolios at Banks (EGP mn)

FY09/10 FY10/11 FY11/12 FY12/13 FY13/14 FY14/15 Dec-15 Feb-16

Private Sector Banks 66,530 110,319 105,451 117,408 143,512 185,693 169,269 174,472 change

65.80% -4.40% 11.30% 22.20% 29.40%

% of Total T-Bills 39.50% 46.60% 41.80% 39.80% 41.30% 44.60% 38.83% 39.36%

Public Sector Banks 91,276 116,892 129,978 166,309 187,620 207,903 239,767 243,577 change

28.10% 11.20% 28.00% 12.80% 10.80%

% of Total T-Bills 54.20% 49.40% 51.60% 56.40% 54.00% 49.90% 55.00% 54.95%

Foreign Banks- Branches 10,748 9,304 16,597 11,159 16,595 22,658 26,891 25,225 change

-13.40% 78.40% -32.80% 48.70% 36.50%

% of Total T-Bills 6.40% 3.90% 6.60% 3.80% 4.80% 5.40% 6.17% 5.69%

Total 168,555 236,517 252,027 294,877 347,728 416,255 435,927 443,274 change

40.30% 6.60% 17.00% 17.90% 19.70%

% of Total Deposits 18.70% 24.50% 24.50% 24.80% 24.30% 23.90% 22.77% 22.91%

SOURCE: CBE



41

The private sector was also the major contributor in implemented investments in Egypt. However, the aggressive

increase in investments implemented by the Egyptian government, led to decline in the percentage of total invest-

ments implemented by the private sector to stand to total implemented investments at 57% in FY14/15, down from

62% in FY13/14. Worth mentioning that, total implemented investments as a percentage of Egypt’s GDP dropped

sharply from 20% in FY09/10 to 14% in FY14/15. Moreover, Loans for private sector/GDP and Private sector’s invest-

ments/GDP are decreasing since FY09/10. It is worth mentioning that CAGR of deposits over FY09/10 till FY14/15

reached 14.1%, CAGR of loans reached 9% and CAGR of implemented investments reached 7.6%, while the CAGR for

T-Bills investments almost reached 20% which reflects the slowdown in investments and lending activities.

SOURCE: CBE



42

Comparative Analysis

Egypt’s Banks

Price FV Rating P/E P/BV ROAE DY%

2015 2016F 2017F 2015 2016F 2017F 2015 2016F 2017F 2015

CIB 42.81 45.58 Hold 15.18 12.02 9.45 3.04 3.25 3.12 2.64% 2.94% 2.90% 2.27%

CIEB 23.23 23.40 Hold 6.94 6.48 5.84 1.88 1.85 1.81 3.25% 3.30% 3.45% 9.3%

HDBK 17.01 32.67 Buy 5.46 5.25 5.04 0.88 0.98 0.88 1.94% 1.88% 1.78% 8.7%

ADIB 3.95 4.74 Buy 6.98 6.16 5.51 1.32 0.91 0.77 0.98% 0.95% 0.93% 0%

EXPA 9.29 12.73 Buy 3.67 3.40 3.66 0.55 0.51 0.47 1.67% 1.61% 1.40% 11.7%

SOURCE: CIB, CIEB, HDBK, EXPA



43

SOURCE: PRIME ESTIMATES



44

We reached a fair value for Commercial International Bank (COMI) of EGP 43.26; implying an upside potential of 1.60%, using a DCF valuation methodology and maintaining our “Hold” recommendation for CIB. Our estimated FV is heavily affected by hikes in risk free rates.

CIB is one of our top picks within the banking sector in Egypt. Besides seizing the largest weight in EGX30, representing more than 30% of EGX30, CIB is the leading private sector bank in the Egyptian Banking market, with a market share of 8.01% and 8.26% as of January 2016 in lending and deposits markets, respectively. In addition, CIB is leaded by a profes-sional management in our opinion, which succeeded to enhance bank’s efficiency ratios as cost-to-income ratio reached 24.6% in 1Q2016 compared to 40% in 2011.

Backed by loyalty of its wide client base, CIB occupies one of the most important strength points compared to its peers, as CIB enjoys the ability to attract new deposits at lower cost than its peers. This is coupled with the high interest rates environment in Egypt, leading CIB to register one of the highest NIM in the Egyptian market.

It is worth mentioning that, CIB’s management is aware of the Basel III regulations, and is adopting strict measures in order to remain comfortably above CBE’s regulations maintain-ing resilient asset quality and conservative liquidity position in both local and foreign cur-rencies. However, due to the CBE’s limits on retail lending, we believe CIB will find diffi-culty in achieving its aggressive expansion strategy in retail segment.

Although, CIB seeks to maintain high asset quality, non performing loans, representing 4.68% of gross loans portfolio, increased in 1Q2016 up from 3.98% in 4Q2015 and 3.64% in 1Q2015, which indicate that assets are weakening Q-O-Q basis and NPLs are increasing. On the other hand, coverage ratio representing 171% in 1Q2016 decreased from 188% in 4Q2015.

Furthermore, CIB was able to increase its deposits by 9% during 1Q2016, to reach EGP 169,352mn at the end of 1Q2016 compared to EGP 155,234mn by the end of December 2015.Moreover, during 1Q2016, CIB recorded an increase in its gross loans portfolio by 6.4% to reach EGP 66,520mn at the end of 1Q2016 compared to EGP 62,524mn at the end of December 2015. However, we believe that these growth in deposits and gross loans resulted mainly from the effect of EGP devaluation.

CIB’s net profit reached EGP 1,291mn over 1Q2016 compared to EGP 1,108mn over 1Q2015.This increase is driven by 22% increase in net interest income recording EGP 2,268mn in 1Q2016 compared to EGP 1,856mn in 1Q2015; in addition to lower tax rate applying 22.5% tax rate and lower provisions in 1Q2016 recording EGP 287.6mn compared to EGP 420.9mn in 1Q2015. It is worth mentioning that, interest income from T-bills con-tributed 61.8% of interest income by the end of 1Q2016 ,which reflects the slowdown in lending market.

Although we expect a slowdown in lending activity in 2016 fueled by the slowdown in economic activity in Egypt, we expect CI Capital deal during 2016, coupled with high in-terest rates on treasuries to boost the bank’s bottom line. Then after, we see CIB is well positioned to capitalize on growth opportunities with economic recovery. We expect CIB to maintain deposits and gross loans portfolios and achieving rising bottom lines by as-suming deposits to increase in 2016 by 14% and continue to grow by 10% in the fore-casted period. On the other hand, we assumed gross loans to increase with an average of 15% in the forecasted period maintaining the same cost to income ratio in addition to the maintenance of higher NIM. We expect CIB to record EGP 5,890mn net profit by the end of 2016.

COMMERCIAL INTERNATIONAL BANK-COMI COMI Runs Unsurpassed…

“HOLD” MARKET PRICE EGP 42.58 FAIR VALUE EGP 43.26 POTENTIAL 1.60%

INVESTMENT GRADE “VALUE”

Stock Data Outstanding Shares [in mn] 1,147 Mkt. Cap [in mn] 49,732 Bloomberg – Reuters COMI EY /COMI.CA 52-WEEKS EGP 28.9/EGP 47.2 DAILY AVERAGE VOLUME 1,982,277

Ownership GDRs 26.1% FairFax 6.7% Free Float 67.2%

Source: Bloomberg

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COMI EGX 30-REBASED

Bank Profile

Commercial International Bank was established in 1975 as a joint venture between the National Bank of Egypt and the Chase Manhattan Bank. COMI is the leading private sector bank in Egypt, offering a broad range of financial prod-ucts and services to its customers, which in-clude enterprises of all sizes, institutions, households and high-net worth individuals. The Bank strives to provide clients with superior financial solutions to meet all of their financial needs. Having the strongest brand equity right-fully places CIB as the bank of choice for over 500 of Egypt’s largest corporations. Moreover, CIB shows tremendous upside potential within the bourgeoning Retail and SME Banking mar-kets.


LOW/HIGH

Stock Data Outstanding Shares [in mn] 1,147 Mkt. Cap [in mn] 49,732 Bloomberg – Reuters COMI EY /COMI.CA 52-WEEKS EGP 28.9/EGP 47.2 DAILY AVERAGE VOLUME 1,982,277

Ownership GDRs 26.1% FairFax 6.7% Free Float 67.2%

Source: Bloomberg

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45



Interest Income 14,765.3 16,962.5 18,024.2 19,372.3 Interest Expenses (6,650.0) (7,668.1) (8,598.6) (9,588.1)

Net Interest Income 8115 9294 9426 9784

Fees & Commission Income 1932 1935 2225 2732 Fees & Commission Expenses -300 -330 -363 -399

Net Income from Fees & Commission 1632 1606 1863 2333

Net Operating Income 9,748 10,900 11,288 12,118

Investment Income 63.9 88.9 118.8 131.1 Net Trading Income 710.4 781.4 859.6 988.5

Profit (Loss) from Financial Investments -14.4 58.2 64.6 71.0 Depreciation 188.3 197.7 207.6 217.9

G & A Expenses 1840.1 2061.0 2267.1 2471.1 Other Operating (Expenses) Income -570.0 -596.4 -623.8 -638.9

Provisions 1682.4 1104.6 805.3 763.6 Intangible Asset Amortization 21.701 21.701 21.701 21.701

Goodwill Impairment 7.24 7.24 7.24 7.24 Net Profit before Tax 6,198 7,840 8,399 9,188

Taxes -1950 -2027 -2075 -2151 Deferred Taxes 136.05 78.4 83.98 91.88

Net Profit From Continued Operations 4,384.1 5,891.5 6,407.8 7,128.9 Minority Interest 0.686 0.921866317 1.0026523 1.1154869

Net profit after Minority Interest 4,383.43 5,890.58 6,406.79 7,127.78


In EGP Mn 2015 2016F 2017F 2018F

T-Bills& Governmental notes 22,130 34,371 37,796 43,013 Due From Banks 21,002 17,640 17,141 10,714 Net Loans to Customers 56,798 65,072 77,209 93,414 Fixed Income Securities 60,356 61,731 66,567 70,972

Total assets 179,500 200,075 220,641 241,311

Customers Deposits 155,234 176,376 195,785 215,067 Due To banks 1600.8 1664.8 1748.0 1835.4 Provisions 861.8 947.9 1042.7 1147.0


Shareholders’ Equity 16,583 15,501 16,156 16,989

Financial Ratios Hist. Forecast

2015 2016F 2017F 2018F

ROAA 2.64% 2.76% 2.90% 2.95% ROAE 28.52% 36.14% 39.65% 41.98% EPS 2.90 3.66 4.67 5.12

DPS 1.00 1.29 1.40 1.56 P/E 14.70 11.64 9.12 8.32 P/BV 2.95 3.09 2.96 2.81 DY 2.35% 3.02% 3.29% 3.66%



We reached for HDBK a Fair Value of EGP 32.67 with a “Buy” recommendation, driven from an upside potential of 92.19%, using Sum of The Parts valuation method. 45% of our estimated FV stemmed from the banking operations using DCF method. In addition, we valued Hyde Park using DCF valuation method representing 32% of our valuation or EGP 10.3/share. As for the other real estate projects and land bank, which are 100% owned by HDBK, we valued them at cost representing 24% of HDBK valuation resulting in EGP 7.7/share.

Since our valuation model yielded a value of EGP 22.4/share for the activities reported on the bank’s standalone financial statement (banking operations and other real estate pro-jects and land bank), then the consolidated financial statement contains hidden value of Hyde Park of EGP 10.3/share, which the investor gets it for free when buy HDBK’s stock, as the current market price does not reflect this value. In addition, the current market price of EGP 17.0/share is still below the value of the banking activity and other real estate projects and land bank (EGP 22.4/share).

HDBK serves as an ordinary commercial bank with an exposure for real estate sector serving them from a financing and developmental perspective. In other words, HDBK used to have a land bank and ongoing real estate projects but after restricting specialized banks, HDBK became a traditional commercial bank with current real estate investments. Some of these real estate investments are directly owned by HDBK, and therefore reported on the stand alone financial statement, while others indirectly or co-owned investments such as Hyde Park and Zayed City Edge which are found on the consolidated financial statement. HDBK has the greatest experience among its peers in mortgage lending which offer its retail port-folios an edge to record increasing growth rates. The main risk to our valuation is the bank’s inability to monetize its huge land bank.

By the end of 2015, HDBK has succeeded to increase its gross loans portfolio by 15.53% to report EGP 8,211mn compared to EGP 7,108mn at the end of 2014. This growth was driven by the significant boost of 22.53% in retail loans that represented 64.58% of total loans reaching EGP 5,303mn at the end of 2015 .On the other hand, corporate loans which repre-sent 35.42% of total loans moderately increased by 5% to reach EGP 2,908mn at the end of December 2015. In 1Q2016 gross loans increased by 8.2% to reach EGP 8,884mn compared to EGP 8,211mn at the end December 2015 resulting from the 6.6% increase in retail loans to reach EGP 5,652mn and 11% increase in corporate loans recording EGP 3,232mn at the end of 1Q2016. Meanwhile, deposits grew by 10.2% to reach EGP 12,936mn at the end of 1Q2016 compared to EGP 11,733mn at the end of December 2015. As a result loans to deposits ratio decreased from 70% at the end of December 2015 to 68.7% at the end of 1Q2016. Furthermore, HDBK continues to report strong Capital Adequacy Ratios as it is reported 22.39% in 1Q2016 compared to 16.58% by the end of 2015, therefore, we do not expect HDBK to be affected by the new buffer rules that will result in continuous increase in the required CAR till reaching to 12.5% by 2019.

HDBK’s bottom line hiked by 60% in 2015 to reach EGP 491mn compared to EGP 306mn in 2014 and continued to soar in 1Q2016 to report EGP 218mn compared to EGP 177mn in 1Q2015 achieving a growth rate of 23%, y-o-y basis. We expect HDBK to continue to en-hance its retail loan portfolios supported by the mortgage initiative of the CBE assuming an average of 11% growth rate of loans and 10% growth rate of deposits in the forecasted period.

HOUSING AND DEVELOPMENT BANK... Unlocking Hyde Park Value…

“STRONG BUY” MARKET PRICE EGP 17.0 FAIR VALUE EGP 32.67 POTENTIAL 92.19%


Stock Data Outstanding Shares [in mn] 126.5 Mkt. Cap [in mn] 2,136 Bloomberg – Reuters HDBK EY /HDBK.CA 52-WEEKS EGP 16.5/EGP 25 DAILY AVERAGE VOLUME 651.2K

Ownership New Urban Communities Authority 29.81% Egyptian Endowment Authority 11.43% Abdel Moneim Rashed Al Rashed 9.74% Misr Insurance Company 8.29% Housing Finance Fund 7.41% Misr Life Insurance 8.92% Free Float 24.4%

Source: Bloomberg

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HDBK EGX 30-REBASED

Bank Profile

HDBK was established in 1979 as a finance arm for the Ministry of Housing. HDBK had the role to finance housing units for Egyptians in order to decrease the gap between supply and demand in the real estate market. By the late 1990’s, the bank had delivered several projects and developed urban communities in Egypt; however, in 2003 Law 88 prohibited the existence of specialized banks in Egypt and HDBK was appointed a new manage-ment in order to become a commercial bank that continue to own some plots of lands ready to be developed into commercial and residential pro-jects. After restricting specialized banks by the CBE, Housing and Development Bank is moving toward being a commercial bank with 64 branches and a land bank that is attributing to its real estate devel-opment to be carried out through subsidiaries. HDBK has two financial statements, the stand-alone financial statement which includes the bank-ing services and the real estate developments on lands owned directly by HDBK. In addition, the consolidated financial statement which includes the HDBK’s investments activities in associates, subsidiaries, sister and equity associates function-ing in the real estate finance and related services.

46

LOW/HIGH

Stock Data Outstanding Shares [in mn] 126.5 Mkt. Cap [in mn] 2,136 Bloomberg – Reuters HDBK EY /HDBK.CA 52-WEEKS EGP 16.5/EGP 25 DAILY AVERAGE VOLUME 651.2K

Ownership New Urban Communities Authority 29.81% Egyptian Endowment Authority 11.43% Abdel Moneim Rashed Al Rashed 9.74% Misr Insurance Company 8.29% Housing Finance Fund 7.41% Misr Life Insurance 8.92% Free Float 24.4%

Source: Bloomberg

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47



Interest Income 1,833 1,975 2,018 2,111 Interest Expenses 804 953 1,009 1,117

Net Interest Income 1,029 1,021 1,010 994

Fees & Commission Income 204 200 215 215 Fees & Commission Expenses -14.1 -15.6 -17.1 -18.8

Net Income from Fees & Commission 189.8 184.1 198.1 196.4


Investment Income 61.6 62.4 66.8 75.8 Housing Projects’ Investments 174.9 192.4 211.6 232.8

Net Trading Income 268.1 294.9 324.4 356.8 Profit (Loss) from Financial Investments 11.5 14.7 25.3 25.2

Depreciation 51.5 50.7 55.8 61.4 G & A Expenses 649.6 714.6 786.0 864.6

Other Operating (Expenses) Income 13.1 13.5 13.9 14.3 Provisions 371.96 351.56 313.67 314.71

Net Profit before Tax 674.7 666.4 694.2 654.7 Taxes -183.5 -150.0 -156.2 -147.3

Deferred Taxes 491 516 538 507 Net Profit From Continued Operations 491 516 538 507

Net profit after Minority Interest 491 516 538 507


In EGP Mn 2015 2016F 2017F 2018F


Total assets 25,338 27,455 30,260 31,882





2015 2016F 2017F 2018F

ROAA 1.44% 1.94% 1.88% 1.78% ROAE 19.86% 23.22% 21.81% 18.82% EPS 3.15 3.27 3.41 3.21 DPS 1.50 1.43 1.49 1.40 DY 8.82% 8.41% 8.76% 8.26% P/E 5.40 5.20 4.99 5.29 P/BV 0.87 0.97 0.87 0.20



48

Utilizing a WACC of 17.5%, we reached a FV of EGP23.18/share. Our new fair value reflects 0.3% downside potential over the current market price of EGP 23.25/share. Accordingly, we retain our “Hold” recommendation for Credit Agricole Egypt.

Credit Agricole Egypt has a strong reputation and acquired the needed knowledge and capabilities to grow in the Egyptian market; however, French parent bank adop-tion of Basel III is limiting the bank’s ability to expand in the Egyptian market, since it is considered as one of the most risky markets where the bank operates. Therefore, the weight of the Egyptian asset on the French bank’s consolidated balance sheet should stay limited. As a result CAE is cautiously growing maintaining its market share; accordingly, we assumed lower terminal growth rate than the one we as-sumed for CIB.

Over 2015 CAE succeeded to increase its gross loans portfolio by 11.14% to reach EGP 14,632mn at the end of December 2015 compared to EGP 14,632mn at the end of December 2014. CAE’s retail loans portfolio increased by 19% to reach EGP 4,947mn at the end of December 2015 from EGP 4,168mn at the end of December 2014; this growth was driven by the increase in personal loans that represented 78% of the retail loans in December 2015, which increased by 25% reaching EGP 3,871mn at the end of December 2015 from EGP 3,087mn at the end of December 2014. On the other hand, the corporate loans portfolio increased by 8.3% to reach EGP 9,685mn at the end of December 2015 from EGP 8,957mn at the end of Decem-ber 2014. However, the new CBE’s regulations regarding personal lending limiting the installments to 35% of individual’s income will hinder the bank in expanding its lending activities in retail. The modest growth rate of 1.7% in net loans, to reach EGP 14,011mn at the end of 1Q2016, is believed to be a result of EGP devaluation and reflects the economic slowdown.

In contrast, CAE’S deposits slowed down tremendously recording 0.03% growth rate to reach EGP 26,662mn by the end of December 2015, up from EGP 26,588mn as of December 31, 2014. Besides, deposits continued to grow slowly in 1Q2016 re-cording only 2.7% growth rate reaching EGP 27,394mn at the end of 1Q2016.

CAE’s interest income from loans contributed by 52% to total interest income and this percentage reflects the strength of CAE in generating income from lending ac-tivities unlike other banks that generate most of their interest income from T-Bills, for example the CIB’s income from T-Bills represents 62% of total interest income and that exposes the bank to fluctuations in country’s monetary policy.

CAE’s net profit after tax and minority interest witnessed a significant increase of 54% to register EGP 1,037mn over 2015 compared to EGP 676mn. This sharp increase in bottom line is due to the significant 23% increase in net operating income from EGP 1,7025mn in 2014 to EGP 2,086mn during 2015, in addition to the increase in net trading income by 32% recording EGP 159.4mn in 2015 com-pared to EGP 121mn in 2014. Furthermore, the lower tax rate in 2015 compared to 2014 contributed to the increase in bottom line. It is worth mentioning that, CAE‘s bottom line reached EGP 315.9mn in 1Q2016 compared to EGP 236.171mn in 1Q2015.

We expect CAE to continue to grow with restrictive growth rates such as 5.5% growth in deposits and 10% growth in loans during 2016. As a result we expect from CAE to achieve EGP 1,107mn bottom line during 2016.

CREDIT AGRICOLE EGYPT-CIEB... Postponed Decision in Expanding...

“HOLD” MARKET PRICE EGP 23.25 FAIR VALUE EGP 23.18 POTENTIAL 0.3% DOWNSIDE


Stock Data Outstanding Shares [in mn] 310.917 Mkt. Cap [in mn] 653 Bloomberg – Reuters CIEB EY /CIEB. CA 52-WEEKS EGP 18.11-EGP 24.88 TURNOVER 7,228 DAILY AVERAGE VOLUME 164,824

Ownership Credit Agricole Bank-France 47.39% Credit Agricole Corporate and Investment

13.07%

El Mansour and El Maghraby Investment and Development Co.

8.66%

Others 10.16% Free Float 20.72% Source: CIEB, Prime Estimates All prices are as of 18 May 2016

Source: Bloomberg

Source: Bloomberg

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Bank Profile

Crédit Agricole Egypt is a subsidiary of the Crédit Agricole Group, a market leader in France and one of the largest banks worldwide. Established in 2006, Crédit Agricole Egypt has become an active player in Egypt’s financial industry offering a wide range of innovative and convenient prod-ucts to its clients across the entire field: Corpo-rate, SMEs and individuals offering a nationwide network of branches and ATMs. Furthermore, the bank is considered as a market leader in terms of electronic services by offering state-of-the-art electronic banking solutions.

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LOW/HIGH

Stock Data Outstanding Shares [in mn] 310.917 Mkt. Cap [in mn] 653 Bloomberg – Reuters CIEB EY /CIEB. CA 52-WEEKS EGP 18.11-EGP 24.88 TURNOVER 7,228 DAILY AVERAGE VOLUME 164,824

Ownership Credit Agricole Bank-France 47.39% Credit Agricole Corporate and Investment

13.07%

El Mansour and El Maghraby Investment and Development Co.

8.66%

Others 10.16% Free Float 20.72% Source: CIEB, Prime Estimates All prices are as of 18 May 2016

Source: Bloomberg

Source: Bloomberg

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Interest Income 2,696 2,814 2,922 2,870 Interest Expenses (1,091) (1,118) (1,214) (1,287)

Net Interest Income 1,606 1,695 1,709 1,583

Fees & Commission Income 625 548 787 735 Fees & Commission Expenses -144 -151 -158 -166



Investment Income 7.3 5.3 7.4 8.7 Net Trading Income 159.4 183.3 210.8 231.9

Profit (Loss) from Financial Investments 10.2 2.8 4.8 3.8 Depreciation 61.3 65.0 68.9 73.0

G & A Expenses 736.0 772.8 826.9 884.8 Other Operating (Expenses) Income 11.8 12.4 13.1 13.7

Provisions 117.5 29.8 92.5 65.5 Net Profit before Tax 1,360 1,428 1,585 1,387

Taxes 323 321 357 312 Deferred Taxes 0 0 0 0

Net Profit From Continued Operations 1,037.4 1,107.1 1,228.5 1,074.7 Minority Interest 0.001 0.001 0.001 0.001

Net profit after Minority Interest 1,037.36 1,107.05 1,228.54 1,074.69


In EGP Mn 2015 2016F 2017F 2018F


Total assets 31,929 33,574 35,587 37,862





2015 2016F 2017F 2018F

ROAA 3.25% 3.30% 3.45% 2.84% ROAE 29.79% 31.29% 34.13% 29.42% EPS 3.03 3.24 3.60 3.16 DPS 1.96 2.15 2.39 2.09 DY 9.3% 10.3% 11.4% 10.0% P/E 6.94 6.48 5.83 6.66 P/BV 1.88 1.85 1.81 1.79



We reached a FV of EGP 12.02/share, our new fair value reflects 32.26% upside potential over the current market price of EGP 9.09/share. Accordingly, we issued a “Buy” recommendation for Export Development Bank of Egypt. FV is downgraded from 12.73/share due to recent hikes in Risk free rats.

During the issuance of the Suez Canal certificates, EDBE was one of the few banks that witnessed flight out of deposits. In our opinion, this indicates the bank’s inabil-ity to preserve its clients and EDBE’S clients are also ready to move for other banks for better offerings. This may lead EDBE to attract deposits at higher cost, affecting the bank’s profitability. Hence, with the expected aggressive competition in the Egyptian banking market, we see EDBE has a limited room for growth, especially with the CBE’s recent regulations, that will affect mainly small banks like EDBE. Al-though, the bank is traded below the par value of EGP 10/share at a market price of EGP 9.09/share, reflect the serious liquidity problem that this stock is facing, 75% owned by governmental institutions, weigh heavily on the price movement.

Although the figures of 1H15/16 are undersized, FY2015 figures are on the rise| By the end of June 2015 EDBE has showed a slowdown in the growth rate of loans growing only by 10% reaching EGP 9,304mn from EGP 8,336mn at the end of June 2014 where the growth rate was 27% over the comparable period. However, by the end of 1H15/16, the bank’s loans portfolio witnessed a slight decline of 0.44% to reach EGP 9,276mn, reflecting the economic slowdown in the country. It is worth mentioning that, loans increased by 3.6% in 9MFY15/FY16 recording EGP 10,397mn and net loans EGP 9,584mn which reflects the slow growing trend in EDBE. More-over, EDBE’s loans portfolio have no breakdown or disclosures in the financial state-ments, but we believe that this moderate growth resulted from EGP devaluation.

On the other hand, EDBE’S deposits increased by 18.2% from EGP 14,791mn at the end of June 2014 reaching EGP 17,490mn at the end of June 2015. This significant Increase was due to the increase in Demand deposits by 82.3%, reporting EGP 4,688mn at the end of June 2015 compared to EGP 2,572mn at the end of June 2014. Deposits Increased again in 1H15/16 by 14% reaching EGP 19,948mn due to the 21% increase in Time deposits that hiked from EGP 8,530mn to EGP 10,351mn. Moreover, Deposits recorded a 12% growth rate in 9MFY15/FY16 recording EGP 19,625mn at the end of March 2016 compared to EGP 17, 490mn at the end of June 2015.

EDBE’s interest income grew by 20 % over FY15 to register EGP 1,701mn compared to EGP 1,420mn a year earlier. On the other hand, in 9MFY15/FY16 interest income increased by 21% recording EGP 1,451mn compared to EGP 1,196mn over the same comparable period. This growth rate was driven by 17.5% increase in interest in-come from loans recording EGP 671mn compared to 571mn at the end of March 2015. In addition To 12.8% increase in interest income from T-bills recording EGP 660mn in 9MFY15/FY16 compared to EGP 585mn 9MFY14/FY15.

On the other hand, EDBE’s bottom line increased by 29% reaching EGP 255mn in 1H15/16 compared to EGP 198.6mn in 1H14/15. Moreover, it increased in 9MFY15/FY16 by 8.9% reaching EGP 300mn compared to EGP 275mn in 9MFY14/FY15.

EXPORT DEVELOPMENT BANK OF EGYPT... Illiquidity Coupled with Limited Growth...

“BUY” MARKET PRICE EGP 9.09 FAIR VALUE EGP 12.02 POTENTIAL 32.26%


50

Stock Data Outstanding Shares [in mn] 144 Mkt. Cap [in mn] 1,310 Bloomberg – Reuters EXPA EY /EXPA.CA 52-WEEKS EGP 8.20-EGP 10.87 DAILY AVERAGE VOLUME 30,854

Ownership National Investment Bank 40.75% Banque Misr 23.13% National Bank of Egypt 11.43% Free Float 24.69%

Source: Bloomberg

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EXPA EGX 30-REBASED

Bank Profile

The Bank was founded in 1985 as a financial institu-tion to boost Egyptian Exports in order to help with the the balance of payments deficit at that time. Since its inception, the Bank has managed to maintain its identity as a commercial and investment bank and was always eager to support the export sector through financing investment projects pertaining to such sector by opening of new branches and gathering deposits in order to meet its main goal of establishing and boosting a solid export sector. Accordingly, the network of branches at our bank had increasingly expanded to 21 branches in March 2012.With the beginning of the financial reform in 2004 following the amendment of Central Bank Law, as well as The Bank-ing Sector and Money Law no. 88/2003, Central Bank reclassified all banks thus giving them full freedom to open new branches and promote several saving. Ac-cordingly, the bank had to rectify all its future plans to include branch expansion policy, as well as the new banking products that concern individuals and corpo-rations.


LOW/HIGH

Stock Data Outstanding Shares [in mn] 144 Mkt. Cap [in mn] 1,310 Bloomberg – Reuters EXPA EY /EXPA.CA 52-WEEKS EGP 8.20-EGP 10.87 DAILY AVERAGE VOLUME 30,854

Ownership National Investment Bank 40.75% Banque Misr 23.13% National Bank of Egypt 11.43% Free Float 24.69%

Source: Bloomberg

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Interest Income 1,701 1,939 2,018 2,141 Interest Expenses 1,003 1,176 1,272 1,358

Net Interest Income 698 763 746 783



Net Operating Income 894 944 959 1,015

Dividend Income 4.2 5.3 6.1 6.6 Net Trading Income 19.5 21.4 23.6 26.0


G & A Expenses 271.3 284.9 304.9 320.1 Other Operating (Expenses) Income -16.0 -16.8 -17.6 -18.5

Provisions 44.8 32.1 52.4 90.0 Net Profit before Tax 557.5 622.1 596.6 600.0

Taxes -169.9 -205.9 -210.4 -221.6 Deferred Taxes 0.9 6.2 6.0 6.0

Net Profit From Continued Operations 388 422 392 384 Minority Interest 10.5 11.4 10.6 10.4



In EGP Mn 2015 2016F 2017F 2018F

T-Bills& Governmental notes 4,346 4,597 4,740 4,885 Due From Banks 777 2,115 2,201 1,663 Net Loans to Customers 9,304 9,575 10,561 12,184 Fixed Income Securities 5,012 5,658 6,042 6,498

Total assets 22,613 25,472 27,318 29,238

Customers Deposits 17,490 19,987 21,544 23,262 Due To banks 1,493 1,553 1,631 1,712 Provisions 95 104 115 126




2015 2016F 2017F 2018F

ROAA 1.67% 1.61% 1.40% 1.28% ROAE 5.66% 0.74% 7.67% 14.70% EPS 2.33 2.52 2.34 2.29 DPS 1.00 1.08 1.06 1.04 DY 11% 11.9% 11.7% 11.4% P/E 3.90 3.61 3.89 3.97 P/BV 0.59 0.54 0.50 0.46



We valued ADIB using DCF valuation method reaching a fair value for ADIB of EGP 4.59/share, implying an upside potential of 23.39%. Worth mentioning that, we reached this value based on number of shares of 389 million shares, which came after increasing the bank’s paid-in capital (EGP 1,99.5mn) by the amount of paid under capital increase of EGP 1,861mn that was provided from the UAE’s parent bank as a supporting loan. In addition, the amount of the decline in deferred tax assets is added back in calculating free cash flow, as it has no effect on the cash flow of the bank. It bears to note that, by the end of 2015, ADIB reported subordinated debt from the UAE’s parent bank of EGP 258mn. However, we deducted it from the entity value to reach the bank’s equity value.

Despite turning into profitability and the 23.39% upside potential, we opted to issue a recommendation of “Do not Invest” for ADIB, as the negative effect of the expected dilution will dominate. Moreover, due to the expected dilution, the fair value of ADIB’s share came almost 50% less than the par value of the share of EGP 10. In addition, un-clear picture regarding timing of dilution and treatment of deferred tax assets represent a major risk to the bank’s valuation. However, over the short term, it may be an opportu-nity to achieve 20% expected potential over the current market price.

Balance sheet is getting stronger| ADIB’s balance sheet is growing in 1Q2016 recording a 6.5% growth in gross loans due to the EGP devaluation recording EGP 10,953mn at the end of 1Q2016 compared to EGP 10,276mn at the end of December 2015. On the other hand, deposits benefited from devaluation by growing by 6.5% during 1Q2016 reporting EGP 21,665mn compared to EGP 20,343 at the end of December 2015. Moreover, treas-ury bills increased by 20.3% at the end of 1Q2016 to reach EGP 3,616mn compared to EGP 3,005mn at the end of December 2015. It is worth mentioning that CAR ratio re-corded 10.2% in 1Q2016 opposed to the required CAR ratio of 10.625% implying the urge for ADIB to increase its Tier 1 Capital by the end of 2016, to abide with new regulations.

Healthy profitability | ADIB’s interest income grew significantly by 32% over 2015 to register EGP 1,911mn compared to EGP 1,450 a year earlier. Furthermore, ADIB’s interest income continued to grow in 1Q2016 as a result of increasing loans and treasury bills recording interest income of EGP 571mn in 1Q2016 compared to EGP 427mn in 1Q2015. This 33.7% growth rate in interest income is driven by the 25% interest income from loans and 58% interest income from t-bills recording EGP 307mn and EGP 258mn at the end of 1Q2016 compared to EGP 245mn and EGP 163mn respectively, y-o-y basis.

ADIB’S Bottom Line soared by 151% y-o-y basis despite the continuance of deferred taxes | ADIB’s net profit reached EGP 119.7mn in 1Q2016 compared to EGP 47.6mn in 1Q2015 driven by the increase in net operating income that reached EGP 346.5mn in 1Q2016 compared to EGP 273mn in 1Q2015. The hike in 1Q2016 bottom line must be maintained in order for ADIB to start reporting strong bottom line, however; this cannot be predicted based on the performance of one quarter.

Moreover, we expect for ADIB to witness a slowdown in growth rates since the macro-

economic environment are not favorable and outsized corporate and large individuals

are catered by larger banks with clearer visions and stronger management. As a result we

assume an average growth of 10% in deposits and 8% growth rate of loans portfolio in

2016.

ABU DHABI ISLAMIC BANK-ADIB... ADIB Still No Clear Prospect...

“DO NOT INVEST” MARKET PRICE EGP 3.72 FAIR VALUE EGP 4.59 POTENTIAL 23.39%


Stock Data Outstanding Shares [in mn] 199.5 Mkt. Cap [in mn] 756 Bloomberg – Reuters ADIB EY /ADIB. CA 52-WEEKS EGP 3.6-EGP 7.08 TURNOVER 15,260 DAILY AVERAGE VOLUME 143,640

Ownership Abu Dhabi Islamic Bank PJSC 49.62% National Investment Bank 12.39% Emirates International Investment Co. 9.51% Free Float 28.48%

Source: Bloomberg

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ADIB EGX 30-REBASED

Bank Profile

Abu Dhabi Islamic Bank (ADIB) Egypt started its operations in Egypt after the acquisition of the National Bank for Development (NBD), through the Emirati consortium between Abu Dhabi Is-lamic Bank and Emirates International Invest-ment Company (EIIC) in 2007. As part of its strat-egy to be a leading universal Islamic bank in Egypt, the Bank focuses on offering a broad vari-ety of Shari’a compliant banking solutions, to cater to the needs of corporate and retail cus-tomers through the development of its 70 branches network.

52


LOW/HIGH

Stock Data Outstanding Shares [in mn] 199.5 Mkt. Cap [in mn] 756 Bloomberg – Reuters ADIB EY /ADIB. CA 52-WEEKS EGP 3.6-EGP 7.08 TURNOVER 15,260 DAILY AVERAGE VOLUME 143,640

Ownership Abu Dhabi Islamic Bank PJSC 49.62% National Investment Bank 12.39% Emirates International Investment Co. 9.51% Free Float 28.48%

Source: Bloomberg

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Interest Income 1,911 2,165 2,345 2,538 Interest Expenses 944 1,121 1,265 1,404

Net Interest Income 967 1,044 1,080 1,134




Dividend Income 6.1 6.3 7.1 7.9 Net Trading Income 107.9 113.3 121.2 129.7


G & A Expenses 669.3 736.2 809.8 890.8 Other Operating (Expenses) Income 119.8 123.4 129.6 133.5

Provisions 51.56 68.31 65.31 84.19 Net Profit before Tax 634.0 637.8 635.2 645.0

Taxes -150.7 -189.4 -207.5 -224.9 Deferred Taxes -264.064 -200 -150 -100

Net Profit From Continued Operations 219 248 278 320 Minority Interest 7.0 7.9 8.8 10.1



In EGP Mn 2015 2016F 2017F 2018F


Total assets 23,588 27,179 30,535 33,590

Customers Deposits 20,343 23,236 26,066 28,561 Due To banks 667 701 736 772 Provisions 167 172 177 182




2015 2016F 2017F 2018F

ROAA 0.98% 0.95% 0.93% 0.97% ROAE 20.58% 18.08% 15.63% 15.14% EPS 0.55 0.62 0.69 0.80 DPS 0.00 0.00 0.00 0.00 P/E 6.82 6.02 5.38 4.67 P/BV 1.28 0.89 0.75 0.63

53



EFG HERMES…

Hedging Volatility Ahead Through New Non-cyclical Businesses Penetra-tion...

“STRONG BUY” MARKET PRICE EGP 11.78 FAIR VALUE EGP 17.54 POTENTIAL 48.9% UPSIDE


We valued EFG Hermes at EGP 17.54/share driven from a sum of the parts valuation; com-prised of a P/BV multiple median of 0.84 estimated for the entity`s standalone book value. Added to the company`s estimated sale value for commercial banking operations through Credit Libanais bank and micro finance investment; which yielded a 73.8% upside over mar-ket price of EGP 10.09/share, after adding net cash position and non-core assets market value.

EFG Hermes is Egypt`s and among the GCC leading investment banks, with operations exe-cuted almost across the whole Arab world. The company continues to target creating share-holders` wealth through enlarging its structure through new businesses penetration. Recently the company penetrated the leasing business through a fully owned subsidiary that showed impressive performance and ranking in a matter of half an operating year, being inaugurated in June 2015. EFG continued its diversification through an acquisition for the widespread and successful microfinance enterprise “Tanmeyah”. such additions mark a new less volatile reve-nue generating streams, in time the region`s investment banking industry are suffering from the bearish outlook. Yet, EFG Hermes` size and reputation continues to secure deals backlog, while competing in a downtrend to book highest execution shares through its brokerages op-erations. The company is also known to possess an active asset management division, and a tactical private equity team, with recent focus directed towards the ever growing renewable energy investments.

EFG Hermes is a fully fledged investment bank, capitalizing on several divisions complementing each other to preserve the company`s ongoing operations and market share in some of the MENA leading countries by turnover. EFG execute in 10 of the MENA region`s most active mar-kets, Egypt, UAE, KSA, Qatar, Oman, Jordan, Kuwait, Bahrain, Lebanon and Morocco through its securities brokerage arms. EFG executes transactions for investors from over 11 different nationalities going from the GCC to Europe and USA. A leading investment banking division has been able to locally differentiate its offering, besides being strongly present in the regional scene through mega Equity, M&A and Debt transactions; with the support of the brokerage arm through its wide reach and diversified client base exceeding 100k investors across the globe. EFG Hermes also has an active asset management arm through which it competes over capital markets strongly supported by 50 professionals. The company`s private equity division has also been successful in conducting valuable partnerships and getting involved in successful investments with proven profitable exits with high multiples when the business matures.

Although we strongly believe in FCF valuation methodologies` (FCFF or FCFE) abilities to unlock and breakdown uncertainties to the most reasonable level. But only to the extent of cases where short term visibility over market dynamics is assumed, in other words, in cases we believe that as deeper we dig we get closer to reality and away from being pure subjective. We did not find the idea appealing to apply a DCF valuation for such industry, especially in current times when even setting a base year for projection becomes unrealistic; as the MENA region, EFG Hermes` core focus up till now, have been very volatile with too much politics and unex-pected economic events currently priced in within the region`s indices, but yet with no visibil-ity where or when it ends. Instead of setting assumptions setting risk adjustments through premiums and set reasonable growth projections that can be correlated with other multifactor fundamental or macro-models; we see multiple based valuation as the most suitable in our case.

Our choice for multiple-valuation was based on our view as early stated for the highly volatile scene, whether for estimating markets` executions, market shares, fees, deals prospectus, that are dependent variables at the end for the same one independent variable “Investors Senti-ment” with its coefficients being news on economic event and political status.

Stock Data Outstanding Shares [in mn] 614.8 Mkt. Cap [in mn] 6,204.3 Bloomberg – Reuters HRHO EY / HRHO.CA 52-WEEKS EGP 6.37 – EGP 14.14 YTD AV. DAILY TURNOVER EGP 37.1MN

Ownership Bank of New York (GDRs) 10.5% Dubai Financial Group 11.8% Abdel Moneim Al Rashed 8.7% Free Float 69.0%

Stock Performance

Source: Bloomberg

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Company Profile

EFG Hermes S.A.E, which is a fully fledged investment bank, was established in 1984, as the Egyptian Financial Group that was later incorporated into EFG Hermes. Since inception, the company has struggled to diversify its business through adding more investment arms consistently and penetrating new areas of growth to become a fully fledged investment bank with a portfolio of stakes in the most rapidly growing businesses.

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HRHO EGX 30-rebased

All prices are as of 31 May 2016

54

Stock Data Outstanding Shares [in mn] 614.8 Mkt. Cap [in mn] 7,242.34 Bloomberg – Reuters HRHO EY / HRHO.CA 52-WEEKS EGP 6.37 – EGP 14.14 YTD AV. DAILY TURNOVER EGP 37.1MN

Ownership Bank of New York (GDRs) 10.5% Dubai Financial Group 11.8% Abdel Moneim Al Rashed 8.7% Free Float 69.0%

Stock Performance

Source: Bloomberg

LOW/HIGH



Valuation

1) Investment Bank Valuation We used EFG Hermes` standalone total equity as a reference for our multiple calculations, We chose to apply a multiple based valuation for EFG Hermes to appropriately reflect the value it should have been trading at as per 2015`s book value. We applied a P/BV multiple of 0.84 driven from the median value of the list of comparables we chose. We used the standalone equity value as it is believed to reflect contribution to the IB, Asset Management, Brokerage, Private Equity, and Leasing business which was established during 2015. It is worth mentioning that, P/BV for the sector showed sharp drop across the world`s markets suffering from higher volatility.

2) Commercial Bank Proceeds In March 2016, EFG Hermes announced exiting its 63.7% stake; the sale of a 9.4mn shares representing 40% in Credit Libanais at a price of USD 33/share to a consortium of Lebanese and Arab investors, subject to legal procedures includ-ing the Central Bank of Lebanon approvals; with execution stated at no later than end of June 2016. Beside, selling the remaining stake of 5.5mn shares indirectly owned with execution taking place at same pricing terms, up to end of May 2017. The sale would generate proceeds of EGP 2.7bn in 2016 added to proceeds of EGP 1.6bn in 2017 discounted for 1-period at a cost of equity of 23.2%, utilizing an equity risk premium of 8%, risk free of 14.4% and a statistically adjusted beta of 1.11.

551

Sample Ticker Name P/BV - 2015 Market Cap - Respective CCYS USA LM US Equity LEGG MASON INC 0.856 3,670

SF US Equity STIFEL FINANCIAL 0.828 2,140

KCG US Equity KCG HOLDINGS-A 0.774 1,035

Sweden CATB SS Equity CATELLA AB 1.196 1,514

ECEX SS Equity EAST CAPITAL EXP 0.743 1,744

England III LN Equity 3I GROUP PLC 1.192 4,669

France ROTH FP Equity ROTHSCHILD & CO 1.063 1,494

FFP FP Equity FFP 0.542 1,692

Italy EXO IM Equity EXOR 0.800 7,576

Spain ALB SM Equity ALBA 0.598 1,982

India NINV IN Equity NALWA SONS INVES 1.006 3,285

PGLT IN Equity PNB GILTS LTD 0.749 4,401

CGCL IN Equity CAPRI GLOBAL CAP 0.549 4,848

BENG IN Equity BENGAL & ASSAM C 0.330 4,268

OSCR IN Equity OSCAR INVESTMENT 0.213 3,802

Malaysia OSK MK Equity OSK HOLDINGS BHD 0.551 2,313

Pakistan OLPL PA Equity ORIX LEASING 1.427 3,893

Thailand KGI TB Equity KGI SECURITIES T 1.351 7,210

CNS TB Equity CAP NOMURA SECS 0.951 5,075

Philippines V PM Equity VANTAGE EQUITIES 0.753 6,677

Sri Lanka TAP SL Equity TAPROBANE HOLDIN 0.779 4,713

CFVF SL Equity FIRST CAPITAL HL 1.212 2,521

Botswana LETSHEGO BG Equity LETSHEGO HOLDING 1.5710 5,513

South Africa AEE SJ Equity African Equity E 1.863 4,250

ZED SJ Equity ZEDER INVESTMENT 0.988 9,518

Egypt BTFH EY Equity BELTONE FINANCIAL 1.187 3,377

PIOH EY Equity PIONEERS HOLDING 0.940 5,860

UAE DIC UH Equity DUBAI INVESTMENT 0.764 9,516

Median 0.842

Standalone Shareholders Equity Outstanding Shares BV/Share

EGP 6,756mn 614.8mn EGP 10.99/share

Comparables Median 0.84

Implied Standalone Value EGP 9.25/share

SOURCE: BLOOMBERG, PRIME

Total Sale Proceeds Discounted proceeds Outstanding Shares EGP 4.33bn EGP 4.03bn 614.8mn

Implied Value EGP 6.55/share

SOURCE: EFG HERMES, PRIME

55



3) Microfinance Business – Investment Value at BV Tanmeyah was acquired at a total investment cost of EGP 423mn, equivalent to EGP 0.69/share added to total valuation. 4) Non-core assets We valued the company`s 4.7% investment in SODIC at April 21st, 2016 closing price of EGP 11.1/share, which yields a total value of EGP 176.8mn equivalent to EGP 0.29/share.

5) Finally we added the standalone net cash position of EGP 469.1mn equivalent to EGP 0.76/share.

Upside Risks Stability in oil prices, before showing upward trends; hence enhancing investors` sentiments in markets

especially in GCC.

End to the current geopolitical tension in MENA region, incentivizing foreign investors` sentiments further than current levels.

EFG Hermes replicating 2015 investment banking performance or book more deals during 2016.

Regaining Incentive fees over better performance for the asset management division.

More successful exits for current investments under the PE division management at high IRRs.

Successful and further brokerage operations expansions throughout Asia and Africa as early planned.

Further EGP devaluation, is additive to proceeds from regional operations and commercial bank stake sale.

Downside Risk

The CBE to continue limiting MMFs percentage to deposits in Egypt, impacting AuMs.

Continuity of adopting contracting monetary policy by the CBE in attempts to curb inflation through fur-ther hikes in interest rates; seen adverse empirically on stock returns and valuation.

Any manufactured appreciation, would adversely hurt proceeds from regional operations and bank stake sale.

Investment Catalyst

We are awaiting impressive performance from EFG Hermes lease and the micro finance business in 1Q2016.

Concluding Credit Libanais stake sale successfully, benefiting from the EGP devaluation, while opening up for funding more growth opportunities.

Acquisition in non-cyclical businesses; likewise leasing and microfinance that support non-cyclical in na-ture financing are anticipated utilizing the bank`s sale proceeds.

56

Valuation Summary Sum of Parts Share Outstanding Per Share Standalone Equity Valuation EGP 5.69bn 614.8mn EGP 9.25

Bank Proceeds EGP 4.03bn

EGP 6.55

Non-core - SODIC Market Value EGP 0.176bn

EGP 0.28

Micro-finance Investment Value EGP 0.423bn

EGP 0.69

Net Cash (debt) EGP 0.469bn

EGP 0.76 Total EGP 10.79bn

EGP 17.54

SOURCE: EFG HERMES, PRIME

56


EGYPT BOOK

571


57


EGYPT BOOK POWER & CONTRACTING

Great opportunity for investment on the back of severe need for all forms of infrastructure...

We expect increased infrastructure investments as pledged and agreed upon in the form of MoUs during the EEDC.

This is in addition to the projects that are going to be implemented in the developmental area around the New Suez

Canal. We anticipate a hike in construction demand over the upcoming period reflected in a total of USD 173.4bn,

according to MEED worth of projects to be implemented over 2015-2025. These projects will cause a significant

increase in demand. The Residential and Non-residential projects alone stand at a net value of USD117.2bn, while

power related projects stand USD 24.4bn with transportation projects standing at USD 31.9bn.

Value in USD, bn

Residential & Non-Residential 117.2

Transportation Projects 31.9

Power & Water Projects 24.4

Total 173.4

UPCOMING PROJECTS EGYPT

SOURCE: MEED PROJECTS

EGYPT’S POPULATION & POPULATION GROWTH

SOURCE: CAPMAS & PRIME ESTIMATES

Contractors like OC and El Sewedy Electric are facing

several challenges in their MENA operations. Saudi

Arabia, which is considered one of the biggest markets

in the MENA region facing and economic slowdown.

Delays and awards slowdown have been the case in

the Saudi kingdom as well as slower receivable collec-

tion. Several companies operating in Saudi Arabia

have received delayed payments or in extreme case no

payment at all for their contractual work. Moreover,

UAE, one of the countries with the largest construction

activity in the MENA region have witnessed a slight

slowdown in tendering process. This has led most

contractors to being more selective in their backlog

growth. Companies choose areas where they have the

infrastructure to support their operations.

Challenges facing contractors in the MENA region…

SAUDI ARABIA FOREIGN RESERVES, USD BN

SOURCE: REUTERS

58



Challenges facing contractors in Egypt...

Repayment Risk: This represents a major risk for companies operating on public projects. A slowdown in repayment is sometimes the case for contractors where countries are suffering from economic instability. Funding for ongoing projects in Egypt (EGP and foreign) is secured with the company getting receivables timely in projects such as the Siemens power generation project. According to some companies, there is no sign of non-payment yet as receiv-ables have been coming in with no delays. However, the main risk that contractors operating in Egypt may face is the government’s inability to secure foreign currency required to pay for those contractors, in light of current FX crisis in the country. On the other hand, however, the expected replenishment in the country foreign reserves sup-ported by GCC aids and loans from global institutions would mitigate this risk.

Devaluation: Companies operating in Egypt face a further challenge of FX fluctuations and shortage. Hence, most

contractors opted to maintain most of their backlog in Egypt foreign currency denominated with cost escalation

clauses embedded in its contracts. The latest devaluation was actually in favor of companies like OC and El Sewedy

Electric whose backlog is valued in foreign currency. Contractors hedge against any further devaluation by 1) main-

taining most of their backlog in foreign currency and 2) operating at an “EPC+Finance” basis, where foreign cur-

rency is provided by those parties to act against any delays due to foreign currency availability.

Privatization represents a turning point...

Companies like OC and El Sewedy would definitely reap the benefit of privatization. One of the sectors that wit-

nessed major opportunity following privatization is the power sector. In attempt to close the gap between demand

and supply, private entities were allowed to participate in the power generation sector. Following the Egyptian revo-

lution in 2011, the Egyptian economy was left shattered; among the visible effects of the turmoil was the never

ending problem of power cuts. With respect to the energy crisis, a major step was taken to liberalize energy prices

by gradually eliminating all subsidies by FY-18. In turn, paving the way for private companies to venture into the

field of energy generation. The liberalization of energy prices has first taken effect in July 2014; with the government

releasing the pricing plan of how it intends to carry out the phase-out by FY-18. The plan entails varying energy

prices for each consumption bracket according to energy use. A consortium led by Siemens signed a EUR 8bn deal in

June with the Egyptian government to establish three high-efficiency natural gas power plants and wind power in-

stallations at a capacity of 16.4GW. OC’s share of the contract stood at EUR 1.6bn while El Sewedy’s share stood at

EUR 785mn.

IMPLEMENTED INVESTMENTS BY SECTOR


IMPLEMENTED POWER INVESTMENTS BY SECTOR

SOURCE: CBE

59



We reached a fair value for El Sewedy Electric (SWDY.CA) of EGP 58.6/share with a “BUY” rating; and an upside potential of 34%. We applied the Discounted Cash Flow (DCF) valuation methodology to value El Sewedy Electric’s operations. Utilizing an average WACC of 13.35% over our forecasted period, and a perpetual growth rate of 4% we arrived at this Fair Value. Our initial fair value of EGP55.5 has been upgraded to EGP 58.6 following the first quarter results. We took into consid-eration the revaluation of the companies receivables in USD from the fast track projects as well as signing the Angola project worth USD 484.5mn adding to the company’s backlog. El Sewedy Electric entering a new era after participating in the power contracting business: The company recorded a historical record net profits in 2015 backed by turnkey projects. This signals the beginning of a new era for El Sewedy. Electricity reforms in Egypt opened the door for the private sector to participate in the electric-ity sector following the emergency power plan to face the power shortage crisis. The company was assigned to be the main contractor for the establishment of two power plants in Ataka and Mahmudeya worth USD 706mn. The company is also participating in the power generation project led by Siemens with a portion of EUR 785mn for a plant in Beni Suef and has already completed almost 9% in 1Q2016. Further MoUs were signed with Marubeni to build another power plant in Egypt, while other pro-jects are set to take place in Africa starting with power generation project in Angola. Turnkey projects have pushed the company to achieve 3.1x of its net profit of the previous year in 2015 a level at which the company is set to remain, which adds a huge value to El Sewedy Electric. Company is well positioned to take advantage of severe need for infrastructure: The company has the required capacity to benefit from the growing demand for in-frastructure in Egypt, the GCC and Africa. Egypt is set to witness investment through construction, infrastructure and power generation projects triggering demand for cables and transformers as well as participation in turnkey projects. Despite project delays in the GCC on the back of government spending cuts, demand is expected to pick up in Qatar and Saudi Arabia backed by huge infrastructure projects. Meanwhile, investment in Africa, which has been considered a “hidden treasure”, has already begun setting further demand to cater for projects. El Sewedy’s presence in countries such as Sudan, Angola, Zambia and Ethiopia sets the company in perfect position to benefit from investments in these countries. European meter roll-out plan signal opportunity for El Sewedy Electric: Meters de-mand is expected to grow over the medium term with European countries switching to smart meters, while Saudi Arabia is also in the process of implementing smart meters to minimize distribution and transmition loss. Meanwhile, Egypt is also work-ing on replacing old meters with electro and smart meters, which is a great opportu-nity for the company as it would be the main supplier. However, the company would have to rebuff competition by cheaper meter imports from China. Devaluation would support the company’s exports enabling the company to achieve higher sales in their international markets. Second, devaluation would also be posi-tively perceived for the company’s local turnkey projects which have been struck in foreign currency including projects such as Beni Suef or the 706 power project. In addition, the prices of El Sewedy’s products in domestic markets are set in USD but paid in EGP. On the other hand, Sewedy’s raw materials are mainly imported, which would ease the positive effect of the EGP devaluation.

EL SEWEDY ELECTRIC... Entering New Era of Power Generation...

“BUY” MARKET PRICE EGP 43.6 FAIR VALUE EGP 58.6 POTENTIAL 34% UPSIDE


Stock Data Outstanding Shares [in mn] 223.4 Mkt. Cap [in mn] 9,477.4 Bloomberg – Reuters SWDY EY / SWDY.CA 52-WEEKS EGP 27.9/EGP50.1 DAILY AVERAGE TURNOVER (2015) EGP 5.0MN

Ownership El Sewedy Family 73.0% Free Float 27.0%

Source: ARCC, Prime Estimates

All prices are as of 16 February 2016

Source: Bloomberg

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ESRS EGX30 - rebased

Company Profile

El Sewedy Electric, is a fully integrated

electricity conglomerate, with operations

spanning over 30 production facilities in 15

different countries. The company operates in

segments spanning from power cables and

wires, turnkey projects, electrical meters,

transformers, to electrical products. The wires

and cables segment, the company’s main

revenue driver, currently operates with full

integration; supported by a raw materials sub-

segment to provide the necessary feedstock; in

turn, enhancing margins and profitability. The

wires and cables segment produces power

cables, special cables, optical ground wires,

winding wires, along with copper and PVC as a

raw materials that serve production but are

also sold externally. The electrical meters

segment offers reliable electricity metering for

both residential and industrial applications. The

transformers segment produces both power

and distribution transformers in Egypt, Sudan,

Algeria, and Zambia. Finally, the turnkey

segment, operates in construction in the field of

power generation; working on electricity

generation projects spanning from engineering,

to procurement and construction.

60

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SWDY EGX 30-rebased


LOW/HIGH

Stock Data Outstanding Shares [in mn] 223.4 Mkt. Cap [in mn] 9,477.4 Bloomberg – Reuters SWDY EY / SWDY.CA 52-WEEKS EGP 27.9/EGP50.1 DAILY AVERAGE TURNOVER (2015) EGP 5.0MN

Ownership El Sewedy Family 73.0% Free Float 27.0%

Source: SWDY, Prime Estimates


Source: Bloomberg

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SWDY EGX 30-rebased

Company Profile

El Sewedy Electric, is a fully integrated

electricity conglomerate, with operations

spanning over 30 production facilities in 15

different countries. The company operates in

segments spanning from power cables and

wires, turnkey projects, electrical meters,

transformers, to electrical products. The wires

and cables segment, the company’s main

revenue driver, currently operates with full

integration; supported by a raw materials sub-

segment to provide the necessary feedstock; in

turn, enhancing margins and profitability. The

wires and cables segment produces power

cables, special cables, optical ground wires,

winding wires, along with copper and PVC as a

raw materials that serve production but are

also sold externally. The electrical meters

segment offers reliable electricity metering for

both residential and industrial applications. The

transformers segment produces both power

and distribution transformers in Egypt, Sudan,

Algeria, and Zambia. Finally, the turnkey

segment, operates in construction in the field of

power generation; working on electricity

generation projects spanning from engineering,

to procurement and construction.





Revenues 20,572 22,940 23,135 22,297

Change 21% 12% 1% -4%

COGS 12,670 14,062 16,908 18,444

Change 20% 9% 1% -2%

Gross Profit 3,664 4,496 4,465 4,019

Depreciation & Amortization 353 433 487 490

EBITDA 2,293 3,544 2,498 2,922

EBITDA Margin 11% 15% 11% 13%

Net Income After MI 1,245 2,458 1,475 1,776

NPM 6% 11% 6% 8%


In EGP Mn 2015 2016F 2017F 2018F

Cash 3,822 5,206 5,030 6,881 Net Receivables 9,350 8,527 8,632 7,822 Net Inventory 3,322 4,884 4,944 4,840

Other Current Assets 864 570 575 554


Net PPE 2,969 3,158 3,063 2,943 Projects Under Construction 224 0 0 0

Other LT-Assets 223 103 103 103


Total Assets 20,775 22,447 22,347 23,143

Liabilities

STD - incl CPLTD 6,096 5,866 4,943 3,802 Accounts Payable 7,141 6,569 6,650 6,009 Due to Affiliates 180 214 217 212


LTD 167 27 0 0 Long Term Provisions 615 799 984 1,162

Total Long Term Liabilities 823 985 1,262 1,555


Equity

Paid-in-Capital 2,234 2,234 2,234 2,234

Total Equity 6,535 8,727 9,248 11,564


2015 2016F 2017F 2018F


NPM 6% 11% 6% 8% EPS 5.6 11.0 6.6 7.9 DPS 2.0 4.4 3.3 4.8 P/E 7.8x 4.0x 6.6x 5.5x

EV/EBITDA 6.5 3.8 5.0 3.2 ROA 9.0% 11.8% 6.6% 7.9% ROE 20.1% 34.6% 15.5% 17.4%

Total Assets Turnover 1.0 1.0 1.0 1.0

BV/Share 29.3 39.1 41.4 51.8

61



We value Orascom Construction Ltd (ORAS.CA) with a “HOLD” rating; with an upside potential of 0.5% driven from a Fair Value of EGP 56.1/share. We applied the Dis-counted Cash Flow (DCF) valuation methodology to value OC’s operations, reflecting our assumptions for the company during the forecast period. We utilized a risk pre-mium of 6.4%, as a weighted market risk premium as revenues generated outside Egypt make up almost 50% of OC’s total revenues (USA, KSA, Algeria and other). Moreover, we used 3% perpetual growth rate as we expect great potential for OC on the back of an expected boom in the real estate sector with infrastructure and development projects in Egypt as well as other underserved markets like Algeria, which creates an opportunity for OC. However, operations in the KSA have been an issue for OC and growth in these mar-kets is yet to be achieved. It is worthy to mention that, the current backlog of contracts that the company secured is expected to be completed by 2018. Therefore, on the back of our belief in the company’s management, we assumed further awards over the fore-casted period.

Significant backlog growth on the back of Egyptian awards: OC’s backlog grew by 20% in 2015 reaching USD 6.7bn with Egypt’s backlog witnessing 117% increase. Projects awarded during the EEDC as well as privatization of the power generation sector set a great opportunity for OC. One of the main additions to OC’s backlog was the power gen-eration project with Siemens in Egypt with OC’s portion standing at EUR 1.6bn. Projects are expected to be completed within 24 months contributing to significant revenue hike for 2017 and 2018.

Repayment Risk: Delays and awards slowdown have been the case in the Saudi kingdom as well as slower receivable collection. Several companies operating in Saudi Arabia have received delayed payments or in extreme case no payment at all for their contractual work. As a result the company have stopped most of it non-critical operations in Saudi Arabia after agreeing with Binladen with the Jeddah airport the only remaining Saudi project in the company’s backlog. In Egypt there has been no sign of non-payment yet as receivables have been coming in with no delays. However, the main risk that OC and other contractors operating in Egypt may face is the government’s inability to secure foreign currency required to pay for those contractors, in light of current FX crisis in the country. On the other hand, however, the expected replenishment in the country foreign reserves supported by GCC aids and loans from global institutions, would mitigate this risk.

Devaluation effect: OC opted to maintain most of their backlog in Egypt foreign currency with cost escalation clauses embedded in its contracts. The latest devaluation was actu-ally in favor of companies like OC and El Sewedy Electric whose backlog is valued in for-eign currency.

Recovery in 1Q2016 following net loss in 2015: OC recorded a total net loss of USD 347mn in 2015 as a result of the Iowa fertilizer project, which witnessed delays adding to the project’s cost and leading towards a negative EBITDA for this project. In 1Q2016 OC’s revenues grew by 13% y-o-y to reach USD 972.9mn in led by revenues in the MENA re-gion as Egypt’s contribution stood at 44% with other MENA countries contributing with a 9% share to 1Q2016 total revenues. In terms of EBITDA, the company recorded an EBITDA of USD 48.8mn (+29% y-o-y), in line with our expectations. The major contribu-tion to EBITDA was also from the MENA region as MENA EBITDA stood at USD 44mn (90%) while US EBITDA standing at a mere USD 4.8mn. We believe that, the lower EBITDA from US is caused by the operational issues in the Iowa fertilizer project, expected to be finalized by 3Q2016, which will ease pressure on US EBITDA.

ORASCOM CONSTRUCTION... Promising Opportunities amid Economic Challenges...

“HOLD” MARKET PRICE EGP 55.84 FAIR VALUE EGP 56.13 POTENTIAL 0.5% UPSIDE


Stock Data Outstanding Shares [in mn] 118.04 Mkt. Cap [in mn] (USD) 717.91 Bloomberg – Reuters ORAS EY / ORAS.CA 52-WEEKS EGP 48.2/EGP113.1 DAILY AVERAGE TURNOVER (2015) EGP 8.6MN

Ownership Listed on NASDAQ Dubai 85% Free Float on EGX 15%

Source: ORAS, Prime Estimates All prices are as of 31 May 2016

Source: Bloomberg

-

20.0

40.0

60.0

80.0

100.0

120.0

Oras EGX 30-rebased

Company Profile

Orascom Construction Limited (ORAS.CA) is a global engineering and construction contractor operating in infrastructure, industrial and commer-cial projects. The company operates in Egypt, MENA region and the United States for public and private clients. Orascom Construction employs approximately 53,000 people in over 20 countries and is dually listed on NASDAQ Dubai and the Egyptian Exchange.

62


LOW/HIGH



This reflected in the US EBITDA margin which stood at 1.1% compared to 8.5% EBITDA margin from MENA operations. Net income for 1Q2016 witnessed a significant in-crease as it jumped 296% y-o-y to reach USD 23mn, 12% higher than our 1Q2016 net profit forecast of USD 20.4mn. MENA’s contribution to net income stood at 90% with a net margin of 3.6%, compared to a net margin of 0.5% from US operations. Despite US operations still suffering from lower margins, the company turned to profits in 1Q2016 following net loss reported in 2015. We expect US operations to achieve higher EBITDA margin (2-3%) after finalizing the Iowa fertilizer project.

63




Income Statement Brief Hist. Forecast In USD Mn 2015 2016F 2017F 2018F

Revenues 3,882 4,178 4,299 3,324

Change

7.6% 2.9% -22.7%

COGS 4,041 3,760 3,826 2,992

Change

-6.9% 1.8% -21.8%

Gross Profit -158 418 473 332


EBITDA -302 196 314 258

EBITDA Margin -7.8% 4.7% 7.3% 7.8%

Net Income After MI -347 81 172 111

NPM -8.9% 2.2% 4.3% 3.6%


In USD Mn 2015 2016F 2017F 2018F

Cash 575 82 135 271 Net Receivables 1,680 1,808 1,767 1,320 Net Inventory 203 189 193 151


Total Current Assets 2,468 2,162 2,180 1809

Net PPE 280 401 437 476 Net Intangibles 0 0 0 0 Other LT-Assets 41 41 41 41

Total Long Term Assets 768 889 925 965

Total Assets 3,236 3,052 3,105 2,773

Liabilities

STD - incl CPLTD 413 451 383 359 Accounts Payable 1,075 1,030 1,048 820

Other Current Liabilities 877 677 574 359





Equity

Paid-in-Capital 118 118 118 118

Total Equity 561 665 861 988

64


2015 2016F 2017F 2018F

GPM -4% 10% 11% 10% EBITDA Margin -8% 5% 7% 8%

NPM -9% 2% 4% 4% EPS -3.5 0.7 1.5 0.9 DPS 0.0 0.0 0.0 0.2 P/E -1.8x 9.1x 4.3x 6.7x

EV/EBITDA -3.7 8.6 5.0 5.0 ROA -13% 3% 6% 4% ROE -73% 12% 20% 11%


BV/Share 4.7 5.6 7.3 8.4


EGYPT BOOK


65


EGYPT BOOK BUILDING MATERIALS - CEMENT

Cement Industry... facing key challenges post revolution...

Post revolution the country faced several challenges such as security issues, strikes, power cuts and FX shortage. How-

ever, the most important factor in the market was the energy. Natural gas prices jumped from USD 3/mmbtu to reach

USD 8/mmbtu in mid 2014. Moreover, the lack of natural gas meant that the government had to prioritize household

consumption to avoid power cuts, leading the government to decrease and sometimes cut energy supplies for cement,

steel, ceramics and fertilizers companies. Companies were forced to import clinker (negatively affecting their bottom

line) in order to maintain their operations. Construction activity by the informal sector pushed towards higher de-

mand, while the energy challenge forced companies to operate at low utilization rates pushing prices higher due to the

excess demand in the market. In FY2011 cement was enjoying one of the highest margins in Egypt supported by de-

mand. Post FY2011 demand created by informal real estate sector offset the effect of natural gas shortage. However,

natural gas prices increasing coupled with shortage in its supply caused price increase on the back of limited cement

supply, and deteriorated manufacturers managers.

Despite the huge potential for high returns in Egypt’s cement sector, it was faced by stalling cement demand and over-

supply in the past year. Lower than expected demand coupled with higher utilization rates in FY2015 led to a collapse

in cement prices. The lower than anticipated demand is attributed to the delays for the start date for certain projects,

in addition to the waning local economy. Furthermore, our main export destinations (Libya and Sudan) have been suf-

fering from political and market instability, denying Egyptian producers the opportunity to export their excess produc-

tion. The higher supply was ascribed to: 1- The conversion to coal by several market players enabled them to operate

at higher utilization rates compared to FY2014, like Arabian Cement. 2- Other companies who have not converted to

coal yet, have used HFO witnessing a more steady supply in comparison to natural gas. This higher supply coupled with

the above mentioned sluggish demand resulted in a market oversupply in FY2015. In FY2016, we expect total cement

sales to witness a significant 11% increase, looking at 1Q2016, we can see that demand grew compared to the same

period in 1Q2015. The increase in demand is expected to continue until FY2017 where the market reaches equilibrium,

then, we expect demand to surpass market supply, to reach an expected sales volume of 82mn tons in FY2020. Our

expectation is backed by our belief that most halted projects will be in operation during FY2017-18, in addition to the

expected growth in real estate sector .

NATURAL GAS HISTORICAL PRICES IN EGYPT

SOURCE: PRIME RESEARCH DATA

66



The above mentioned oversupply in FY2015 pressured prices downward by c15% compared to FY2014. Although our

previous expectations of prices to be at EGP 575/ton ex factory in FY2016, prices jumped surprisingly in the first four

months of 2016 to record an average of EGP 622/ton, and soared in May to EGP 690/ton ex factory. We believe this

rebound in cement selling prices is a tentative and an unsustainable one. In our opinion, this increase might be at-

tributed to the halt of production in some cement facilities for maintenance, which resulted in an increase in prices

due to limited supply. Moreover, we think this price spike was not supported by market fundamentals, as it is

unlikely that demand has increased in the recent weeks to the extent that justifies this jump. However, we think the

inflation, as a result of EGP devaluation, will have an effect on the prices. Hence, we now expect an average ex fac-

tory price of EGP 587/ton in FY2016.

Energy is a key factor for cement industry...

Energy represents more than 60% of total production costs. Cement sector used to depend on natural gas as a main

source of energy before the crisis in 2014. The rising demand on electricity created a shortage of natural gas that

resulted in NG supply cuts to cement facilities. The government set households as priority, setting a limited supply of

natural gas to energy intensive industries (cement, steel & fertilizers) lowering their utilization rates. Eventually,

EGAS announced the complete halt of natural gas to cement facilities. Instead they were supplied heavy fuel oil

(HFO aka. Mazut). Hence, market players, led by Arabian Cement and Lafarge, started to convert towards coal as a

substitute for natural gas to operate at maximum capacity, followed by other market players like Suez Cement. The

government has approved environmental standards to regulate the usage of coal in FY2014 whilst seeking regula-

tions to control the coal importing process as well as the transport, kilns specifications and disposal processes do-

mestically. Despite a relatively high investment cost, coal conversion ensures facilities to operate at stable high utili-

zation rates and lower cost. However, the main risk lies in carbon tax that could be added to the coal which would

increase coal cost significantly. Noteworthy, coal prices dropped significantly during FY2015 and are believed to

remain low in the near future in correlation with oil, with no sign of increase in oil prices. Moreover, European coun-

tries as well as China are in the process of eliminating coal usage from their power plants, which negatively affect

demand and in turn causing lower coal price.

CEMENT DEMAND FORECAST


2012 2013 2014 2015 2016 2017 2018 2019 2020

Average price EGP (ex factory) 456 546 675 575 587 598 616 635 654

Growth

20% 24% -15% 2% 2% 3% 3% 3%


67

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

GDP (Real), EGP bn 1,528 1,558 1,592 1,626 1,678 1,746 1,818 1,902 1,995 2,095 2,146

Construction & Building (Real)

64 66 69 71 74 77 80 83 83 83 81

% of GDP 4.2% 4.2% 4.4% 4.4% 4.4% 4.4% 4.4% 4.4% 4.2% 4.0% 3.8%

Cement Demand, mn tons 49 49 51 50 51 53 60 69 74 78 82

Cement Value mn 14,850 21,029 23,012 22,057 23,337 27,352 34,617 28,784 30,071 31,456 31,486

Cement % of Construction Value

29.0% 36.0% 36.1% 33.4% 33.7% 38.4% 47.1% 37.6% 37.7% 37.7% 37.7%



Government ready to issue new licenses… is it required?

The government announced the issuance of new 14 cement licenses at an estimated capacity of 1.7mtpa, and an

investment cost of EGP 150mn per line. Due to the harsh conditions of obtaining the licenses including; its high cost

and having to ensure their own electricity and energy, several market players like Arabian Cement and Misr cement

Qena shown that they are unwilling to apply for the new licenses. On the other hand, there have been recent re-

ports that five cement companies showed their willingness to acquire the new licenses. South Valley Cement Com-

pany is at the top of these companies, as a new license would represent a key opportunity for the company, the rest

of the company’s names are still anonymous. Our expectation for demand of 82mn tons by 2020 means that the

government only needs to add licenses worth 13.5mtpa with no assumption of increasing utilization rates above

100% to cater for the growing demand, hence, we see any further addition to this capacity would pose a threat of

further oversupply.

Energy Source FY2015 FY2016 FY2017 FY2018 FY2019 FY2020

Natural Gas 214 232 246 258 253 248

Coal 118 127 132 145 149 148

RDF 111 116 121 126 132 139

HFO 235 272 252 252 270 289

ENERGY COST COMPARISON & FORECAST

SOURCE: PRIME RESEARCH DATA

68



CEMENT FIGURES FOR 2015

Company Name Capacity Production Utilization Sales Marketshare Sales YoY

Total suez cement group 12.0 8.0 67% 7.9 15% 0.3%

National Cement Co. 3.5 1.8 50% 1.9 4% 16.9%

Assiut Cement Co. 6.0 4.6 77% 4.7 9% -9.5%

Amreyah Cement 3.5 3.4 97% 3.4 6% -9.1%

Alex &Bani Swaif Cement Co. 4.5 3.9 86% 3.9 7% 28.7%

Lafarge Cement Co. 10.0 7.5 75% 7.4 14% 16.4%

Sina Cement Co. 3.0 2.1 70% 2.0 4% -6.1%

Qena Cement Co. 1.9 1.8 95% 1.7 3% -12.7%

Masr Bani Swaif Cement Co. 3.0 2.8 93% 2.7 5% 12.7%

Arabian Cement Co. 5.0 4.2 84% 4.2 8% 2.4%

South Vally Cement 1.5 1.5 99% 1.5 3% 34.6%

Shoura Cement 0.6 0.3 50% 0.3 1% 0.0%

Medecom Aswan 0.8 0.7 100% 0.7 1% -6.2%

Sinai whitecement 1.5 0.1 6% 0.1 0% 120.3%

Elsewedy Cement Co. 1.5 2.4 162% 2.4 5% 10.0%

Wadi El Nile Cement Co. 2.0 1.7 83% 1.7 3% 18.1%

El-Areish Cement Co. 3.0 1.6 54% 1.6 3% -32.5%

El Nahda Industries Co. 1.5 1.3 87% 1.3 2% -13.6%

Building Materials Ind. Co. 1.8 1.6 91% 1.6 3% 9.6%

ASEC Minya Cement Co. 1.9 1.9 98% 1.9 4% 0.0%

Total 68.5 53.2 78% 53.0 100% 3.4%

69

SUEZ CEMENT... Coal Conversion Key For Growth...





We reached a fair value for Suez Cement Group of EGP 23.9 with a “Strong Buy” recom-mendation, using a DCF valuation methodology; implying an upside potential of 88%, us-ing a DCF valuation methodology. We valued SUCE utilizing an average WACC over our forecasted horizon of 15.9%, a risk free rate of 11.2%, an equity risk premium of 8% and a perpetual growth rate of 3%. We assign SUCE a beta of 0.75. Our initial fair value of EGP29.6 (Feb 16) has been downgraded to EGP 23.9 following a significant hike in risk free rate witnessed in Egypt. However, a significant drop in stock’s market price has led to an upside potential of 88% setting our recommendation at a “Strong Buy”. A market leader aims to maintain its share. SUCE with its five cement plants dominates the local cement industry in Egypt, with a total capacity of over 12mn ton of cement. Despite of the lower prices in 2015, Suez Cement opted to maintain its leading market share of 15% through operating at high utilization rates. We believe that, Suez plant will increase its utili-zation rates in the coming years, starting 2016, until it reaches 100% utilization rate by 2019. On the other hand, the company’s management informed us that they received all the re-quired approval to use coal as source of energy in Helwan and Tourah. And hence, we do not expect any increase in their utilization rates before conversion is completed in 2018, according to our estimates. The plan to upgrade Tourah and Helwan into using coal provides a key for growth. Tourah plant depends on HFO and Helwan plant depends on a mix of HFO and NG as main sources of energy. As both Tourah and Helwan convert into using coal which is in a lower cost rela-tive to both HFO and NG, the cost/ton is expected to decline for Suez cement on the consoli-dated level. In addition, Suez plants converted to use coal in 2015 which will also reduce cost/ton for the group. However, changing to use coal in both Tourah and Helwan will not be commenced before 2018, which will affect the cost/ton in the coming 2 years for the two plants affecting the whole company. The inclusion of 100% coal conversion in Tourah and Helwan plants by 2018 would improve margins for the company. Gross profit margin would increase by about 4% y.o.y. Meanwhile, EBITDA margin would jump to 35% in 2018 com-pared to 24% in 2015 while net profit margin to surge to 7% in 2018. The main risk to our valuation is the company’s ability to implement conversion plan in Tourah and Helwan. As the plants are located in resedential areas, this may enforece the government to revoke the approval the company received. Financial Position in 1Q2016: Suez Cement Group turned to net profits after suffering from a net loss of EGP 60mn in FY2015 due to poor performance in 4Q2015. Despite a 14% y-o-y increase in revenues the company still suffered from a lower gross margin compared to the same quarter in the previous year on the back of higher production costs. Energy cost has been the major issue for SUCE. Turning from using HFO to use coal by the half of 2015, al-lowed Suez Cement facility to increase its utilization rates. However, as Tourah still depends on HFO in FY2015 and Helwan depends on a mix of HFO and natural gas as their main sources of energy, cement utilization rates declined in FY2015 for the two plants. We believe that, there was a shortage in the government supply of HFO to the plants, this shortage prompted the facilities to seek HFO supply from other sources, rather than the government, at higher prices than the official price, and hence, increasing production cost. Furthermore declining FX gains which recorded EGP 5.1mn (versus 31.2mn in 1Q2015) negatively affected the company’s net profit. The recent devaluation as well as foreign currency shortage, which led producers towards the black market, is main contributors for the decline in FX gains. SUCE depends partially on imported coal for as an energy source and has suffered as a result from the unstable FX situation in Egypt. As a result net profits for 1Q2016 stood at EGP 4.3mn versus EGP 62.8mn in 1Q2015.

70

Stock Data Outstanding Shares [in mn] 181.86 Mkt. Cap [in mn] 2,318.7 Bloomberg – Reuters SUCE EY / SUCE.CA 52-WEEKS EGP 12.1/EGP 38.0 DAILY AVERAGE TURNOVER (2015) EGP 0.7MN

Ownership Italecemnti Group 55% Abd El Menaam Rashed 7.9% Gazelle 7.6% Free Float 29.4% Source: SUCE, Prime Estimates


Source: Bloomberg

05

10152025303540

SUCE EGX 30-rebased

Stock Data Outstanding Shares [in mn] 181.86 Mkt. Cap [in mn] 2,315 Bloomberg – Reuters SUCE EY / SUCE.CA 52-WEEKS EGP 12.1/EGP 38.0 DAILY AVERAGE TURNOVER (2015) EGP 0.8MN

Ownership Italecemnti Group 55% Abd El Menaam Rashed 7.9% Gazelle 7.6% Free Float 29.4%

Source: ARCC, Prime Estimates All prices are as of 31 May 2016

Source: Bloomberg

05

10152025303540

SUCE EGX 30-rebased


LOW/HIGH

Company Profile

Suez Cement was established in 1977 with a production capacity of 4 mtpa. The company started its operations by building its first plant Suez followed by the Kattameya plant. The company is traded in the EGX under the symbol (SUCE) with a paid in capital of EGP 909mn and a par value of EGP 5. Suez Cement is the largest cement producer in Egypt with a total cement capacity of 12 mtpa through its five plants: Suez, Kattameya, Tourah, Helwan and El Minya. The main shareholder of Suez cement is Italce-menti group, ranked as the fifth cement pro-ducer in the world, acquires 55% of the total shares in Suez Cement.




71


Revenues 5,642 5,851 6,293 7,714

Change -8% 4% 8% 23%

COGS 4,755 4,775 4,864 5,605

Change 3% 0% 2% 15%

Gross Profit 887 1,076 1,429 2,109


EBITDA 322 461 764 1,291


Net Income After MI -60 -88 136 496

NPM -1% -2% 2% 6%


In EGP Mn 2015 2016F 2017F 2018F

Cash 771 974 1,074 1,906 Net Receivables 170 171 174 201 Net Inventory 1,362 1,368 1,393 1,606




Other LT-Assets 2,785 2,785 2,785 2,785


Total Assets 9,550 9,616 9,804 10,556

Liabilities

STD - incl CPLTD 481 495 485 499 Accounts Payable 912 916 933 1,075



LTD 149 119 89 60 Long Term Provisions 750 797 846 897

Total Long Term Liabilities 1,024 1,058 1,096 1,141


Equity


Total Equity 6,550 6,462 6,629 7,064


2015 2016F 2017F 2018F


NPM -1% -2% 2% 6% EPS -0.3 -0.5 0.7 2.7 P/E NA NA 17.0x 4.7x

EV/EBITDA 7.7 5.0 2.9 1.1 ROA -0.6% -0.8% 1.3% 4.6% ROE -0.7% -1.1% 1.7% 6.0%


BV/Share 36.0 35.5 36.3 38.7

MISR CEMENT QENA … Acquisition Bolsters Profitability… While Tumbling Prices Pressure It...





On the back of weak performance during 1Q2016, we downgrade Misr Cement Qena’s Fair Value to EGP 102.5/share from our re-initiation of coverage’s Fair Value of EGP 106.7/share, maintaining, however, a “BUY” rating; with an upside potential of 17%. We valued Misr Cement Qena using a Sum of Parts (SOPT) valuation methodology. We valued Misr Cement Qena and Asec Minya using a DCF valuation method utilizing an average WACC over our forecasted period of 15.1%, a risk free rate of 11.2%, an equity risk premium of 8%, adjusted beta of 0.65 and a perpetual growth rate of 3%. Moreover, we valued Asec Concrete based on the acquisition price of the company. MCQ acquired 55% of Asec Concrete’s shares with a total value of EGP 69.8mn, which we used as an indicator to the total value of the company.

Despite the surge in cement selling prices in the domestic market during 1Q2016 on the back of declining supply due to maintenance work, the 14% decline in MCQE’s sales vol-ume offset the price increase and led to a slight decline of 2% y-o-y in the company’s sales revenue. On the other hand, MCQE reported a significant increase of 15% y-o-y in COGS during the same period. This increase can be attributed to a) 17% y-o-y increase in Technical Management Fees to reach EGP 24.5mn in 1Q2016, b) the increase in electric-ity prices led to a 28% increase in cost of electricity and c) 23% y-o-y increase in cost of fuel to register EGP 99mn over 1Q2016. As a result, the company’s gross profit margin dropped sharply from 41% in 1Q2015 to 30% in 1Q2016, and registered 55% y-o-y drop in its bottom line to reach EGP 36.7mn. It bears to note that, the sharp drop in the com-pany’s bottom line cam as a result of weak operating performance, as mentioned earlier, as well as the increase in financing expenses to register EGP 28.6mn in 1Q2016 compared to zero in 1Q2015.

Accordingly, we revised down our assumptions for MCQE during 2016, as we lowered our expected utilization rate, as well as increasing our assumptions regarding contribution of HFO to the company’s energy mix during 2016.

In November 2015, MCQ acquired 46.5% of shares of Asec Minya Cement, in addition to the 13.9% that was already held by MCQ, and 55% of shares in Asec Concrete for EGP 1bn. We believe this acquisition will have a positive effect on MCQ group and enhance profitability, in addition to double its market share to be around 8% of the total market.

Over the recent years, MCQE was affected by the volatile cement industry, although MCQE was of the most profitable cement companies in Egypt. However, we have a posi-tive outlook for Misr Cement Qena. This positive view is supported by: 1- Migration to use coal and RDF as sources of energy will enhance the company’s profitability margins significantly, and 2- The acquisition of Asec Minya Cement in November 2015, will sup-port the company’s plans to increase its market share, benefiting from large scale econo-mies.

The firm used to record solid margins supported by a low operating cost structure, pro-fessional management and a very efficient production line that might pass 100% utiliza-tion rate. Although, the company’s solid margins were trammeled in 2015 by two main barriers: 1- The increasing cost of energy. 2- And falling prices, MCQ maintained its strong profitability relative to its peers in FY2015.

MCQ used to adopt consistent dividends payout policy because of the company’s abil-ity to generate profit and its solid margins. MCQ announced dividends of EGP 16/share for the FY2010, however, this rate started to decline after 25th January revolution reach-ing dividends of EGP 3/share for the FY2015. In our opinion, once MCQ reap the benefits of the acquisition of Asec Minya, it will increase its dividends per share to reach EGP 16/share by FY2020.

Stock Data Outstanding Shares [in mn] 29.9 Mkt. Cap [in mn] 2,156.6 Bloomberg – Reuters MCQE EY / MCQE.CA 52-WEEKS LOW-HIGH EGP 70 – EGP 89.4 TURNOVER (1-YR DAILY AVERAGE) EGP 3.5MN

Ownership Misr Insurance 12% Egyptian company for investments 10% Kuwaiti – Egyptian Investment 10% Misr Life Insurance 9% Others 59% Free Float 24%


Source: Bloomberg

0

20

40

60

80

100

MCQE EGX 30-rebased

Company Profile Misr Cement Qena (MCQE.CA) was founded in May 25th 1997 as a shareholding company to produce and sell cement and other construction products. In May 2000, MCQE had its shares listed in EGX. The company’s current authorized capital is EGP 600mn with an issued and paid-in capital of EGP 298.78mn and a par value of EGP 10/Share.

72

Stock Data Outstanding Shares [in mn] 29.9 Mkt. Cap [in mn] 2,620 Bloomberg – Reuters MCQE EY / MCQE.CA 52-WEEKS LOW-HIGH EGP 70 – EGP 90 TURNOVER (1-YR DAILY AVERAGE) EGP 3.2MN

Ownership Misr Insurance 12% Egyptian company for investments 10% Kuwaiti – Egyptian Investment 10% Misr Life Insurance 9% Others 59% Free Float 24%

All prices are as of 29 March 2016

Source: Bloomberg

0

20

40

60

80

100

MCQE EGX - Rebased




*Starting from 2016, MCQE will consolidate ASEC on its financial statements

73

Income Statement Brief Hist. Forecast In EGP Mn 2015 2016F* 2017F 2018F

Revenues 1,096 2,169 2,366 2,541

Change -5% 98% 9% 7%

COGS 704 1,359 1,332 1,397

Change 13% 93% -2% 5%

Gross Profit 392 810 1,034 1,143


EBITDA 355 684 895 990

Net Income After MI 266 223 373 446


In EGP Mn 2015 2016F 2017F 2018F

Cash 298 311 484 667 Net Receivables 7 6 6 8 Net Inventory 80 275 271 269

Total Current Assets 481 864 1,054 1,257

Net PPE 320 1,856 2,168 2,059


Total Assets 2,081 4,506 4,587 4,680

Liabilities

STD 61 871 879 898

Accounts Payable 28 158 140 147

Total Current Liabilities 267 871 879 898

LTD 850 1,397 1,090 783

Total Long Term Liabilities 974 1,579 1,271 963


Equity

Paid-in-Capital 256 256 256 256 RE 423 534 834 1,081

Total Equity 839 1,091 1,471 1,854

Financial Ratios Hist. Forecast GPM 36% 37% 44% 45%

EBITDA Margin 32% 32% 38% 39% NPM 24% 10% 16% 18% EPS 8.9 7.5 12.5 14.9 DPS 3.0 4.3 9.0 13.2 P/E 9.8x 11.4x 6.8x 5.7x

EV/EBITDA 9.2 6.3 4.1 3.2 ROA 20.2% 6.1% 7.4% 8.7% ROE 26.4% 18.3% 23.4% 22.2%

Debt/Equity 0.60 1.68 1.05 0.67

ARABIAN CEMENT… Pioneer Reaping the Benefits of Early Conversion...





We reached a fair value for Arabian Cement (ACC) of EGP 9.90; implying an upside potential of 20%, using a DCF valuation methodology. We valued ARCC utilizing an average WACC over our forecasted horizon of 15.5%, a risk free rate of 11.2%, an equity risk premium of 8% and a perpetual growth rate of 3%. We preferred to use an average sector Beta of 0.65 rather than a statistical Beta due to the company short trading history. Our initial fair value of EGP11.95 (Feb 16) has been downgraded to EGP 9.91 following a significant hike in risk free rate witnessed in Egypt. ACC pioneered shifting towards coal after the energy crisis in 2014 gaining competitive ad-vantage: Arabian Cement (ACC) currently owns and operates two 2.5mtpa integrated cement production lines in Al Ain El Sokhna in Suez governorate reaching a total capacity of 5mtpa. The company was listed on the EGX in May 2014, a year also considered significant for another reason for the company as it started its conversion towards coal amid the energy crisis. Along-side Lafarge, both companies are considered the first to take steps towards conversion which led ACC to reap the benefits of having cheaper and more stable energy supply. Dropping coal prices benefit ACC From a global view, coal prices continued to decline, as China alone consumes 50% of coal; currently china is having a slow-down in its GDP growth in gen-eral and in industrial sector in specific. Moreover, the Chinese government had devaluated its currency, a one-time correction as the government stated, in attempt to support their indus-trial sector through boosting export, with cheaper products. This is perceived as an advantage for companies which operate using coal as they are able to import coal at a lower cost. Coal has contributed as 70% of ACC’s energy and its price decline led to a direct decrease in ACC’s COGS/ton. With its correlation to oil coal is expected to grow at a slower rate. Company and country specific risks: Arabian Cement has an ongoing legal case over its plant license with the IDA. ACC is currently paying EGP 8m each month. The case has been most recently moved for international arbitration and is yet to receive a ruling. If the company loses the case, this could result in an immediate payment of EGP 450mn, putting temporary pres-sure on cash flow. In terms of country specific risk a major issue is the EGP devaluation and the risk of the inability to secure foreign currency required. The EGP rate versus USD has been fluctuating since the beginning of 2015 starting at EGP7.15/USD. A multi step devaluation has led to an official exchange rate of EGP 8.88/USD. Moreover, there is a high risk of not acquiring the required foreign currency, needed for importing coal from South Africa. Further hike in the EGP/USD rate, it is believed that the coal price would increase which would put further pres-sure on the gross profit margin. Furthermore, some of the company’s debt is in USD. Due to the recent energy crisis and the FX situation they agreed with the bank to extend the remain-ing loan tenor from 1.5 to 4 years to be paid over 16 installments ACC 1Q2016 financial position: ACC recorded total cement sales of EGP 536.3mn with sales volume standing at 1.02mn tons dropping 5% y-o-y. This comes as a result of the halt in pro-duction in the whole Egyptian cement sector for maintenance, which affected supply and in turn pushed selling prices upwards compared to the 2H2015 where prices plunged. The com-pany witnessed a COGS-to-Sales ratio of 61%, lower than our expected 64% on the back of higher selling prices. The company reported a 68% y-o-y drop in net profits to reach EGP 33.3mn on the back of higher than expected FX loss. The recent devaluation as well as foreign currency shortage, which led producers towards the black market, are main contributors for the inflated FX loss. ACC depends on imported coal for as an energy source and has suffered as a result from the unstable FX situation in Egypt.

Stock Data Outstanding Shares [in mn] 378.7 Mkt. Cap [in mn] 3,166.3 Bloomberg – Reuters ARCC EY / ARCC.CA 52-WEEKS EGP 7.14/EGP18.5 DAILY AVERAGE TURNOVER (2015) EGP 2.2MN

Ownership Aridos Jativa SLU 60% Al Borini Family 17.5% Free Float 22.5%



Source: Bloomberg

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ARCC EGX 30-rebased

Company Profile

Arabian Cement Company (ACC) (ARCC.CA) was founded in 1997 by a group of Egyptian investors and was later acquired by Spanish company Cementos La Union. The firm ac-quired a license for a production line of 2.5mtpa capacity (Cement) in its plant in Ain El Sokhna. After the acquisition the plan was adjusted to add a second line to reach a full capacity of 5mtpa (Cement). In 2014 the firm was offered for sale to the public via an IPO that priced common equity at EGP 9/share. Following the government’s decision to allow the use of coal as a substitute for the unavail-able natural gas ACC was one of the first mar-ket players to shift towards a coal/RDF energy mix gaining a competitive advantage with other suppliers suffering from a shortage in natural gas.

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Stock Data Outstanding Shares [in mn] 378.7 Mkt. Cap [in mn] 3,106 Bloomberg – Reuters ARCC EY / ARCC.CA 52-WEEKS EGP 6.5/EGP18 DAILY AVERAGE TURNOVER (2015) EGP 3.6MN

Ownership Aridos Jativa SLU 60% Al Borini Family 17.5% Free Float 22.5%



Source: Bloomberg

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ARCC EGX 30-rebased


LOW/HIGH




75


Revenues 2,273 2,433 2,647 2,931

Change -10% 7% 9% 11%

COGS 1,543 1,560 1,768 1,841

Change -3% 1% 13% 4%

Gross Profit 731 873 880 1,090


EBITDA 637 805 806 1,008



NPM 14% 17% 17% 21%


In EGP Mn 2015 2016F 2017F 2018F


Total Current Assets 643 606 578 699

Net PPE 2,546 2,540 2,450 2,330 Net Intangibles 109 109 109 109


Total Assets 3,423 3,315 3,167 3,168

Liabilities

STD - incl CPLTD 207 290 284 156 Accounts Payable 289 111 121 133


LTD 757 497 213 57

Total Long Term Liabilities 1,167 873 591 438


Equity


Total Equity 1,372 1,633 1,735 1,994


2015 2016F 2017F 2018F



EV/EBITDA 5.7 4.0 3.7 2.5 ROA 8.3% 12.1% 12.0% 17.9% ROE 15.9% 21.6% 19.0% 25.8%


BV/Share 3.6 4.3 4.6 5.3

SINAI CEMENT… Coal Conversion Represents a Key Opportunity...





We reached a Fair Value of EGP 28.4/Share with a “Buy” recommendation; driven from an upside potential of 22%. We valued Sinai Cement using a DCF valuation methodology, utilizing an average WACC over our forecasted horizon of 16%, a risk free rate of 11.19%, an equity risk premium of 8% and a perpetual growth rate of 3%. We preferred to use a Beta of 0.8 rather than an adjusted Beta calculated of 0.66, in order to factor the higher risk arises from the company’s location.

Sinai Cement operates two lines with a production capacity of 3mtpa. The company was one of the most successful cement companies in Egypt prior Jan 25th revolution. However, post Jan 25th revolution, Sinai Cement has been challenged by many obsta-cles. The company that once recorded a net profit of EGP 688mn and distributed dividends of EGP 9.5/share, is now jeopardized by the deteriorating situation in Sinai. Sinai cement reported a negative bottom line in FY2015 of EGP 38.9mn, compared to a net profit of EGP 93mn in FY2014. This can be ascribed to the drop in gross profit margin by 9% in FY2015 y-o-y. The drop in gross profit margin is attributed to: 1- The drop in selling price by 13% y-o-y coupled with the company’s lower utilization rates. 2- The use of HFO as a source of energy rather than NG, led to surging cost of produc-tion.

The conversion to coal in 4Q2015 paved the way for Sinai cement to increase its clinker utilization rate to record 101%, compared to 70% in 4Q2014 and 75% in 3Q2015. We believe migration to coal will improve the company’s utilization rates gradually in the upcoming years. Noteworthy, Sinai Cement recorded a utilization rate of 77% in 1Q2016, which represents a 9% increase y-o-y and a 31% increase q-o-q. Moreover, the lower cost/ton resulted from using coal, is expected to reduce costs of production by c12% in FY2016 y-o-y. The lower cost/ton coupled with higher utili-zation rates are expected to push up gross profit margins. This will pave the way for Sinai Cement to record net profits in the upcoming years. Nevertheless, the expected net profit is way below its levels prior the revolution.

Sinai Cement acquired a medium term loan of EGP 150mn in 1Q2015, in order to finance its migration to coal. CBE’s decision to increase corridor rates by 150 bps in 1Q2016 does not bode well for the company’s. Moreover, the higher interest ex-pense is expected to erode c39% of the company’s EBT in FY2016.

We expect gross profit to grow at a CAGR of 30% in the next five years. This is at-tributed to the, mentioned earlier, expected lower costs of production and higher utilization rates. In addition, we expect demand in Sinai to surge in the coming years due to the expected megaprojects investments in Sinai, which will allow the company to increase its selling prices. We expect EBIT margin to increase in the coming years reaching 24% in FY2020; however, this jump will not be totally reflected in the bot-tom line of the company as it will be depressed by the increasing costs of serving debts.

Stock Data Outstanding Shares [in mn] 68 Mkt. Cap [in mn] 5,036.1 Bloomberg – Reuters SCEM EY / SCEM.CA 52-WEEKS 6.11-13.15 DAILY AVERAGE TURNOVER [in mn] 10.07

Ownership Vicat Cement 39.64% Sama Cement 9.42%

Social Insurance Fund 9.42% Arab Industrial Investment 6.22% Free Float 35.3% All prices are as of 31 May 2016

Source: Bloomberg

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SCEM EGX 30-rebased

Company Profile

Sinai Cement (SCEM.CA) was established in

1997 as a shareholding company with the aim of

producing cement and its different products.

The company has a production capacity of

3mtpa and is located in Sinai, east of Egypt.

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Stock Data Outstanding Shares [in mn] 68 Mkt. Cap [in mn] 5,036.1 Bloomberg – Reuters SCEM EY / SCEM.CA 52-WEEKS 6.11-13.15 DAILY AVERAGE TURNOVER [in mn] 10.07

Ownership Vicat Cement 39.64% Sama Cement 9.42%

Social Insurance Fund 9.42% Arab Industrial Investment 6.22% Free Float 35.3% All prices are as of 31 May 2016

Source: Bloomberg

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SCEM EGX 30-rebased

LOW/HIGH




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Revenues 975 1,124 1,265 1,516

Change -18% 15% 13% 20%

COGS 772 722 771 922

Change -9.28% -6.57% 6.83% 19.61%

Gross Profit 203 402 494 593


EBITDA 49 241 325 405



In EGP Mn 2015 2016F 2017F 2018F




Net PPE 1,192 1,413 1,391 1,332 Net Intangibles 933 877.5 833.6 792.1 Other LT-Assets 415 151 101 101


Total Assets 2,263 2,139 2,111 2,182

Liabilities






Total Liabilities 938 781 708 683

Equity

Paid-in-Capital 631 631 631 631 Reserves 256 258 261 268

RE 438 472 516 608

Total Equity 1,325 1,361 1,408 1,508

Financial Ratios Hist. Forecast GPM 21% 36% 39% 39%

EBITDA Margin 5% 21% 26% 27% NPM -4% 6% 12% 13% EPS -0.57 0.96 2.17 3.00 DPS 0.00 1.00 1.00 1.00 P/E 0.00 25.53 11.21 8.12

EV/EBITDA 42.9 8.0 5.7 4.4 EV/Ton 1,023 858 770 656

ROA -0.02 0.03 0.07 0.09 ROE -0.02 0.04 0.08 0.11

Debt/Equity 0.34 0.23 0.18 0.15


BV/Share 19.5 20.0 20.7 22.2

SOUTH VALLEY CEMENT... New License a Game Changer for South Valley...

“HOLD” MARKET PRICE EGP 5.40 FAIR VALUE EGP 5.32 POTENTIAL 1.5% DOWNSIDE




We assigned the fair value of EGP 5.32 for South Valley Cement implying a downside poten-tial of 1.5%, using a DCF valuation methodology. We valued SVCE utilizing an average WACC over our forecasted horizon of 18.22%, a risk free rate of 11.2%, an equity risk premium of 8% and a perpetual growth rate of 3%. We calculated SVCE’s adjusted statistical Beta which came at 1.10. Our initial fair value of EGP 5.6 (Feb 16) has been downgraded to EGP 5.32 following a significant hike in risk free rate witnessed in Egypt.

Coal conversion is a key to future improvement of financial position. Despite the decline in average selling prices in 2015 due to the excess supply in the market the revenue still 46% y-o-y increase on the back of increase in volumes sold. SVC’s sales volume jumped by almost 40% to reach 1.48mn tons in 2015 causing the hike in revenues. On the other hand cost of produc-tion inflated mainly based on increasing energy cost. This caused a compression in SVC’s gross margin which stood at 18.9% versus 28.9% in 2014. Furthermore the major increase in SG & A in 2015, which is 11.8 x the figure of 2014, has put major pressure on the company’s EBITDA and net profit with the company witnessing 113% drop in net profits to reach EGP 71.1mn in 2015. South Valley Cement has been operating on a natural gas/ HFO energy mix in FY2014, however due to the lack of natural gas the company was forced to use HFO for 100% of its energy needs, whose stands between EGP 235/ton – EGP 272/ton of cement compared to EGP 214/ton of cement for natural gas Going forward we expect an improvement in operations as a result of coal conversion. SVC is expected to include coal in its energy mix by 2016 with a much lower current value EGP 118/ton of cement. Such conversion would be a key to a higher gross profit margin. The inclusion of coal for 45% of required energy would cause a 5% y-o-y decline for COGS/ton to reach EGP 417 by FY2016. In FY2016 EBITDA margin is expected to jump to reach 33% while net profit margin to surge to reach 22%. It is noteworthy, that global coal forecasts have been cut significantly as we showed previously in correlation with declining oil prices. That would set a further advantage for companies converting to coal. Cost/ton would drop further to reach EGP 385 by 2017. However, this stands only for the first production line as the second line relies on imported clinker at a much higher cost. This explains the signifi-cant drop in gross profit margin which remains at an average of 24% between 2017 and 2020 compared to 36% in 2016. Both EBITDA and net margins drop as a result of the high cost of imported coal to average at 22% and 13% for the same period (2017-2020), respectively.

South Valley to double capacity by 2017 SVCE is expected to add a further capacity at a total cement capacity of 1.7mtpa starting 2017. This added capacity is set to increase the company’s market share after reaching a total capacity of 3.4mtpa Adding to the companies sold volume would signal improved the company’s profits due to its higher selling prices. Moreover, the new projects and added demand which is expected to surpass market capacity by the end of 2017 ensures a market for the increased production capacity. However, a main concern for this line is that it relies on imported clinker as it doesn’t own a silo to produce clinker as we men-tioned earlier. Imported clinker costs is significantly higher than produced clinker which would force the company to maintain lower utilization rates for the second line in case it becomes value destructive. This could be caused by a further devaluation for the Egyptian pound or even the FX shortage that remains a concern.

Investment in new license: SVC will invest EGP 1.7bn in doubling its production capacity to 3.4mn ton from 1.7mn ton by expanding the Beni Suef facility through a new cement license, according to company’s Chairman. This represents an upside potential for SVC. SVC was ex-pected to add a further capacity to its production of 1.7mtpa starting 2017, which was set to increase its market share and total capacity reaching 3.4mtpa. However, our main concern was that it would rely on imported clinker as it does not own a silo to produce clinker, which ex-poses SVC to FX risk and high cost of sales. Moreover, we considered the new cement licenses as key opportunity for SVC, since it will open the way to construct its own silo to produce clinker which will reduce its cost of sales and eliminate FX risk.

Stock Data Outstanding Shares [in mn] 482.3 Mkt. Cap [in mn] 2348.6 Bloomberg – Reuters SVCE EY / SVCE.CA 52-WEEKS EGP 3.3/EGP 7.2 DAILY AVERAGE TURNOVER (2015) EGP 2.3MN

Ownership Blue Nile LTD 37.7% GAZELLE LTD INC 9.3% Al Nahla Co 8.2% Free Float & Others 44.8%

Source: SVCE, Prime Estimates


Source: Bloomberg

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SVCE EGX 30-rebased

Company Profile

South Valley Cement (SVC) (SVCE.CA) was

established in 1997 to produce top quality

cement and its associated products as well as a

wide range of other premium building materials

product such as Ready Mix, beside owning and

managing a huge portfolio of diverse multi

sector direct and indirect investments. The

company has been listed on the EGX since 1998

and currently operates at a clinker capacity of

1.6mtpa equivalent to 1.76mtpa cement

capacity.

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Stock Data Outstanding Shares [in mn] 482.3 Mkt. Cap [in mn] 2,628 Bloomberg – Reuters SVCE EY / SVCE.CA 52-WEEKS EGP 3.3/EGP 5.5 DAILY AVERAGE TURNOVER (2015) EGP 2.9MN

Ownership Blue Nile LTD 37.7% GAZELLE LTD INC 9.3% Al Nahla Co 8.2% Free Float & Others 44.8% Source: SVCE, Prime Estimates


Source: Bloomberg

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SVCE EGX 30-rebased

Company Profile

South Valley Cement (SVC) (SVCE.CA) was

established in 1997 to produce top quality

cement and its associated products as well as a

wide range of other premium building materials

product such as Ready Mix, beside owning and

managing a huge portfolio of diverse multi

sector direct and indirect investments. The

company has been listed on the EGX since 1998

and currently operates at a clinker capacity of

1.6mtpa equivalent to 1.76mtpa cement

capacity.


LOW/HIGH




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Revenues 908 926 1,757 1,916

Change 46% 6% 90% 9%

COGS 665 604 1,339 1,420

Change

3% 122% 6%

Gross Profit 243 323 418 496


EBITDA 140 306 399 475



NPM 8% 22% 14% 16%


In EGP Mn 2015 2016F 2017F 2018F





Other LT-Assets 1,664 2,071 2,125 2,181


Total Assets 4,162 4,271 4,923 4,990

Liabilities




LTD 184 404 604 431 Other LT Liabilities 49 3 3 2


Total Liabilities 760 751 1,187 1,022

Equity

Paid-in-Capital 2411 2411 2411 2411

Total Equity 3,328 3,520 3,737 3,968


2015 2016F 2017F 2018F



EV/EBITDA 11.5 7.5 6.2 4.7 ROA 2.2% 4.7% 5.5% 5.9% ROE 2.6% 5.8% 6.7% 7.8%


BV/Share 6.9 7.3 7.7 8.2


EGYPT BOOK BUILDING MATERIALS - STEEL

Steel Industry... Economic slowdown in China weighs on steel industry… Through the past decade, global steel industry has witnessed its highest growth cycle in its history. Production surged

by c41% from 1.2bn ton in FY2005 to 1.6bn in FY2015. This unprecedented growth was spurred by the growing levels

of urbanization and industrialization in China. Nowadays, China represents c50% of the world’s steel production and

consumption, which makes it the prime force controlling steel industry. Global steel industry has been facing many

challenges over the past two years as China reported a deceleration in its economy’s growth. Part of this deceleration

is ascribed to the slowdown in industrialization and urbanization sector in the country.

As China’s urbanization and industrialization euphoria fading, its steel demand crashed. The largest steel producer and

consumer found itself loaded with a steel glut, so it simply dumped it on the rest of the world. With the large number

of small iron ore miners in China, who stabilized their output with no response to the new dynamics, Chinese steel

producers also kept the same level of production, supported by exports subsidies they receive from Chinese govern-

ment. This pressured steel prices and raw material prices downward. Steel prices dropped by c42% in Jan 1st 2016 com-

pared to Jan 1st 2014, Iron ore price dropped by c68% in Jan 1st 2016 compared to Jan 1st 2014, while scrap price

dropped by c40% in Jan 1st 2016 compared to Jan 1st 2014.

STEEL SUPPLY

SOURCE: WSA & PRIME CALCULATIONS

SOURCE: BLOOMBERG & PRIME CALCULATIONS

GLOBAL STEEL PRICE IRON ORE & SCRAP PRICE

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The aforementioned steel glut in China, coupled with exports subsidies given to Chinese steel exporters paved the way for Chinese exporters to dump global markets with cheap Chinese steel. This forced many countries to impose import tariffs and anti dumping fees in order to curb this persistent flow of cheap steel exports to their countries. Eventually, many steel manufacturers had to lay off a portion of its workers and shed many jobs. Others had to shut down some of its mills temporarily or permanently in order to reduce their production capacities. While global steel industry was so fragile by the aforementioned factors, Egypt’s steel industry was also overwhelmed by the following:

The local government decided to increase NG supply prices to steel manufacturers to record USD 7/mmbtu from USD 4/mmbtu in the mid of 2014. This led to a surge in costs of production for local steel manufacturers, espe-cially those who use NG as a raw material in their production process. There are two common steel production methods in Egypt, the first one is importing or buying billets, semi finished steel, and then rolling it in rolling mills. This method is not efficient and it is characterized by high costs of production. The second method depends on operating DRI plants that use iron ore and NG to produce DRI, and then use a mix of DRI and scrap to produce billets and at last rolling these billets in rolling mills. It is worth mentioning that in the second method whenever NG is not available to produce DRI, higher cost scrap is used to produce billets. The second production method is the most efficient one and it is characterized by low costs of production. Since the second method depends on NG as a raw material and cannot be replaced by any other material, it was affected the most by the government’s decision to increase NG cost.

The energy crisis in Egypt post the 25th of Jan revolution, which affected all sectors, had a severe effect on DRI steel dependent producers. The government had to cut NG supply to steel mills, especially in 2014 and 2015. In response, steel mills had no choice except of halting operations in DRI plants and relying on billets or scrap, where both of these are at higher costs relative to the DRI, which eroded the cost advantage of operating using this method. This pushed all steel manufacturers to incur losses in the past two years.

The persistent FX crisis that hits the country presented an extra setback for local steel manufacturers. The un-availability of foreign currency through legitimate sources pushed some producers to secure it from the parallel market, where exchange rates reached unprecedented high records, imposing an extra pressure on margins.

EGYPT STEEL SUPPLY

SOURCE: CBE & PRIME CALCULATIONS

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One of the main threats for local steel manufacturers is imported steel. The plunge in global steel price coupled with global steel oversupply, this motivated local steel importers to import more steel to the market. Turkish steel imports in Egypt recorded EGP 2.1bn, 1.7bn and 1.3bn in 2015, 2014 and 2013, respectively. Consequently, local steel manu-facturers were not able to increase their selling prices to mitigate the rise in NG prices by 75% and the EGP devalua-tion. Despite all of the previous darkness, there is a spotlight ahead. It seems that steel prices had reached its lowest at USD 364/ton on Dec 29th 2015. The trend has turned upward starting FY2016 as steel prices reached USD 560/ton by May 2nd 2016. We expected, in our initiation of coverage, a rebound in steel prices starting FY2016; however, it came faster and more cohesive than our estimates. Soaring steel price can be attributed to: 1- Amendments by Chinese steel producers to compensate for the drop in steel global demand. 2- The shutdown of many facilities around the world, easing some of the pressure on steel price through reducing the total production capacity. Nevertheless, we think it is too soon to conclude that the worst is over for steel industry and steel prices are on track again. Moreover, steel pro-ducers in China have been ramping up their output as steel prices recovered; this represents a warning that may hurt the commodity’s price and pushing it downward again. Hence, we still do not believe the rebound in steel price would record the historical high price of USD 700/ton again in the near future. We expect global steel price to be at an aver-age of USD 442/ton in FY2016. It is worth mentioning that the average selling price for the first four months of 2016 was at USD 427/ton. In addition, iron ore price soared in the recent months, as it recorded an average price of USD 50/ton in the first 4 months of FY2016 compared to an average of USD 47/ton 4Q2015. Iron ore market was oversupplied by the largest producers in Australia and Brazil as they increased or maintained their production levels, unlike the expectations of cutting production in accordance with the slowdown in demand by the largest consumer and importer of iron ore, China. Iron ore miners adopted a predatory pricing strategy, which is setting low prices in order to eliminate competi-tion. This was ascribed to the market share war flamed by the largest producers of iron ore, in order to oust small min-ers of China’s market. The recent jump in steel price increased demand for iron ore, hence; iron ore minors increased their supply to china in order to meet this growing demand. Iron ore inventory have been reportedly increasing in ports as minors kept ramping output. Accordingly, we expect iron ore price to be on an average of USD c40/ton in FY2016, as we believe this recent price spikes was not supported by market fundamentals. Hence, the consistent in-crease in supply and inventory levels will offset this spike in the commodity’s price. The abovementioned spike in global steel price increased the costs of importing steel to Egypt. Moreover, the Fx short-age hitting the country, imports restrictions imposed by the CBE, import tariff imposed on steel imports with a mini-mum of EGP 325/ton in FY2016 and the devaluation of the EGP against USD in March 2016, all of these factors pre-vented steel importers from dumping the local market with cheap imported steel, as imported steel lost its price ad-vantage. This pushed local steel manufacturers to increase their selling prices in the local market, as they increased selling prices by EGP c1500/ton from January to half of May 2016. This increase came as a result of, according to manufacturers, the increase in billets prices by EGP 1000/ton coupled with the devaluation of the EGP/USD. Steel sell-ing prices were above EGP 6000/ton while ex factory prices are EGP 5875/ton. This unexpected surge in local selling prices bodes well for steel manufacturers as the high cost of production was squeezing their margins without being able to pass the increases to the end consumer. In March 2016, the minister of industry announced the reduction of NG supply price to steel manufacturers from USD 7/mmbtu to USD 4.5/mmbtu. We considered such a decision as a glimpse of hope for steel industry as it was heavily weighted by the sudden jump in costs of production that drove companies to incur losses. However, this decision was

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conditioned by achieving a full capacity utilization rates, reducing the quantity of imported billets and, in our belief, reducing steel selling prices or at least maintain it at its levels when the decision was taken at EGP 5000/ton ex factory. This bodes well for DRI steel manufacturers as it will enable them to capitalize on the cost advantage of using DRI in production rather than scrap. However, and as mentioned earlier, steel producers increased their selling prices by EGP c1000/ton in the two consecutive months following this decision. In a response, and as we expected, the government declared that it is considering cancelling its previous decision of reducing NG prices due to, 1- the recent jump in steel selling prices. 2- Billets imports were not reduced. We consider this as a big threat for steel manufacturers. Eventually, steel manufacturers reduced selling prices by EGP c475/ton in May 18 2016. Steel selling prices are now at

an average of EGP 5600/ton. We expect local steel price to be on an average of USD 511/ton ex factory in FY2016,

while now it is on an average of USD 563/ton ex factory in the first five months of 2016. This was followed by a govern-

mental approval to reduce NG prices to steel manufacturers starting September 2016. However, the government de-

clared that it will cut NG supply to steel plants starting August 2016 till September 2016.

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We reached a Fair Value of EGP 14.51/Share with a “Strong BUY” recommendation; driven from an upside potential of 85%. We valued Ezz Steel using a Sum of Parts (SOPT) valuation methodology, where we valued Al Ezz El Dekhila, Al Ezz Flat Steel and Al Ezz Steel Rebar and Al Ezz Rolling Mills using a DCF valuation method, utilizing an average WACC over our forecasted period of 13%. The main upside risk to our valuation is derived from a higher than expected NG supply to Ezz Steel, paving the way for the company to use higher quantity of DRI in its production. While downside risk is continuity of Fx shortage affecting utilization rates negatively.

Ezz steel is the leading steel producer in Egypt, it has managed to occupy half of the local market for long steel with a production capacity of 3.5mn ton. It also occupies almost the half of local market for flat steel with production capacity of 1mn ton. Moreover, EFS operates a flexible capacity of 1.3mn ton whether long or flat.

As shown in the below table, Ezz Steel increased its selling prices by EGP c1500/ton. In response, the government announced that it is reconsidering its previous decision to reduce NG supply prices. However, in May 18, Ezz Steel announced that it has reduced its ex factory selling prices by EGP 475/ton, to record EGP 5400/ton compared to EGP 5875/ton. The company attributed this decision to the decline in global prices of raw materials, in addition to stable supply of Natural Gas to its new DRI plant in Suez.

*A discount of EGP 200/ton over prices in April

The company’s decision to reduce its selling prices comes in line with our expectations, as we expected the rising trend in steel selling prices since the beginning of the year to not persist on the back of our belief that; the government will pressure the domestic manufactures to reduce selling prices after the cabinet’s decision to reduce natural gas price for steel manufacturers. In May 19, it has been reported that the government’s decision to reduce NG supply prices will be applied starting September 2016. Appar-ently, this bodes well for Ezz Steel’s margins, as it will allow Ezz group to reap the benefits of dueling the DRI production method in EFS and ESR. Nevertheless, the gov-ernment will halt, completely, NG supply to steel manufactures during August 2016, and it will be resumed again during September 2016. This will force Ezz Steel to halt production in its DRI mills and depend on higher cost imported billets and scrap as raw materials in production, which will increase costs of production. Hence, we maintain our conservative outlook for NG supply to DRI plants, as we expect Ezz steel will receive 55-60% of NG required to operate its DRI plants in FY2016.

EZZ STEEL…

Promising Prospects, Supports Rebound Expectations...



Ezz Steel Selling Price (EGP/Ton)

Region Feb-

16 Mar-

16 M-O-M Change

Apr-16*

M-O-M Change

May-16

M-O-M Change

May-16 Change

Alexandria & West of Alexandria

4,760 5,120 8% 5,530 8% 6,135 11% 5,660 -8%

Cairo & Delta 4,775 5,135 8% 5,545 8% 6,150 11% 5,675 -8%

Northern Upper Egypt 4,820 5,180 7% 5,590 8% 6,195 11% 5,720 -8%

Southern Upper Egypt, Sinai & Red Sea Region

4,860 5,220 7% 5,630 8% 6,235 11% 5,760 -8%

SOURCE: EZZ STEEL & PRIME CALCULATIONS

84

Stock Data Outstanding Shares [in mn] 543 Mkt. Cap [in mn] 4,199 Bloomberg – Reuters ESRS EY / ESRS.CA 52-WEEKS 6.11-10.3 DAILY AVERAGE TURNOVER [in mn] 10.1

Ownership Ezz Industries 65% Free Float 35% All prices are as of 17 April 2016

Source: Bloomberg

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ESRS EGX30 - rebased

02468

101214

ESRS EGX 30-rebased


Company Profile

Ezz steel was originally established in 1994 under the name of Al Ezz Steel Rebar. Ezz steel is listed in the Egyptian stock market deliberat-ing under the symbol (ESRS) and in London stock market through a GDR program under the symbol (AEZD). Company’s latest paid in capital is EGP 2.71bn distributed over 543.27mn shares with par value of EGP5 per share. About 65% of the company’s shares are owned by Ezz group and the remaining 35% are free float. Ezz group operates through 4 subsidiaries: 1- Its directly owned company Ezz Steel rebar (ESR). 2- Ezz Flat Steel (EFS). 3- Ezz Rolling Mills (ERM). 4- Ezz Al Dekhila (EZDK).

LOW/HIGH



Ezz Steel has a high leverage risk stemmed from the company’s high interest bearing debt. Leverage ratio increased in FY2015 to record 3.6x compared to 2.6x in FY2014. We expect the CBE’s decision to increase corridor rates by 150 BPS coupled with the decision to devaluate the local currency to be EGP 8.87/USD compared to the previous rate of EGP 7.83/USD, to result in: 1- Increase FX losses in FY2016 to record EGP 276mn. 2- Increase debt service cost and principal to be repaid for the USD denominated loan. 3- Surging the costs of raw materials denominated in USD including NG. This will subdue the company’s margins in the short term. We have a bullish outlook on Ezz Steel backed by the following: 1. Reduction of NG prices from USD 7/mmbtu to USD 4.5/mmbtu. 2. Pickup in local steel prices and improving global ones. 3. FX shortage and imports regulations curbing steel imports flow to the country. 4. Expected enhancements in NG supply to Ezz Steel starting 2016, giving the way to Ezz group to reap the benefits

of duplicating DRI model in EFS & ESR.

SOURCE: BLOOMBERG & PRIME RESEARCH

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Revenues 16,641 25,254 26,296 28,680

Change -14% 52% 4% 9%

COGS 14,804 21,231 21,298 23,833

Change -18% 43% 0% 12%

Gross Profit 1,837 4,023 4,999 4,847

Depreciation & Amortization 752 990 1,003 1,016

EBITDA 1,096 2,996 3,871 3,665



In EGP Mn 2015 2016F 2017F 2018F

Cash 4,784 4,668 4,427 2,292 Net Receivables 15 131 131 147 Net Inventory 4,265 3,798 3,810 4,264

Other Current Assets 2,562 1,943 2,012 2,192


Net PPE 11,211 15,194 14,721 14,245 Other LT-Assets 490 637 591 593


Total Assets 28,235 26,486 25,833 23,874

Liabilities

STD - incl CPLTD 10,450 9,586 10,150 8,124 Accounts Payable 3,650 2,327 2,334 2,612


LTD 6,971 7,847 5,216 4,148 Other Long Term liabilities 1,260 1,376 1,489 1,464

Total Long Term Liabilities 8,232 9,223 6,704 5,612


Equity

Paid-in-Capital 2,644 2,644 2,644 2,644

Total Equity 4,782 4,489 5,911 6,697



NPM -3% 0% 3% 3% EPS -0.77 0.18 1.29 1.69 DPS 0 0 0.65 0.85 P/E NA 42.2x 5.90x 4.50x

EV/EBITDA 19.15 6.63 4.83 4.47 ROA -1.62% 0.36% 0.81% 1.12% ROE -7.07% 1.80% 3.56% 3.97%



BV/Share 8.8 8.3 10.6 12.1



EGYPT BOOK


87


EGYPT BOOK PETROCHEMICALS

Global Petrochemicals Industry: Cost Competition is Key to Petrochemicals Success … Petrochemicals are chemicals made from petroleum (crude oil) or natural gas. Products made from petrochemicals include plastics, soaps, detergents, solvents, paints, drugs, fertilizers, pesticides, explosives, synthetic fibers, rub-bers and flooring materials. The petrochemicals products are quiet diversified, where they can be generally classi-fied into 2 main categories; primary petrochemicals and intermediates and derivatives. The feedstock cost is the most important factor determining the competitiveness of the petrochemical producers. However feedstock op-tions for the petrochemical producers are limited and mainly depend on the location of the manufacturing facili-ties. The three main feedstocks used in the global petrochemicals industry are naphtha, natural gas and coal. Most of the regions are dominated by only one single feedstock. Naphtha is a dominant feedstock used for petrochemi-cals production in Asia Pacific and Europe; while on the other hand, natural gas is dominant in the Middle East, Africa, and North America regions. Since natural gas is relatively cheaper than naphtha, companies that produce petrochemicals using natural gas as the feedstock, are able attain higher margins than companies that produce petrochemicals using naphtha. Global petrochemicals market size was valued at USD 514bn in 2014. In terms of volumes, the global petrochemicals market size was 490.5mn tons in 2014. Generally, the petrochemicals sector is affected by the global economic activity, growth in the industrial sector and population expansion. The petrochemical industry was expected to grow at an estimated CAGR of 5.1% from 2015 – 2022. The main driver of the market growth will be the globally increasing demand from end-use industries rang-ing from consumer goods to manufacturing. China is currently the world’s largest consumer of petrochemicals where it consumed more than 23% of the global petrochemicals in 2014; standing at USD 120bn. China is also ex-pected to have the highest growth of 6.2% during 2015-2022. This comes as a result of growing demand for several plastic products (such as polyethylene and polypropylene) and engineering plastics from domestic automotive, packaging and construction industry. There are other Asian countries such as India and Thailand that are expected to witness significant gains in their consumption of petrochemicals on the back of expected rapid industrialization and government support to increase FDIs. Picking up of Crude Oil prices and declining PE Prices: Due to the abundance of naphtha and the dominance of producing petrochemicals from naphtha, the prices of PE tend to be correlated with the prices of crude oil. Even though historical data shows that the PE and Crude oil prices tend to converge over time, since the beginning of 2016 both prices have taken different directions. The prices of Crude oil started to pick up since March, after reaching one of its historical lowest levels in February. In the beginning of January 2016, crude oil prices reached USD 36.76/bl and USD 48.31/bl on May 17th. The latest World Bank’s report estimates that the average prices of crude oil would be USD 37/bl and USD 48/bl in 2016 and 2017 respectively. On the other hand, Polyethylene prices have started to decline in April and the downward trend persisted till date. In the beginning of January 2016, PE prices reached USD 1,159/bl and reached USD 1,218/bl on May 17th. We believe that the volatility of Polyethylene prices will persist only in the short-term, however it will start to gradually pick up with oil prices.

CRUDE OIL PRICES – USD/BL

SOURCE: BLOOMBERG

PE PRICES – USD/BL

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Petrochemicals Sector in Egypt: One of Egypt’s Top Growing Sectors… Since the early 2000s, the government of Egypt has shown its intention to collaborate with the private sector to expand business opportunities in the petrochemicals sector through public private partnerships (PPP). The Egyp-tian Ministry of Petroleum has established ECHEM to accelerate the implementation of new petrochemicals pro-jects. The government has adopted a 3-phase, 20-year master plan (2002-2022) in order to guide investment deci-sions in the petrochemicals industry, with an estimated budget of USD 20bn. It is expected that the plan’s imple-mentation will last longer than anticipated, due to the occurrence of 2 revolutions in Egypt, in 2011 and 2013 re-spectively. The plan had a target of achieving USD 15bn of revenues per annum and to produce 15mn tpa of inter-mediate and final products. The plan has proven to be successful so far, as the total petrochemicals’ production capacity increased from around 600,000 tpa in 2002 to 3.15mn tpa in 2012 and 5.27mn tpa in 2015. Currently, the petrochemicals sector represents around 12% of Egypt’s total industrial production and is worth around USD 7bn. The petrochemicals industry contributes c3% of the Egypt’s total GDP. Egypt has always been considered a net importer of petrochemicals and chemical products. The trade balance shows a huge deficit over the 2003-2014 period. However, it is worthy to note that the value of exports’ growth has increased at a faster rate than that of imports. Egypt exports petrochemicals to more than 30 countries, where European countries were the largest importers (67%), followed by Asian (21%) and African (12%) countries. It is worthy to note that Egypt is among the countries with very low self-sufficiency ratios of petrochemicals and hence plastics. Egypt produces only 28% of the plastic materials that are locally consumed.

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We maintain our recommendation for Sidi Kerir Petrochemicals – SIDPEC with a “STRONG BUY” rating driven from an upside potential of 55%; driven from our esti-mated Fair Value of EGP 17.99. Using the DCF valuation methodology for SKPC, we utilized an average WACC over our forecasted horizon of 17.32%, a risk free rate of 11.46%, and a market risk premium of 8%. We used the 5-year adjusted beta which is equivalent to 0.73. We applied a perpetual growth rate of 3.5%. Sidi Kreir Petro-chemicals (SKPC.CA) remains to be one of our top picks for the coming period. Sev-eral occurrences that took place during the last period were in favor of SIDPEC.

SIDPEC enjoys monopolistic power in the PE local market: Sidi Kerir Petrochemicals Company – SIDPEC - is Egypt’s sole producer of Ethylene and Polyethylene with a current production capacity of 300,000 tpa of ethylene and 225,000 tpa of Polyethyl-ene. SIDPEC produces its primary products; ethylene and polyethylene, in addition to several secondary products that include Butene-1, Liquefied Petroleum Gas (LPG), Naphtha, Nitrogen and Ethane. Most of the company’s Ethylene production is used internally for Polyethylene production, while, the remaining quantity is supplied to the Egyptian Petrochemicals Company (EPC), a subsidiary of the Egyptian General Petroleum Corporation (EGPC). Long term deal with GASCO for securing feedstock: The Egyptian Natural Gas Com-pany “GASCO”, a subsidiary of the Egyptian General Petroleum Corporation (EGPC), provides SIDPEC with the main feedstock “Ethane/Propane Mix”. The mix is com-prised of 90% Ethane and 10% Propane and it is provided to the company through GASCO’s pipelines. SIDPEC has entered into a long-term contract with GASCO for the supply of the mixture; however the pricing formula has never been disclosed. The feedstock price is set according to a formula, where the feedstock price is set in ac-cordance to the global Ethylene and Polyethylene prices. The pricing formula sets an upper and lower limit for the prices, where it limits the margin from expanding be-yond a certain limit during cycle upturns and limiting the margins from declining be-low a certain level during the cycle downturns. The inputs that are used in the pricing formula are reviewed every 3 years. We believe that the feedstock cost is determined as a function of 20-25% of the global Ethylene and Polyethylene prices. It is worthy to note that the feedstock factor is 1.6; 1.6 tons of Ethane/Propane mix is required to produce 1 ton of Ethylene. Strong presence in local and export markets: SIDPEC sells its products in the local market and it has a solid export base. In the local market, it sells its products to major distributors and large plastic manufacturers. As for the export markets, the company exports only its main product - Polyethylene - to more than 50 countries. In 2015, 33% of SIDPEC’s revenues came from its export markets.

SIDI KREIR PETROCHEMICALS - SIDPEC Main Beneficiary of the EGP Devaluation… Remains to be one of our top picks…



Valuation Summary Total Per Share

Enterprise Value of SKPC EGP 6,106.16mn EGP 11.63

SKPC Share in ETHYDCO EGP 3,338.88mn EGP 6.36

Total EGP 9,445.04mn EGP 17.99

Stock Data Outstanding Shares [mn] 525 Mkt. Cap[Bn] 6.13 Bloomberg – Reuters SKPC EY, SKPC.CA 52-WEEKS LOW/HIGH 9.95 – 13.91 DAILY AVERAGE TURNOVER (‘000S) 2,240

Ownership Egyptian Petrochemicals Holding 20% Egyptian Petrochemicals Company 7% Al Ahly Capital Holding 7% National Investment Bank 7% Social Insurance Fund for Governmental Sector Employees 19% Social Insurance Fund for Public and Private Sector Employees 12% Misr Insurance 3% Nasser Social Bank 2% Free Float 23%

All prices are as 31st May 2016

Source: Bloomberg

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SKPC.CA EGX 30 -Rebased

02468

101214

Sidpec EGX 30-rebased

Company Profile

Sidi Kerir Petrochemicals Co. - SIDPEC - is an Egyptian joint stock company that was estab-lished in 1997 under the Egyptian Investment Law. SIDPEC is Egypt’s sole producer of Ethyl-ene and Polyethylene. It also produces Bu-tene-1, Naphtha and Nitrogen among other products. It produces different types of poly-ethylene such as HDPE and LLDPE, which are used in several applications, such as film grades, blow molding grades, injection mold-

ing grades and roto molding grades. The

company has a current capacity of 300,000kta of Ethylene, 225,000kta of Poly-ethylene, 25,000kta of LPG, 10,000kta of Naphtha.

90



Selling prices denominated in USD: During March 2016, the CBE decided to devaluate the EGP against the USD by 14.5% and the CBE announced that the CBE will adopt a more flexible exchange rate regime. The selling prices of SIDPEC’s products are set in terms of USD. The selling prices in the local market are also set in USD, however they are paid in EGP using the prevailing exchange rate. On the other hand, the cost of the feedstock is also set in terms of USD. Therefore, we expect SIDPEC to benefit from the EGP devaluation in terms of boosting the revenues’ value starting the second quarter. Selling at a discount of global PE prices: SIDPEC sets the prices of Ethylene and Polyethylene (Local and Export) in relation to crude oil prices. SIDPEC sells its products in the exports markets at a discount to global prices. The aver-age discount during the period 2010-2015 was c19%. This pricing strategy enabled the company to maintain its global market share and it is supported by the higher margins that SIDPEC can attain due to its favorable produc-tion mechanisms using natural gas rather than naphtha. SIDPEC changes its pricing strategy in response to any changes that occur in the global Polyethylene prices; when the global prices tend to rise, the company is able to maintain or even increase its discount to global prices and on the other hand, during the periods of declining global prices, SIDPEC would slightly decrease its discount to global prices in order to maintain its margins. In the local market, SIDPEC also sells its Polyethylene at a discount to global prices; however the discount is always less than the discount for its exports, with an average of c13%. In 2015, SIDPEC followed the same strategy where it sold its products at prices very close to the global prices, where it minimized the discount in order to maintain its margins. Huge production potential from Ethydco: In 2010, SIDPEC signed an agreement with GASCO and ECHEM to estab-lish a new petrochemicals company, named The Egyptian Ethylene and Derivatives Company - ETHYDCO-. SIDPEC holds a 20% share in ETHYDCO. It was established in January 2011, under the Egyptian Investment Law with a total investment cost of USD 1.9bn. It was planned that it would be financed through 35% equity and 65% debt, cur-rently; the debt portion is fully paid. The complex will produce 3 products; Ethylene, Polyethylene and Butadene. We expect Ethydco to start operations in 2H2016 and we expect it to operate at a utilization rate of 25% and 75% during 2016 and 2017 respectively. No threat from Ethydco on SIDPEC: We believe that even though ETHYDCO will have almost double the capacity of SIDPEC – 460,000 tpa of Ethylene and 400,000 tpa of Polyethylene; we believe it will not impose a threat to SIDPEC as SIDPEC only covers 45% of the local market needs. It is possible that SIDPEC may focus more on exporting its products in order to secure FX for the government, while ETHYDCO may satisfy the local market needs. Financial performance: In 2015, SIDPEC reported net sales of EGP 2,787mn compared with EGP 2,980mn a year earlier, declining by 6%. In terms of volume, Polyethylene sales volume, it dropped by just 1%, reaching 224,021 tons in 2015. Almost 60% of the total Polyethylene was sold in the local market, while the remaining 40% was ex-ported to 53 countries, mainly in Europe. The cost of raw materials increased in 2015 by 7% reaching EGP 1,067mn versus EGP 993mn in 2014. Moreover, the company achieved a gross profit of EGP 1,148mn in 2015, yielding a GPM of 41%, compared to a gross profit of EGP 1,467mn in 2014, which yielded a GPM of 49%. We expect that total COGS will increase at a CAGR of 4% over the period 2016-2020, on the back of rising international prices of Ethylene and Polyethylene and the government slightly reducing the subsidies on fuels over the coming years. SIDPEC’s bottom line dropped by 15% in 2015, where it reached EGP 842mn, yielding a NPM of 30%, versus EGP 997mn in 2014 with a NPM of 33%. Consequently the EPS dropped from EGP 1.90/share in 2014 to EGP 1.60/share in 2015. SIDPEC has one of the highest payout ratios. As for the 1Q2016 results, the company issued key financial indicators, where net profits rose by 29.85% y-o-y to reach EGP 216.87mn from EGP 167.01mn in the same period a year earlier. Moreover, the company’s revenues rose to EGP 628.69mn, 10.57% up from EGP 543.98mn for the same period a year earlier.

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Revenues 2,788 2,755 3,138 3,270

Change -6% -1% 14% 4%

COGS 1,640 1,646 1,792 1,896

Change 8% 0% 9% 6%

Gross Profit 1148 1109 1346 1374

Depreciation & Amortization 63.65 64.019 64.4 64.66

EBITDA 1019.8 985.9 1207 1219.7

Net Income After MI 842.36 802.49 983.35 1011.7

NPM 30% 29% 31% 31%


In EGP Mn 2015 2016F 2017F 2018F

Cash 991 1,177 1,616 1,910 Net Receivables 300.96 297.37 323.09 327.045 Net Inventory 316.75 317.87 346.04 366.2

Other Current Assets 109.67 108.36 123.45 128.65

Total Current Assets 1,718.4 1,900.4 2,408.2 2,731.8

Net PPE 485.26 494.2 384.08 328.6 Net Intangibles 0 0 0 0 Other LT-Assets 983.53 908.9 908.9 908.9

Total Long Term Assets 1,468.79 1,403.13 1,293 1237.52

Total Assets 3,187.17 3,303.55 3,701.2 3,969.4

Liabilities

STD - incl CPLTD 0 0 0 0 Accounts Payable 201.61 246.89 286.68 322.37

Other Current Liabilities 210.92 211.67 230.42 243.87

Total Current Liabilities 412.53 458.56 517.1 566.24

LTD 0 0 0 0 Other Long Term liabilities 214.95 241.19 297.84 362.06

Total Long Term Liabilities 214.95 229.54 271.92 321.46

Total Liabilities 627.48 688.09 789.02 887.69

Equity

Paid-in-Capital 1,050 1,050 1,050 1,050 Reserves 629.27 671.39 711.51 760.68

RE 880.4 894.07 1150.7 1,271.03

Total Equity 2599.69 2615.46 2912.18 3081.7


GPM 41% 40% 43% 42% EBITDA 37% 36% 38% 37%

NPM 30% 29% 31% 31% EPS 1.60 1.53 1.87 1.93 DPS 1.40 1.15 1.40 1.54 P/E 7.25 7.62 6.21 6.04

EV/EBITDA 5.1 4.8 3.5 3.2

ROA 18.70% 22.52% 26.60% 24.42% ROE 25.30% 25.78% 30.41% 28.00%

Debt/Equity 19.69% 20.83% 21.32% 22.36%


BV/Share 4.88 4.98 5.55 5.87


EGYPT BOOK


93


EGYPT BOOK FOOD AND BEVERAGES SECTOR - SUGAR

Global Sugar Industry After 5 years of Surplus … Sugar Goes into Deficit on the back of “El Nino”….. Since September 2015, sugar prices – raw and refined – started to pick up after reaching the lowest levels since 2010 in August 2015. During the period August 2015 – April 2016, raw and refined sugar prices rose by 43% and 28% respectively. In April 2016, the price for raw and refined sugar stood at 15.22cts/lbs and 19.96cts/lbs respectively. The surge in prices can be explained by one main factor “El Nino”. This weather pattern results in cutting the su-crose content and the harvest quantity of the sugar cane grown in the world’s largest producers; namely Brazil, In-dia and Thailand. The three countries, which collectively represent c45% of the world’s production, faced major problems that halted production in 2015. Severe drought hit India last summer, production problems occurred in Thailand and wet weather accompanied by heavy rainfall occurred in Southern Brazil. Moreover, when the weather is too wet in Brazil, due to heavy rainfall, sugar producers use the drenched sugar cane for ethanol production in-stead of exporting raw sugar. Due to all these factors, the sugar market is expected to enter into a deficit after more than 5 years of surplus. RAW SUGAR PRICES: THE COFFEE SUGAR AND COCOA EXCHANGE – CSCE CONTRACT NO. 11

REFINED SUGAR PRICES: CONTRACT NO. 407 “AKA NO.5” FOR REFINED SUGAR, SPOT PRICES

SOURCE: INDEX MUNDI & LONDON INTERNATIONAL FINANCIAL FUTURES AND OPTIONS EXCHANGE

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USD/lbs % m-o-m Change - Aug. 15 - Mar. 16

Aug. 2015 10.67 -

+43%

Sep. 2015 12.14 13.78%

Oct. 2015 14.14 16.47%

Nov. 2015 14.89 5.30%

Dec. 2015 15 0.74%

Jan. 2016 14.29 -4.73%

Feb. 2016 13.29 -7.00%

Mar. 2016 15.44 16.18%

Apr. 2016 15.22 -1.42% USD/lbs % m-o-m Change - Aug. 15 - Mar. 16

Aug. 2015 15.57 -

+28%

Sep. 2015 15.93 2.31%

Oct. 2015 17.59 10.42%

Nov. 2015 18.25 3.75%

Dec. 2015 18.62 2.03%

Jan. 2016 19.05 2.31%

Feb. 2016 17.54 -7.93%

Mar. 2016 19.94 13.68%

Apr. 2016 19.96 0.10%

REFINED SUGAR PRICES: CONTRACT NO. 407 “AKA NO.5” FOR REFINED SUGAR, SPOT PRICES

RAW SUGAR PRICES: THE COFFEE SUGAR AND COCOA EXCHANGE – CSCE CONTRACT NO. 11

What is El Niño–Southern Oscillation (ENSO) - El Niño & La Niña??? El Niño and La Niña are opposite phases of what is known as the El Niño-Southern Oscillation (ENSO) cycle. The ENSO cycle is a scientific term that describes the fluctuations in temperature between the ocean and atmos-phere in the east-central Equatorial Pacific. La Niña is sometimes referred to as the cold phase of ENSO and El Niño as the warm phase of ENSO. These deviations from normal surface temperatures can have large-scale im-pacts not only on ocean processes, but also on global weather and climate. These changes result in extreme weather conditions, such as drought or abnormal rainfall, in the affected areas. El Niño’s effects are often the strongest globally from September to November, causing much drier-than-usual weather in large portions of India, Indonesia, the Philippines, Australia, and South America. Globally, El Niño appears to have a negative impact on crops in more areas than La Niña. The negative impacts of El Niño affect 22 to 24 per cent of har-vested areas worldwide, compared to 9 to 13 per cent for La Niña.

El Niño – Warm Phase

El Niño is a naturally occurring phenomenon characterized by the abnormal warming of sea surface temperature in the central and eastern equatorial Pacific Ocean. On average, it occurs every two to seven years and can last up to 18 months. El Nino impacts the global climate and disrupts normal weather patterns, which as a result can lead to intense storms in some places and droughts in others. The impacts that generally do occur during most El Niño events include below-average rainfall over Indonesia and northern South America, while above average rainfall occurs in southeastern South America, eastern equatorial Africa, and the southern United States.

La Niña - Cold Phase

La Niña is the cold phase of the El Niño Southern Oscilla-tion and is associated with cooler than average sea sur-face temperatures in the central and eastern tropical Pacific Ocean. A La Niña often, though not always, follows an El Niño. El Nino impacts the global climate and disrupts normal weather patterns, which as a result can lead to intense storms in some places and droughts in others. Globally, La Niña is characterized by wetter than normal conditions west of the equatorial central Pacific over northern Australia and Indonesia during the northern hemisphere winter, and over the Philippines during the northern hemisphere summer.

SOURCE: INDEX MUNDI & LONDON INTERNATIONAL FINANCIAL FUTURES AND OPTIONS EXCHANGE



Raw sugar production in 2015/16 is expected to be range between 173-174 MMT, which is a very close figure to the 2014/15 production of 174.3 MMT. Even though the absolute figure is quiet close to those of the previous years, this year’s harvest is considered among the worst during the last decade, due to the poor weather conditions that led to the poor sucrose content and lack of investments due declining world market returns for producers during the past 5 years. None of the top producing countries are expected to achieve a y-o-y growth in 2015/16. The El Niño effects are expected to last most of 2016, probably till September. Raw sugar consumption is expected to stand at 184-185 MMT in 2015/16, which is considerably higher than the last several years. During the last several years, consumption has increased at a stable rate of 1.5-2% annually. The main driver for the increase in consumption remains to be the growing world population which remains at around 1%, in addition to the increase in per capita consumption which is mainly driven by the developing countries. After more than 5 years of surplus, a trade deficit is expected to occur in 2015/16. The deficit is expected to be one of the largest deficits that the sugar industry has ever witnessed. The outlook for 2016/17 is also discouraging, due to the disruptions of weather conditions in India and Brazil, however the EU countries (especially France and Russia) are expected to increase their sugar beets plantings and consequently their sugar production due to the lift of pro-duction quotas as part of its Common Agriculture Program (CAP) reform agreements.

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The 2015-2016 El Niño, however, is being called a "super" El Niño, the worst in 15 years. The two previous super El Niños occurred in 1982-1983 and 1997-1998. Positively affected commodities: Corn, Soybeans, Wheat & Coffee. Negatively affected commodities: Sugar, Cocoa, Palm Oil, Dairy, Fish & Rice

Wetter than normal conditions are also observed over southeastern Africa and northern Brazil, during the northern hemisphere winter season. During the northern hemisphere summer season, the Indian monsoon rainfall tends to be greater than normal, especially in northwest India. Drier than normal con-ditions are observed along the west coast of tropical South America, and at subtropical latitudes of North America and South America during their respective winter seasons. Positively affected commodities: Sugar, Cocoa, Rice & Palm Oil. Negatively affected commodities: Corn, Soybeans, Wheat & Coffee.

Production (MMT) Consumption (MMT) Surplus / Deficit

(MMT)

Czarnikow 174.1 184.4 -11.4

F.O. Licht 171.1 181.7 -10.6

ISO 166.8 171.8 -5.0

Kingsman - - -5.1

USDA 173.4 173.4 -3.8

EXPECTED MARKET DYNAMICS IN 2015/16

SOURCE: CZARNIKOW



Local Sugar Industry: Finally the government has intervened... 2015 can be considered as the worst year for the local sugar producers during the last several decades. Unfair compe-tition from abroad: The local sugar industry suffered due to the unfair competition from international producers. The international producers benefited from the declining global prices that reached their lowest levels in 2015, yet the local producers were threatened by the farmers as they demand more money and higher compensations for their harvest every year. During 2015, the imported sugar was sold at lower prices than the locally produced sugar, where the price differential reached 15-20%. The damage was further heightened when the New Subsidy Program was ap-plied and allowed the imported products to be offered in the government shops and outlets. Anti dumping fees on refined sugar: In April, 2015, the government imposed temporary anti-dumping fees of 20% with a minimum of EGP 700 (USD 90) on the imported refined sugar. The government did not amend the tariffs on raw sugar, keeping it at 2%. The huge difference in tariff system enticed the local producers to import cheap raw sugar, benefit from the very low tariffs and refine it in the local factories. These disruptions led to the piling up of huge levels of inventory, where the inventory at the SIIC reached 900,000 tons by the end of 2015, compared to the average of 500,000 tons. The market dynamics changed to a large extent in 2016, in favor of the local producers. Import tariffs: In late January, the Egyptian President Abdel Fattah Al-Sisi issued a decree increasing the customs tariffs on some product groups that represent a wide range of imports amid a crisis in the hard currency. The decision was issued on January 26 th and was posted in the Egypt’s official journal “The Official Gazette”. The new increases were to be effective on the first Monday of February. The groups included several food commodities, electrical appliances and clothing. The increased fees have different ranges starting from 5% to 40%. Both, raw and refined sugar were among those food commodities. Imported sugar (sugar cane / sugar beets and raw/refined) is currently exposed to a tariff of 20%. On February 8th, the Ministry of Trade and Industry announced through the Official Gazette that the anti-dumping fees on refined sugar imports are to be cancelled. The ministry justified that the investigations that were held has showed that the anti-dumping fees were found to be unnecessary and they will refund all the fees that were paid by the importers during the period of the investigations. EGP Devaluation: During March, the CBE decided to devaluate the EGP against the USD by 14.5% and the CBE announced that the CBE will adopt a more flexible exchange rate regime. Local sugar producers are ex-pected to benefit from the devaluation as it will make the imported substitutes more expensive. It is worthy to note that the local producers’ cost structures have 0% reliance on imported raw materials and hence they are not exposed to any sort of FX risk. Increasing the global prices of sugar: Meanwhile, the huge increase in international prices have been in favor of the local producers, as it led to the diminishing of the price differential between the local and the imported sugar. The combined effects of all the aforementioned factors show that 2016 should be a very promising year for the local sugar producers.

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MY 2014/15 (A) –

1,000 MT MY 2015/16 (E) – 1,000MT % Change Y-o-Y

Area Planted / Harvested – Sugar Cane - 1,000ha 100 100 0%

Area Planted / Harvested – Sugar Beets - 1,000ha 182 194 7%

Total 282 294 4%

Quantity Harvested - Sugar Cane 9,167 9,167 0%

Quantity Harvested - Sugar Beets 8,230 8,750 6%

Total 17,397 17,917 3%

Sugar Production from Sugar Cane 917 915 0%

Sugar Production from Sugar Beets 1,150 1,210 5%

Total 2,067 2,125 3%

Raw Imports 1,300 850 -35%

Refined Imports 30 30 0%

Total 1,330 880 -34%

Raw Exports 350 200 -43%

Refined Exports 0 0 -

Total 350 200 -43%



Using the DCF Valuation method, based on a WACC Rate of 15.33% and a Perpetual Growth Rate of 4%, a 5-year adjusted beta of 0.64, our valuation led to a value of EGP11.50 Per Share implying a upside potential of 27%. Accordingly we assigned a “Buy” recommendation for Delta Sugar Company (SUGR.CA).

Delta Sugar Co. remains to be one of Egypt’s largest sugar producers. DSC has a market share of around 15% of total sugar produced from sugar beets and around 10% from the total sugar market. The company has only one factory in Kafr El Sheikh Governorate with 2 production lines with an annual production of around 250,000 tons of sugar, 100,000 tons of animal feed and 100,000 tons of molasses. Even though 2015 was an unpleasant year for local producers, Delta sugar operated at above full utilization levels. It produced 310,887 tons of sugar, 109,800 tons of molasses and 134,344 tons of animal feed. As for the prices, delta sugar, as well as other local producers were not able to adjust their sugar selling prices, where they had to increase their prices in response to the farmers’ demands of higher compensations. On the other hand, Delta sugar had to drastically lower the prices of the by-products, molasses and animal feed by 30% and 57% respectively, as most of them are exported. When the local market was flooded by the relatively cheap imported sugar, the inventory levels of locally produced sugar started piling up and Delta Sugar was no exception. Inventory levels hiked in 2015, as the company’s inventory stood at EGP 581.55mn versus EGP 356.48mn in 2014, showing an increase of 63%. Finished goods represented an ex-tremely high figure of the inventory in 2015, as finished goods represented 87% of in-ventory, versus 57% in 2014. In terms of volumes, by the end of 2015 Delta Sugar had a 127,000 tons of unsold sugar inventory. We expect that 2016 would be a very favorable year for local sugar producers, and spe-cifically Delta Sugar. Finally the government has intervened in order to protect the local industry. The local producers announced that the tools that the government has under-taken has proven to be effective, as they have been able to sell their entire inventories that were unsold in 2015 during the first two months of 2016. Beside the earlier men-tioned tariffs imposed on sugar imports, the government has passed a new decision on May 18th, where it will impose EGP 900/ton (USD 101.35/ton) on sugar exports. This emphasizes that the government is seeking to reach a higher level of self-sufficiency and reduce the reliance on the imported substitutes. As for the 1Q2016, revenues rose by 128% to record EGP 495mn, compared to EGP 217mn for the same quarter a year ago. As for the bottom line, net losses surged by 912% y-o-y to reach EGP 11.5mn from EGP1.14mn. The surge in net losses could be explained by the hike in COGS. Every year COGS rise severely in the first quarter due to the fact that Delta Sugar purchases its sugar beets inventory in the first quarter of the year. Delta Sugar pays extra money, ranging EGP 100-120/ ton for early delivery by farmers. It is worthy to note that the COGS in 1Q2016 was much higher than the COGS in 1Q2015. The severe rise in COGS in the current year can be attributed to either the rise in prices paid for sugar beets or that the company could have purchased larger quantities of sugar beets at the beginning of season, in order to benefit from the favor-able market conditions. We expect that Delta Sugar will record revenues of EGP 1.63bn in 2016, versus EGP 1.14bn in 2015. As for the bottom line, we expect the company to achieve a net profit of EGP 185mn versus EGP 26.97mn in 2015.

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DELTA SUGAR CO. 2016 … A Very Sweet Year for Local Producers...



Company Profile Delta Sugar Co. SAE is a state-owned Egyptian company that was established in 1987. The com-pany was listed on the Egyptian Exchange in 1992. It is a leading sugar producer that produces sugar from premium-quality sugar beets. Major-ity (55.73%) of the company is owned by the Sugar and Integrated Industries Co. (SIIC). The company relies mainly on sugar production; how-ever it also produces several by-products such as animal feed (beet pulp) and beet molasses.

Stock Data Outstanding Shares [in mn] 142 Mkt. Cap[Bn] 1.3 Bloomberg – Reuters SUGR EY / SUGR.CA 52-WEEKS LOW-HIGH EGP 8.36 – EGP 11.35 DAILY AVERAGE TURNOVER (‘000S) EGP 3.1

Ownership Sugar & Integrated Industries 55.7% Misr Life Insurance 8.6% Misr Insurance 8.3% Endowment Authority 8.1% Egyptian Chemical Industries 6.5% National Investment Bank 6.3% Free Float 6.6%

All prices are as of 29 March 2016

Source: Bloomberg

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SUGR EGX 30-rebased






Revenues 1,138 1,634 1,716 1,635

Change -17.1% 43.6% 5.0% -4.7%

COGS 1,017 1,297 1,403 1,332

Change -2.7% 27.5% 8.2% -5.0%

Gross Profit 120.8 337.3 313.2 302.6


EBITDA 86 288 262 253


NPM 2% 11% 10% 11%


In EGP Mn 2015 2016F 2017F 2018F




Projects under Construction 147 61 0 0 Net PPE 620 703 758 746

Long Term Investments 282 282 282 282 Other LT-Assets - - - -


Total Assets 1,919 2,002 1,947 1,918

Liabilities




LTD 72 97 122 147 Other Long Term liabilities - - - -


Total Liabilities 868 786 714 689

Equity

Paid-in-Capital 711 711 711 711 Reserves 293 294 303 312

RE 48 212 218 206

Total Equity 1,052 1,217 1,232 1,229


GPM 11% 21% 18% 19% EBITDA 8% 18% 15% 15%

NPM 2% 11% 10% 11% EPS 0.2 1.3 1.3 1.2 DPS 0.0 1.0 1.1 1.0 P/E 47.56 6.92 7.14 7.37

EV/EBITDA 20.8 3.9 4.3 4.3 ROA 1.38% 8.54% 8.22% 8.14% ROE 2.56% 15.22% 14.57% 14.16%

Debt/Equity 43.52% 20.22% 16.31% 14.39%


BV/Share 7.4 8.6 8.7 8.6

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EGYPT BOOK FOOD AND BEVERAGES SECTOR - DAIRY

Dairy Market…

Fierce Competition eased by Growing Consumption per Capita and Conversion Rates…

The Egyptian dairy industry has witnessed a strong consumption growth rate since 2007. Dairy consumption in 2007 – 2015 grew at a CAGR rate of 14%. It is estimated that Egypt’s Dairy sales reached 432,123 tons in 2015. The Egyp-tian dairy market is considered to be underpenetrated as Egyptians spend little of their income on dairy products – 13% on Milk, Cheese and Eggs. Egyptians tend to have very unhealthy diets, as they tend to have high levels of con-sumption per capita of unhealthy food items such as sugar, while on the other hand they tend to have relatively low levels of consumption per capita of healthy food items such as milk and yoghurt. Consumption per capita of milk is quiet low compared to other countries. On average, Egyptians consume 25kg/annum of dairy, while other countries such as Japan, India, and Brazil consume 32 kg/annum, 44 kg/annum and 64 kg/annum respectively. Egyptian con-sumers are relatively more elastic to dairy than other countries. This imposes a huge risk for dairy producers as Egyptians do not consider consuming dairy as a priority. The elasticity of dairy in Egypt is -0.2 while it stands at -0.08 and -0.05 in China and Japan respectively. The packaged dairy market is dominated by major local and regional players. Juhayna is the market leader in the plain milk market, possessing 63% followed by Al Marai (19%), Lamar (5%) and Sabaho (Faragello) (5%). Regional players have shown interest in the dairy milk market, on the back of fast conversion rates from loose to packaged milk and the rising consumption per capita levels. The fierce competition is affecting the market dynamics and hence their respective market shares. Backward integration, owning a vast distribution network and association with VCs will be the key determinants of success in the coming period. The Egyptian milk market is highly fragmented and is mainly dominated by non-packaged (loose) products. Before 2009, loose milk accounted for around 88% of the total supply of Egyptian milk. Research associated the consump-tion of loose milk with several health and hygiene issues. The government (Ministry of Health) has carried out sev-eral awareness campaigns to educate people of the health risks of consuming loose milk and encouraging healthier packaged milk. These campaigns have been quiet successful as by 2015, the consumption of packaged milk repre-sented around 40% of the total milk consumption. Between 2010 and 2015, packaged milk consumption in Egypt grew by a CAGR rate of 15%. The acceleration of the conversion to packaged products will mainly depend on low to middle income families. Factors that will affect the conversion include GDP Per Capita, disposable income and family formation rates. Moreover, the availability of low-priced packaged milk is crucial. Both raw milk and powder milk are used by dairy producers in Egypt. This is mainly due to the low rates of milk production by local herds. Local herds in Egypt are known to have low fertility rates, poor breeding and low yields. The rate of growth in the cow herds is far less than the growth in population and in the dairy consumption patterns. This implies that Egypt will remain a net importer of dairy and the self-sufficiency rates will keep declining. As a consequence, major dairy pro-ducers rely heavily on imported powder milk, which affects their cost structures and subjects them to FX risks as powder milk is imported. The Egyptian yoghurt market is currently very competitive. International and local players have shown interest in the underpenetrated yoghurt market in Egypt, such as Danone, Lactel, Nestle and Dina Farms. Juhayna is a also the market leader in the yoghurt market with a market share of 35%, followed by Lactalis (22%), Nestle (19%) and Da-none (15%) respectively. Egyptians consume very little amounts of yoghurt compared to other countries. Per capita yoghurt consumption was around 2.6 kg/annum in 2009 in Egypt, which is considered low compared to other coun-tries ; at that time Saudi Arabia, Tunisia and Oman had consumption per capita of 4.9kg/annum, 6.6kg/annum and 7.2kg/annum respectively. Consumption of yoghurt is expected to increase in the near term; however Egypt will remain to have a low-consumption per capita compared to other countries. Egyptians are very also quiet elastic with respect to yoghurt as they consider it non-essential in their diets. Demand for yoghurt is quiet cyclical and is subject to seasonal fluctuations. It typically increases during the summer months and almost doubles during Ramadan where there can be a shortage of supply of yoghurt products.

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Juice Market… Egypt is one of the region’s most underpenetrated juice markets…. The juice market in Egypt is fragmented with more than 300 producers. The juice industry has very low barriers to entry, where some brands are produced in small houses in rural areas. Egyptians are considered highly elastic for juice as it is considered non-essential and luxurious. Juice can be divided into 3 main types according to the fruit concentration levels; pure, nectar and drinks. Egyptians tend to consume very little amounts of juice. In 2009, the consumption per capita Egypt was quiet low – 2.8 litres/annum, compared to the consumption per capita in the MENA region - 13 litres/annum this low consumption can be justified by the Egyptians preferences of tea, coffee and other soft drinks. Juhayna, Beyti and Faragello have quiet similar market shares of 20%, followed by Rani and Cappi with 11% and 3% market shares. The juice market is changing at a very fast pace, as some players such as Coca-Cola have penetrated the market slightly before 2010, yet it managed to acquire a 3% market share. Over the last several years, interna-tional players such as Coca-Cola and Pepsi (through Al Marai) have shown huge interest in the juice market and both have done massive investments. We believe that the Egyptian juice market is well-positioned for future growth. The VAT taxation system is expected to be applied during the 2H2016. Essential food items will be exempted and they will be exposed to the current sales tax of 10%. The Dairy and Yoghurt products will be exempted from the VAT, however juice will not be exempted or not, as it not considered an essential food item. The rate differential between the VAT and the current sales tax would be around 4%, which is quiet minimal and it will be applied on all juice products.

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We maintain our rating for Juhayna Food Industries with a “Hold” rating driven from an downside risk of 3%; driven from our estimated Fair Value of EGP 6.81. The downgrade in value came on the back of utilizing a higher risk-free rate. Using the DCF valuation methodology for Juhayna, we utilized an average WACC over our forecasted horizon of 14.73%, a risk free rate of 11.12%, and a market risk pre-mium of 8%. We used the average F&B Sector Beta which is equivalent to 0.68. We applied a perpetual growth rate of 5%, driven by the sector’s ability to outperform the GDP; supported by the population growth coupled with increasing disposable income and spending power over the medium-term.

Juhayna Food Industries is a leading producer and distributor of milk, juice and yo-ghurt products. The company was established in 1983 by Safwan Thabet along with a number of other founders, with a paid-in-capital of EGP 1.3mn. Production com-menced in 1987 with a total production capacity of 35 tons per day and annual sales of EGP 2.4mn. Since 1983, and for more than 3 decades Juhayna has embarked a journey full of developments and expansions that distinguished it as a leading Egyp-tian producer of juice and dairy products. Currently, its holds the largest market share in all of its products – plain milk (63%) – flavored milk (64%) – juice (20%) – drinkable yoghurt (35%) – spoonable yoghurt (33%) . Dairy is the largest contributor to sales revenue, followed by yoghurt, where they represented 52% and 25% respectively in 2015. The juice segment showed the highest y-o-y growth in sales (24%), due to the launching of the new juice brand – Premium-.

Juhayna has a diversified customer base. Sales come from Retailers (Super markets), Wholesalers, Hypermarkets, B2B and Exports. The business segment is comprised of Airlines, Restaurants/ Cafes, Schools & Universities (Public and Private). Juhayna products are not sold through government outlets.

Juhayna’s competitive edge is its strong brand equity, solid backward and forward integration and diverse set of products. Its main risks are the increasing competition from other companies (local, regional and international) and the rise in raw materi-als cost; namely powder milk. The group operates a highly integrated business model through Juhayna Food Industries SAE and its 7 subsidiaries. The business is divided into 3 main arms; manufacturing, commercial & distribution and agriculture & farming. It operates through 5 segments: dairy, yoghurt, juice, concentrates and agriculture. Some of the group’s subsidiaries (El Dawleya, EgyFood, and Modern Concentrates) benefit from a 10-year tax holiday that was offered to some compa-nies conducting business in designated Industrial Zones and New Urban Communi-ties in Egypt. The manufacturing segment is considered Juhayna’s main segment, where it is divided into 4 main sub-sectors: dairy, yoghurt, juice and concentrates.

The agricultural arm of Juhayna currently operates through 2 subsidiaries: Enmaa for Livestock Company – (Dairy Farm) and Enmaa for Reclamation and Agriculture (Reclaims land for the cultivation of fruits / cattle feed and other agricultural crops). On April 3rd, 2016, Juhayna announced that its subsidiary Al-Enmaa for Agricultural Development and Livestock Company has sold its entire stake of 40% in its subsidi-ary Milky's for Milk Production for total consideration of EGP 56.5mn. The aim of owning a share in Milky’s was to gain exposure on how to develop dairy farms. Ju-hayna decided to focus more on its own dairy farm where it has full control of it.

JUHAYNA FOOD INDUSTRIES... PT One of the Egyptians’ Favorite Brands…

“HOLD” MARKET PRICE EGP 7.00 FAIR VALUE EGP 6.81 POTENTIAL 3% DOWNSIDE


Stock Data Outstanding Shares [mn] 941.4 Mkt. Cap [Bn] 6.38 Bloomberg – Reuters JUFO EY / JUFO.CA 52-WEEKS LOW/HIGH 6.60 – 10.90 DAILY AVERAGE TURNOVER (‘000S) 4,041

Ownership Pharon Investments 52.22% BoD 0.85% Free Float 46.93%

Prices are as 21 February 2016

Source: Bloomberg

ource: GB AUTO, Prime Estimates

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Company Profile Juhayna Food Industries is a leading producer and distributor of milk, juice and yoghurt products. The company was established in 1983 by Safwan Thabet along with a number of other founders, with a paid-in-capital of EGP 1.3mn. Production commenced in 1987 with a total production capacity of 35 tons per day and annual sales of EGP 2.4mn. Since 1983, and for more than 3 decades Juhayna has embarked a journey full of developments and expansions that distinguished it as a leading Egyptian producer of juice and dairy products. According to a study by Nielsen released early 2014, Juhayna holds Egypt’s highest brand-equity-index score, higher than the other leading multinational household and FMCG Brands in Egypt.

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Stock Data Outstanding Shares [mn] 941.4 Mkt. Cap [Bn] 6.59 Bloomberg – Reuters JUFO EY / JUFO.CA 52-WEEKS LOW/HIGH 6.15 – 9.7 DAILY AVERAGE TURNOVER (‘000S) 3,472

Ownership Pharon Investments 52.22% BoD 0.85% Free Float 46.93%

Prices are as 21 February 2016

Source: Bloomberg

ource: GB AUTO, Prime Estimates

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It is worthy to note that the current cow herd of Juhayna stands at 1,550 and is expected to reach 4,000 by the end of 2016. Milky’s used to provide Juhayna with 8-10% of its required raw milk; however it will be replaced by the new 3 shipments that will arrive during 2016. The cow herd is expected to reach 8,000 cows by 2020. The 4,000 cows are expected to provide the company with 10-15% of the raw milk requirements and the 8,000 cows are expected to provide the company with 20% of the raw milk requirements. The distribution network plays a major part in the product penetration in the Egyptian market and is very diffi-cult for competitors to replicate. The distribution, sales and marketing is carried out by Juhayna’s subsidiary, Tiba for Trade and Distribution that was established in 2007. In 2015, Tiba owned 30 distribution centers lo-cated throughout Egypt. It announced its plans to build up 2 new centers and renovate another 2 in 2016, reach-ing a total number of 32 distribution centers. By end of 2015, Tiba operated a fleet of more than 1,000 trucks, which delivers the group’s products across a wide distribution network and it is able to reach remote areas in a timely manner. Currently, the products reach more than 50,000 retail outlets. Juhayna is considered to have a first-mover advantage and it represents a barrier to entry for potential new competitors. Large competitors such as Al Marai and Lamar have started to build-up distribution networks; however it will take them several years to build a vast network as that of Juhayna. Juhayna’s COGS is mainly dominated by raw materials. Raw materials represent around 70% of the total COGS, where the rest comes from packaging and other costs. The volatile costs of raw materials impose a huge risk for Juhayna. Powder Milk (30%) and Raw Milk (30-35%) are the 2 main materials used by the company. 50% of the raw materials is subject to FX risks and consequently 50% of the company’s COGS is subject to FX risks. Juhayna secured its powder milk requirements till November 2016. Juhayna was able to secure its required powder milk at very favorable prices, slightly lower than the 2015 prices. The favorable prices will slightly offset the effect of devaluation. Juhayna’s management has a very positive outlook for the prices of the powder milk prices for 2017, as they expect a very slight change than the 2015 prices. In May, 2015, Juhayna and a Danish company named Arla Foods announced that they formed a new VC in Egypt, called “Arju Food Industries”. Arju will focus mainly on three segments; cheese, butter and infant formula. Arju will be 51% owned by Juhayna and 49% owned by Arla. Arla will be in charge of the day-to-day operations and management. The JV will explore the expansion opportunities in other Middle East and African markets. The Arju VC will be carried out in 2 different phases: Phase 1: (2015-2017): It will focus on the distribution of Arla products, using Juhayna’s distribution platform. The distribution began in November 2015. The allocation of Arju profits will be divided according to ownership status (51% for Juhayna and 49% to Arla). The contribution to Juhayna’s profits was extremely minimal in 2015, yet it is expected to reach EGP 250 mn in 2016. Phase 2: This phase will be concerned with manufacturing and it will probably begin in 2018. It has not been decided yet if they will build a new factory (greenfield plant) or will they buy an existing one (brownfield plant). The partner-ship is a very good match for both parties and is expected to yield positive results, due to the combination of Arla’s well-recognized brands and regional know-how and Juhayna’s massive distribution network. Arlais very well placed in the cheese and butter markets. They produce mainly premium-brands as they are most famous for Lurpack (butter), Puck (cheese) and Castello (cheese). They have a solid experience in emerging markets and they sell their products in more than 100 countries. Arla’s local revenues reached EGP 200mn in 2015 (Juhayna’s revenue in 2015 – EGP 4.2bn Financial performance: Juhayna had an extraordinary performance in 2015. Juhayana proved to be a true market leader, despite all the pressure from local, regional and international competition. Revenues reached EGP4.23 bn in 2015, showing an annual increase by 15% as it reached EGP 3.68 bn in 2014. Revenues for the Dairy, Yoghurt, Juice and Agricul-ture sectors showed y-o-y increases in Revenues; 13%, 12%, 24% and 32% respectively. The concentrates sector was the only sector that showed a y-o-y decline of 17% in 2015. The main contributors to Juhayna remained Dairy and Yoghurt where they represented 52% and 25% of the total revenues. Juice sales hiked in 2015 due to the successful launch of a new product line named Premium. Premium juice represented around 80% of the total juice sales. In 2015, net profits reached EGP 279.8mn, showing an increase of 65% from the net profits of 2014, which stood at EGP 169.96mn. Juhayna’s gross profit stood at EGP 1.67bn in 2015, yielding a GPM of 40% , versus EGP 1.16bn in 2014 which represented a GPM of 32%.

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On April, 17th 2016, Juhayna Food Industries reported its consolidated financial results for 1Q2016. JUFO’s consoli-dated net profits grew at a rate of 23.4% y-o-y as it stood at EGP 80.4mn in 1Q2016 versus EGP 65.2mn in 1Q2015. Consolidated revenues grew by 27% y-o-y as it reached EGP 1.1bn in 1Q2016 against EGP 867mn in 1Q2015. Gross profit stood at EGP 360mn in 1Q 2016, versus a gross profit of EGP 287mn, where both years had a similar GPM of 33%. We expect Juhayna to record a top line of EGP 4,845mn in 2016 and a net profit of EGP 418mn in 2016, showing a y-o-y increase of 15% and 49% respectively. It is worthy to note that Juhayna has not increased prices for any of its products so far. However, since the begin-ning of 2016, Juhayna has frozen all of promotions / offers, which was used extensively in 2015. It is worthy to note that other F&B companies, such as Arabian Food Industries - Domty have announced their intentions to increase their prices for most/all of their products with the increase ranging 6-12%. We were informed that the manage-ment has decided that the company will raise its prices for most of its products. The rise in prices will be imple-mented gradually and it will have an average of 6-7%. The plan was to start raising the prices before the Holy month of Ramadan; taking advantage of the higher levels of most of the company’s products during Ramadan, yet the decision has not been finalized.



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Revenues 4,231.16 4,845.01 5,586.98 6,388.17

Change 15% 15% 15% 14%

COGS 2,558.81 2,914.73 3,418.67 3,935.94

Change 2% 14% 17% 15%

Gross Profit 1,672 1,930 2,168 2,452

Depreciation & Amortization 204.28 235.58 272.45 304.51

EBITDA 863.38 959.90 1,052.53 1,169.27

Net Income After MI 279.83 417.65 486.39 580.39

NPM 7% 7% 9% 9%


In EGP Mn 2015 2016F 2017F 2018F

Cash 795 263 378 602 Net Receivables 171.88 199.11 229.60 262.53 Net Inventory 606.88 648.83 688.42 762.93

Other Current Assets 16,126

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Net PPE 2,761.27 2,971.15 3,442.58 3,296.59 Net Intangibles 97.093 97.093 97.093 97.093 Other LT-Assets 547 702 102 102

Total Long Term Assets 3,405 3,770 3,642.3 3,496.3

Total Assets 4,995.3 4,883 4,939.6 5,125.5

Liabilities

STD - incl CPLTD 916.87 1039.81 980.43 969.05 Accounts Payable 199.43 191.62 224.75 258.76

Total Current Liabilities

1307 1381.89 1,382.88 1,431.69

Total Long Term Liabilities

1265.3 845.7 602 377.9

Total Liabilities 2,573 2,229 1,985.1 1,808.78

Equity

Paid-in-Capital 941.405 941.405 941.405 941.405 Reserves 798.267 812.259 833.141 857.461

RE 682.454 901.859 1,179.986 1,517.829

Total Equity 2422.9 2655.5 2954.4 3316.7


GPM 40% 40% 39% 38% EBITDA 20% 20% 19% 18%

NPM 7% 9% 9% 9% EPS 0.30 0.44 0.52 0.62 DPS 0.15 0.16 0.18 0.22 P/E 23.55 15.78 13.55 11.53

EV/EBITDA 9.0 7.54 6.6 5.5

ROA 6.20% 7.53% 8.98% 10.59% ROE 11.55% 15.73% 16.64% 17.5%

Debt/Equity 51.50% 45.63% 40.20% 35.30%



EGYPT BOOK


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EGYPT BOOK TELECOMMUNICATIONS

Telecom Industry Egypt`s telecom sector is characterized by 1 player setting monopoly over the fixed-voice segment (Telecom Egypt), and 3 players (Vodafone, Orange and Etisalat Egypt) competing over the mobile business operations. The 4 players compete all together over the broadband business with TE levying dominance in the fixed-lines based data service (ADSL services), leaving a market share of less than 30% for the other 3 mobile virtual operators (MVOs) to compete on. However, currently the 3 MVOs capture the mobile-data competition for themselves with Vodafone acquiring the largest share.

Contemplating the telecom scene recent past, leads to an ambiguous outlook, driven by 2014`s regulatory re-forms. The regulations amendments were assumed to be implemented for enhancing competition and industry dynamics. The reforms were scheduled to come in action phase by phase with the 1st taking place in 2014; how-ever nothing came in action as we speak. The reforms were based on issuing a unified license to enhance competi-tion, as well to create a national entity that permits investment and developing basic infrastructure, being the core for developing telecommunication services. The unified license was composed of 3 phases to be applied consecu-tively.

The 3 proposed regulatory reform phases were in summary set to target equal footing between all the 4-telecom operators. Through, proposing that TE would provide Orange, VFE and Etisalat Egypt the right to use TE infrastruc-ture to provide fixed lines services, and have access to TE`s copper wires, and in return TE would have received the right to launch its mobile virtual operations and 4G services through the operators` networks. However, no agree-ment was reached up to current moment as the 3 mobile operators did not find the deal appealing, as TE would receive the upper hand given its wide reach, in time the 3 mobile operators will not have access to the company`s under development fiber optics project.

Recently, the MCIT minister and NTRA are seen moving forward with issuing the 4G licenses, with official sources announcing that TE mobile operations would soon come to reality through acquiring the license and launch operations through the 3 mobile operators networks for an exclusive 6-months win-dow. During which no other operator will receive the license in order to provide TE the space needed to build its mobile client base. However, we will have to wait and see with no expectations for what comes next, except TE`s full intention to acquire the license.

Currently TE dominates the fixed voice operations, comprising households and enterprise clientele, with our base assumption that such dominance is to continue over the upcoming horizon, even if the other 3 operators were granted the right to launch fixed operations as we see no takers due to the de-clining business profitability. As the business is already being under cannibalization by the mobility of mobile phones beside the lower average costs for users.

FIXED VOICE OPERATIONS ON A DOWNTREND WITH ENTERPRISE USERS CONTRIBUTION INCREASING

SOURCE: TE, PRIME SOURCE: TE, PRIME

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The internet market is still largely underpenetrated; with the 3 mobile operators capturing the mobile internet business for themselves, while TE is seen increasing its broadband market share on yearly basis thanks to the wide reach, pricing and connection quality.

A GROWING POPULATION & HH NUMBERS HAND IN HAND … WILL BE ADSL UPWARD DRIVER …

SOURCE: CAPMAS, PRIME SOURCE: MCIT, PRIME

MOBILE INTERNET & ADSL WERE …(CHANGE-RHS) THE MAIN DRIVERS BEHIND INTERNET USERS INCREASE

SOURCE: MCIT, TE, PRIME SOURCE: MCIT, TE, PRIME

ADSL BB - `000 2014 2015 2016F 2017F 2018F 2019F 2020F CAGR TE 1,977.0 2,809.0 3,490.2 4,135.8 4,888.2 5,664.2 6,117.4 20.7%

Others 1,053.0 976.0 1,132.6 1,270.5 1,419.2 1,551.4 1,675.5 8.0% Total 3,030.0 3,785.0 4,622.8 5,406.3 6,307.3 7,215.6 7,792.8 17.1%

TE`s Market share 65.2% 74.2% 75.5% 76.5% 77.5% 78.5% 78.5%

Others Market Share 34.8% 25.8% 24.5% 23.5% 22.5% 21.5% 21.5%

ADSL BB Users - % of Population 3.4% 4.2% 5.0% 5.7% 6.5% 7.3% 7.6%

ADSL BB Users - % of Households 14.5% 17.6% 21.0% 24.0% 27.3% 30.5% 32.1%

Mobile Operations 2015E 2016F 2017F 2018F 2019F 2020F CAGR Users - mn 93.7 94.2 98.5 101.9 107.4 112.2 3.7%

Change -1.7% 0.6% 4.5% 3.5% 5.4% 4.4%

Mobile Penetration 104.0% 102% 104% 105% 108% 110%

SOURCE: MCIT, PRIME

SOURCE: MCIT, PRIME

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On March 24th we reinitiated coverage on TE, assuming one of 3 roads to follow over the medium term, not excluding the probability of transitioning from a case to an-other. Recently, news and updates seem to resolve which road we are about to take. We believed TE fair value would be worth EGP 11.34/share if company`s current op-erational structure continues with no changes in market dynamics, which we as-sumed to be the base case. While if the company`s and government`s plan for making TE the 4th authorized mobile operator hunt for mobile operations take place at antici-pated by 2017, if it is to materialize, we would then see 1 of 2 scenarios …

Scenario 1: a value of EGP 7.88/share, in case fiber optics rollout proceed while incurring mobile CAPEX.

Scenario 2: a value of EGP 9.79/share, in case mobile operations` required CAPEX to solely be incurred.

TE ROIC is by far below the company`s average WACC; being in maturity stage justi-fies the historical dividend play. However, in our base case through which we assume current operations continuation up to 2020, we see a squeeze in dividends driven by high fiber optics CAPEX.

Assuming current operations` continuation means no mobile operations for TE. Hence, we anticipate cash dividends from VFE to resume after the recent EGP 1.5bn payment after years of freezing. However, we set VFE retention at 40%, added to TE`s investment BV.

TE`s broadband success story seems sustainable. BB is anticipated to grow in reve-nues over the horizon by a CAGR of 15.9%, increasing in contribution to total reve-nues from 21.6% in 2015 to 39.3% by 2020. To alleviate a massive expected com-pounded decline of 15.3% in wholesale business units revenues; being under adverse effect from tourism arrivals` declines and Over-The-Top applications` cannibalization.

Looking at Scenario 1, we followed 2014`s regulatory reforms, driving CAPEX higher on the back of obtaining the MVNO license and 4G spectrum License at an estimated EGP 5bn by 2017. Necessitating TE`s 44.95% VFE stake sale, estimated at EGP 13.99bn at an EV/EBITDA of 5.41x by 2017. Out of which EGP 2.54bn represents TE`s after-tax capital gain.

Through Scenario 1, we assume the continuation of the fiber optics rollout, but ex-tending the project up to 2021 versus TE`s indication of 2019. We chose to slow down fiber optics` CAPEX in years of mobile licenses acquisition. We also see TE`s capturing a market share of 20% by 2020, as we believe in a predatory pricing coming at discounts to all other market players. In Scenario 1 we applied same discounting parameters, and our assumptions yielded a fair value of EGP 7.88/share; 8% above market price.

Liberalizing International Gateway, is also assumed to take place by 2017 in case TE becomes the 4th mobile operator. Leading to losing revenues of EGP 14.6bn from our base case projected Domestic wholesale and International Carriers Affairs revenues; captured by VFE and Orange. However, a net gain in revenues of EGP 1.94bn would take place thanks to mobile operations, generating EGP 16.5bn over same time dura-tion; neglecting time value of money.

Recent developments points out to scenario 1 or 2 – for TE becoming a mobile op-erator, however, no talks are being circulated about VFE stake, mobile operators’ responses, and clear strategy. We hence, remain cautious but maintain our base case scenario valuation until we find solid ground.

TELECOM EGYPT... Ambiguity Concerning The Upcoming Path Remains The Main Theme …



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Stock Data Outstanding Shares [in mn] 1,707.0 Mkt. Cap [in mn] 15,465.4 Bloomberg – Reuters ETEL EY / ETEL.CA 52-WEEKS EGP 5.5 – EGP 11.4

Ownership Government 80% Free Float 20% Source: Telecom Egypt, Prime Estimates All prices are as of 18 May 2016

Source: Bloomberg

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Company Profile

Telecom Egypt is the nation`s incumbent tele-communications operator. The company`s 1st operations launched in 1854 with the first tele-graph line in Egypt. TE is Egypt`s largest and main infrastructure provider. The Company is the largest provider of fixed-line services in the Mid-dle East and Africa with. TE provides retail tele-communication services including access, local, long distance and international voice, Internet and data, and other services. The company also provides wholesale services including bandwidth capacity leasing to Internet Service Providers (ISPs), and national and international intercon-nection services. TE`s services also include the provision of narrowband and broadband internet access through its subsidiary TE Data, the largest BB service provider in Egypt. TE currently partici-pates in the mobile segment indirectly through its current stake of 44.95% in Vodafone Egypt.

LOW/HIGH




SOURCE: TE, PRIME

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Revenues 12,184.2 12,503.9 12,862.4 13,310.1 Change 0.2% 2.6% 2.9% 3.5%

COGS 5,519.3 5,793.9 6,122.9 6,453.4 Change 4.9% 5.0% 5.7% 5.4%

Gross Profit 6,664.9 6,710.0 6,739.5 6,856.7 Depreciation & Amortization (1,589.1) (1,621.5) (1,708.4) (1,793.7)

EBITDA 3,112.9 3,140.0 3,014.9 2,954.9 Net Income After MI 2,997.4 2,176.0 1,955.2 1,790.5


In EGP Mn 2015 2016F 2017F 2018F

Cash 2,413.5 3,318.5 1,997.4 1,534.2 Net Receivables 4,611.6 4,732.6 4,868.3 5,037.7 Net Inventory 556.9 544.9 570.7 601.6

Other Current Assets 1,585.4 1,611.7 1,653.2 1,705.1


Net PPE 11,839.3 12,408.7 13,319.6 14,218.0 Net Intangibles 933.0 877.5 833.6 792.1 Other LT-Assets 12,638.1 11,903.6 12,330.2 12,781.2

Total Long Term Assets 25,410.5 25,189.8 26,483.4 27,791.3

Total Assets 34,577.8 35,397.5 35,573.0 36,669.9

Liabilities

STD - incl CPLTD 62.5 65.3 69.2 28.5 Accounts Payable 330.0 346.4 366.1 385.9

Other Current Liabilities 3,859.3 4,092.5 4,290.0 4,495.1

Total Current Liabilities 4251.8 4504.2 4725.2 4909.5

LTD 326.9 327.7 306.5 301.6 Other Long Term liabilities 1,024.74 1,122.27 1,222.61 1,326.44

Total Long Term Liabilities 1,351.6 1,450.0 1,529.1 1,628.1

Total Liabilities 5,603.4 5,954.2 6,254.3 6,537.5

Equity

Paid-in-Capital 17,070.7 17,070.7 17,070.7 17,070.7 Reserves 6,380.1 4,443.2 4,501.9 4,573.5

RE 5,508.9 7,785.1 7,535.5 8,205.9 Minority interest 10.3 11.8 13.2 14.4

Total Equity 28,974.4 29,443.4 29,318.7 30,132.4

Ratios

2015 2016F 2017F 2018F

GPM 54.7% 53.7% 52.4% 51.5% Ebitda Margin 25.5% 25.1% 23.4% 22.2%

NPM 24.6% 16.9% 14.6% 13.3% EPS 1.76 1.28 1.15 1.05 P/E 5.16 7.07 7.87 8.60 DPS 0.20 0.75 1.03 0.40 BV/S 16.97 17.25 17.17 17.65

EV/Ebitda 3.6 3.3 3.9 4.1 ROA 8.96% 6.25% 5.54% 4.97% ROE 10.75% 7.49% 6.69% 6.04%

Debt/Equity 1.34% 1.33% 1.28% 1.10% Total Assets Turnover 0.35 0.35 0.36 0.36


EGYPT BOOK


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EGYPT BOOK PERSONAL & HOUSEHOLD PRODUCTS - TEXTILES

Textiles

Egypt`s economy is still reeling from years of turmoil following 2011. The adverse impact was extended to almost all industries that used to be well-performing. Egypt`s textiles industry is among those industries under pressure. But not only because of the worsened society welfare; but due to losing competitive edge regionally and globally due to out-dated techniques and technologies not on rivals` current levels. Especially garment-related ones, that lost it all against Turkey, China and European manufacturers.

Such dynamics led Egypt`s textiles net trade to turn red, as we break it down to clothes, garments and raw fabrics. However, in 2014, Egypt exported carpets valued at USD 411.95mn representing 14.3% of total exports, while imports were the lowest among textiles aggregate imports of USD 3,548.4mn, standing at only USD 64.95mn. We believe that Orien-tal Weavers contributed to the whole industry; due to the company`s sizeable exports to over 130 countries.

Still, hope appears in the horizon with the government plans for re-structuring and supporting the industry, that used to be one of the ma-jor contributors to the economy, and among foreign currency net suppli-ers. We also see the recent governmental decision for raising tariffs on some imports including garment and textiles by 10% to reach 40%, would benefit the industry and provide a catching-breath break for upgrades.

Egypt`s new governing regime is intensely focusing on providing more job opportunities to win the fight against high unemployment. Through enhancing Egypt`s investment climate to make room for mega projects to materialize. A matter anticipated to take place gradually over the up-coming years. However, as gradually we say, individuals' disposable in-come and purchasing ability will be enhancing in correlation; in time of the CBE apparent policy of tackling inflation.

We anticipate Egypt`s population to grow at an average of 2.54% (accelerating in nature) per annum. Such population growth rates should be considered a blessing to consumers-oriented companies. With such population, with majority skewed towards youth we believe private con-sumption to grow at an average of 3.3% from FY2016F to FY2018F; in-cluding high consumption for textiles-flooring, driven by:

Those below 34 years old (most looking for housing) represented 67.7% in 2014.

In 2014, 953k marriages were registered; hence, creating demand for new residential needs, which in turn creates demand on textiles`-based flooring. Marriages would cross the 1mn per annum level in 2017.

In 2014, number of Egyptian families reached 20.9mn, creating de-mand for carpets and rugs renovation and renewal as the average life of a carpet may come at 5-years based on its constituents.

Total number of buildings was 11.59mn in 2006 according to CAP-MAS, out of which 11.15mn were utilized, a figure we believe has grown massively at current time due to 2011-2013 illegal residential construction, an aspect also driving renovation and renewal demand for carpets higher.

TEXTILES TRADE RAISES RED FLAGS

SOURCE: MINISTRY OF TRADE & INDUSTRY

A RISING CONSUMPTION CONTRIBUTING TO REAL GDP (IN EGP BN) GROWTH

SOURCE: CBE, PRIME ESTIMATES

Marriages & Youth - in `000 2014A 2015E 2016F 2017F 2018F 2019F 2020F Egypt`s Population 87,963 90,118 92,371 94,727 97,190 99,765 102,459

Change 2.30% 2.45% 2.50% 2.55% 2.60% 2.65% 2.70% Total Marriages 953.0 972.1 991.5 1011.3 1041.7 1078.1 1121.3

Change 4.38% 2.00% 2.00% 2.00% 3.00% 3.50% 4.00% Population below 34 Years 59,588 61,281 62,997 64,698 66,575 68,738 71,004

% of Population 67.7% 68.00% 68.20% 68% 68.50% 68.90% 69.30% No. of Families 20,944 21,457 21,993 22,554 23,140 23,754 24,395

SOURCE: CAPMAS, PRIME ESTIMATES

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After getting into Egypt`s population Anatomy; it is now apparent how residential supply is insufficient. As the private sector supply is to an extent skewed towards higher, middle and upper middle income classes driven from profitability targets. While the lower-middle income to low income segments that represent the higher percentage of Egypt`s population and hence highest contribution to annual marriages suffers from an enlarging gap. On the contrary to the private sector targets, the public sector supply mainly focuses on lower income segments out of the government`s social responsibility; nevertheless, in FY2014 only 42.5K units were supplied to such segments which is still lagging behind demand.

Over the upcoming few years scales will balance; the government recently declared EGP 1bn of "Tahya Misr" fund to be utilized for lower income segments residential supply. Through such capital, the housing ministry along with the Armed Forces engineering division shall build a total number of units exceeding 400K units out of which around 100K units have already been fulfilled. The 400K+ units are due delivery in 2016 and 2017 out of a bigger program for building 1mn residential unit. With such residential supply; we might see for the first time public sup-ply exceeding that of the private sector that is anticipated to maintain its level with no projected jumps.

So as residential supply is expected to record a several-folds hike driven by public spending over the next up-coming years; we shall keep an eye on textiles floor-coverings demand after considering residential pricing and setting anticipations for individuals economic welfare, inflation impact and saving versus spending patterns.

As we anticipate marriage rate to increase annually surpassing population growth sometimes, due to the higher youth contribution in total population. We anticipate higher demand on textiles-floor coverings, as not all new marriages are relocated to new housing destinations; which would act as a catalyst for textiles` renewals and renovations.

AN APPARENT SUPPLY GAP DRIVEN BY PUBLIC LOW INVESTMENTS … DRIVEN BY A LAGGING BEHIND CAPEX - (IN EGP MN)

SOURCE: CAPMAS SOURCE: CAPMAS

Marriages & Income Segments 2015E 2016F 2017F 2018F 2019F 2020F

Egypt`s Population - in`000 90,118 92,371 94,727 97,190 99,765 102,459

Total Marriages- in`000 972.1 991.5 1011.3 1041.7 1078.1 1121.3

Income Segments Percentage of Population (Hypothetical) High Income Class & Upper Middle 10% 10% 10% 10% 10% 10%

Middle-to-Lower Middle Income 25% 25% 25% 25% 25% 25% Lower Income 65% 65% 65% 65% 65% 65%

Income Segments ` Annual Marriages (Hypothetical) - `000 - (Driven from contributions to Population) High Income Class & Upper Middle 97 99 101 104 108 112

Middle-to-Lower Middle Income 243 248 253 260 270 280 Lower Income 632 644 657 677 701 729


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We previously initiated coverage for Oriental Weavers on February 16th 2016, set-ting the company`s fair value at EGP 12.66/share with an upside potential back then of 111% over the closing price of EGP 5.99. We then downgraded ORWE to EGP 11.18/share after applying the new EGP/USD FX-rate driven from the recent devaluation over our forecast horizon as its aggressiveness was spread over more years over our forecast horizon, beside an increase in market capitalization seen as of March 13th that took the cost of equity higher, but still offered an upside poten-tial of 55%. As a matter of the sky rocketing risk free rate reaching 11.19% post tax, we further cut Oriental Weavers fair value to EGP 10.23/share, in comparison to March`s utilized rate of 9.67% post tax.

We maintain our globally adjusted risk premium at 6.876% driven from Aswath Damodaran update on global premiums, driven from our forecasted average ex-port sales contribution over the horizon of 56.21% and average local sales value contribution of 43.79%. We maintain the previous assigned beta at 0.80, beside the applied perpetual growth rate of 3%, driven from our view over net population growth coupled with private consumption average forecasted increase of 3.3% over the short-to-medium term. In 1Q2016, the company was able to increase its local woven sales volume y-o-y by around 11% to 8.4k sqm, however, on the expense of slightly lower pricing by ex-actly 0.8% on blended basis. We previously estimated an average of 4-5% drop in woven export prices in foreign currency as a matter of responding to the declining international market share to cope with the global slowdown. However, price cuts came more aggressive at around 6.5% in USD-denomination in time of an unprece-dented local currency devaluation, which partially eroded ORWE`s historical play on EGP gains from such occurrences. Other products` categories witnessed a dif-ferent story, specifically the tufted division, where local volumes increased by c. 20% y-o-y on the back of around 25% decline in prices, while export volumes dropped by c. 26% while prices hiked by 30% in EGP terms and c. 16% in USD-equivalent.

In summary, the pricing cut overall aggressiveness was above expectations, how-ever, the strategy seems right in time global spending might be at the risk of de-clining, and that, it’s time for competitive advantages to show up for retaining consumers with powers like the European big boxes through huge discounts. Such discounts will be reflected positively on the remaining 3-quarters sales` volume.

Huge FX-losses above expectations but non-recurring at such magnitudes as well. As the EGP recent mega devaluation had its toll on outstanding debt, costs and the company`s in place hedges. However, we believe going forward such figure should normalize. We also believe Oriental Weavers` will put further efforts on resourcing higher percentages of its raw materials needs locally which would then reduce further FX-loss risk to minimal levels.

Oriental Weavers export rebates are secured in our believes; due to Egypt`s worsened FX shortage. The rebates fund value was decreased to EGP 2.6bn by the beginning of FY2014/15 down from EGP3.1; after setting a new rewarding system taking rebates percentage to exports down to an average of 4.5%. However, appli-cation did not take place due to difficulty in calculating local components contribu-tion to exported products. Recently, government talks are believed to set the re-bates fund at its historically highest level to incentivize exporters to put more ef-forts in increasing their global proceeds. However, currently we maintain our previ-ously assumed 6% rebates until further indications.

ORIENTAL WEAVERS... Dropping Oil Markets Overtake Drop in

Exports… Benefiting from Domestic Prospects … While Globally Maneuvering



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Stock Data Outstanding Shares [in mn] 450.0 Mkt. Cap [in mn] 2,929.5 Bloomberg – Reuters ORWE EY / ORWE.CA 52-WEEKS EGP 5.6 - EGP13.3 TURNOVER (1-YR DAILY AVERAGE) EGP 3.1MN

Ownership Khamis Family 57% Foreign Institutions 23% Local Institutions 17% Retail 3% All prices are as of 31 May 2016

Source: Bloomberg

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ORWE EGX 30 - Rebased

Company Profile

Oriental Weavers is a local and global textile flooring leader among few globally full integrated groups; OWG exports, target over 130 countries and locally dominates by a market share of c85%. Oriental Weavers keeps on penetrating new markets every year, adding new points of pres-ence through a global and local network of show-rooms and partnerships (230+). Currently OWG utilizes the most advanced production technolo-gies, with over 4mn copyright-designs offered to clients. Warehousing investments were essential to maintain closer-distance from demand. OWG has 3 warehouses in 3 continents with a total space of c800K Sqm to speed up bloc-orders` deliveries.

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LOW/HIGH




SOURCE: ORIENTAL WEAVERS, PRIME

115


Revenues 5,875.1 6,312.1 6,767.3 7,317.4 Change 3.7% 7.7% 7.2% 8.1%

COGS 5008.5 5,154.7 5,690.4 6,237.0 Change (11.6%) 5.7% 10.4% 9.6%

Gross Profit 866.6 1,157.3 1,076.9 1,080.3 Depreciation & Amortization (333.3) (337.2) (343.4) (355.1)

EBITDA 808.6 1,161.1 1,067.7 1,060.3 Net Income After MI 339.1 557.8 495.9 489.6


In EGP Mn 2015 2016F 2017F 2018F

Cash 369.9 745.3 830.8 884.9 Net Receivables 1,250.6 1,205.5 1,227.8 1,344.7 Net Inventory 1,578.5 1,721.5 1,916.1 2,149.6

Other Current Assets 775.2 264.11 266.26 285.88


Net PPE 2,577.3 2,360.9 2,108.4 1,938.0 Net Intangibles 326.2 366.2 366.2 366.2 Other LT-Assets 211.4 161.7 219.0 209.0


Total Assets 6,708.2 6,825.1 6,934.7 7,178.4

Liabilities

STD - incl CPLTD 1,269.2 1446.5 1398.7 1425.2 Accounts Payable 726.2 807.7 868.0 966.0


Total Current Liabilities 2,238.6 2425.5 2454.4 2598.2

LTD 119.8 58.8 48.0 33.5 Other Long Term liabilities 134.4 189.9 185.2 173.1

Total Long Term Liabilities 254.2 248.7 233.2 206.5

Total Liabilities 2,492.8 2674.2 2687.6 2804.7

Equity

Paid-in-Capital 450.0 450.0 450.0 450.0 Reserves 1,525.1 1,607.7 1,653.7 1,707.7

RE 1,179.8 1,287.8 1,348.0 1,419.6 Minority interest 380.6 411.6 428.3 447.9

Total Equity 4,215.3 4,151.0 4,247.1 4,373.6

Margins & Ratios

2015 2016F 2017F 2018F


NPM 5.8% 8.8% 7.3% 6.7% EPS 0.75 1.24 1.10 1.09 P/E 8.68 4.88 5.49 5.56 DPS 0.50 0.74 0.77 0.76 BV/S 9.4 9.29 9.53 9.78

EV/Ebitda 4.6 3.0 3.1 3.1 ROA 5.1% 8.10% 7.14% 6.91% ROE 8.0% 13.61% 11.71% 11.27%

Debt/Equity 32.9% 36.74% 34.01% 32.73% Total Assets Turnover 0.87 0.91 0.97 1.02


EGYPT BOOK


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EGYPT BOOK INDUSTRIAL GOODS - AUTOMOTIVE

Automotive Industry Over 2016-2017, a new automotive comprehensive strategy is believed to replace the current one. The new strategy is believed to set new incentives for the domestic deteriorating industry status, suffering from unfair com-petition against Free-Trade-Agreements related automotive players, with pricing advantage due to lower custom duties. We believe the new strategy`s play might take place through cutting customs for the non-related FTA im-ports, while raising sales` tax on all imported parts and vehicles, to enhance competition, or through providing tax breaks on vehicles assembled and/or produced domestically utilizing high local component contribution. We still believe in the country`s need for applying such strategy, as the annual 10% reduction in custom duties for EU-imports that is planned to continue until complete removal by 2019-2020 might lead European manufacturers based in Egypt to withdraw their investments from the Egyptian market and fly to other African production hubs like Algeria, Morocco and South Africa and export their productions to Egypt then. Hence, reaping the custom du-ties` benefits while saving high overhead costs in Egypt and receiving more investors` incentives from the other markets. Although the custom duties annual cuts are said to be compensated by levying more sales taxes; sales taxes increases are applied to all passenger cars imports whether European or not. So the competitive edge re-mains in favor of the European importers and assemblers. The strategy if applied, would also help augment the domestic feeding complementary automotive industries, which in return would benefit the economy through add-ing more taxes as the industry grow in addition to enhancing Egypt`s employment rate through offering skilled and semi-skilled labor opportunities. In 2H2015, the Ministry of Finance along with the Ministry of Industry and Trade presented an Automotive-industry Strategy to the cabinet for consideration and approval. The draft included raising local components in locally assembled vehicles from 45% to around 55% over the upcoming 15-years instead of the previously man-dated 60% years. If the mandated local contribution was to be applied, we believe global producers would relocate their production facilities to Egypt to benefit from the numerous free trade and economic zones being under-

development especially within the Suez Canal developmental axis to receive investments.

A cyclical industry in blackout, with wakeup calls postponed, due to Egypt`s severe foreign currencies` shortage, as the industry is on average an 80% imports-dependent. We believe 2016 to show the lowest vehicles` sales vol-ume, with gradual weak improvements over the upcoming 3-years. We believe 2015 total market sales` volume will not be surpassed before 2018, with the total portfolio of vehicles primary dependent on FX availability. Buses also face the adverse impact from replenishments’ demand drop from the tourism sector.

2016 Customs Custom Duties Development Tax Sales Tax CBUs EU Turkey Morocco Other Regions Across the Board Across the Board

Below 1.6Lt. 16% 16%

0%

40% 3% 15%

Above/Equal 1.6Lt. 54% 54% 135% 5% 30%

Above 2.0Lt. 54% 54% 135% 8.50% 45%

CKD Kits

Below 1.6Lt.

5-7%

3% 15%

Above/Equal 1.6Lt. 5% 30%

Above 2.0Lt. 8.50%

SOURCE: GB AUTO, PRIME

Total Market 2015 2016F 2017F 2018F 2019F 2020F CAGR Passenger Cars 195,559 152,536 160,163 172,976 193,733 203,420 0.8%

Change -5.9% -22.0% 5.0% 8.0% 12.0% 5.0% Buses 32,556 26,045 27,607 30,920 35,558 38,403 3.4%

Change 5.30% -20.0% 6.0% 12% 15% 8% Trucks 50,291 41,239 42,476 45,449 52,266 53,834 1.4%

Change 7.10% -18% 3% 7% 15% 3% Total Sales Volume 278,406 219,819 230,246 249,345 281,558 295,658 1.2%

SOURCE: AMIC, PRIME

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GB AUTO... Still Carrying An Upside … Although Being

in Distress… A Macro Aspect Rather Than Company Specific…





FX Scarcity continues to cast a shadow over the Industry, a macro aspect severely impact-ing all automotive market players. We previously indicated that we were in anticipation for 1Q2016 to revise our earlier assumptions conducted in January 2016. The market perform-ance in 1Q2016 showed a weaker than anticipated performance across the wide range of different vehicles` types. Egypt PC market showed a y-o-y and q-o-q decline of 31.8% and 32% respectively to stand at 33.38k PC; a magnitude of decline only surpassed once back in 1Q2011 when sales were impacted by the country`s political and status back then. Buses and commercial vehicles followed the downtrend as well, with buses dropping on a y-o-y basis by 23.1% and q-o-q by 14.3% to stand at 6.54k bus, while trucks showed a 34.1% y-o-y decline and a 22.8% q-o-q decline to stand at 9.74k truck.

Hence, we cut our fair value to EGP 3.62/Share down from EGP 5.44/Share, on the back of such negative developments that definitely came below our earlier over optimism in com-parison to the current status. Egypt`s current hike in sovereign risk also had a role in such valuation cut down, as seen through a hike in cost of capital through a 173.1bps jump in the 1-year risk free rate post tax. We maintain GB Auto valuation inputs concerning the com-pany`s perpetual growth at 3% as we continue to monitor huge un-released pent up de-mand indicated through the current strong consumer appetite towards the different types of vehicles although prices sky-rocketed. We also maintain the assigned systematic risk beta at 1.0 above the current statistically risk adjusted beta of 0.75 to price in further wor-ries concerning short term status.

However, GB Auto`s efforts in diversifying it’s offering and building a solid fire wall paid off significantly in 1Q2016, although the company`s top line retreated by 8.6% y-o-y to stand at EGP 2,924.6mn. As gross profit showed a hike of almost 10% y-o-y to stand at EGP 442.4mn …

1) Thanks to the continuously growing financing business, that increased in contribution to revenues from 7.25% in 1Q2015 to reach 11.9% in 1Q2016. Such higher contribu-tion came along with a 60bps y-o-y widening in the business gross profit margin to reach 22.6% in 1Q2016, to act as a fire fall through increasing contribution to the ag-gregate gross profit from 12.7% to 17.8%.

2) Beside GB Auto`s stronger ability in passing on more than the hiked USD-denominated costs` hike to end consumers, reasonable in time of consumers widening marginal utility on the back of a mismatch between passenger cars` supply and demand indicat-ing higher than usual PC division GPM.

We do not see an improvement in FX liquidity pre 3Q/4Q-2016; pricing that in through lower anticipated full year sales` volume across the board not cured by pricing hikes, lead-ing to lower revenues in 2016 to show an anticipated drop of 1.9% to come in at EGP 12,031.6mn. In same time we see an 8.9% improvement in gross profit to end the year at the company`s historical highest level of EGP 1,735.9mn. Mostly eaten up through, a higher than anticipated SG&A expenses, a hike in debt service expenses driven by the recent corri-dor hikes, in addition to a massive previously unseen FX-losses amount; anticipated to eat up most of the passed on costs` hikes.

Leading to the lowest forecasted bottom line since current operational divisions were established, for 2016; anticipated at EGP 95.4mn pre-minority and EGP 124.0mn post mi-nority as subsidiaries losses remains heavy in the overall mother company but reversed in reaching to the net attributable income.

We maintain excluding the tires` plant until solid data is released concerning such a huge project, and update the 240k wheelers` plant investment cost to USD 60mn up from an earlier indication of USD 50mn, as per the company`s Chief Investment Officer recent announcement.

118

Stock Data Outstanding Shares [in mn] 1,094.0 Mkt. Cap [in mn] 2,680.3 Bloomberg – Reuters AUTO EY / AUTO.CA 52-WEEKS LOW/HIGH EGP 2.16 – EGP 5.62

Ownership Ghabbour Family 54.4% Free Float 45.6% All prices are as of 31 May 2016

Source: Bloomberg

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Company Profile

GB Auto is Egypt`s automotive market leader; a significant player with PC market share BOVE 30% to be considered. The company has launched a number of operations in key mar-kets and sectors throughout the MENA region. GB Auto is a vertically-integrated company; as it manufactures certain vehicles` bodies and also carries assembly operations. GB Auto then shifts in chain to sales, distribution and marketing. Playing on consumers retention; GB Auto has it’s a wide extensive network of after-sales services one-stop shops. The com-pany operates in passenger cars, commercial vehicles and equipments, wheelers, tires be-side a several startup businesses all supported from the company`s wide chain of financing solutions.

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AUTO EGX 30-rebased





SOURCE: GB AUTO, PRIME

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Revenues 12,264.7 12,031.6 13,022.9 14,269.3 Change -0.5% -1.9% 8.2% 9.6%

COGS 10,670.3 10,295.7 11,108.2 12,027.8 Change -0.7% -3.5% 7.9% 8.3%

Gross Profit 1,594.4 1,735.9 1,914.7 2,241.5 Depreciation & Amortization 254.7 265.4 287.8 310.4

EBITDA 1,004.9 936.7 1,045.9 1,131.7 Net Income Before Minority 191.5 95.1 178.8 280.6

Minority Interest 41.6 28.5 (17.9) (28.1) Net Income After MI 233.1 124.0 161.2 252.9


In EGP Mn 2015 2016F 2017F 2018F

Cash 1,188.7 768.8 1,424.6 2,173.4 Net Receivables 1,649.6 1,543.0 1,668.0 1,661.5 Net Inventory 2,951.0 2,443.7 2,636.5 2,617.5

Other Current Assets 1,484.9 1,220.7 1,085.8 1,129.7


Net PPE 3,660.4 3,441.9 3,491.2 3,232.8 Net Intangibles 293.1 292.1 291.2 290.2 Other LT-Assets 570.6 562.7 468.8 441.6


Total Assets 11,798.2 10,272.9 11,066.1 11,546.7

Liabilities

STD - incl CPLTD 4,334.8 2,740.7 3,251.7 3,490.7 Accounts Payable 1,305.4 1,551.4 1,673.8 1,812.4


Total Current Liabilities 6,255.2 4,941.4 5,621.7 5,970.2

LTD 898.5 614.8 473.4 350.5 Other Long Term liabilities 701.4 695.2 792.0 873.6

Total Long Term Liabilities 1,599.9 1,310.1 1,265.4 1,224.1

Total Liabilities 7,855.1 6,251.5 6,887.1 7,194.2

Equity

Paid-in-Capital 1,094.01 1,094.01 1,094.01 1,094.01 Reserves 1,449.56 1,468.16 1,492.34 1,530.27

RE 817.38 905.70 1,021.27 1,128.69 Minority interest 608.66 580.04 597.95 626.05

Total Equity 3,943.11 4,021.40 4,179.07 4,352.51

Margins & Ratios

2015 2016F 2017F 2018F


NPM 1.9% 1.0% 1.2% 1.8% EPS 0.21 0.11 0.15 0.23 P/E 11.50 21.68 16.66 10.61 DPS - - - 0.07 BV/S 3.60 3.68 3.82 3.98

EV/Ebitda 6.6x 5.5x 4.7x 3.8x ROA 2.18% 1.12% 1.51% 2.23% ROE 6.58% 2.93% 3.64% 5.44%

Debt/Equity 1.32x 0.83x 0.89x 0.88x Total Assets Turnover 1.04x 1.17x 1.18x 1.24x


EGYPT BOOK

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Stock Recommendation Guidelines

Recommendation Target-to-Market Price (x)

Strong Buy x > 40%

Buy x > 15%

Accumulate 5%< x <15%

Hold -5% < x < 5%

Reduce -15% < x < -5%

Sell x < -15%

Investment Grade Explanation

Growth 3 Yr. Earnings CAGR > 20%

Value Equity Positioned Within Maturity Stage of Cycle

Speculative Quality Earnings Reflect Above Normal Risk Factor


EGYPT BOOK

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Egypt Book - June 2016