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Slide 3: November 11, 2008 EGYPT | TABLE OF CONTENTS Sector/Co. STRATEGY ECONOMY INDUSTRY BANKING CEMENT FERTILIZERS POULTRY REAL ESTATE STEEL SUGAR TELECOM WHITE CONSUMER GOODS EQUITY AL-EZZ CERAMICS & PORCELAIN (GEMMA) ARAB COTTON GINNING CO. (ACGC) COMMERCIAL INTERNATIONAL BANK (CIB) CREDIT AGRICOLE EGYPT (CAE) DELTA SUGAR EASTERN COMPANY (EC) EGYPTIAN FINANCIAL & INDUSTRIAL CO. (EFIC) EIPICO EZZ AL-DEKHEILA STEEL EZZ STEEL (ES) MARIDIVE & OIL SERVICES MISR BENI SUEF CEMENT (MBSC) MISR CEMENT (QENA) MOBINIL NASR CITY HOUSING & DEVELOPMENT (NCHD) NATIONAL SOCIETE GENERALE BANK (NSGB) OLYMPIC GROUP ORASCOM CONSTRUCTION INDUSTRIES (OCI) ORASCOM TELECOM (OT) ORIENTAL WEAVERS CARPETS (OWC) PAINTS & CHEMICAL INDUSTRIES (PACHIN) PALM HILLS DEVELOPMENTS RAYA HOLDING SINAI CEMENT TELECOM EGYPT (TE) TMG HOLDING Page No. 3 11 22 30 41 50 58 67 80 91 101 107 109 111 113 115 117 119 121 123 125 127 129 131 133 135 137 139 141 143 145 147 149 151 153 155 157
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Slide 5: November 11, 2008 EGYPT | STRATEGY AN OASIS OF GROWTH AND VALUE THAT SURPASSES RISK Welcome to CI Capital Research (CICR)'s first Egypt Book, where we look from the top to drill down through 9 sectors and into 26 companies, which we think demonstrates a wide and deep knowledge of the market. WHY HERE? WHY NOW? The Egyptian market has been hit hard by factors not of its own making. Ever since its reformist government has been in place it has managed c.7% p.a. growth, and now, despite global events, is widely recognized as a market of least risk characteristics for its ability to continue delivering growth. Yet, as high commodity prices brought inflation to emerging markets and as the dawning realization that the global financial crisis would have a global economic impact, then the Egyptian market was hit by an outflow of (largely foreign) portfolio investments. This saw the market plummet some 50% year-to-date. This is despite the potential to grow, despite the robustness of its banking system, despite the lack of toxic financial products, and despite economic growth being driven nearly 3/4's by local demand. In short, this has left investors with a market with the potential to grow through these turbulent times, the potential for strong long-term growth, a market of low-cost production, and at valuations often lower than their developed and emerging market peers. We conclude, therefore, that whilst the Warren Buffet approach of buying value for the long-term at times like these is correct, it is entirely possible that the returns may be seen rather sooner. Compelling macro backdrop Egypt’s reformist government is determined to keep growth going, to minimize risk, and to complete a program to bring rising living standards to the masses. It is a consumer-led environment, stimulated by investments, and gradually lowering interest rates. Long-term growth is assured by demographics and geographic location. Summary macro snapshot 2005/6 6.8% 71,347 35,531 1,527 5.3% 8.0% Actual 2006/7 7.1% 72,798 36,253 1,792 9.1% 7.3% 2007/8 7.2% 74,357 37,030 2,191 13.4% 6.6% 2008/9 5.0% 75,844 37,770 2,305 10.5% 6.5% Forecasts 2009/10 2010/11 4.4% 5.7% 77,361 78,908 38,526 39,296 2,455 2,698 9.0% 12.3% 6.0% 5.7% 2011/12 6.3% 80,486 40,082 3,026 14.0% 5.3% Real GDP Growth (%) Population (000) Avg. Population (>15<45 yrs old) GDP/Capita, Current (US$) Private Sector Credit Growth Fiscal Deficit % GDP Source: CBE and CICR forecast FIVE TOP PICKS We suggest below five interesting investments spread between a wealth of opportunities and investment requirements. We have chosen these from among the larger stocks, although within the body of the report there are exciting stories for those interested in smaller stocks. Top recommendations LE m LE LE Up12M side FV % 35.8 98% 50.1 68% 206.0 79% 34.2 212% 43.7 79% 2008 2009 2008 2009 2008 2009 2008 2009 EV/ EV/ EBITDA EBITDA Yield Yield N/A N/A 2.8% 4.1% 6.5 3.3 2.9% 3.7% 3.9 3.6 13.9% 14.6% 1.8 2.1 2.7% 2.1% 3.2 2.6 7.8% 9.2% Name NSGB EFIC Mobinil Ezz Steel EIPICO M.Cap 5,468 2,064 11,537 5,949 1,763 Price 18.1 29.8 115.4 11.0 24.5 PER 5.4 9.7 6.2 3.3 6.6 PER 4.8 4.5 5.5 4.4 5.9 PBV 1.27 2.91 8.54 0.99 1.50 PBV 1.07 2.33 6.51 0.81 1.36 Source: CICR forecast 3
Slide 6: November 11, 2008 EGYPT | STRATEGY VALUATION AND STOCK SELECTION Our analysts use one main method of valuation, namely a discounted cash flow (DCF) model. This discounts the explicitly forecast free cash flow for our 5 year forecast period, then a terminal value at an assumed long-term growth rate. For the real estate companies, the analyst discounts only the expected performance of the known projects. Our basic cost of equity (COE) is taking a risk-free rate of 11.5% (derived from a 10-year bond) and 8% equity risk premium, which is considerably higher than the traditional 5-5.5% seen in global equity research for emerging markets. Individual company models have different COE, adjusting for specific risk and leveraged beta. Basically we think you want to see at least 20% upside potential from a share price performance in the current environment. After the steep market fall, it is unsurprising that every stock has a significant upside potential to the thus-calculated methodology. Clearly in times like these, the sensitivities of DCF go awry, not least as the market perception is perhaps saying that the required rates of return have gone stratospheric. Whilst we are indeed debating changing the valuation methods (in addition to DCF) and how we choose a target price and recommendation, it is convenient to leave this in place, if nothing else to emphasize the fact that EGYPT is way below its long-term potential and indeed the whole market may be a “BUY”. For the purposes of this report, rather than a simple relative ranking between the stocks versus DCF upside potential, we have developed an “S” Score (or Subjective) rating in order to rank the stocks in some order of preference. We do this by looking at a number of “screens” for Profitability, Momentum and Valuation, and by looking at some charts to highlight this relative positioning. We bring this together by including a number of factors, with weights to then provide a ranking order of the stocks, and from this derive a focus list of five companies drawn from different sectors. The factors and weightings we use include our relative assessment of: management, size and tradability of the shares, valuation from PER, PBV and EV/EBITDA, profitability from ROE or ROIC, balance sheet risk from gearing, industry risk from our top-down view, and relative DCF upside. We weight the factors subjectively, having higher weights for management and industry risk than DCF upside potential. We also add a factor if we think the company may be an acquisition target. We only produce the result here in the form of a ranked chart and is only one factor in considering our assessment of our top recommendations. FROM THE TOP - SECTORS From our view on the sustainability of growth in the economy, and with reducing but high inflation, we try to think about which sectors are most and least at risk. Given that the economy is 70% driven by local consumption, and given the government’s desire to sustain economic growth, we generally think the least risky sectors should be the ones that would benefit from any investment program and are linked to domestic consumption. More risky In this global environment, it is perhaps easier to think about where nerves should settle, or where risks are increasing. The sectors below - we think - are relatively high risk: Housing & construction, particularly at the high-end of the market. Demand has been falling away here and the market looks somewhat saturated. If economic growth continues and inflation abates, then there should be reducing pressure on the middle classes, and this is reflected in the housing companies’ shift towards the middle classes away from the topend. It is worth noting that there has not been the property boom to the extent there has been in parts of the Middle East, and property is still consid- 4
Slide 7: November 11, 2008 EGYPT | STRATEGY ered more affordable in Egypt than in the Gulf. PALM HILLS DEVELOPMENTS, SODIC, and TMG HOLDING are companies in this segment Tourism: Falling global demand should place tourist receipts at risk. In recent years, tourists have been coming not only from Europe and the Middle East but increasingly from CIS. Egypt is a relatively low-cost location, with good-all-year weather. Nonetheless, in our macro estimates, we pare the growth of tourist receipts and think this sector potentially at risk. Export oriented: With the slowdown in global trade expected, so too exports, particularly of consumer goods, are at risk. Egypt has some advantage in that it is generally considered to be a low-cost producer. In addition, we expect some currency weakness and export incentives to mitigate this slowdown. Companies such as ORIENTAL WEAVERS CARPETS and OLYMPIC GROUP (the latter to a lesser extent; only 10% of sales come from exports to Arab and African countries) spring to mind as exporters in categories that may suffer from falling global consumption, and yet these companies will also spend efforts in focusing on domestic consumption as the export markets weaken. Less Risky Agriculture: We think food and food services is an interesting sector from the top-down. Firstly, food is needed whatever the economy. Secondly, after the rapid rise in basic food staples last year, Egypt realizes it has to make more of its fertile crescent, and we think this is a sector which will receive investment. Fertilizer, sugar, poultry ,and flour mills all make interesting sectors. Included in this report are EFIC (fertilizers), DELTA SUGAR, and EASTERN COMPANY (tobacco). (Our industry team would be happy to help with bespoke requests on sectors, such as the milling sector, and companies not included in this report.) Non-housing construction: Since we think that there will be investment in infrastructure and help for strategic sectors, then construction per se should still be an activity going on in Egypt. Included in this should also be building services and materials companies. OCI is the principal company in this sector, but the larger proportion of its construction activity is outside of Egypt (mainly GCC). However, its main profit growth driver comes from the fertilizer segment. Other construction-related companies include EZZ STEEL (virtual monopoly in Egypt). In addition, we include cement companies, which is a sector wrongly out of favor – in our view. Within this, there are speculative investments (MISR CEMENT – QENA) and totally mispriced (MISR BENI SUEF CEMENT) and which foreigners can buy. Oil & oil services: We think the energy sector is also a strategic sector for further development. Mostly, we think this will benefit construction companies in the quoted sector. MARIDIVE & OIL SERVICES is an oil services company and has most of its earnings generated globally. Mostly, we think we shall see continuing foreign direct investments (FDIs) in this sector as indeed recent press articles have continued to highlight the foreign interest in the sector. 5
Slide 8: November 11, 2008 EGYPT | STRATEGY DRILLING DOWN In this section we drill down from the top, running several screens and charts for consideration. We only show the top and bottom companies in each screen, so our top picks, including our "S" Score chart, may have companies that have not featured in these tables, but nonetheless in our opinion do well. PE versus growth 12.0 10.0 SUGR 8.0 ACGC 6.0 IRAX OCIC ETEL EAST EMOB ORWE CIEB SCEM PHAR PACH ESRS MOIL OLGR COMI MBSC NSGB MCQE 09E PER RAYA4.0 2.0 0.0 -10% -5% 0% 5% 10% 15% 20% 3-year EPS CAGR 25% 30% 35% 40% Source: CICR forecast The downward sloping trend line perhaps indicates that growth is not the main factor on investors’ minds at the moment, or even that the very high growth rates are disbelieved. In any case, as the cycle goes round, growth should undoubtedly come back into fashion and now is the time to look at companies and markets with the potential for long-range growth – Egypt! Noteworthy above is Palm Hills Developments (PHDC), but this growth is coming off a very low base. We circled the "Sweet Spot" i.e. companies growing at a credible pace at under 6x earnings. ROE vs. PBV and ROIC vs. WACC The ROE versus PBV is in effect a diagram of the PER, and the slope of the line greatly affected by the outliers. The correlation is low, r-squared is just 0.25, but pictorially it does give a snapshot and prompt one to think about whether stocks in the bottom right hand corner really are cheap. The PBV, or Market Value to Invested Capital, compared to the ROIC/WACC, or in a banks case ROE/COE, allows some comparison across sectors, adjusted for risk. The ROE/COE implies the level at which the equity or book value or invested capital should trade, and then (ignoring growth) can be compared to the PBV. ROE vs. PBV 3.5 3.0 2.5 09E PBV 2.0 1.5 1.0 0.5 EAST MOIL CIEB ORTE COMI PHAR ETEL NSGB PACH OLGR ECAP ESRS MBSC ORWE SCEM RAYA TMGH 0% 10% 20% 30% 09E ROE 40% SUGR MCQE IRAX EFIC ROIC (ROE) vs. WACC (COE) 45% 09E ROIC (ROE for banks) OCIC 40% 35% 30% 25% 20% 15% 10% 5% 0% 7% 9% OCIC EMOB EFIC MCQE IRAX COMI CIEB PHDC SCEM NSGB PHAR PHDC MBSC EAST MOIL OLGR ESRS RAYA ORTE TMGH ETEL ORWE ECAP MNHD ACGC SUGR PACH 11% 13% 15% 17% 19% 21% 23% 50% 60% WACC (COE for banks) Source: CICR forecast Source: CICR forecast 6
Slide 9: November 11, 2008 EGYPT | STRATEGY VALUATION Company Cheapest Sinai Cement Palm Hills Developments TMG Holding Misr Beni Suef Cement Raya Holding Dearest Delta Sugar OCI Orascom Telecom Holding Al-Ezz Ceramics Nasr City Housing & Dev. Company Highest Mobinil Credit Agricole Bank-Egypt Ezz Al-Dekheila Misr Beni Suef Cement Olympic Group Lowest Al-Ezz Ceramics Maridive & Oil Services PACHIN Palm Hills Developments TMG Holding 2008E PER 4.0 4.4 4.1 3.6 4.1 PER 9.0 9.5 12.3 13.4 36.4 2008E Yield 14% 10% 14% 6% 7% Yield 0% 0% 0% 0% 0% 2009E PER 2.5 2.9 3.4 3.5 3.6 PER 8.9 9.4 9.5 22.4 33.4 2009E Yield 15% 12% 11% 10% 9% Yield 0% 0% 0% 0% 0% Company Cheapest TMG Holding Arab Cotton Ginning Raya Holding Oriental Weavers Sinai Cement Dearest EFIC Misr Cement (Qena) OCI Mobinil Nasr City Housing & Dev. Company Cheapest Sinai Cement Palm Hills Developments Arab Cotton Ginning Misr Beni Suef Cement Ezz Steel Dearest Olympic Group Delta Sugar Misr Cement (Qena) OCI Nasr City Housing & Dev. 2008E PBV 0.35 0.48 0.55 0.65 0.83 PBV 2.91 2.95 2.82 8.54 15.31 2009E PBV 0.32 0.46 0.50 0.60 0.65 PBV 2.33 2.52 3.16 6.51 12.99 2008E 2009E EV/EBITDA EV/EBITDA 3.3 1.5 2.2 1.6 2.5 1.9 2.9 2.0 1.8 2.1 EV/EBITDA EV/EBITDA 5.5 5.2 4.9 5.3 5.5 5.3 8.9 11.7 28.5 25.4 MOMENTUM Company Fastest Palm Hills Developments EFIC TMG Holding Al-Ezz Ceramics OCI Slowest Nasr City Housing & Dev. Delta Sugar Arab Cotton Ginning Raya Holding Orascom Telecom Holding Company Fastest Sinai Cement Maridive & Oil Services Palm Hills Developments EFIC TMG Holding Slowest Ezz Steel Misr Beni Suef Cement Ezz Al-Dekheila Raya Holding Nasr City Housing & Dev. 2009E EPS 52% 116% 21% -40% 1% EPS 9% 1% 10% 14% 30% 2009E CASH 1389% 5% -4% 70% 37% CASH -28% 1033% -12% 5% -14% 3yr CAGR EPS 100% 69% 47% 42% 40% EPS -3% -5% -6% -6% -27% 3yr CAGR CASH 244% 200% 78% 53% 45% CASH -2% -8% -11% -19% -24% Company Fastest Palm Hills Developments TMG Holding EFIC OCI Olympic Group Slowest Eastern Company Ezz Al-Dekheila Nasr City Housing & Dev. Misr Cement (Qena) Delta Sugar Company Fastest Maridive & Oil Services Ezz Steel CIB Ezz Al-Dekheila Misr Beni Suef Cement Slowest Delta Sugar Arab Cotton Ginning PACHIN Telecom Egypt Nasr City Housing & Dev. 2009E EBITDA 42% -1% 86% -12% 30% EBITDA 2% -20% 13% -4% -7% 2009E BVPS 29% 22% 28% 19% 20% BVPS 7% 5% 5% 4% 18% 3yr CAGR EBITDA 105% 95% 62% 41% 25% EBITDA 5% 5% 1% -2% -6% 3yr CAGR BVPS 48% 36% 29% 26% 25% BVPS 7% 5% 5% 4% 1% Source: CICR forecast The cheapest rated stocks, (PER) tend to come from the sectors out of favor, such as cement, real estate, and IT services, with steel not far behind. Similarly the highest yields are found there. Dividend yields are approaching money market rates, which should enhance any total return for an investment. Whilst a sector like cement is out of favor with investors, there really appears a good longer-term opportunity. Consider that the government is trying to sustain growth through investment, and there continues to be much need for infrastructure investment in Egypt to such an extent that the companies are finding it necessary to increase their capacity (see the industry section), and there is some sector consolidation to consider. 7
Slide 10: November 11, 2008 EGYPT | STRATEGY PROFITABILTY & RISK ROE Best Mobinil EFIC Ezz Al-Dekheila Palm Hills Developments Nasr City Housing & Dev. Worst Oriental Weavers Telecom Egypt TMG Holding Arab Cotton Ginning Al-Ezz Ceramics NET DEBT/EQUITY Best Al-Ezz Ceramics Orascom Telecom Holding Olympic Group OCI Worst PACHIN Palm Hills Developments EIPICO Misr Cement (Qena) Delta Sugar 2008 120% 32% 74% 43% 36% 2008 13% 10% 9% 6% 7% 2008 54% 78% 51% 52% 2008 -20% -36% -41% -32% -48% 2009 135% 58% 45% 43% 42% 2009 13% 12% 10% 6% 4% 2009 37% 50% 78% 113% 2009 -22% -33% -45% -45% -46% EBITDA Margin Best Palm Hills Developments Misr Cement (Qena) Telecom Egypt TMG Holding Misr Beni Suef Cement Worst PACHIN Ezz Steel Oriental Weavers Olympic Group Raya Holding Net Interest/Revenue Best Arab Cotton Ginning OCI TMG Holding EIPICO Misr Cement (Qena) Worst Oriental Weavers Mobinil Orascom Telecom Holding Raya Holding Olympic Group 2008 66% 53% 50% 39% 56% 2008 20% 22% 17% 15% 6% 2008 33% 8% 8% 5% 2% 2008 -12% -9% -21% -25% -16% 2009 59% 53% 52% 51% 46% 2009 20% 20% 17% 16% 6% 2009 35% 11% 11% 5% 4% 2009 -10% -10% -18% -19% -19% Source: CICR forecast Mobile telephony may start to benefit from sector rotation as recent results from MOBINIL suggest the concerns of a downturn in subscriber activity may have been overdone. Clearly, the market also fears the housing and real estate companies which seem already to be discounting a major downturn in real estate prices. This also is a sector where consolidation may occur, especially amongst smaller players, as in this environment the larger companies seek to acquire land banks. If our analysts are right there is considerable momentum still to be seen in Egypt. Even those ranking in the “worst section” have reasonable growth expectations. EZZ STEEL, almost a steel monopolist in Egypt, stands out as lowly rated and growing quickly. The catalyst again should be construction volumes as it can control its margin. MISR BENI SUEF CEMENT also falls into this category and looks potentially mispriced. EFIC has fast growing earnings and is cash generative, and a look at the company pages shows that it too is not highly rated. This is in a strategicallyimportant sector as the government wants to increase the agriculture capacity and is still benefiting from better pricing even if fertilizer prices are well off their peak. The lowly-rated housing and cement sector rank well on EBITDA margin, and MOBINIL in terms of returns on shareholders’ equity, but this latter is also one of the most highly leveraged, just escaping our list of bottom 5. Reducing interest rates, now that the cycle is turning may be of some help, but this is increased financial risk for the returns. Even the worst appear to have reasonable returns measured as EBITDA margin. 8
Slide 11: November 11, 2008 EGYPT | STRATEGY "S" SCORE Given the weightings and factors we include, the highest ranked stocks do not necessarily have the most compelling valuations. In this way, OCI has come out highly paced, and is indeed one of Egypt’s premier blue chips, with a wellregarded management. The banks as cheap and tradable come out well in this scoring too. “S” Score ranking 140 120 100 80 60 40 20 0 ORTE SUGR RAYA IRAX MNHD TMGH PHAR MOIL ETEL EAST ORWE NSGB 2008 Div. Yield 0.0% 3.8% 3.3% 9.7% 8.3% 6.7% 2.9% 7.8% 14.4% 2.7% 0.0% 5.5% 7.1% 13.9% 1.7% 2.8% 2.3% 7.2% 2.7% 6.8% 0.0% 0.0% 8.0% 5.0% 6.6% 0.0% ESRS CIEB EFIC PACH OLGR PHDC MCQE Source: CICR forecast CI Capital Research Universe LE m LE LE 12M FV 7.2 10.1 N/A 15.3 32.3 305.6 50.1 43.7 1,501.9 34.2 5.1 152.5 98.5 206.0 42.8 35.8 330.5 55.1 96.1 48.3 83.4 24.3 11.5 93.0 24.3 12.8 Upside % 45% 148% N/A 49% 47% 40% 68% 79% 68% 212% 99% 226% 28% 79% 37% 98% 68% 128% 161% 111% 185% 199% 152% 183% 55% 231% 2008 2009 2008 2009 2008 EV/ EBITDA 5.6 2.5 N/A N/A 4.9 4.7 6.5 3.2 3.4 1.8 5.9 2.9 5.5 3.9 28.5 N/A 8.9 5.5 3.9 5.0 4.1 2.2 3.6 3.3 5.6 3.0 2009 EV/ EBITDA 4.2 1.9 N/A N/A 5.3 4.4 3.3 2.6 4.1 2.1 4.6 2.0 5.3 3.6 25.4 N/A 11.7 5.2 3.3 4.2 3.4 1.6 3.0 1.5 4.8 2.4 2009 Div. Yield 0.0% 4.1% 4.1% 12.1% 8.4% 7.0% 3.7% 9.2% 11.2% 2.1% 0.0% 10.0% 7.7% 14.6% 1.8% 4.1% 2.9% 9.4% 3.5% 7.8% 0.0% 0.0% 9.1% 8.0% 8.2% 0.0% Price M.Cap (11/6/08) 254 5.0 1,020 4.1 8,989 30.7 2,959 10.3 2,170 22.0 5,450 218.0 2,064 29.8 1,763 24.5 12,249 896.2 5,949 11.0 3,781 2.6 936 46.8 2,310 77.0 11,537 115.4 3,122 31.2 5,468 18.1 42,192 196.5 1,450 24.1 33,116 36.8 1,708 22.9 585 29.2 3,774 8.1 259 4.6 1,150 32.9 26,801 15.7 7,857 3.9 Name Al-Ezz Ceramics Arab Cotton Ginning CIB Credit Agricole Bank-Egypt Delta Sugar Eastern Company EFIC EIPICO Ezz Al-Dekheila Ezz Steel Maridive & Oil Services Misr Beni Suef Cement Misr Cement (Qena) Mobinil Nasr City Housing & Dev. NSGB OCI Olympic Group Orascom Telecom Holding Oriental Weavers PACHIN Palm Hills Developments Raya Holding Sinai Cement Telecom Egypt TMG Holding PER 13.4 8.0 5.1 5.6 9.0 7.1 9.7 6.6 4.2 3.3 7.8 3.6 8.5 6.2 36.4 5.4 9.5 5.5 12.3 5.3 5.3 4.4 4.1 4.0 9.9 4.1 PER 22.4 7.3 4.3 4.9 8.9 7.1 4.5 5.9 5.4 4.4 6.5 3.5 7.8 5.5 33.4 4.8 9.4 4.2 9.5 4.6 4.5 2.9 3.6 2.5 7.9 3.4 PBV 0.80 0.48 1.69 1.68 2.42 1.75 2.91 1.50 2.62 0.99 1.85 1.11 2.95 8.54 15.31 1.27 2.82 1.51 1.46 0.65 1.14 1.25 0.55 0.83 1.00 0.35 PBV 0.78 0.46 1.32 1.52 2.27 1.54 2.33 1.36 2.21 0.81 1.44 0.92 2.52 6.51 12.99 1.07 3.16 1.23 1.28 0.60 1.09 1.20 0.50 0.65 0.96 0.32 Source: CICR forecast *Maridive & Oil Services share price is in US dollar 9 SCEM EMOB ECAP MBSC ACGC OCIC
Slide 12: November 11, 2008 EGYPT | STRATEGY CONCLUSIONS Summarizing the charts, tables and data above, these are the main conclusions we draw: A. Mispriced in our opinion: SINAI CEMENT - Heavily sold off and half the value of its peers. RAYA HOLDING - Consumer electronics, slow growth, and its net debt ranking belies a liquid balance sheet and investments into a growing service sector. EIPICO – Low PER, high yield, decent (defensive - pharmaceutical) growth, good margins and profitability. The banks (see industry section) do not make most of the screens but are relatively well placed as well capitalized and liquid, profitable, growing, and cheaply rated. Now that the interest rate cycle has stabilized, interest may return to this segment, not least as it is one banking sector in the world capable of lending to a market with the potential to grow. B. Speculative interest: RAYA HOLDING - Cheap liquid balance sheet could be made to sweat more. MISR CEMENT (QENA) - Cement in the right place at the right time, and ASEC is building a stake. Our top five picks From the above and from our “S” Score, we highlight the following investment opportunities from different sectors and in no particular order: NSGB: profitable, good returns, sound balance sheet, and still gaining restructuring benefits, trading at 4.8x 2009E earnings, 1.1x 2009E BV, ROE 24%, while earnings growing at 31% over next three years. EFIC: Sound high returning growth in a strategically-important agricultural sector, valued at 4.5x 2009E earnings. EIPICO: Defensive play in the healthcare sector. Stable earnings with long-range potential as health becomes an increasingly important issue in Egypt. MOBINIL: Mobile operator which has just beat consensus 3Q08 earnings. It pays a generous dividend and sweats the equity. Interest rate and leverage risk should be declining and has ongoing cost efficiency program. We think there is some rotation back to Telcos, which should benefit from stimulated consumer. EZZ STEEL: Virtual monopoly position in Egypt, with controlled margins, cheaper than foreign competition. Benefit from any rally in commodity prices, and more fundamentally from the continued (non-housing) construction investment we think will continue in Egypt. 10
Slide 13: November 11, 2008 EGYPT | ECONOMY DEMAND & INVESTMENT: A DARING CHALLENGE From the beginning of 2008 emerging economies watched the global tornado from afar. Now with a vanishing confidence, foreign capital has fled compelling the waning of many emerging economies stock markets. Yet, we deem Egypt's economy will reveal distinguished resilience amidst the headwinds from the developed economies. Reinforced by its diversified GDP, liquid banking system, and an under-leveraged economy; Egypt is expected to maintain a modest GDP growth rate of 5% in FY08/09 – based on the GoE's ability to promote local investments, with a focus on SMEs. Consumer-led recovery “the guardian” for growth: Reaping the fruits of bold reforms implemented to date and a growing investors’ confidence, Egypt's economy has leapfrogged both on its economic and fiscal management platforms. Thanks to the export-led strategy adopted, which led to the witnessed domestic demand boom, GDP jumped to a growth rate of 7.2% in FY07/08. FDI, a perfect exhale: Given Egypt’s fertile business soil and the increasing investors’ confidence in a reformist government, FDI soared reaching US$13.2 bn in FY07/08 up from US$3.9 bn in FY04/05. Yet, it is expected to be hardly hit by the global downturn and exacerbated by investors’ panic all over the globe. Sustained high inflation jeopardy fading away: Like other open economies, Egypt was hit hard by the surge in international oil and food prices with inflation recording a double-digit growth of 11.7% in FY07/08. However, complying with the expected decline in international markets, we believe inflation to simmer down driving the wheel for strengthened domestic demand. BOP surplus maintained while current account deteriorates: Expenses of the robust domestic demand has been reflected in a deteriorating current account reaching US$0.9 bn in FY07/08 and turning into a deficit of US$ 3.3 bn in FY08/09 given the widening trade deficit and the relatively static services growth. Yet, still BOP reflects low vulnerability given the performance of the capital and financial account outweighing such pitfalls. Fiscal deficit restructuring, right on track: Despite the huge hike in expenditures due to increased subsidies, driven by the spiraling rise of oil prices; fiscal deficit to GDP narrowed to 6.6% in FY07/08 down from 7.3% in FY06/07. This is mainly attributable to the revenues growth, powered by tax revenues' increase as well as other revenues including proceeds from cement licenses worth of around LE 1.14 bn in FY07/08. POTENTIALS Populous economy with inherent sizable demand. Domestic investments represent the bulk – around 60% - of implemented investments. Well capitalized, under leveraged Banking sector flushed with liquidity. Solid BOP position even with the weakening at the margins. Favorable factors of production and benign business environment that allows Egypt to act as an investment hub within the region. Underlying potential in a number of sectors including fertilizers, infrastructure, agribusiness and pharmaceutical. RISKS The current global challenges that is expected to negatively impact exports growth. Highly affected FX earning sectors, namely tourism, Suez Canal and FDI. Inability to rely on fiscal pumping to promote growth with the prevailing fiscal deficit. SELECTED MACRO INDICATORS GDP (Current, LE bn) Real GDP GR (%) GDP/Capita (Current, US$) Inflation (CPI %) FDI (US$ mn) Investments (LE bn) 2006/7 744.8 7.1% 1,792 10.9% 11,053 155.3 2007/8 896.5 7.2% 2,191 11.7% 13,237 179.3 2008/9F 1,002.8 5.0% 2,305 17.0% 6,364 190.8 ALIA MAMDOUH ALIA.MAMDOUH@CICH.COM.EG EGYPT’S ECONOMIC PERFORMANCE Real GDP GR 8.0% Investment GR 25.0% 7.0% 20.0% 6.0% 5.0% 15.0% 4.0% 10.0% 3.0% 2.0% 5.0% 1.0% 0.0% 2003/4 2004/5 2005/6 2006/7 2007/8 2008/9 2009/10 2010/11 2011/12 0.0% 11
Slide 14: November 11, 2008 EGYPT | ECONOMY REAL SECTOR Economic growth in recent years has been aggravated by a diversified output strategy that was reflected in the strong growth in tourism, construction, real estate, communications, oil and gas and trade sectors. The inflow of foreign investments as DAMAC and Emaar helped flourishing the construction and real estate sectors that in turn fed the building materials industry. In addition, the entrance of the third mobile operator, Etisalat Misr, lifted up the communications sector. Export volumes, despite the strengthening of the Egyptian pound against the US$ helped the manufacturing sectors to record a growth of 8% in FY07/08 up from 5.9% in FY05/06. Real GDP growth breakdown Private consumption Gross Capital Formation 100% 25.0% Fueled by an expanded output strategy, economic growth has been maintained over the past years GDP growth by sector Government consumption Net Exports 2006/7 30.0% 2007/8 90% 80% 70% 60% 10.0% 20.0% 15.0% 50% 40% 30% 20% 10% 0% 2004/5 2005/6 2006/7 2007/8 5.0% 0.0% Construction Real Estate Oil & Gas Financial services Industries Communications Wholesale & Trade Tourism Others Source: CBE Source: CBE SMEs have been one of the pillars of the Egyptian private sector, compromising the bulk - above 90% - of the operating private non-agricultural establishments. Micro, small and medium enterprises contribute with around 80% of total value added and attract 47% of total investments. Moreover, their input to the country’s exports reached around 20%; of which chemical products represent the lion’s share of 38%. SME’s contribution to Industrial GDP An economy with an increasing say for SME’s and the informal sector 2000 Small, 12% 2006E Large, 38% Small, 14% Large, 48% Medium, 40% Medium, 50% Source: CICR database 12
Slide 15: November 11, 2008 EGYPT | ECONOMY As SMEs provide affordable goods and services that suits the lower and lowermiddle income groups - which represents 57% of the population - they are highly interrelated to the informal economy. Such high level of informality limits SMEs access to a wide range of formal services, most importantly credit facilities. Recognizing their vital role, GoE launched an Exchange market for growing medium and small companies, Nilex, to facilitate access to capital as well as exposure to foreign investors. We highly believe that increasing SMEs support is crucial to sustain high growth levels by promoting entrepreneurship, job creation and attracting domestic investments. High level of informality is the main impediment facing SMEs. Yet, they enjoy increasing GoE support INVESTMENTS The package of bold reforms implemented on all fronts, namely (1) reducing the minimum capital requirement of incorporation to LE 1,000, (2) corporate tax cut by half reaching 20%, (3) reducing weighted average custom tariffs from 14% to 6.9%, (4) tariff bands streamlined and reduced from 27 to 6, and (5) customs on capital assets capped at 5% have created an attractive environment for investment. Moreover, with the country's favorable factors of production and competitive energy prices, both investment and FDI recorded buoyant growth. Based on weighted growth, the services sectors accounted for the bulk of new investments. In FY07/08, investment in transportation and communication witnessed the highest flow of 7.8%; followed by hydrocarbon investments, namely in the upstream activities which recorded a weighted growth of 7.1%. Infrastructure investments come next with a rate of 5% - especially in water and electricity stations. Vibrant investment appetite Services sectors led investment growth Investment breakdown FY07/08 Health, 2% Education, 3% Real Estate, 7% Tourism, 3% Others, 8% 9.0% Investments weighted growth by sector 8.0% 7.0% 6.0% 5.0% 4.0% Agriculture, 4% Crude Oil & NG, 17% Financial Intermediaries, 1% Wholesale & Retail Trade, 3% 3.0% Manufacturing & Oil Products, 22% 2.0% 1.0% 0.0% Transp. & Com. Tourism Manuf.& Oil Products Suez Canal Real Estate Agriculture Crude Oil & NG Electricity & Water Wholesale Trade Financial Sector Construction Education Transp. & Com., 20% Construction & Building, 2% Electricity & Water, 8% Source: CBE Source: CBE Rising confidence in the country's economic performance loosened the wheel for FDI flows which maintained their high growth levels reaching US$13.2 bn in FY07/08 up from US$3.9 bn in FY04/05. FDI constitutes around 8.2% of the country's GDP in FY07/08. The petroleum sector held the major chunk of 38% of such inflows, while the contribution of the real-estate still maintains a low level of 0.8% in FY07/08, despite its strong growth reaching US$90.6 mn up from US$39 mn in FY06/07. Within the non-petroleum investments, the financial sector accounted for the lion’s share of 40% followed by industrial activities (32%) and the services sectors (15%). Mounting FDI inflows were reflected in a strengthened currency and an expanded output 13 Health Others
Slide 16: November 11, 2008 EGYPT | ECONOMY Investment & FDI & Shares in GDP US$ mn 35,000 30,000 20.0% 25,000 20,000 15,000 10,000 5.0% 5,000 0 2004/5 2005/6 2006/7 2007/8 0.0% Construction, 7.3% 15.0% Industry, 31.6% FDI FDI % of GDP Implemented Investments Investment % of GDP 25.0% Non-Petroleum FDI Breakdown FY07/08 CIT, 0.3% Real Estate, 1.8% Tourism, 2.2% Services, 15.3% 10.0% Financial Sector, 40.1% Agriculture, 1.4% Source: CBE Source: Ministry of Investment However, sustaining such strong FDI levels is doubtful, especially after the removal of tax exemptions from the free zones for energy-intensive industries coupled with the increase in energy prices that were announced in May 2008. Moreover, the current global financial turmoil is expected to have a negative impact on the inflow of FDI, as 70% of such inflows comes from the US and EU countries. Yet, with GCC surplus such decline is expected to be mitigated. We expect net FDI inflows to reach US$6.4 bn in FY08/09, followed by US$5.9 bn in FY09/10. On a different note, GoE expects FDI to reach around US$10 bn in FY08/09. Despite the global gloom, announcements of new projects are still in the headlines: Al Kharafi Group confirmed plans to pump US$2 bn in new investments in the steel industry; Schneider Electric will establish a new electricity plant with an investment cost of around US$ 45.5 mn; GlaxoSmithkline plans to buy the Egyptian mature products business of Bristol-Myers Squibb Co. for US$210 mn, and Solvay SA, the world's largest soda- ash maker, bought Alexandria Sodium Carbonate Co. in a deal worth US$137.5 mn. Moreover, the fertilizers sector is to witness further investments including EBIC, Agrium and Egyphos. Key pipeline projects over 2008-12 Sector Cement El-Swedy Cement North Sinai Cement Al-Nahda Industries Al-Wady Cement Four new steel raw materials factories; Ezz Steel (ES), Suez Steel Company, Tiba for Iron & Steel and the Egyptian Company for Sponge Iron. Almaza City Center by Al-Futtaim Hyde Park by Damac Real Estate Cairo Nile Corniche Towers project by Qatari Diar West Town Cairo, in Sheikh Zayed by SODIC East Town Cairo, in Katameya Port Ghalib by El-kharafi Group Serrenia resort by Shaheen Bus.& Inv, Group Tourism Porto Sokhna by Amer Group Marassi by Emaar Almaza Bay Resort by Travco Egyptian Basic Industries Co. (EBIC) Fertilizers Egyptian Fertilzers Co. (EFC) Agrium Egyphos Project Investments US$350 mn LE 1,500 mn LE 1,600 mn LE 1,000 mn US$15 bn US$0.5 bn US$5.5 bn LE 5.75 bn US$2.4 bn US$1.6 bn US$1.2 bn US$2.5 bn LE 1.5 bn US$1.74 bn LE 2.56 bn US$432 mn US$250 - 300 mn US$1400 mn US$680 mn Completion Date 2010 2010 2011 2012 NA 2008 2011 2011 2011 2011 2009 2010 2010 2012 2012 2008 2010 2010 2011 However, sustaining such strong FDI inflows is of a concern A positive aspect is that announcements of new foreign investments are still in the headlines Steel Source: CICR 14
Slide 17: November 11, 2008 EGYPT | ECONOMY As domestic investments represent the bulk of total implemented investments in Egypt, of which SMEs bears a considerable contribution, the GoE's commitment to support SMEs investments as well as providing them with export facilities – through tapping new potential markets – is expected to mitigate a reduced FDI inflows. Moreover, the GoE's decision of freezing any increase in energy prices till the end of 2009 is another measure that can drive further investments. In addition to the continued infrastructural development with US$8.9 bn worth of transport investments expected to pour into the country over the coming three years. We expect total implemented investments to reach LE 190.8 bn in FY08/09. Against this backdrop and given the purchasing power resilience of the upper and upper middle classes of the society and their influence on the informal sector domestic demand growth will likely maintain its levels. Thus, we believe Egypt to maintain a modest growth amidst such turbulence and negative sentiments with expected GDP growth rates of 5% and 4.4% in FY08/09 and FY09/10, respectively. Said moderate setback in growth is to be also supported by the country’s diversified GDP, liquid banking system with loans to deposits ratio of 53% and an underleveraged economy. We highly believe a 5% GDP growth is still significantly higher than that witnessed during the slowdown early in the decade, reflecting a better-off economic structure with stronger spine and foundations. Overall, we believe economic slowdown will worsen in FY09/10 given the steep decline in oil prices and the maintained global slowdown affecting large emerging markets, including Russia and China. Our estimates are considered conservative, yet there might be upside surprises if the GoE succeeded to attract higher than expected FDI levels and support exportoriented industries. Another positive aspect is the GoE's commitment to focus on SMEs and continuing infrastructural development FDI & Investment Outlook LE bn 300.0 Investment FDI US$ mn 14,000 12,000 10,000 200.0 8,000 150.0 6,000 100.0 4,000 50.0 2,000 2005/06 2006/07 2007/8 2008/9 2009/10 2010/11 250.0 0.0 Source: CICR forecast Public-private partnerships (PPP) are integral to investments, as well as sustained economic growth as it aims at lifting-off some of the burden on the government budget, particularly in terms of infrastructural investments. PPP is considered an important supporting tool for the private sector as well benefiting from the government endorsement in fast-tracking the projects permits. One of the main sectors that witnessed PPP projects is the transport sector with Cairo-Alexandria highway project that will be awarded to a private firm under the PPP model in January 2009 with an estimated investment cost of LE 1.9 bn. In addition to the Mediterranean Coastal highway with an investment cost of LE 1.5 bn. There are still a number of PPP opportunities in infrastructure development, including water facilities and sanitation as well as electricity plants with Egyptian Contracting Co. (Mokhtar Ibrahim) winning a project for expanding a water utility in Obour City with an investment cost of LE 280 mn. We highly believe that endorsing PPP will enhance sustaining moderate economic growth levels without imperiling the existing fiscal deficit. Public-private partnership, another mechanism for supporting investments 15
Slide 18: November 11, 2008 EGYPT | ECONOMY MONETARY SECTOR INFLATION Rising global oil prices as well as international commodities prices, namely food – as Egypt is a net importer - lifted up local products' prices, leading CPI reading of 11.7% in FY07/08. Yet, the full impact should be reflected in FY08/09 by which CPI reading is expected to reach 17%. In an effort to curb inflationary pressure, the GoE raised up interest rates; reduced imports tariff to 6.9% from 9%; and imposed tariffs on certain export commodities (steel, cement, rice), yet, inflation maintained its increase – with CPI reading reaching the peak of 23.6% in August 2008. Bearing the highest weight in CPI (44%), food & non-alcoholic beverages drove up the hike being highly influenced by changes in oil prices. In an attempt to alleviate inflationary pressures on the public, as Egyptians spend around 45% of their income on food items expanding to 60% for the lowest income groups, GoE increased wages by 30% in May 2008. Yet, sustained high levels of inflation outweighed such efforts and eroded the Egyptian's purchasing power and real incomes. CPI, food & oil prices CPI 35.0% Food prices Oil prices US$/barrel 160.0 140.0 120.0 100.0 20.0% 80.0 15.0% 60.0 10.0% 40.0 20.0 0.0 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 High levels of inflation imposed a threat to growth 30.0% 25.0% 5.0% 0.0% Source: CAPMAS & Bloomberg The decline in global oil prices witnessed since July 2008 was filtered down to food commodities' prices which started to cool-off since September 2008, bringing down the CPI reading to 20.2% in October 2008. We believe inflation will not record its 2008 skyrocketing readings, not only due to the cool-off in international prices but also due to the absence of the low base of the consumer price index effect. We expect inflation to start exhibiting lower levels in FY09/10, enhancing the purchasing power and driving up domestic demand. Yet, inflation started cooling-off As a measure to counteract inflation, the Central Bank of Egypt (CBE) raised interest rates for six consecutive times starting February 2008. The overnight deposits and lending rates rose from 8.75% and 10.75% in December 2007 reaching 11.5% and 13.5%, respectively in September 2008. Consequently, broad money supply and liquidity (M2) witnessed slower growth of 15.7% in FY07/08 down from 18.2% in FY06/07. We do not believe that the monetary tightening have been totally effective in curbing inflation mainly due to the slow pass of changes in corridor interest rates to general interest rates in the banking system. In addition to, the relatively low loan-to-deposits ratio of 53% that flushed the banks with excess liquidity, along with the nature of the Egyptian economy – which bears a significant contribution from the informal sector. Monetary tightening was the first response 16
Slide 19: November 11, 2008 EGYPT | ECONOMY With easing inflation readings coupled with expected risk of a downturn, the tightening monetary cycle seems to come to an end. The pressing need to support the economy in facing the impact of the global economic downturn should be through driving up local investments. Therefore, monetary policy is expected to be loosened with lending rates to decline to 12% in FY09/10. Policy rates is a tool to support growth CPI & interest rate Deposits 16.00% 14.00% 20.0% 12.00% Lending CPI 25.0% Money supply growth & lending rates LE bn 900.0 800.0 700.0 10.0% 600.0 15.0% 500.0 400.0 10.0% 300.0 4.0% 200.0 5.0% 100.0 0.0% 0.0 2.0% 0.0% 8.0% 6.0% Domestic Liquidity (M2) Lending Rates 14.0% 12.0% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Source: CAPMAS & CBE Source: CBE EXTERNAL SECTOR The extensive growth in capital flows, exports revenues as well as FDI inflows, contributed to the rebound in the Egyptian pound’s confidence leading to the pound’s appreciation to an average of 5.503 LE/US$ in FY07/08 up from 5.710 LE/US$ in FY06/07. We believe such appreciation will not likely to continue with the strength gained by the US$ against the EUR and the declining oil prices. In addition to the decline in FDI flows and the expected current account deficit that will exert more pressure on the Egyptian pound. We expect the LE to depreciate reaching an average of 5.735 LE/US$ in FY08/09, followed by further depreciation in FY09/10 reaching an average of 5.819 LE/US. Exchange rates US$ 1.60 1.40 1.20 1.00 5.80 0.80 5.60 0.60 0.40 0.20 0.00 5.40 5.20 5.00 EUR/USD LE/USD LE 6.40 6.20 6.00 2003/4 2004/5 2005/6 2006/7 2007/8 2008/9 2009/10 2010/11 Source: Bloomberg & CICR forecasts 17 2011/12 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-07 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Strong Egyptian pound, yet, not for long
Slide 20: November 11, 2008 EGYPT | ECONOMY Egypt's Balance of Payment (BoP) ran an overall surplus of US$5.4 bn in FY07/08 supported by the combined effect of a net inflow of US$7.1 bn on the capital and financial account, and a current account surplus of US$0.9 bn. On the other hand, Egypt’s trade balance reflected an increasing trade deficit despite exports’ growth recording 19% in FY06/07 and 33% in FY07/08 - mainly led by the 43% increase in oil exports. But, the hike in domestic consumption pushed imports growth higher recording 26% and 38% in FY06/07 and FY07/08, respectively. Imports growth was mainly attributed to petroleum payments registering the highest growth of 131% in FY07/08 due to the rising international oil prices. Yet, the services balance surmounted such deficit led by the strong growth of tourism revenues, which resulted in a current account surplus of US$888 mn in FY07/08. It is worth highlighting that the current account is experiencing a shrinking surplus with a declining share in GDP of 0.5% in FY07/08 down from 1.7% in FY06/07 exacerbated by the growing trade deficit. Current account & trade balance US$ mn 30,000.0 Trade Balacne Consumption Current account balance LE bn 700.0 Consumption boom led to a higher trade deficit Current account inflows US$ mn 16,000 14,000 12,000 500.0 Oil Exports Suez canal Tourism Remittances 20,000.0 600.0 10,000.0 400.0 0.0 300.0 (10,000.0) 200.0 10,000 8,000 6,000 4,000 2,000 0 (20,000.0) 100.0 (30,000.0) 2004/5 2005/6 2006/7 2007/8 0.0 2004/5 2005/6 2006/7 2007/8 Source: CBE Source: CBE Even before we consider the impact of the global slowdown, trade balance has been on the edge with expectations of a growing deficit, given the extensive growth in imports driven, as previously mentioned, by the buoyant domestic demand. Looking ahead, the global shrinking demand, particularly hitting developed economies, especially the US and EU, our main trade partners, are expected to force exports to witness a notable setback in its previous strong growth levels. We believe exports to exhibit a growth of 14% in FY08/09 supported by the weaker pound, and the already signed contracts; while imports are expected to grow with 18% in the same year. As imports' growth is expected to continue exceeding that of exports, a growing trade deficit will remain a major drawback for the current account as it is not expected to be outweighed in the medium-term given the static services growth. Trade Deficit & Current account US$ bn 80.0 2.9 2.3 Trade balance, the pitfall of the current account Imports Exports Current Account US$ bn 4.0 2.0 60.0 1.8 0.9 40.0 20.0 0.0 -20.0 (3.3) 0.0 -2.0 -4.0 -6.0 -40.0 -60.0 -80.0 -100.0 -120.0 -140.0 2004/5 2005/6 2006/7 2007/8 2008/9 2009/10 2010/11 2011/12 (8.5) -8.0 -10.0 (11.0) -12.0 -14.0 -16.0 (13.7) Source: CBE & CICR forecasts 18
Slide 21: November 11, 2008 EGYPT | ECONOMY Tourism, one of the main FX earnings pillars, witnessed dramatic growth over the past two years. Both, international tourist arrivals (ITA) and international tourism receipts (ITR) recorded significant respective growth of 18.3% and 32.3% in FY07/08. Such buoyancy has been mainly supported by the weakness of the Egyptian pound against the euro and GCC currencies, where Europe accounts for the bulk of ITA representing 69%, followed by the Middle East 18.8%. Yet, such exceptional tourism performance is expected to be at risk, being faced by the anticipated slowdown in the global economy with ITR expected to reach US$11.1 mn and US$11.8 mn in FY08/09 and FY09/10, respectively. Boosted by the rising global trade and high oil prices; Suez Canal receipts recorded magnificent growth of 17.2% and 23.6% in FY06/07 and FY07/08, reaching US$5.2 bn. Yet, the anticipated slowdown in global trade is expected to impact Suez Canal receipts leading to a lower growth levels reaching US$5.6 bn. Tourism receipts is the first to be hit With expectation of a declining global trade, Suez canal receipts will be negatively impacted Suez Canal Receipts & Traffic Number 2,000.0 1,800.0 1,600.0 1,400.0 1,200.0 1,000.0 800.0 600.0 400.0 200.0 0.0 Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 MayJun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 MayJun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 MayJun-08 0.0 200.0 300.0 500.0 No. of Vessels Oil Tankers Suez Canal Receipts US$ mn 600.0 International tourists arrivals & receipts US$ mn 12,000.0 Tourism Reciepts Tourists Arrivals Visitor 14,000.0 10,000.0 12,000.0 400.0 10,000.0 8,000.0 8,000.0 6,000.0 6,000.0 4,000.0 4,000.0 100.0 2,000.0 2,000.0 0.0 2004/5 2005/6 2006/7 2007/8 0.0 Source: IDSC & CBE Source: CBE Remittances of Egyptian workers have been one of the main drivers to the current account surplus, through an extensive growth of 25.6% and 35.4% in FY06/07 and FY07/08, respectively. Growth in remittances has been mainly driven by inflows from GCC – the major contributor to remittances with 51% - which recorded a 42% growth in FY07/08 up from 19% in FY06/07. Given that GCC countries will maintain current account surplus, yet at lower levels due to lower oil prices, we expect that it will mitigate the risk of the anticipated decline of remittances from the US. Remittances US$ mn 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2004/5 2005/6 2006/7 2007/8 GCC US Europe Remittances remains an important source for Egypt’s BOP Source: CBE 19
Slide 22: November 11, 2008 EGYPT | ECONOMY Provoked by the widening trade deficit and the declining growth in net services, the current account is expected to leave its surplus era, which has been prevailing since FY01/02, heading towards a growing deficit reaching US$3.3 bn in FY08/09 deteriorating further to US$8.5 bn in FY09/10. We believe current account deficit will reach 1.9% of GDP in FY08/09 shifting from a surplus of 0.5% of GDP in FY07/08. . Current account exhibiting high vulnerability to growing trade deficit FISCAL SECTOR With a committed government embarking on a restructuring scheme for revenues and expenditures targeting a fiscal deficit of 3% of GDP by FY10/11, it managed to ease fiscal deficit from a GDP share of 9.6% in FY04/05 to 6.6% in FY07/08. Backed by maintained economic growth and enhanced tax payers’ compliance, tax revenues witnessed strong growth of 16.9% and 20% in FY06/07 and FY07/08, respectively, pushing revenues to LE 218.5 bn in FY07/08. However, the surge in oil and food commodities prices exerted more pressure on subsides, besides the 30% increase in wages, putting more pressures on the expenditures side which grew by 25% in FY07/08. Even with the subsidies restructuring scheme (an average energy price increase of 27% July 2006 and 40% in May 2008) that was outlined to alleviate the increasing burden; expenditures reflected signs of rigidity with the oil subsidies accounting for around 48% of the total subsidies. Revenues & Expenditure LE mn 300,000 Revenues Expenditures Fiscal Deficit/ GDP 12.0% Others 8% Despite fiscal restructuring, subsidies is still a heavy burden Expenditure Breakdown FY07/08 250,000 10.0% Purchase of NonFinancial Assets 12% Wages & Salaries 22% 200,000 8.0% 150,000 6.0% Purchase of Goods & Services 6% 100,000 4.0% Interest Payments 18% Subsidies 34% 50,000 2.0% 0 2004/5 2005/6 2006/7 2007/8 0.0% Source: MOF Source: MOF Tax buoyancy has been improving and is expected to progress further with planned reforms in sales tax and the introduction of value-added tax, the newly introduced real estate tax law, and the new traffic law. We believe revenues will continue to grow reaching LE 269.9 bn in FY08/09. Bearing in mind, the decline in international oil prices that will simmer down subsidies’ growth and the new industrial energy policy that reduces fuel subsidies for energy-intensive industries as well as the reduction in imports payments, we believe expenditure will grow at a slower pace. We believe the GoE’s economy rescue package of increasing support for exports; offering financing and export-related facilities for SMEs; and expanding infrastructure investments could be implemented from expenditures' savings. We believe this will help reduce the fiscal deficit to 6.5% of GDP in FY08/09 and 5.3% in FY11/12. It is unlikely to hit the target of 3% of GDP unless more restructuring on the expenditures side takes place, which is unlikely to be attainable in the mean time. Declining international oil prices trimming fiscal deficit share in GDP 20
Slide 23: November 11, 2008 EGYPT | ECONOMY Reforms also improved Egypt’s debt position with net domestic debt to GDP falling to 43.2% in FY07/08 down from 52.3% in FY04/05. Moreover, net budget sector debt declined reaching 53.4% in FY07/08 from 67.4% in FY04/05. Interest payment as well recorded significant improvement recording a growth of 5.6% in FY07/08 well down from its high levels of 29.6% in FY06/07. Debt Growth & Debt-to-GDP LE mn 600,000 Gross Domestic Public Debt Net Domestic Debt % GDP Net Domestic Public Debt 60.0% A downsized public debt 500,000 50.0% 400,000 40.0% 300,000 30.0% 200,000 20.0% 100,000 10.0% 0 2004/5 2005/6 2006/7 2007/8 0.0% Source: MOF Egypt’s economic outlook 2005/6 Real Sector GDP, Current (LE bn) GDP, Current (US$ bn) Real GDP Growth (%) Population (000) GDP/Capita, Current (US$) Investments (LE bn) External Sector Balance of Goods & Services (US$ bn) Tourism Revenues (US$ bn) Suez Canal Revenues (US$ bn) Transfers (US$ bn) Current Account (US$ bn) Current Account % GDP Exports % GDP FDI (US$ mn) FDI % GDP LE/USD Exchange Rate (Period Avg) Monetary Sector Inflation (CPI %) Lending Rate (%) Credit Growth Fiscal Sector Expenditure % GDP Revenues % GDP Fiscal Deficit (LE mn) Fiscal Deficit % GDP Source: CBE, MOF & CICR forecasts Actual 2006/7 744.8 130.4 7.1% 72,798 1,792 155.3 (4.79) 8.18 4.17 7.06 2.3 1.7% 33.0% 11,053 8.5% 5.710 10.9% 12.64% 9.1% 29.8% 24.2% 54,697 7.3% 2007/8 896.5 162.9 7.2% 74,357 2,191 179.3 (8.45) 10.83 5.16 9.34 0.9 0.5% 32.6% 13,237 8.1% 5.503 11.7% 12.22% 13.4% 30.9% 24.4% 59,234 6.6% 2008/9 1,002.8 174.8 5.0% 75,844 2,305 190.8 (13.27) 11.12 5.61 10.02 (3.3) -1.8% 34.7% 6,364 3.6% 5.735 17.0% 12.75% 10.5% 33.4% 26.9% 65,215 6.5% Forecasts 2009/10 2010/11 1,105.1 189.9 4.4% 77,361 2,455 205.3 (18.77) 11.84 6.00 10.25 (8.5) -4.3% 34.4% 5,865 3.1% 5.819 11.7% 12.00% 9.0% 32.7% 26.8% 66,455 6.0% 1,243.2 212.9 5.7% 78,908 2,698 223.9 (22.24) 13.34 6.93 11.20 (11.0) -4.9% 34.6% 7,496 3.5% 5.840 12.9% 11.75% 12.3% 32.7% 27.2% 70,563 5.7% 2011/12 1,412.1 243.6 6.3% 80,486 3,026 251.6 (26.13) 14.81 8.02 12.40 (13.7) -5.3% 36.8% 10,118 4.2% 5.798 14.19% 11.50% 14.00% 32.6% 27.5% 74,299 5.3% 632.8 108.9 6.8% 71,347 1,527 85.0 (3.80) 7.23 3.56 5.55 1.8 1.6% 31.8% 6,111 5.6% 5.810 4.2% 12.71% 5.3% 32.8% 23.9% 50,385 8.0% 21
Slide 24: November 11, 2008 EGYPT | BANKING RISING UP TO THE CHALLENGE Given the global financial crises and amid concerns of a global recession, the Egyptian banking sector is wellpositioned with its balanced loans/deposits ratio of 53% implying both high liquidity and funding surplus, vs. funding gaps in some credit crunch economies. Next to the mounting banking losses related to bad assets in the global market, Egypt has no significant exposure to subprime assets. Sitting in an under-penetrated emerging market like Egypt with inherent growth potential and achievable high profitability levels with a ROAE of 16% for the sector, and leveraging on the readily available liquidity suggested by the said level of loans/deposits, success is not far. Banking sector outperformed the economy since 2001: Banking assets outperformed the nominal GDP growth since 2001, with a total banking assets/GDP ratio reaching a multiple of 1.2x as at June 2008. A real & non-inflated balance sheet: Lending and other assets in the banking system are funded by existing core deposits, with minimal dependence on foreign inter-bank. Not highly exposed in an under-penetrated market: At a loans/deposits ratio of just 53%, the banking sector is not highly exposed and able to withstand expansions leveraging on only the readily available liquidity, in a market that is eager for growth and under-penetrated (15% penetration) . Faster deposits’ growth, yet high NIMs and ROAEs: Despite that deposits had been growing faster than loans for long, still, banks particularly major ones record high NIMs and ROAEs, as evidenced by an average NIM and ROAE of 3.2% and 33.4% for the 3 covered banks, respectively. Improving credit quality & a much stronger sector: With the termination of the CBE’s first phase of reforms that had started in 2003, including enhancing capitalization, provisional accumulation and consolidations, the banking sector now is much stronger. Opportunities include potential capital that used to migrate to distressed economies: If the banking sector working with the local investors rise up to the challenge, potential capital that previously targeted the currently distressed economies could be diverted to Egypt thereby generating further growth. DRIVERS A highly profitable sector. Under-penetrated market with huge growth potential. A balanced total loans/deposits ratio at 53% implies a funding surplus and readily available liquidity. A real and non-inflated balance sheet. Improved asset quality through reforms and consolidations. No significant exposure to sub-prime crises places the sector at an advantage vs. others. RISKS A large global recession and the risk of other exogenous factors that might impact the sector. A wider than expected GDP slowdown due to wider exports and FDI deceleration can trigger lower deposits’ growth and eventually weak loans’ growth. Lower GDP and GDP per capita could heighten corporate and retail default rates, negatively affecting asset quality. Increased liquidity pressures on foreign currency could create an FX squeeze. Currency depreciation could trigger some FX losses. Interest rate risks related to increased pricing pressures of funds. KEY PERFORMANCE INDICATORS Banking assets CAGR (02/3-07/8,%) Deposits CAGR (02/3-07/8, %) Loans CAGR (02/3-07/8, %) Loans/deposits ratio (2007/8, %) Equity/assets (2007/8,%) ROAE (2007/8, %) 13.4 13.3 7.1 52.9 5.3 16 BANKS COVERED CIB CAE NSGB PAGE # 111 113 137 ALIA ABDOUN ALIA.ABDOUN@CICH.COM.EG SECTOR PERFORMANCE | 2002/3 - 2007/8 Nominal GDP In LE bn Banking Assets Banking Assets/GDP Assets/GDP multiple 1,200 1.4x 1.4x 1,000 1.3x 1.3x 1.2x 1.3x 1.4x 1.3x 1.2x 1.3x 800 1.3x 600 1.2x 1.2x 400 1.2x 200 1.1x 2000/1 2001/2 2002/3 2003/4 2004/5 2005/6 2006/7 2007/8 1.1x 22
Slide 25: November 11, 2008 EGYPT | BANKING BANKING SECTOR STRUCTURE ASSETS Looking back since 2001, Egypt’s banking assets had been growing at an average of 14.3%, outperforming the nominal GDP growth by an average of 27% over the same period, with a total banking assets/GDP ratio standing at a multiple of 1.2x as at June 2008. Banking assets to GDP Nominal GDP In LE bn Banking Assets Banking Assets/GDP Assets/GDP multiple The Egyptian banking sector outperformed the economy since 2001 Trend of Assets/GDP ratio Assets/GDP 1.4x 1,200 1.4x 1.4x 1.4x 1.4x 1,000 1.3x 1.3x 1.2x 1.3x 1.4x 1.3x 1.2x 1.3x 1.3x 1.3x 1.3x 1.3x 1.3x 800 1.3x 1.3x 600 1.2x 1.2x 1.2x 1.2x 1.2x 1.2x 400 1.2x 200 1.2x 1.1x 1.1x 2000/1 2001/2 2002/3 2003/4 2004/5 2005/6 2006/7 2007/8 1.1x 1.1x 2000/1 2001/2 2002/3 2003/4 2004/5 2005/6 2006/7 2007/8 Source: CICR & CBE Source: CICR & CBE Figures of June 2008 confirm the rich liquidity of the Egyptian banking system, Loans represent the with a loans/assets ratio of only 37.1%, followed by domestic inter-bank assets at main investment; at 25.7%. It is noteworthy that trading securities & T- Bills represent 18.6% of total only 37% of assets… assets, of which 73% representing 13% of total assets are in T-Bills, while foreign inter-bank represented only 11.3% of the total. Banking assets by type, June 2008 Funding by type, June 2008 Cash Balances banks abroad 100% 90% 80% 70% 60% 50% 40% Securities & TBs Loans & discounts 6.3% Domestic Interbank Other assets 100% 90% Reserves Other liabilities Obligations to banks abroad Capital Obligations to banks in Egypt Long term loans&Bonds 2.1% 1.2% Provisions Total deposits 37.1% 80% 70% 60% 69.0% 11.3% 50% 40% 25.7% 30% 20% 10% 0% 18.6% 0.9% 30% 20% 10% 0% 9.1% 7.9% 5.8% 3.4% 1.5% Liabilities Assets Source: CICR & CBE Source: CICR & CBE 23
Slide 26: November 11, 2008 EGYPT | BANKING Not only does the banking system benefit from liquidity, but also its liquidity stems ….while core deposits from internal core deposits which capture 69% of total funding, whereas domestic generate the main and foreign inter-bank liabilities barely represent 9.1% and 1.2% of financing, re- funding at 69% spectively. Core internal deposit financing represents a safety haven against external shocks. DEPOSITS Total banking sector deposits having been growing at an average of 13% for the Steady deposits growth, composing an past 5 years, an average multiple of 0.9x of GDP. average of 90% of GDP From the deposit breakdown by type, it is apparent that the household sector has long been the major depositor, the second place has shifted from the government deposits to private business sector starting 2006/7, indicating the wider role the private sector has been taking up, thanks to all the reform efforts taking place in Egypt during the last three decades including deregulation and privatization of the economy and the sector. Total deposits growth relative to GDP Total Deposits In LE bn Nominal GDP Deposits/GDP Household sector as major depositor, followed by a strengthened private business sector Deposits breakdown by depositors Government deposits Household sector Private sector business deposits Non-resident (external sector) 0.1% 0.5% 0.4% 0.7% 0.6% Public sector business deposits 1,000 900 800 700 600 522 551 571 0.9x 0.9x 897 1.0x 1.0x 0.9x 658 745 633 756 1.0x 100% 90% 0.1% 1.0x 80% 70% 65.3% 63.9% 65.1% 63.8% 59.3% 66.5% 0.9x 60% 50% 500 405 418 464 485 0.8x 400 300 200 100 2002/3 2003/4 2004/5 2005/6 2006/7 0.9x 40% 30% 4.1% 13.6% 4.1% 14.0% 4.0% 13.6% 4.6% 14.1% 4.6% 5.1% 0.8x 20% 10% 16.7% 17.9% 16.8% 19.2% 23.4% 14.4% 11.7% 2006/7 11.6% 2007/8 0.8x 2007/8 0% 2002/3 2003/4 2004/5 2005/6 Source: CICR & CBE Source: CICR & CBE Deposits dollarization had been easing in the aftermath of the complete currency Local currency domifloatation that took place in 2003, standing at only 25.8% of total deposits as at nates the deposits base June 2008. Although the constitution of deposits is mainly captured by time and saving deposits, still, demand deposits and blocked deposits hold a significant 16%, offering an advantage for the banks to benefit from either interest free or low interest bearing deposits, partially cushioning against funding pricing pressures. Household sector as major depositor, followed by a strengthened private business sector 24
Slide 27: November 11, 2008 EGYPT | BANKING Deposits breakdown by currency LCY FCY Breakdown by types of deposits Demand deposits Time & Saving deposits 4% Blocked or retained deposits 100% 90% 30.8% 32.5% 28.8% 29.4% 28.4% 100% 90% 80% 70% 60% 25.8% 80% 70% 60% 50% 40% 69.2% 67.5% 71.2% 70.6% 71.6% 84% 50% 40% 30% 20% 10% 12% 74.2% 30% 20% 10% 0% 2002/3 2003/4 2004/5 2005/6 2006/7 2007/8 0% Total Deposits Source: CICR & CBE Source: CICR & CBE LOANS Total loans hovered around 50% of GDP during the last 5 years, with the industrial sector capturing the lion’s share, followed by the services sector. Loans dollarization rate reached 33.3% as at June 2008. Further, FCY loans/deposits ratio has started to exceed LCY loans/deposits ratio since 2006/7, indicating an increased activity on the foreign currency side. Loans growth relative to GDP Loans In LE bn Nominal GDP Loans/GDP Lending remained at an average of 50% of GDP, with the industry sector as main lender Loans breakdown by lender Government Agriculture Industry Trade Services Household & external sector 100% 1000 0.4x 0.8x 897 12.8% 13.1% 90% 0.7x 80% 0.6x 0.5x 25.6% 25.2% 14.1% 17.2% 18.0% 900 0.7x 0.5x 0.6x 745 0.5x 0.6x 551 485 418 399 295 307 323 352 633 21.4% 800 700 600 500 400 300 200 100 0 2002/3 2003/4 2004/5 2005/6 283 24.7% 25.5% 26.9% 25.5% 70% 60% 50% 40% 30% 20.7% 20.3% 18.7% 0.4x 0.3x 0.2x 17.7% 13.9% 14.4% 34.4% 34.0% 33.3% 31.4% 31.4% 29.4% 20% 0.1x 0.0x 2006/7 2007/8 10% 0% 1.7% 4.7% 1.9% 5.5% 2.1% 7.2% 2.2% 7.6% 1.5% 7.8% 1.8% 6.5% 2002/3 2003/4 2004/5 2005/6 2006/7 2007/8 Source: CICR & CBE Source: CICR & CBE 25
Slide 28: November 11, 2008 EGYPT | BANKING Loans breakdown by currency LCY FCY Loans/deposits ratio by currency LCY FCY 100% 90% 80% 70% 60% 23.1% 22.9% 24.3% 90.0% 80.0% 29.7% 33.3% 77.8% 72.7% 68.2% 62.5% 59.0% 52.4% 49.6% 44.9% 50.5% 56.0% 52.6% 47.5% 26.2% 70.0% 60.0% 50.0% 50% 40.0% 40% 30% 20% 10% 0% 2002/3 2003/4 2004/5 2005/6 2006/7 2007/8 76.9% 77.1% 75.7% 73.8% 70.3% 66.7% 30.0% 20.0% 10.0% 0.0% 2002/3 2003/4 2004/5 2005/6 2006/7 2007/8 Source: CICR & CBE Source: CICR & CBE With the commencement of the reform program around 2003, total loans/deposits ratio has declined from 70% to 52.9% in 2007/2008. Even at the current deposits level and without expanding the deposits base, the readily available liquidity level suggested by the system’s total loans/deposits ratio of just 52.9% as at June 2008, indicating that the sector can withstand further loan growth without jeopardizing a reasonable liquidity position. Loans to deposits ratio at a favorably reasonable 53%, implies both liquidity and room for growth… Total loans/deposits of the system 75.0% Egypt’s loans/deposits vs. others 140.0% 121.3% 70.0% 120.0% 70.0% 99.9% 100.0% 65.0% 63.6% 85% 91% 94% 80.0% 60.0% 58.8% 56.5% 60.0% 52.9% 55.0% 53.5% 52.9% 40.0% 32.8% 50.0% 20.0% 0.0% 45.0% 2002/3 2003/4 2004/5 2005/6 2006/7 2007/8 Lebanon Egypt Turkey Saudi Arabia UAE U.S.A U.K Source: CICR & CBE Source: CICR, Central Banks& Bloomberg With the system’s LCY loans/deposits ratio of 47.5% and FCY loans/deposits ratio of 68.2% as at June 2008, it can be argued that in both cases funding is generated from actual core deposits; meaning, demand is still below supply, implying a funding surplus vs. a funding gap in some countries; according to the Bank of England, the UK for example had a funding gap worth around GBP740 bn as at June 2008, the same case as some other credit crunch economies. Egypt also is in a healthier position with no significant exposure to sub-prime markets and without a high exposure to real-estate; where real-estate represented 6.5% of total implemented investments in 2007/8, vs. many gulf countries that are relatively more exposed to global markets and some highly exposed to real- Better position; no funding gap in Egypt and insignificant exposure to distressed economies 26
Slide 29: November 11, 2008 EGYPT | BANKING estate, additional to having much higher loans/deposits ratios indicating lower liquidity - not a favorable situation concurrent with the easing of oil prices. Following the reforms through banking law no. 88/2003 and its amendments, the CBE had implemented strict supervision over banks including enhancing their provisioning base to hedge against low asset quality, to the extent of forcing some banks to book their entire returns in provisions and record nil profits. Reforms also included increasing capitalization, cleaning bad loan portfolios and consolidations, the banking sector now is considered much stronger. Unlike the private sector banks, non-performing loans are particularly concentrated in the public banks less the privatized Bank of Alexandria (BoA) which had gone through a strong clean up and restructure before its sale. The government is still considering the sale of Banque du Caire, but waiting for the right time. Over the last 5 years, improving credit quality in Egypt & a much stronger sector PROFITABILITY Being in an emerging market, Egyptian banks enjoy decent interest spreads, especially the leading banks with superior asset liability management which enables them to efficiently manage their spreads in both rising and declining interest rates environments. Deposits had been growing faster than loans, yet, Egyptian banks generate high NIMs & high ROAEs Profitability of leading banks NIM ROAE Leading 2009 multiples P/E 2009P P/BV 2009P 50.0% 45.0% 40.0% 35.0% 6.0x 5.0x 4.3x 4.9x 4.0x 30.0% 25.0% 20.0% 15.0% 10.0% 1.0x 5.0% NIM, 3.7% NIM, 3.3% NIM, 2.7% ROAE, 42.6% 3.7x 3.0x ROAE, 32.0% ROAE, 25.6% 2.0x 1.5x 1.3x 0.9x 0.0% CIB NSGB CAE 0.0x CIB NSGB CAE Source: CICR & Banks’ financials as at June 2008 *NSGB’s ROAE is ex-goodwill Source: CICR projections *NSGB’s P/E is ex-goodwll In June 2008 our analysis, using the maximum 3M USD deposit rate and the 1M LIBOR reveals an increased spread vs. June 2007. Since then there has been some reversal due to the international scene, and the increased demand on USD. However, this may not truly reflect the experience of the private banks, as our discussions with them indicate that especially in the case of fixed lending rates (unlike floating) related to long-term loans that were booked previously but not revalued, benefiting from larger spreads. Domestically, banks are still considered liquid in both currencies, so there are no liquidity pressures on the FCY yet. Widening FCY spread until June 2008, partially narrowing in September 2008... Meanwhile, the LCY side benefits from high spreads, despite funding pricing pres- …Significant LCY sures resulting from the consecutive CBE hikes the in the corridor rates totaling spread 2.75% since early 2008. Said rise in rates did not seem to filter with a large magnitude in the price of funds as evidenced from the 1H08 of the covered banks, particularly CIB and NSGB. Fortunately, Egyptian banks rely more on core de- 27
Slide 30: November 11, 2008 EGYPT | BANKING posit financing rather than inter-bank, therefore enjoy a cost advantage interval; as deposit rates’ rates’ adjustment to rises in interest rates lag behind inter-bank rates. Meanwhile, banks benefit from rate increases with regards to lending portfolios that are benchmarked to the discount rate. We expect the CBE to start reducing rates to boost economic activity starting 2009. LCY interest spread LCY less 1-year deposit rate LCY less 1-year lending rate FCY indicator of spread USD 3M average deposit rate USD 1M libor rate Lending rate 14.0% 12.6% 12.0% 12% 8.0% 7.33% 7.0% 6.06% 12.0% 6.0% 10.0% 5.33% 5.1% 5.0% 8.0% 6.9% 7.1% 7.2% 4.06% 4.93% 4.0% 3.06% 6.0% 3.0% 2.0% 1.0% 0.0% 2006/7 2007/8 Jul-08 2.93% 2.7% 4.0% 2.0% 0.0% 2006/7 2007/8 Sep-08 Source: CICR & CBE (July is the latest available) Source: CICR, CBE, British Banking Association *Assumed lending rate as USD 1M libor plus 2% BALANCE SHEET OUTLOOK In line with our internal forecast entailing the softening of nominal GDP growth rates in the coming two years, followed by a slight pick up over the subsequent years, we project slower deposits’ and banking assets’ growth in said years, followed by a smooth pick up. Starting 2010/11 as the consequences of the global crises on the local market become quantifiable, we project lending to slightly pick up leveraging on the already available liquidity, in view of the fact that it had originally fallen from the 70%-level in 2002/3. Balance Sheet outlook for the sector In LE bn Assets Deposits Loans Loans/Deposits 2006/7 938 23.2% 658 15.2% 352 9.1% 53.5% -298 bps 2007/8 1,083 15.5% 756 14.8% 399 13.4% 52.9% -67 bps 2008/9P 2009/10P 2010/11P 2011/12P 1,197 1,305 1,455 1,651 10.5% 9.0% 11.5% 13.5% 835 910 1,015 1,152 10.5% 9.0% 11.5% 13.5% 441 481 540 616 10.5% 9.0% 12.3% 14.0% 52.9% 52.9% 53.3% 53.5% 0 bps 0 bps 38 bps 25 bps Total loans/deposits to remain stable for the next two years followed by a slight rise… Source: CBE & CICR projections We expect the 3 covered private banks to outperform the sector thereby win mar- Comparative forecasts ket share starting 2009, then to continue steady growth in the following years. for the 3 covered banks 28
Slide 31: November 11, 2008 EGYPT | BANKING Deposits growth of the 3 banks Deposits Forecast CIB NSGB* CAE Average 2008P 27% 5% 14% 15% 2009P 13% 13% 16% 14% 2010P 13% 13% 16% 14% 2011P 12% 12% 16% 13% 2012P 12% 11% 14% 12% Source: CICR projections *NSGB 2008 deposits’ growth is low due to the decline in 2Q08 partially related to the withdrawal of Asset Manager deposits. Loans growth of the 3 banks Loans Forecast CIB NSGB CAE* Average 2008P 26.6% 21.7% 60.2% 36% 2009P 17.0% 18.1% 26.2% 20% 2010P 15.9% 15.9% 22.7% 18% 2011P 13.6% 12.6% 20.6% 16% 2012P 12.6% 12.6% 18.1% 14% Source: CICR projections *CAE 2008 loans’ growth is 2008 is high due to strong growth in 1H08 29
Slide 32: November 11, 2008 EGYPT | CEMENT SURVIVAL ON THE BACKLOG Given the current fears from the negative impact of the expected global recession, maybe the picture for the Egyptian cement industry is not that gloomy—supported by the massive backlog of real-estate projects which will secure cement consumption despite of some expected delays in these projects. Against the backdrop of an improved mortgage scheme, the middle-income group may exert some demand pressures for real-estate—especially that the mortgage loans almost doubled reaching LE 3 bn in October 2008 up from LE 1.4 bn in June 2007. In addition to the GoE’s commitment to push further local investments through building commercial and industrial zones in many governorates which will increase the demand for the retail segment. On the exports front, the GoE’s removal of the export ban and duties will give the local cement producers more competitive edge—namely that the Egyptian cement exports prices is considered one of the cheapest in the region. Most notably, the expanded foreign ownership reaching 79% in 2008, highlights the market’s growth potential. We believe that the industry with its current concentration level—3 cement groups controlling 62.1% of the local market—is capable of weathering the coming challenges, yet the market still sustains further consolidations. Availability & proximity to high-grade limestone: The abundant raw materials in Egypt, gives the industry a cost advantage compared to some of its regional peers that relies on imported clinker. The expanding potential of utilizing natural gas gives an edge to further reduce cost: The growing natural gas reserves expands the industry’s potential to utilize a relatively cheaper energy source and hence, enhance the margins of the companies utilizing natural gas. Moreover, it is an environmental friendly energy source compared to mazot. The industry enjoys higher margins: The local cement players enjoy higher margins averaging a gross profit margin of 54.6% in 1H08 versus a regional average of 36.3%. Cement demand is to be secured by the backlog: In light of the expected slowdown in real-estate demand cement consumption is to be secured by the backlog of the developers projects. Yet, with the anticipated pick-up in the economy which will trigger the inflow of projects the demand for cement will regain its strength. DRIVERS Removal of export duties & export ban. Abundance of raw materials. High margins compared to regional peers. New capacities on stream. Outstanding real-estate projects secure demand for cement. The expanding existence of foreign companies in the local market allows for efficient operation and signals market potential. RISKS Anticipated slowdown in construction activities. Rising cost on inputs. Sudden governmental decisions as imposing exports bans and duties. Massive regional capacity additions which intensifies rivalry. KEY PERFORMANCE INDICATORS Cement production CAGR (04-07,%) Cement consumption CAGR (04-07,%) Cement exports CAGR (04-06,%) Average surplus (04-07,mn tons) Average utilization rate (04-07,%) 10.2 13.5 20.9 5.1 86.1 COMPANIES COVERED PAGE # Misr Beni Suef Cement Misr Cement (Qena) Sinai Cement 129 131 153 BASMA SHEBETA BASMA.SHEBETA@CICH.COM.EG SECTOR PERFORMANCE | 2004-2008 mn tons 45 Production Supply Growth Demand Demand Growth 25% 40 20% 35 15% 30 10% 25 20 5% 15 0% 10 -5% 5 0 2004 2005 2006 2007 8M08 -10% 30
Slide 33: November 11, 2008 EGYPT | CEMENT CEMENT MARKET IN EGYPT Over the first eight months in 2008, Egypt's cement market reached 26 mn tons, up by 12.7% from the same period a year earlier. Yet, production growth lagged behind with a 3.5% increase reaching 26.8 mn tons. Consumption outpaced production growth MARKET STRUCTURE Currently, the designed grinding capacity is 46.1 mn tons, with foreign companies holding the bulk of 74%. The total companies operating in the cement sector is 13; 8 of which are foreign companies, 4 are private; and one is a public company. Moreover, total grinding capacity reached 46.1 mn tons split between gray cement (97.1%) and white cement (2.9%). It is worth highlighting that Arabian Cement company which started operations in 2008 is currently producing clinker only till its own grinding mills are up and running. Cement capacity by product in 2008 White 2.9% Designed capacity reached 46 mn tons with foreign companies bearing the bulk Cement capacity by ownership in 2008 Public 7.6% Private 18.4% Gray 97.1% Foreign 74.0% Source: CICR Database Source: CICR Database KEY MARKET FACTS The wave of acquisitions activity by foreign companies to local cement companies started since 1999 with Lafarge & Cemex acquiring 76% & 96%, respectively of Beni Suef Cement and Assiut Cement companies and ending with Lafarge acquiring 100% of OCI Cement Group namely, Egypt Cement Company (ECC). The deal became effective by the end of January 2008, moving up foreign ownership share – in terms of local sales- from 20.8% in 1999 to 78.9% in 2008 - hence, emphasizing the market's potential. Local cement market shares in 1999 & 8M08 1999 2008E An expanding foreign ownership confirms the market's potential 7.8% Public 12.9% 13.3% Private 66.3% 78.9% Foreign 20.8% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Source: Ministry of Investment 31
Slide 34: November 11, 2008 EGYPT | CEMENT The consolidation wave within Egypt's cement market increased the concentration level of the largest three players from 47.3% in 1999 to 62.1% in 2008.* 1999 Local cement market shares ECC 7.4% Suez 16.5% Helwan 11.4% Beni Suef 5.7% Torah 15.6% Increasing market concentration 8M08 Local cement market shares Misr Cement Qena 4.0% Sinai 5.5% National 7.8% Misr Beni Suef 3.8% Italicementi (Torah, Helwan & Suez) 29.4% Alexandria 4.3% Lafarge (ECC) 19.6% Cemex (Assiut) 13.1% Titan (Beni-Suef & Alexandria) 8.1% Cimpor (Ameriyah) 8.6% Amereyah 11.0% Cemex 15.2% National 12.9% Source: Ministry of Investment Source: Ministry of Investment Boosted by the construction & real-estate boom within Egypt, cement market reversed its growth pattern with demand growth exceeding that of supply (14% vs. 6.2%, respectively) in 2007 and (12.7% vs. 3.5%) during the first eight months of 2008, hence depressing market surplus to 0.74 mn tons. Cement market development pattern (2004-8M08) mn tons 45 40 35 15% 30 10% 5% 0% 10 5 0 2004 2005 2006 2007 8M08 -5% 1 5 Production Production Growth Demand Demand Growth 25% 20% A shrinking surplus Cement market surplus pattern (2004-8M08) mn tons 7 5.99 6 5.21 5.05 4.01 25 20 15 2 0.74 4 3 -10% 0 2004 2005 2006 2007 8M08 Source: Ministry of Investment Source: Ministry of Investment As demand has been following a higher growth pattern than that of supply, hence tighter utilization rates were achieved, reaching its peak of 92.2% in 2007. … and tighter utilization rates * In terms of local sales 32
Slide 35: November 11, 2008 EGYPT | CEMENT Added capacity, demand & utilization rate (20042007) mn tons 6 5 4 3 86.8% 2 1 0 2004 -1 -2 0.0 57.5% 8M06 8M07 8M08 1.5 Added capacity, demand & utilization rate (8M06-08) 95% mn tons 3.5 Added Capacity Added Demand Utilization Rate 63.0% 62.6% 62.5% 62.0% 61.5% 61.0% Added Capacity Added Demand Utilization Rate 92.2% 90% 87.0% 3.0 62.2% 2.5 85% 2.0 60.5% 60.0% 59.5% 59.5% 59.0% 58.5% 78.3% 80% 1.0 2005 2006 2007 75% 0.5 58.0% -3 70% Source: Ministry of Investment Source: Ministry of Investment As demand has been boosted, triggered by the real-estate boom, cement prices have been following a rising trend. Cement ex-factory prices reached an average of LE 435/ton over the first eight months of 2008 up from an average price of LE 362/ton in 2007. Cement prices by month* (Jan 2006-Aug 08) LE/ton 470 460 450 440 430 420 410 400 390 380 370 360 350 340 330 320 310 300 Prices are following higher levels Increasing the levied duties on cement exports to LE 85/ton Imposing a ban of 6-month period on cement exports Second increase in energy prices LE 65/ton levied duties on cement exports First increase in energy prices imposing fees on clay amounting to LE 35.1 per 1 ton of cement produced Source: Ministry of Investment Energy accounted for the highest share in cement production costs, yet, varying based on the type of feedstock used. Energy contribution during 3Q08 registered a lower share of 51.2% in the cost structure of the companies using natural gas against 53.9% for those using mazot such as Misr Cement (Qena). Ja n Fe -06 b M -06 ar Ap -06 M r-06 ay Ju -06 nJu 0 6 Au l-06 g Se -06 pO 06 c N t-06 ov D -06 ec Ja -06 n Fe -07 b M -07 ar Ap -07 M r-07 ay Ju -07 nJu 07 Au l-07 g Se -07 pO 07 c N t-07 ov D -07 ec Ja -07 n Fe -08 bM 08 ar Ap -08 M r-08 ay Ju -08 nJu 0 8 Au l-08 g08 Energy is the major contributor to cost * Ex-factory including transportation cost 33
Slide 36: November 11, 2008 EGYPT | CEMENT 3Q08E Cost structure for companies using natural 3Q08E Cost structure for the company using magas as feedstock zot Transportation Others 1.5% 1.1% Packaging 13.7% Raw materials 8.7% Resource Dev. Fees 10.2% Maintenance 18.8% Raw Materials 8.2% Packaging 19.1% Asec 13.6% Energy 51.2% Energy 53.9% Source: CICR estimates Source: CICR estimates MARKET DYNAMICS Domestic Market Governmental Measures - Removal of export duties & export ban - Modifying anti-monopoly law - Raising energy prices - Raising raw materials prices - New licenses Supply-Related Factors - Raw materials availability - Rising cost of inputs - Higher margins - Observed tight supply - Impact from export ban & duties - Impact of strict conditions on new capacities - Electricity availability Demand Driver - Construction boom GOVERNMENTAL MEASURES Ever since the beginning of 2007, the government has taken several actions and decisions to regulate the cement industry's trading activity as well as new capacities. Recent governmental measures Measure Revoking the export ban & export duties Date 19-Oct-08 Description Calling-off the 6-month export ban previously imposed by the Ministry of Trade & Industry on cement exports starting from March 29, 2008. Soon after, the GoE decided to remove the LE 85/ton duties imposed on cement exports. By raising the minimum level of fines charged per violator from LE 30k to LE 100k and the maximum level from LE 10 mn/violator to LE 300 mn. Raising natural gas & electricity prices by 37.3% & 20.1% respectively. Increasing mazot prices in early January 2008 by 100% to record LE 1000/ton. Impact POSITIVE Modifying Anti Monopoly Law Jul-08 NEGATIVE Raising energy prices Sep-07 Jan-08 NEGATIVE NEGATIVE Source: CICR Database 34
Slide 37: November 11, 2008 EGYPT | CEMENT Measure Increasing clay prices New licenses Date 6-May-08 Oct-07 Description Imposing on cement companies a resource development fees on the clay amounting to LE 35.1/ton of cement produced. Offering 7 licenses through a public auction: 5 licenses for Greenfield operations, and 2 licenses for expansion purposes of existing companies. In addtion, a license was offered for free to a Greenfield company namely, New Valley as it was the only bidder for New Valley license Raising the duties previousely levied on cement exports by 31% to reach LE 85/ton Imposing an export duty of LE 65/ton on cement exports Impact NEGATIVE POSITIVE Raising duties on cement exports Imposing duties on cement exports Source: CICR Database Aug-07 Mar-07 NEGATIVE NEGATIVE According to the GoE plan, planned capacity additions will be complete by 2012; raising local gray cement capacity to 62.5 mn tons up from its current level of 42.9 mn tons. The following table illustrates the details of the gray cement capacity additions over 2009-2011: Gray cement capacity additions over 2009-2011 Greenfield Licenses Wadi Al Nile Cement Co. (WNCC) Al-Swedy Cement Arab National Cement Co. (ANCC) Al-Nahda Industries North Sinai Cement Building Materials Industries Al-Wadi Cement Governorate Beni Suef Suez El Meniah Qena North Sinai Assuit New Valley License Cost (LE mn) 251 201 200 83 44 22 Free Capacity in 000 tons 1500 1500 1500 1500 1500 1500 1500 Expansion Fees Assiut Cement Company Beni Suef Cement Company Governorate Assuit Beni Suef License Cost (LE mn) 202 135 Capacity in 000 tons 1500 1500 Reconciliation Fees Arabian Cement Sinai Cement Medcom Aswan Misr Beni Suef Cement South Valley Cement Governorate Suez Sinai Aswan Beni Suef Beni Suef Fees Charged (LE mn) NA 44 NA 251 251 Capacity in 000 tons 1500 1500 1000 1500 1500 Source: CICR Database and IDA SUPPLY-RELATED FACTORS Despite the minimal share of raw materials in the production cost of cement – an average of 8.45% in 3Q08E, their availability, proximity and quality are crucial to expanding cement production. The fact that Egypt has abundance of limestone, gypsum, and slag in moderate and high quality pushed the cement industry to expand and grow, and will even drive its potential further in the future. Since cement is an energy-intensive industry – with energy estimated to constitute an average of 52.5% of total production cost in 3Q08– raising natural gas & electricity prices by 37.3% & 20.1% effective September 2007, followed by a 100% increase in mazot prices effective January 2008 have negatively impacted the industry's margin. Consequently, the average EBITDA margin for gray cement producers declined from 50.8% in 2006 to 46% in 2007; and from 50% in 1H07 to 47% in 1H08. It is worth noting that the impact of the LE 35.1/ton of resource development fees for clay imposed on May 6, 2008 was not yet significantly reflected on the 1H08 margins, however, it should be mirrored in 3Q08 margins. Raw materials availability Rising cost of inputs 35
Slide 38: November 11, 2008 EGYPT | CEMENT Average EBITDA margins for the cement industry (2006-2008) 52% 51% 50% 49% 48% 47.0% 47% 46.0% 46% 45% 44% 43% 2006 Annual 2007 1H07 Semi-Annual 1H08 50.8% 50.0% Source: Company’s Reports The high gross profit margins for the Egyptian cement industry compared with their regional peers played a key role in boosting the industry's expansions, in addition to encouraging a wave of acquisitions by foreign companies. Regional gross profit margins in 1H08 80% 70% 63.1% 60% 50% 40% 32.7% 30% 22.8% 20% 14.0% 10% 0% Arabian Cement Yamama Cement Gulf Cement Fujairah Cement UAE Ras AlKhaimah Cement Sinai Misr Beni Misr Cement Suef Cement Cement (Qena) Helwan Cement Suez Cement Torah cement 49.0% 57.9% 50.2% 45.8% 40.1% 67.3% Yet, local producers enjoy higher margins compared 66.1% KSA Egypt Source: Company’s Reports Despite witnessed capacity additions over 2004-2007 averaging 1.7 mn tons per annum, expanding cement consumption maintained the industry’s utilization rate at high levels - with an average of 86%. Over the aforementioned period, cement capacity increased by a CAGR of 4% to reach 42 mn tons in 2007 vs. a CAGR of 13.5% for demand recording 34.5 mn tons. It is worth highlighting that such tight market status led to further capacity additions in order to satisfy the market needs. Despite capacity additions, still supply is tight 36
Slide 39: November 11, 2008 EGYPT | CEMENT Cement supply status (2004-2007) mn tons 45 40 90% Cement utilization rates (2004-2007) 95% 92.2% Capacity Production Demand 35 30 25 20 15 10 5 0 2004 2005 2006 2007 70% 2004 2005 2006 2007 75% 80% 78.3% 87.0% 85% 86.8% Source: Ministry of Investment Source: Ministry of Investment Imposing tariffs on cement in 2007, followed by a 6-month export ban which started by the end March 2008, led to a 28% drop in 2007, followed by a further decline of 73.2% in 8M08 versus 8M07. Yet, to mitigate the negative impact of the anticipated global economic slowdown the GoE decided to call off the export ban and the export duties on cement exports. Cement exports pattern (2004-8M08) mn tons 7 5.9 5.2 5 4.7 4.2 4 3.2 3 Imposing the export ban and duties led to a huge drop in exports 6 2 1 0.7 0 2004 2005 2006 2007 8M07 8M08 Source: Ministry of Investment The GoE set strict standards for investors in order to participate in the Greenfield & expansions auctions. In addition, new licenses include strict terms in order to grant that new capacities start on schedule such as, the founder can not sell the Greenfield license until the production starts, yet the GoE allowed the investor to sell a stake, which may open the door for another wave of consolidation in the local market. One of the major constraints facing any capacity additions is the electricity availability. It is worth mentioning that in order to implement the declared new capacities, companies will be required either to establish their own power stations to secure their needs from electricity or to pay the investment cost of the power station to the GoE which will handle its establishment. It is worth mentioning that the investment cost for establishing a power station may reach LE 125 mn. Strict conditions in new licenses to prevent any delay in the new capacities entrance Electricity availability 37
Slide 40: November 11, 2008 EGYPT | CEMENT CONSTRUCTION DRIVER The massive construction activity witnessed in Egypt has triggered demand for cement. Over 2004-2007, the construction sector grew with a CAGR of 7.4%, pushing further cement consumption from 23.6 mn tons in 2004 to 34.5 mn tons in 2007 – reflecting the strong ties between both variables which is emphasized by the high coefficient correlation of 0.910. Construction activity vs. cement consumption (2004-2008) LE bn 40 35 30 25 20 15 10 5 0 2004 2005 2006 2007 2008E Construction Cement Consumption mn tons 40 35 30 25 20 15 10 5 0 Source: CBE, Ministry of Investment & CICR estimates FUTURE OUTLOOK Against the backdrop of the global economic turmoil and the expected slow down in construction and real-estate activities worldwide and in Egypt, the demand for cement is expected to grow at a slower pace, an AAGR of 1.36% over 2009 and 2010. Nevertheless, cement consumption is expected to gain back its momentum by 2011 with the anticipated pick-up in the economy and the expected inflow of new projects, concurrently cement consumption will grow by a AAGR of 9.4% over 2011-2012 reaching 47.9 mn tons by 2012. It is worth mentioning that demand for cement over 2009 & 2010 will be mainly secured by the outstanding real-estate contracts, as the existing contractors are expected to continue their construction works, yet at a slower pace. Future cement outlook mn tons 50 45 40 35 30 25 20 15 10 5 0 2006 2007 2008E 2009F 2010F 2011F 2012F Outstanding realestate projects will secure cement consumption over 2009 and 2010, with an anticipated pickup afterwards Source: CICR Database and estimates 38
Slide 41: November 11, 2008 EGYPT | CEMENT Planned grinding capacity additions is expected to expand gray cement capacities to 62.53 mn tons by 2012 up from its current level of 42.86 mn; of which year 2011 will witness the highest capacity additions of 9 mn tons. Most notably, Greenfield is to contribute with almost 51% of total additions, highlighting the market’s potential. Planned gray cement grinding capacities Company Name Torah Cement Helwan Cement National Cement Cemex Al-Amreyah+Cimpor Titan Suez Cement Lafarge Sinai Cement Misr Cement Qena Misr Beni Suef Cement Arabian Cement Madcom-Aswan Arab National Cement Co. (ANCC) Wadi Al Nile Cement Co. (WNCC) El-Sweedy Cement North Sinai Cement South Valley Cement Al-Nahda Industries Building Materials Industries Al-Wadi Cement Total Effective Capacities 2006 3,330 4,500 3,500 5,000 3,700 3,000 4,200 10,000 1,500 1,500 1,500 41,730 2007 3,330 4,500 3,500 5,000 3,700 3,000 4,200 10,000 1,500 1,500 1,500 41,730 2008E 3,330 4,500 3,500 5,000 3,700 3,000 4,200 10,000 1,750 1,500 1,500 875 42,855 2009F 3,330 4,500 3,500 5,000 3,700 3,375 4,200 10,300 3,000 1,500 2,250 750 1,500 46,905 2010F 3,330 4,500 3,500 5,375 3,700 4,500 4,200 10,300 3,000 1,500 3,000 1,500 1,000 1,375 375 125 1,500 52,780 2011F 3,330 4,500 3,500 6,500 3,700 4,500 4,200 10,300 3,000 1,500 3,000 1,500 1,000 1,125 1,500 1,500 1,500 1,500 1,500 1,125 1,500 61,780 2012F 3,330 4,500 3,500 6,500 3,700 4,500 4,200 10,300 3,000 1,500 3,000 1,500 1,000 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 62,530 Huge capacity additions of 20 mn tons till 2012 Source: CICR Database and estimates Expected slowdown in construction activity over 2009-2010, coupled with around 10 mn tons of capacity additions will ease utilization rates to 76% by 2010. Despite the expected pick-up in cement consumption starting 2011, utilization rate will further decline to 74% due to the huge capacity additions of 9 mn tons in that year. Yet, by 2012, utilization rate will rebound reaching 79%. Cement supply status (2006-2012) mn tons 70 65 60 55 50 45 40 35 30 25 20 15 10 5 0 2006 2007 2008E 2009F 2010F 2011F 2012F Cement Capacity Production Demand Utilization rate to strengthen by 2012 Market utilization rate (2006-2012) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2006 2007 2008E 2009F 2010F 2011F 2012F 86.8% 91.1% 92.2% 84.8% 76.1% 74.2% 78.7% Source: CICR Database and estimates Source: CICR Database and estimates 39
Slide 42: November 11, 2008 EGYPT | CEMENT Local & export cement prices will continue increasing yet, at a decelerating rate over 2009-2010 due to the weakened demand for cement in the local and export markets over the aforementioned years. However, with the expected recovery in local & international economies, local & export cement prices will start increasing at an accelerating rate over 2011-2012, yet, still below historical growth rates due to the rising competition from regional peers. Local & export cement prices* (2006-2012) LE/ton 700 Local Prices Exports Prices US$/ton 120 Increased cement prices 600 100 500 80 400 60 300 40 200 20 100 0 2006 2007 2008E 2009F 2010F 2011F 2012F 0 Source: CICR estimates * Local prices include transportation cost, while exports prices are ex-factory prices 40
Slide 43: November 11, 2008 EGYPT | FERTILIZERS POUNCE AND ROAR Rising global food demand to support the increasing population, and the international move towards expanding sources of clean energy renders the need for fertilizers as a key supportive industry. With the developed region, namely Europe, restricting further set-up of environmental-polluting production units as fertilizers, investments are to shift to the developing regions. With Egypt being in central geographical location, and China's slashing of 30% of global fertilizers trade with its levied export tariff, Egypt's fertilizers exports are highly valued. On the local front, strong fertilizers demand is to be maintained as the GoE plans to expand the agricultural land and reclaim an additional 150k feddans/annum. Moreover, given the country's cheap cost of production coupled with the abundance of natural gas and phosphate rocks gives Egypt an edge in nitrogen and phosphate segments. Most notably the higher margins that the fertilizers industry enjoys compared to its global peers adds to the country's investment potential. Good prospects in the local and export markets: Against the backdrop of the growing global food needs, and increasing bio-fuels demand the global fertilizers consumption is expected to maintain its strength. In the local scene, a sustained strong demand growth is anticipated driven by the expanding agricultural land. Cheap factors of production and availability of raw materials are key strengths: With significant price differential that Egypt offers to investors, as natural gas prices being maintained at US$1.25 – 3/MMBtu against the international prices of US$6-7/MMBtu, and the cheap abundant phosphate rocks at LE250/ton (less than US$46/ton) in 1Q08 versus c.US$200/ton – based on Casablanca benchmark –total fertilizers production reached 15.8 mn tons in FY07/08 (of which 7.5 mn tons targeted the export markets) up from 11.2 in FY05/06 (of which 2.8 mn tons targeted the export markets). Such growth was namely due to the Greenfield capacity of 3.9 mn tons/year from both, Helwan and Alexandria fertilizers companies. Still more investment to come on stream: Egyptian Basic fertilizers Industries (EBIC) will launch its operations in 4Q08, with its full potential in 2009 with an annual ammonia production capacity of 750k. In addition the Canadian fertilizers company, Agrium is expected to start production by 2010 with a total annual capacity of 2.2 mn tons for urea and ammonia combined. Moreover, Egypt's fertilizers portfolio will include DAP/MAP production as the result of the growing global need and the availability of the required feed stock. To capitalize on higher margins: With EBITDA margins registering higher levels than its global peers in both, nitrogen and phosphate fertilizers, Egypt has an edge in supporting future investments. As for nitrogen, free zone companies' EBITDA margin average 80% versus an average of 30% for the global margin; while phosphate fertilizers bear a local industry average EBITDA margin of 30% compared with 20% for the global margin in 2007. DRIVERS The abundance of cheap natural gas prices in the range of US$1.72 - 3/MMBtu compared with an international price of US$6.3/ MMBtu – based on Henry Hub – as well as phosphate rocks support magnified local companies' margins. Phosphate fertilizers enjoy no government interventions, whether in terms of export ban or price caps; which allows for cost passing ability. Egypt enjoys a strategic location for exporting to different regions and strong local distribution network. RISKS Phosphate mines are state owned, which reflects the monopolistic stance of the government. The GoE intervenes in the nitrogen fertilizers sector (mainly companies located outside the free zones) in the form of export ban and price caps. Sulfur - a basic raw material for sulfuric acid production - is imported which subjects the industry to FX risk. KEY PERFORMANCE INDICATORS Fertilizers production CAGR (05-08,%) N production CAGR (05-08,%) Fertilizers exports CAGR (05-08,%) 10 11 26 Added annual capacities (2010,mn tons) 2.5 COMPANY COVERED EFIC PAGE # 119 MUHAMMAD EL EBRASHI MUHAMMAD.ELEBRASHI@CICH.COM.EG SECTOR PERFORMANCE | FY04/05-07/08 k tons 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 2004/05 2007/08 Production Exports Imports Consumption Sales 41
Slide 44: November 11, 2008 EGYPT | FERTILIZERS MARKET STRUCTURE Egypt represented 7.5% of the global fertilizers market and 4% of the phosphate fertilizers segment. Total fertilizers market in Egypt reached 12.4 mn tons in FY06/07, up 13% over FY05/06, of which phosphate fertilizers consumption contributed 1.6 mn tons. It is worth noting that the recommended NPK ratio is 1:1/3:1/6 ton for nitrogen (N)*, phosphate (P)**, and potassium (K), respectively. Egypt's fertilizers market structure A dominating nitrogen market Source: Higher Council for Fertilizers There are currently 10 fertilizers-producing companies; of which 8 are nitrogenbased, while 2 are phosphate-based entities. Concerning the former, 3 companies are located in the free-zone – by which their production is mostly targeting the international market – while the remaining 5 companies are directing their sales to the local market. It is worth noting that the nitrogen-based market is concentrated with the production of the top five companies (Abu Qir, Delta, EFC, Alexandria, Helwan) dominate 97% of total production in FY07/08. As for phosphate fertilizers, EFIC Group leads the market with 64% market share of total local sales of phosphate fertilizers in FY07/08, including its subsidiary SCFP. It is worth noting that EFIC's stand-alone market share amounted to 47%. Egyptian phosphate fertilizers producers Company Nitrogen Helwan Fertilizers Alexfert El Delta Fertilizers Company Egyptian Fertilizers Company Abu Qir Fertilizers & Chemical Industries El Nasr Coke and Chemicals Company Egyptian Chemical Industries (Kima) El Nasr Fertilizer and Chemicals (SEMADCO) Phosphate Suez Company for Fertilizers Production Polyserve for Fertilizers and Chemicals Ownership Private Private Public Private (100% owned by OCI in 2008) Public Public Public Public Public - (99.8% owned by EFIC) Private Production Ammonia and urea Ammonia and urea A concentrated market structure in both, nitrogen and phosphate fertilizers Establishment Year 2004 2003 1999 1998 1976 1964 1956 1946 2007 1990 Ammonium nitrates and urea fertilizers Ammonia and granular urea fertilizers Ammonia, urea, ammonium nitrate fertilizers Ammoniom nitrate, coal tar, and metallurgical coke Ammonium nitrate and urea fertilizers Ammonium nitrates and urea Soft and granulated SSP and TSP Soft and granulated SSP and TSP fertilizers Abu Zaabal Fertilizers and Chemicals Egyptian Financial & Industrial (EFIC) Soft and granulated SSP and TSP fertilizers, Private- (99.03% owned by Polyserve for fertilizers and phosphate rock, phosphoric acid and sulfuric Chemicals) acid Public Soft and granulated SSP fertilizers 1947 1929 Source: CICR database * All nitrogen fertilizers weights are based on a (15.5%) basis. To translate urea to 15.5%, its weights had to be multiplied by a factor of (3). As for ammonium nitrate and ammonium sulphate, their factors are (2.16) and (1.33), respectively. ** All phosphate fertilizers weights are based on SSP (15%) basis. To translate TSP to SSP, its weights have to be multiplied by a factor of 2.46. 42
Slide 45: November 11, 2008 EGYPT | FERTILIZERS MARKET KEY DEVELOPMENTS SUPPLY & DEMAND PATTERN Over FY04/05–07/08, local market production outpaced local consumption. Over the same period, nitrogen fertilizers production increased by an AAGR of 11.9% recording 14.3 mn tons in FY07/08 versus 11.7 mn tons of consumption which increased by an AAGR of 5.8%. Yet, due to the price cap set by the GoE (excluding companies in free zones), local fertilizers manufacturers endeavored to increase their exports at the expense of their local sales. In FY07/08, exports amounted to 49% of nitrogen fertilizers production. As a result of the excessive fertilizers export activities, manufacturers persistently did not meet local demand. Thus, the nitrogen fertilizers market was characterized with deficits, which grew by a CAGR of 37% during FY04/05–07/08, reaching a total deficit of c. 4.3 mn tons in FY07/08. Egypt's nitrogen fertilizers market k tons 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 2004/05 2007/08 Production Exports Imports Consumption Sales Nitrogen fertilizers' production covers consumption, yet due to price capping a considerable volume is directed to the international market Source: Higher Council for Fertilizers Over FY04/05-07/08 phosphate fertilizers consumption outpaced production in terms of growth, with 4-year AAGRs of 11.9% and 7.9%, respectively. Yet, local production covered 1.2x of consumption with local sales contributing 72% to the local phosphate fertilizers market in FY07/08. Such tendency towards satisfying local market needs is confirmed through the declining imports by a CAGR of 4% and increased exports levels by 5% over FY04/05-07/08. Egypt's phosphate fertilizers market k tons 1,600 1,400 1,200 1,000 800 600 400 200 2004/05 2007/08 Phosphate fertilizers enjoy higher contribution in local sales versus total production, since no price capping is applied Production Exports Imports Consumption Sales Source: Higher Council for Fertilizers 43
Slide 46: November 11, 2008 EGYPT | FERTILIZERS MARKET DYNAMICS DEMAND DRIVERS Rising fertilizers consumption is fueled by population growth - which followed an annual rate of 2% over FY03/04-07/08 - creating a growing need for food. The strong link between fertilizers consumption and population growth is illustrated in the high correlation coefficient of 0.731 over the same time span. To cope with the increasing need for food, agricultural land has been witnessing a rising pattern reaching 8.37 mn feddans in FY06/07. Consequently, demand for fertilizers expanded by a 3-year CAGR of 4.1%, with phosphate fertilizers growing by 6.4% over the same time span (FY03/04-06/07), surpassing the industry's growth rate. It is worth mentioning that phosphate fertilizers are highly associated with preparing the soil in reclaimed areas, especially those plots located in the desert areas. (The GoE's plan is to reclaim 150k feddans p.a.) In addition, phosphate fertilizers are utilized during the plant development phases and in plant cells division. Also, agricultural land and fertilizers demand exhibited a strong correlation coefficient of 0.717 over FY03/04-06/07. Demand for all fertilizers is seasonal. Crops are cultivated in three agriculture seasons: (1) Winter crops extend from November to May; (2) Summer crops extend from March to September; and Nile crops extend from May to October. Although Summer and Winter cropping zones are almost equal in terms of area (6.4 mn feddans for Summer and 6.6 mn feddans for Winter), the former are characterized by their heavy consumption of nitrogen fertilizers. Yet, the case is different for phosphate fertilizers, with consumption being heavier during September-December. Moreover, phosphate fertilizers are required during the early stages of treating and preparing alkaline soils in Upper Egypt (East Owaynat) and North Sinai. Population growth Expanding agricultural land Demand seasonality 44
Slide 47: November 11, 2008 EGYPT | FERTILIZERS SUPPLY DRIVERS Natural gas: The potential for growth in the nitrogen fertilizers industry is heavily dependent on the availability of feedstock, namely natural gas. Egypt enjoys an increasing level of proven natural gas reserves which reached 2,060 bn cu.m in 2007. Phosphate rock: Phosphate rock and sulfuric acid are the basic raw materials for phosphate fertilizers production. In terms of volume, the former contributes 62-66% and the latter 34-38% of total inputs in SSP production – the main phosphate fertilizer produced in Egypt. Phosphate rock is extracted from the Red Sea coast with the government-owned El-Nasr Mining Co. controlling 80% of the market and Red Sea Co. and National Phosphate Co. (both private sector) producing 20%* collectively. It is worth noting that Egypt's phosphate rocks production capacity was close to 2.4 mn tons in FY06/07, of which 1.6 mn tons were P1. It was reported that around 80% of P1 phosphate rock grade is exported, while the remaining is used by the local fertilizers industry**. Sulfuric acid: Sulfuric acid is a key input for phosphate fertilizers production, of which sulfur (the main raw material for its production) is imported. Starting 2004, sulfuric acid demand by other industries (such as water desalination projects, petrochemicals, glass, and pharmaceuticals) began to pick up. Hence, to achieve greater diversification, integration, and to meet the rising local needs, EFIC expanded its sulfuric acid production line in SCFP with an added annual capacity of 425k tons, which commenced its operations in the second half of December 2007***. In order to meet up with mounting demand, both, expansions and green-field developments took place in the fertilizers industry. Helwan fertilizers and Alexandria Fertilizers companies were established in 2006/07 adding 2.4 mn/year of production increasing to 3.9 mn tons/year after the Helwan's plant came to its full potential. EFIC increased its PSSP production capacity by 33% in 2005 to reach 1,200k tons/year. Moreover, the new SCFP ammonium sulphate production line started operation in 2007 with an annual capacity of 150k tons. Added capacities boosts supply further Feedstock availability: an increasing pool of natural gas reserves and a broad base of phosphate rocks, yet sulfur is imported COST-RELATED DRIVERS Although the GoE scaled feed stock prices up to US$3/MMBtu, Egyptian companies are paying US$1.25 – 3/MMBtu, which is still less than there international peers paying US$6 – 7/MMBtu. Accordingly, natural gas cost Egyptian fertilizers plants 40 – 60% of total production costs compared with the international range of 75 – 90%. It is worth mentioning that an increase of US$1 MMBtu should result in a US$32.5 increase in ammonia per ton cost; thus emphasizing the cost advantage the Egyptian market offers to global investors. Although the GoE's decision to increase the natural gas prices starting September 2007 was applicable on local companies, excluding some companies in the free zones, affected their margins. This is because some of them have price caps by the GoE and/or prevented from exporting as highlighted later. However, some companies negotiated some export contracts to catch the hike in fertilizers prices. Price capping for nitrogen fertilizers prevents cost passing * An interview with Eng. Yehia Kotb, Chairman, EFIC. ** An interview with Eng. Samir Abdul Naby, Production Manager, Abu Zaabal Fertilizers. *** Al-Alam Al-Youm newspaper, December 25, 2007. 45
Slide 48: November 11, 2008 EGYPT | FERTILIZERS Nitrogen fertilizers financial highlights US$ Sales - L Gross Margin - R Gross Profit - L EBIDTA Margin - R EBIDTA - L Net Margin - R NI - L 450,000 400,000 350,000 70% 60% 50% 300,000 250,000 200,000 150,000 20% 100,000 50,000 2006 2007 10% 0% 40% 30% Source: Abu Qir Fertilizers Company financials On a different note by Minister Rachid Mohamed on October 16, 2008, the GoE will temporarily freeze prices some industries pay for energy to help Egypt's economy withstand a global financial crisis. Phosphate rocks and sulfuric acid, combined, represent the bulk of total cost of phosphate fertilizers production. Despite the c. 50% increase in local phosphate rock prices in 2007 vs. 2006, it is still lower than international prices (based on North Africa FOB export price). In 1H08, phosphate rocks were in the vicinity of LE 300/ton. As for sulfuric acid, it depends on the cost of imported sulfur, which increased by around 75% in 2007 vs. 2006. In 1H08, sulfur prices were in the range of US$700/ton. Such price hikes were driven by the rapid growth of the military industry, which created heavy international demand for sulfuric acid. In contrary to nitrogen fertilizers, phosphate fertilizers enjoy no price caps levied by the GoE, which allows producers to pass the cost to end customers. Indeed, EFIC's margins have expanded in 2007 versus 2006. Phosphate fertilizers financial highlights Sales Gross Profit EBITDA NI Gross Margin EBITDA MArgin Net Margin …Energy prices are put on "hold" On the other hand, phosphate fertilizers enjoys cost passing ability, since no price capping is imposed 600,000 40% 35% 500,000 30% 400,000 25% 300,000 20% 15% 200,000 10% 100,000 5% 0 2006 2007 0% Source: Egyptian Financial and Industrial Company financials (consolidated) 46
Slide 49: November 11, 2008 EGYPT | FERTILIZERS REGULATORY DRIVERS The government’s spree to unify domestic and international prices has come to impact the fertilizers industry. Prime Minister, Dr. Ahmed Nazif, approved a 100% increase in nitrogen fertilizers prices effective March 1, 2008. Accordingly, the GoE will save LE 800 – 850/ton from the new price scheme, which will be used to subsidize imported nitrogen fertilizers, which we reckon will be partially sourced from companies located in Egypt's free zones. The GoE is moving with steadfast steps towards the deregulation of the nitrogen fertilizers market. The Principal Bank for Development & Agriculture Credit (PBDAC) will increase its capital from LE 1.8 bn to LE 3 bn following the new Parliamentary cycle approval for changing the bank's name to the Egyptian Agriculture Bank, as a public specialized bank. Following the bank's regulatory law, the bank can establish agricultural projects including fertilizers. It is worth mentioning that the bank has finalized a study to establish a new nitrogen fertilizers project with expected investment cost of US$500 mn in Upper Egypt and with annual production capacity of 2.2 mn tons. It is believed that changing the bank's bylaws is one step towards diminishing its monopolistic distribution role in the local fertilizers market. Moreover, involving the bank in fertilizers manufacturing projects will increase the available capacities for the local market. Consequently, the export ban might be unleashed soon. This will give chance for local companies banned from exporting. Nitrogen fertilizer price mechanism (LE/ton) An increased nitrogen fertilizers prices PBDAC restructuring Nitrogen local market prices post 100% price ex factory price Pre GoE decision Customer price - Post GoE decision LE/ton Additions to ex factory price Post GoE decision Factory 1,800 1,600 Pre-Government Decision LE 550-650 Post-Government Decision LE 700-800 1,400 1,200 1,000 800 PBDAC 600 400 Pre-Government Decision Post-Government Decision LE 1,500 - 1,650 200 0 Prilled Urea Granulated Urea Urea Zinc Urea Magnesium Ammonium Nitrate Ammonium Sulphate LE 700 - 800 Consumer Source: High Council of Fertilizers, CICR Source: CICR database 47
Slide 50: November 11, 2008 EGYPT | FERTILIZERS FUTURE OUTLOOK GROWING DEMAND Against the backdrop of the growing need for food coupled with the GoE's plan to reclaim an additional 150k feddans p.a. – which requires the utilization of fertilizers, namely phosphate – the demand for fertilizers is expected to follow a strong growth pattern of 5-year CAGR of 4.1% and that of phosphate to follow an even higher growth of 12.7% over FY06/07-11/12. Future local fertilizers demand mn tons 20 18 16 14 12 10 8 6 4 2 0 2006/07 2011/12 10.80 5.0% 13.63 12.36 1.56 5.2% 2.17 7.0% Nitrogen fertilizers demand 5-year CAGR 15.80 Phosphate fertilizers demand 20 18 16 14 12 10 8 6 4 2 - Source: CICR estimates CAPACITIES Within the framework of the GoE's strategy to expand the phosphate fertilizers industry, fresh investments are expected to come on stream confirmed by the approval granted by the Minister of Trade & Industry to establish a phosphate fertilizers industrial zone in Aswan, including phosphate rock mines and 12 new phosphate fertilizers plants. The first phase includes 5 plants with an annual capacity of 3 mn tons and an investment cost of LE 1 bn.* It is worth highlighting that vertical integration with ensure a cost-efficient operation. For example, IndoEgyptian Fertilizers Company is building a phosphoric acid solution plant and sulfuric acid facility in Edfu with respective capacities of 1.5k/day and 4.5k/day to commence operations by 2010.** Future local fertilizers Ammonia 18,000,000 16,000,000 1,055k 14,000,000 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 2008 2010 4,145k 5,257k 4,610k Nitrogen fertilizers 1,055k 1,800k 1,440k 6,040k Phosphate fertilizers New capacities on stream for the final products as well as raw materials to ensure vertical integration Urea Other N Fertilizers PSSP Other P Fertilizers tons 1,800k 1,440k Source: CICR database 48
Slide 51: November 11, 2008 EGYPT | FERTILIZERS It is worth mentioning that a DAP/MAP project is expected to be launched on two phases, the first is due in 2010, while the second is due in 2013. Thus increasing the production capacity for phosphate fertilizers starting the respective years. PRICES Starting 2008, sustained high demand for phosphate fertilizers (driven by the strong demand for bio-fuels due to the flaring-up of oil prices) coupled with upbeat sulfur consumption (triggered by the tension in the Middle East) pushed prices to enormously high levels. According to EFIC, GSSP export prices reached a current level of c. US$400/ton, while PSSP local prices recorded LE 1,800/ton, hence driving up prices to much higher levels of US$299/ton and LE 1,101/ton on average for 2008 vs. US$91/ton and LE 512/ton in 2007, respectively. Prices are expected to reach their peak by 2010 and cool off starting 2011 when new capacities come on stream. Against the backdrop of an anticipated slowdown in oil prices growth pattern; a reduced pace of growth for bio-fuels demand; and the expected expansions in phosphate fertilizers capacities, phosphate fertilizers prices are to maintain their high level, yet growth is to follow a slower pace over 2009-2012. On the nitrogen fertilizers side, the local ex-factory prices will be locked for a 2year period to align with GoE's directions to maintain energy prices; however, once the situation is clearer, we expect ex-factory fertilizers prices to follow the implementation of the previously announced energy plan, with a possible increase in energy prices by 2010. Urea price forecast PSSP and GSSP price forecast – based on EFIC prices Local Urea Caped price Local Urea selling price Urea Middle East FoB price US$/ton 600 LE/ton 1,200 1,000 800 600 400 PSSP local prices GSSP export prices US$/ton 200 180 500 160 140 120 100 80 400 300 200 60 40 20 200 100 0 2007 2008 2009 2010 2011 2012 0 2007 2008 2009 2010 2011 2012 Source: Bloomberg and CI Capital Research estimates Source: Egyptian Financial and industrial Company, IFA and CICR estimates *. Al-Ahram newspaper, January 1, 2008. ** IFC website and Higher Council for Fertilizers. 49
Slide 52: November 11, 2008 EGYPT | POULTRY CHEK-INS TO THE POULTRY INDUSTRY Poultry is considered a real support to the Egyptian Economy, through providing a healthy, cheap and self-sufficient kind of protein. As Europe and Asia restrict the establishment of poultry farms, future expansions will be shifted to South America and Africa. Egypt’s poultry industry has witnessed a remarkable increase in production reaching 700k tons in 2007 up from 195k tons in 1990. Yet, still potential exists as the country’s 2007 per capita consumption of poultry reached 10.2 kg/annum versus a global average of 12.5 kg/annum. With the country’s population growth, rising GDP/capita, and the diversification of diets the demand for poultry is expected to reach a per capita level of 13.4 kg/annum by 2012. As for poultry producers, the shift is towards vertical integration as to ensure a hygienic cycle and a cost-efficient operation. Rising Consumption/capita in developing countries: While per capita consumption in high income countries increases only marginally, rising incomes and the subsequent diversification of diets led to a shift towards significantly higher white meat consumption in developing countries. Poultry is still threatened by AI outbreak, yet is becoming more immune: The advent of the Avian Influenza (AI) at the end of 2006 heavily impacted poultry consumption and resulted in huge losses for poultry producers and the farms’ owners. Industry experts expect that it will not be before 2010 when the occurrence of such disease will end, yet the industry’s developed immune system should alleviate the impact of the AI disease. As fodder is a key contributor to cost, the witnessed decline in its prices is an advantage to poultry suppliers: As prices of yellow corn (the main component in poultry fodder) is strongly linked to the global oil prices—as factories shift to yellow corn for bio-fuel products as a cheap substitute for oil as oil prices kept rising—the current decline in oil prices decreased fodder prices reaching around LE 1,200/ton. The anticipated low levels of oil prices is expected to maintain fodder prices at reasonable levels, thus, enhancing the companies margins. Moreover, the GoE’s plan to locally cultivate yellow corn will minimize the effect of international price fluctuations. The industry’s shift towards vertical integration: To ensure the implementation of a more hygienic poultry cycle in order to avoid the outbreak of the AI disease, poultry companies are targeting vertical integration. Moreover, such integrated business model ensures a more cost-efficient operation. Thus, investment in slaughterhouses started to kick-off with “Al Wataneya Poultry” planning to establish 5 slaughterhouses with a capacity of 500K chicken/day. DRIVERS The rising consumer health awareness, rising per capita income and growing population will further expand poultry consumption levels. GoE’s plan to locally cultivate yellow corn to minimize the effect of international price fluctuations. New International law preventing the establishment of poultry farms in Europe and Asia, will direct poultry production to South America and African countries. RISKS The dependence on imported fodder exposes producer to international price fluctuations. Entrance of small-scale producers during peak prices disrupts the market balance, and leads to price decline. Disease breakout, as Avian Influenza (AI), impacts supply and demand for poultry. Tariffs reduction on Imported frozen chicken intensifies competition. KEY PERFORMANCE INDICATORS Poultry production (2007, k tons) Local consumption/capita (2007,kg p.a.) Global consumption/capita (2007,kg p.a.) Current fodder prices (LE/ton) 700 10.2 12.5 1,200 MARY MILAD MARY.MILAD@CICH.COM.EG SECTOR PERFORMANCE | 2004-2007 14 12 10 8 6 4 2 0 Consumption/capita Kg/annum Growth rate 8.9% 9.8 10.2 10% 8% 6% 5.9% 2.4% 4.1% 4% 2% 0% 2004 2005 2006 2007 8.5 9.0 50
Slide 53: November 11, 2008 EGYPT | POULTRY MARKET HIGHLIGHTS Since 1990, the poultry industry has witnessed a remarkable increase in production on the local level, as poultry companies increased their production by almost 301%, reaching 700K tons up from 195K tons over 1990-2007, following a CAGR of 7%. Yet, still Egypt’s production represents a minor share of 1% of global poultry production. Local consumption followed the same increasing trend as that of Global Market. Consumption per capita reached around 10.2 Kg/annum in 2007 up from 7.9 Kg in 2000; reflecting the fact that the increase in poultry meat consumption mainly depends on the increase in income and not only related to population. Yet, still the country's per capita consumption is below the global average of 12.5 kg/annum. Expanding production levels Growing consumption, yet, still untapped potential RECENT DEVELOPMENTS Though local production is currently sufficient to cover local consumption, however, around 25-30K tons of frozen chickens are imported from Europe and Brazil. Following the protection of the GoE to the industry, over 1986-2007, through the ban it imposed on imports, in July 1997 the ban was lifted up and imports were allowed with an 80% tariff (plus an additional charge of 4%) on imported frozen poultry and poultry products. Moreover, in September 2004 tariffs slashed to 32%, and then further reduced to 30%. Said act, is a government tool to control monopoly imposed by local producers on poultry prices. Hence, profit margins attract traders, who were unable to neither invest in poultry business nor bear the losses encountered in case of any disease outbreak; consequently trade is the optimum option to enter the poultry business. Such practice created an over supply, leading to a drop in selling prices. Ex-farm prices LE/KG 7.0 Slashing import tariffs as a tool to reduce monopolistic power of suppliers 6.0 5.0 Slashing import tariff from 80% to 32% in 4.0 3.0 2.0 1.0 0.0 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source: Poultry Industry Experts 51
Slide 54: November 11, 2008 EGYPT | POULTRY Poultry is considered a strategic industry – as the income of many families in Egypt depends on this industry – in addition to its importance as a source of protein to the Egyptian families. However, the advent of the Avian Influenza (AI) heavily impacted consumption and resulted in huge losses for poultry producers and the farms’ owners. It is worth noting that losses encountered by AI disease during the end of 2006 and the beginning of 2007 due to the AI disease reached around LE 3-4 bn (hitting 50% of parent chickens flocks and around 70% in layers flocks). Moreover, consumers started to shift to substitutes as fish and meat, as a safe meal to ensure their required protein intake. The impact of AI, which occurred during end 2006, was remarkable later in 2007, as consumption per capita growth dropped drastically from 9% to 4%. Local consumption/capita Kg/annum 10.5 8.9% 10.0 9.8 8% 7% 9.5 5.9% 9.0 9.0 5% 4% 3% 2.4% 8.0 1% 7.5 2004 2005 2006 2007 0% 2% 6% 10.2 9% Consumption/capita Growth rate 10% The advent of the AI disease heavily hit the industry 8.5 8.5 4.1% Source: Poultry Industry Experts MARKET STRUCTURE The poultry industry in Egypt is subdivided into 3 main segments: (1) commercial Commercial and Chickens; (2) Balady Chickens; and (3) other poultry. Both commercial & balady Balady Chickens are chickens are, in turn, subdivided into broilers & Layers leading to the following the main segments four sub-segments: Commercial Broilers: This segment concerns chickens (specifically international breeds) which are reared for the production of white meat. Commercial Chicken Layers: This segment concerns chickens (specifically international breeds) which are reared for the production of eggs for consumption. It partially contributes to the production of white meat. Balady Chicken Broilers & Layers: This segment concerns local breeds reared by individuals in their backyards. Other Poultry: This segment concerns birds, other than chickens, raised for meat production and it includes; ducks, geese, turkeys and pigeons. It is further subdivided into commercial and backyard operations 52
Slide 55: November 11, 2008 EGYPT | POULTRY There are many players in the market; varying from small-scale producers and farmers to well established companies. Moreover, poultry business consists of several production phases; companies’ contribution to the market vary from one stage to another; accordingly, the contribution of market players, on average, can be summarized in the below pie chart. Poultry market players A fragmented market, yet, five key players control the field Other Players 38% Cairo Poultry 30% Wataneya Poultry 4% Dakahleya Poultry 5% Wadi Holdings 4% Misr Arab Poultry 19% Source: Poultry Industry Experts MARKET DYNAMICS MARKET DYNAMICS Socio-economic Drivers Income/Capita Population Market-related Factors Seasonality Diseases Substitutes Fodder-related Factors Fodder Availability Fodder Prices 53
Slide 56: November 11, 2008 EGYPT | POULTRY SOCIO-ECONOMIC DRIVERS As the level of income increases, new social levels enter into the poultry consuming population, hence expand consumption. Income/capita vs. consumption/capita LE 6,000 Income per Capita Consumption per Capita Kg/annum 12.0 Income/capita 5,000 10.0 4,000 8.0 3,000 6.0 2,000 4.0 1,000 2.0 0 2003 2004 2005 2006 2007 0.0 Source: Poultry Industry Experts It has been witnessed that consumption of poultry increased over years with the growing population, as demand for poultry and population illustrate high correlation co-efficient of 0.94. Population vs. consumption ton 900,000 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 Consumption Population mn 76 74 72 70 68 66 64 62 60 58 56 Population 00 20 Source: CICR Estimates 01 20 03 20 02 20 04 20 05 20 06 20 07 20 54
Slide 57: November 11, 2008 EGYPT | POULTRY MARKET-RELATED DRIVERS Poultry consumption is seasonal, as increased consumption levels are witnessed during religious occasions and summer vacations. On the supply level, the global production of fodder, which is the main input in poultry industry, vary according to climate conditions under which seeds (yellow corn and soybean) are cultivated. The emergence of diseases, such as Avian Influenza, impacts both supply and demand for poultry, evidenced by the decline in global production and consumption which occurred during 2003 and 2006 as a natural result of the discovery of AI cases. It is worth highlighting that the outbreak of the disease was witnessed late in 2006, thus, impacting 2007 levels. Global demand vs. supply Seasonality of demand and Supply Diseases impact both demand and supply Demand 000' Tons 100,000 80,000 60,000 40,000 20,000 - Supply Demand Growth Supply Growth 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 2000 2001 2002 2003 2004 2005 2006 2007 Source: FAO STAT Database The rising consumer health awareness and the discovery of FMD (Foot and Mouth Disease) and BSE (Bovine Spongiform Encephalopathy, commonly known as Mad Cow Disease (MCD)) cases negatively affect red meat consumption, yet, boost the demand for poultry and fish – as they represent perfect substitutes for meat in terms of protein intake. Nevertheless, the occurrence of AI disease impacts the demand for poultry and expands consumption of substitutes – as meat and fish. Substitutes FODDER-RELATED DRIVERS Fodder constitutes the bulk of poultry production cost; the production of fodder relies, in turn, on yellow corn and soybean, the importation of which depends on the availability of seeds in the Global commodities market. Moreover, fodder prices are determined by commodities’ global prices. It is worth noting that yellow corn prices is strongly linked to oil global prices as factories shift to yellow corn for bio-fuel products as a cheap substitute for oil, which justifies the tremendous increase in fodder prices in the first half of 2008. However, with the decrease witnessed in oil prices, fodder prices declined reaching a current level of LE 1,200/ton; with an expectation of further decrease. 55
Slide 58: November 11, 2008 EGYPT | POULTRY Oil vs. fodder prices Oil prices 160 140 120 100 80 60 40 20 0 Fodder prices 3500 3000 2500 2000 1500 1000 500 0 Source: CICR Estimates & Poultry Industry Experts Most notably, as fodder constitutes around 65% of poultry total production cost, volatility of fodder prices is consequently reflected in poultry selling prices as illustrated in the graph below. Fodder vs. poultry selling prices LE/ton 3500 3000 2500 2000 Ja n Fe -0 b- 7 M 07 a A r-07 p M r-0 ay 7 Ju -07 n Ju -07 A l-0 u7 S g-0 ep 7 O -07 c N t-07 ov D -0 ec 7 Ja -07 n Fe -0 b8 M -08 a A r-08 pr M -0 ay 8 Ju -08 n08 Fodder prices Selling prices LE/Kg 12.00 10.00 8.00 6.00 1500 1000 500 0 4.00 2.00 - Source: Poultry Industry Experts 56 Ja Fen-0 7 M b-0 ar 7 Ap -0 7 M r-0 ay 7 Ju -0 n7 Ju -07 Au l-0 7 Seg-0 p7 O -0 c7 N t-0 ov 7 D -0 ec 7 Ja -0 7 Fen-0 8 M b-0 a8 A r-0 pr 8 M -0 ay 8 Ju -0 n- 8 08
Slide 59: November 11, 2008 EGYPT | POULTRY FUTURE OUTLOOK Poultry is considered a real support to the Egyptian Economy, through providing a healthy, cheap and self-sufficient kind of protein. The anticipated decline in oil prices will be reflected on a reduced demand for yellow corn as a bio-fuel substitute, hence a downward slope for its prices which will be mirrored on the fodder prices. Moreover, the GoE plan to cultivate yellow corn will alleviate the exposure of poultry suppliers to the volatility of international prices, enhance their margins, and attract new market players. Still the outbreak of AI represents a threat to the industry's supply and demand sides. As per industry specialists, the occurrence of the disease is still a risk until 2010. Therefore, we anticipated demand to be depressed during 2009 and 2010, yet, it will resume higher growth levels throughout the remaining period of our forecast. Given the growing population rate and increasing income per capita, poultry consumption is expected to grow over 2008-2012 by an average of 7.8% annually to reach a per capita consumption of 13.4 Kg/annum by 2012 Future Consumption Anticipated decline in yellow corn prices is a plus Still fears from the outbreak of AI as a threat, yet it is anticipated to end by 2010 000 ton 1,200 Consumption Growth rate 12.0% 1,000 10.0% 800 8.0% 600 6.0% 400 4.0% 200 2.0% 0 2006 2007 2008 2009 2010 2011 2012 0.0% Source: CICR Estimates To ensure the implementation of a more hygienic poultry cycle in order to avoid the outbreak of the AI disease, poultry companies are targeting vertical integration. Moreover, such integrated business model ensures a more cost-efficient operation. Hence, investment in slaughterhouses started to kick-off with “Al Wataneya Poultry” planning to establish 5 slaughterhouses with a capacity of 500K chicken/day. More integration is anticipated 57
Slide 60: November 11, 2008 EGYPT | REAL ESTATE & MORTGAGE FINANCE SHELTERS ARE A MUST Given the strong ties linking the real estate market with the economy, the anticipated economic slowdown will be reflected on real estate prospects, which owes much of its boom to the boost in high-end segment demand. Yet, the cool-off in raw materials prices along with an expected decline in mortgage lending rates will shape up an affordable product to the middle-income group; thus, help materialize its unmet demand, and alleviate the expected simmering down of the high-end demand which is on the brink of saturation. Retail, is another key segment driven by the GoE's commitment to support local investments – namely SMEs – and building commercial and industrial zones in many governorates, thus, highlighting the positive prospects of office and commercial segments – which are still undersized. Moreover, the highly competitive property prices in Egypt versus its regional peers may foster foreign investments. Developers are to weather the storm with a solid ground: Developers are expected to withstand the anticipated slowdown in the real estate market with a much solid ground than earlier in the decade, capitalizing on their sell-off plan model. Other drivers may expand the added supply units beyond the completion of outstanding projects: The completion of outstanding projects is expected to ensure growth in supply. Yet, the negative sentiments for the financial market, may act as a potential for liquidity transfer from equity markets to the perceived safe real-estate market. Moreover, the expected growth in real GDP/capita leads to wealth accumulation and expands demand for real estate. Mortgage scheme development enhances affordability: The anticipated improvements in the mortgage scheme and the expected decline in mortgage lending rates along with the cooling off in raw materials prices are expected to create affordable residential units for the middle-income group. Hence, alleviate the expected cool off in high-end demand. A bright side for retail: The GoE's commitment to support local investments – namely SMEs – and building commercial and industrial zones in many governorates highlights the potential for office and commercial segments, which are still undersized. Highly competitive prices: The recent reforms that helped streamlining the process of property purchase in Egypt, facilitating the purchases for overseas buyers, may render the country's highly competitive real estate prices, compared to its regional peers, as a base to foster foreign investments. DRIVERS Growing population, namely urban, coupled with growth in marriages are key engines to the expanding residential demand. Rising real GDP/Capita enriches wealth accumulation activities, which acts as a potential for real estate demand. The availability of land for projects development. The unmet demand, namely in the medium to lower income classes represents an opportunity for developers in these categories. Foreign ownership is allowed. Declining raw materials prices will increase affordability of real estate units for middle and lower income classes, hence will expand their demand potential. RISKS The underdeveloped infrastructure and transportation facilities act as a limitation for potential real estate investments. The undeveloped mortgage finance scheme limits its full application. Lower oil prices might affect the liquidity flowing into the real estate from the GCC. KEY PERFORMANCE INDICATORS Av. annual added residential urban demand (04-07,k units) Av. annual added residential urban supply (04-07,k units) Added urban supply units (2010,k units) Cairo average residential selling prices (US$/sqm) MENA average residential selling prices (US$/sqm) 508 134 442 1,006 3,068 COMPANIES COVERED PAGE # Nasr City H&D Palm Hills Developments TMG Holding 135 149 157 MUHAMMAD EL EBRASHI MUHAMMAD.ELEBRASHI@CICH.COM.EG SECTOR PERFORMANCE | RESIDENTIAL SUPPLY Luxury Additional Units Medium Lower Cost 140,000 120,000 100,000 80,000 60,000 40,000 20,000 2004/05 2005/06 2006/07 2007/08 58
Slide 61: November 11, 2008 EGYPT | REAL ESTATE & MORTGAGE FINANCE KEY MARKET FACTS The strong ties between real estate and economic performance drove up real estate investments by 77% over FY03/04-07/08 – the period when the economy was booming. Egypt's strengthening economy prompted investors to undertake residential, office, and retail developments, with total real estate investments reaching LE 13 bn in FY07/08, with Gulf investors being at the forefront of a considerable number of developments. Real estate investments versus economic growth Real estate bears strong ties with the economy Real Estate Investment 14,000 Real Estate Growth GDP Growth 40% 35% 30% 12,000 10,000 25% 8,000 20% 6,000 15% 4,000 10% 2,000 5% 0% 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 - Source: Central Bank of Egypt bulletin Despite the dramatic increase in real estate prices, they are still much lower compared to regional peers, hence adding to the sector's potential. Average selling prices US$/sqm during 2008 Cairo US$ per s.qm 6,000 5,175 5,000 MENA average Highly competitive prices 4,000 3,068 3,000 2,960 2,000 1,006 1,000 Average office sales price Average residential sales price Source: Bank Audi 59
Slide 62: November 11, 2008 EGYPT | REAL ESTATE & MORTGAGE FINANCE MARKET DEVELOPMENTS Sliding Phase 2000 - 2003 * The real estate market entered a downward phase. * High-end supply outweighed demand. * Depreciated real estate prices. * Weak real estate demand. * The initiation of the mortgage scheme concept. * Strict foreign ownership regulations. Recovery Phase 2004 - 2005 * Real Estate started its recovery. * Intense development of new urban communities. * Appreciated real estate prices. * Strong real estate demand. * Mortgage law was put into effect. * The first two mortgage companies started operation. * Banks started to offer household credit to finance residential ownership. * Laxed foreign ownership regulations. An Uptrend 2006 - Current * Launch of the Real Estate tax law * Growing real estate market. * Influx of international developers. * Appreciating land and property prices. * Increasing rental yields. * Demand maintained its strength. * Banks started to offer seven to ten years loans. * The establishment of the Egyptian Company for Mortgage Refinancing. * Reduction in property tax from 46% to 10%. * Reduction of property registration fees from 12% of property value to a max of LE 2000 per property. * Increasing number of financing institutions. * Structural gap. Source: CI Capital Research The buoyant sentiment surrounding Egypt’s real-estate market growth coupled with a strengthened economy laid solid grounds for further expanded real-estate investments. With the announcement of billion of dollars worth of emergent projects including residential, offices, commercial and touristic projects that were introduced to the market through local and foreign investors, Egypt is introduced to a new era of intense activity designed to propel it to the global spot light. High oil prices have resulted in a dramatic increase in the wealth of the major oil producers. The GCC in particular are generating huge current account surplus reaching US$210 bn in 2007; which finds their way through local and overseas investments. With the downturn in the US and some European housing markets, which has already dented their economic performance through declines in residential investment and construction activities, along with Egypt undertaking an extensive development program, several Gulf investors have directed much of their appetite towards Egypt, developing several mega projects. Key foreign real estate developers Developer Emaar Kharafi Group Barwa Qatari Diar Al Futtaim Group Project New Cairo City - Cairo Gate Marassi - Up town Cairo Port Ghalib Qatamiyya Cairo Nile Corniche Towers project Tourist Development Cairo festival city Investment (bn) EGP 42.67 EGP 9.20 EGP 7.50 EGP 7.65 EGP 20.10 Delivery Year Master planned - 2013 2013 2013 2012 2011 Positive sentiments coupled with a strengthened economy encouraged foreign investments inflow Led by GCC investment inflows which were further fostered by the boosted surplus from high oil prices Damac Total Gamsha bay - Park Avenue - Hyde Park EGP 107.00 EGP 194.12 2011 - 2018 Master planned - 2018 Source: CICR 60
Slide 63: November 11, 2008 EGYPT | REAL ESTATE & MORTGAGE FINANCE New Cairo communities galloped ahead on their competitive tracks and experienced a dramatic increase in residential property supply especially in the construction of high-end properties. Commercial activity also picked up lately; however, the office market remains untapped. Moreover, the rising flow of tourist arrivals attracted investments not only in hotels but also in integrated touristic developments. Egypt's buoyant economic performance stimulated investors to set up retail developments illustrated by the inflow of hypermarkets as well as supermarkets, by both international and local chains. It is worth noting that there are about c. 26 shopping malls in Greater Cairo; by which the advent of professional retailing and mall construction started in 2005 through the development of the US$1-bn City Stars investment, including a shopping mall, two hotels, cinemas, as well as residential and commercial units according to internationally accepted standards. Such witnessed investment inflow increased the number of added units; by which the yearly additional residential units averaged 195k units over 2004-08 compared to an average of 159k units over 2000-03. Commercial activity witnessed growth as well, however, the office market remains untapped. Estimated Urban additions for Residential Units additional Units 900,000 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 1995-99 2000-03 2004-08 The advent of the integrated project concept and new housing convention… Residential and commercial additions were lifted up Source: CAPMAS & CICR estimates The bulk of inflows were concentrated in the high-end property segment whose spiraling development dominates headlines in the sector, while the added housing units to medium and low-income inhabitants who constitute the vast majority of Egyptians are limited. As supply failed to keep apace with the rising demand of the medium and low- income housing units, the real-estate market is faced by a structural gap between the high-end property market and that of the medium to low-end segment. Estimated Urban Supply/Demand additions for Residential Units (by sector) Luxury Additional Units Yet, a structural gap exists Medium Lower Cost 140,000 120,000 100,000 80,000 60,000 40,000 20,000 2004/05 2005/06 2006/07 2007/08 Source: CAPMAS & CICR estimates 61
Slide 64: November 11, 2008 EGYPT | REAL ESTATE & MORTGAGE FINANCE MARKET DYNAMICS Source: CICR SOCIO-ECONOMIC FACTORS Population growth coupled with rural urban migration is key engine for residential demand. Egypt's population reached 74 mn inhabitants by 2007; growing with 1.9% on average. Rural-urban migration coupled with the normal growth of urban inhabitants pushed urban population to contribute with a share of 42.9% of total inhabitants. With the current age distribution, 50% of the population is below the age of 20, while c. 30% of the country's population lies within the age bracket of 20-39 years – this represents the marriage group that stimulates demand for new residential units. As for the 45-year and older age bracket, which represents around 16% of the population, it creates demand for new properties through relocating, or by buying a secondary property. Moreover, huge demand potential still lies ahead, fostered by the fact that 50% of the population is below 20 years, signaling future real-estate demand. Marriages have reached an estimated level of 669k contracts in 2007/08, and grew at an average annual rate of 5.6% over 2002/03-2007/08. Moreover, cases of divorce have recorded 73.1k cases in 2007/08. Both, marriages and divorces create demand for residential units. Demand for property is closely tied to growth in per capita income. The rise in real GDP/capita averaging 5% annually throughout FY05/06-07/08, allowed for the accumulation of wealth, hence drove up the real-estate market by an annual average of 10%. Population Growth with significant urban share Population structure adds further to demand potential Marriages & Divorces Per Capita Income 62
Slide 65: November 11, 2008 EGYPT | REAL ESTATE & MORTGAGE FINANCE REGAULATORY FRAMEWORK Currently, the property tax law is being amended, by which all unfinished units within the cities or in new urban areas will be subject to the property tax law. This will encourage the developers to accelerate the delivery of units to buyers. Passing this law will force owners to sell their properties to avoid paying property tax. It is believed that such law will increase the property sale turnover in Egypt; thus, residential property liquidity will surge, bringing prices to more competitive levels, and accordingly expands affordability. Moreover, a tax of 2.5% is charged on money earned from a property sale. In addition to taxes of 20% on rental income with a basis threshold for taxation of LE 10,800 per annum. Recent reforms helped streamlining the process of property purchase in Egypt, facilitating the purchases for overseas buyers, and focusing investors' attention on Egypt as a prime location for real-estate buyers as well as developers. In an effort to boost the real-estate market and expand its base, in April 2005, Egypt revamped the property ownership law to extend identical ownership rights and privileges to foreigners as those enjoyed by native Egyptians. Ownership follows a freehold model with the only exception being in Sinai, where the ownership is based on a 99-year long lease system, usufruct system.* Although the mortgage finance scheme was initiated in 2000, it was not put in effect until 2004. Compared to the deferred installment system, a developed mortgage finance system makes purchasing a house more affordable for more people through longer amortization terms and lower prices, which ultimately stimulates and develops the property market. It is worth mentioning that total mortgage loans exceeded LE 2 bn in December 2007 compared with LE 1 bn in December 2006, fueling further the purchase of properties. The launch in the mortgage law was to catch the segment of population with annual salary ranging from LE 1.5 k to LE 6.2 k (22% of the population) and thus can afford to pay the 40% monthly installments of LE 0.6k to LE 2.5k. further improvements in the law could allow the mortgage finance companies and banks to address a further 20% of the population with wages in the range of LE 1 – 1.2 k month. Property tax law Enhancing registration scheme Allowing foreign ownership Mortgage law MORTGAGE FINANCE Despite the introduction of the mortgage finance system to the market, it is still faced with some obstacles. Red tape; the limited number of mortgage finance providers; and the low amount of finance offered – a ceiling of LE 5 mn - hinder the efficient application of the mortgage finance scheme. Although mortgage loans experienced a two fold increase reaching LE 2.8 bn in 3Q08 vs. LE 1.9 bn in 3Q07, still it represents less than 1% of the country's GDP versus 8.1% in the UAE in December 2007. Mortgage Finance Market MFC LE mn Limited application of mortgage finance scheme Banks Mortgage loans as percentage of GDP (current) 4,500 4,000 3,500 1.40% 1.20% 1.00% 3,000 2,500 2,054 2,000 1,500 1,000 502 500 0 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 193 208 871 714 1,000 1,067 1,369 1,906 2,130 0.80% 0.60% 0.40% 0.20% 0.00% Source: Ministry of Finance and Euromoney Conferences * Usufruct system: It is the right to use and exploit property belonging to another person. 63
Slide 66: November 11, 2008 EGYPT | REAL ESTATE & MORTGAGE FINANCE Currently there are 10 key major players (banks and companies) in the mortgage finance market up from 9 in 2007. In addition, several investors, both local and regional, showed their interest to enter Egypt's mortgage market by setting their mortgage companies. For instance, Naeem Holding is preparing to submit a request to acquire a license to establish a mortgage finance company with an authorized and paid-in capital of LE 1 bn and LE 100 mn, respectively - pending finalization of license procedures with the Mortgage Finance Authority (MFA). In addition, Tamweel PJSC, the largest provider of real estate finance in the UAE, has announced that it has received a mortgage finance license from Egypt’s Mortgage Finance Authority (MFA) during March 2008 to launch operations in the Arab world’s most populous nation, with an authorized capital of LE 500 mn and a paid-in capital of LE 100 mn. Figure 15 Key operating Mortgage Finance Institutions Provider Amlak Available to Egyptians, Expatriates, and nonEgyptians Egyptians, Expatriates, and nonEgyptians EHFC Egyptians, Expatriates, and nonEgyptians Egyptians, Expatriates, and nonEgyptians Egyptians, Expatriates, and nonEgyptians Egyptians, Expatriates, and nonEgyptians Type of Unit Residential Mortgage Tenor A maximum monthly installment of 20 years/maximum age of 65 years. A maximum monthly installment of 20 years/maximum age of 65 years. A maximum monthly installment of 15 years/maximum age of 65 years. A maximum monthly installment of 20 years/maximum age of 65 years. A maximum monthly installment of 15 years/maximum age of 65 years. Monthly installment ranging from 5-15 years/maximum age of 60 years. Interest Rate 13.5%-decreasing Max. Loan Amount 90% of property value (up to LE 5 mn) - monthly installment can not exceed 40% of 80% of property value (up to LE 5 mn) - monthly installment can not exceed 40% of 80% of property value (up to LE 2.5 mn) Min Salary (LE) Min monthly salary LE1,000 Charges LE 150 for application form, LE 1000 for the appraiser, and 2% administrative fee are paid once. LE 150 for application form, LE 1000 for the appraiser, and 2% administrative fee are paid once. LE150 for application form and LE1000 for the appraiser. Buy-To-Let Requires Financer Approval Rising number of players Commercial 14%-decreasing Min monthly salary LE2,000 Requires Financer Approval Residential 9.3% Fixed Min monthly salary LE2,000 Requires Financer Approval Taamir Mortgage company Bank of Alexandria Residential 10% Fixed 85% of property value Single person: min LE18,000 annually; Total family income: LE24,000 Min monthly salary LE2,000 & max loan installement is 40% of monthly salary. Min monthly salary LE1,000 & max loan installement 40% of monthly salary. 2% administrative fee from whole loan balance are paid once. 1.5% administrative fee from whole loan balance are paid once. 1% administrative fee from whole loan balance are paid once (min LE 500 and max of LE 25K). Requires Financer Approval Requires Financer Approval yes Residential 12.4% declining for 2 years 13% declining for 13 years 12.5% declining for 3 and 5 years and 13% declining for 10 and 15 years 90% of property value (up to LE 5 mn) 70% of property value in Cairo and other governorate, 75% of property value in new Cairo, 80% construction activities, and 45% finishing activites. Bloom Bank Residential CIB Egyptians, Expatriates, and nonEgyptians Residential Monthly installment 11.5% fixed for five ranging from 5-15 years. 12% years/maximum age of 60 declining for the years. next 10 years 75% of property value (min LE 120k up to LE 5 mn) Min monthly salary LE4,000. LE1,000 is paid for apartments and LE2,000 for villas. In addition to 0.25% is paid annually on the remaining balance of the loan & 1.5% of loan amount is paid once (max LE 30,000) at the begining of the loan and deducted from the loan balance. LE 500 and insurance 2.5% of loan yes Egyptian Saudi Finance Bank Egyptians Residential A maximum monthly installment of 10 years/maximum age of 60 years. 8.2% 90% of property value Min monthly salary LE1000 & max loan installement 40% of monthly salary. Min monthly salary LE1000 & max loan installement 40% of monthly salary. Max loan installement 40% of monthly salary. Requires Financer Approval Egyptian Arab Land Bank Egyptians Residential 9% fixed for Cairo A maximum monthly installment of 15 years for 9.6% fixed for new cities cairo and 20 years for new cities/maximum age of 65 A maximum monthly installment of 10 years/maximum age of 60 years. 13 - 14% 85% of property value NA Requires Financer Approval yes Housing & Development Bank NSGB Egyptians, Expatriates, and nonEgyptians Egyptians Residential 75% of property value 0.1% Administrative fees. Monthly installment ranging from 5-15 years/maximum age of 60 years. 12.5% declining for 80% of property 5 years - 13% value (min 50k - up declining for 10 to LE 5 mn) years - 13.5% monthly installment declining for 15 can not exceed years 40% of gross salary Min monthly salary LE2,000 one time administrative fee which is 1% of total loan. Requires Financer Approval Source: CICR database 64
Slide 67: November 11, 2008 EGYPT | REAL ESTATE & MORTGAGE FINANCE Cost is now by far the most important selection criteria for the bulk of the resident workforce in Egypt. The witnessed inflationary pressures within 2008 had placed increasing emphasis on affordability, as rising interest rates limits an expanded application of the mortgage finance scheme. Given the decline in CPI readings starting September 2008 along with the anticipated lower inflationary levels going forward, interest rates are expected to adjust to the downside, thus, would bring down with it mortgage lending rates. A fact that is expected to enhance the affordability of such scheme and ensures an expanded utilization. The anticipated lower inflationary levels is to have its positive impact on the mortgage finance scheme OIL PRICES The witnessed strengthening of oil prices reflected growing surpluses in oil exporting countries, namely those of the GCC region, which registered a current account surplus of US$210 bn in 2007. Oil windfall pushed upward the private wealth which further boosted the recycling of the petrodollars in value added opportunities as the real-estate market of prospective destinations, including Egypt, thus, stretching further the demand potential as well as expanding the developers' capacities to invest in the real-estate sector. Moreover, the attractive realestate prices compared to those in traditional markets created demand for a second-home within Egypt. However, with the anticipated decline in oil prices, GCC surplus will be depressed, and will impact their investments inflow to Egypt. Yet, FDIs in real-estate remains untapped with a minimal share of less than 1% of total FDIs inflows to the country, and a contribution of around 4% to total realestate investments in FY07/08. Hence, we believe the impact will be limited. Peaking oil prices enforced an upbeat for the real-estate market, yet their anticipated drop is expected to depress such growth RAW MATERIALS The strong real-estate demand witnessed despite the hiking raw materials prices – reaching a peak of LE 6,600/ton in 2008 for steel and a high of LE 462/ton in 2008 for cement – proved the strong belief of the positive prospects of such sector by investors – local and international – and the outweighing of the demand drivers over those of supply, resembled in the dramatic increase in real estate prices caused by the rising steel and cement prices. Yet, the anticipated global economic slowdown which will be reflected on the Egyptian economy is expected to outweigh the anticipated decline in raw materials prices - leaving the real estate market cushioned by the outstanding projects. Strong demand despite the hiking raw materials prices, yet, with the cooling off in steel and cement prices still demand is expected to be depressed DEVELOPERS' SELF-FINANCING MODEL Capitalizing on their self financing model (sell-off plan), developers are to weather the slowdown in demand on a more solid ground than during the downturn that occurred earlier in the decade. Hence, reversing the previous high working capital needs with developers’ financial leverage averaging 0.9x in 2007. With the de-leveraged standing of developers, they are to weather the storm with a solid ground FUTURE OUTLOOK The coming two years are expected to witness a depressed demand with the pace of growth being based upon the completion of outstanding projects. Yet, a more developed mortgage scheme with expected lower interest rates – following the expected decline in lending rates as a measure to expand investments – coupled with the cool-off in raw materials prices could allow for the entry of the middle-income class, as residential units can become more affordable. We have accounted for a more conservative picture for demand on real estate to incorporate the impact of such economic slowdown. Real estate residential demand is expected to grow at a decelerated rate over 2009 and 2010, and a pick-up is to follow afterwards. Depressed demand for residential units, yet, with expected lower mortgage lending rates units to the middle-income class could be affordable 65
Slide 68: November 11, 2008 EGYPT | REAL ESTATE & MORTGAGE FINANCE As supply mainly targets the high-end, its growth is expected to be based upon completing the outstanding projects. However, the unsatisfied demand that is expected to stem from the middle-income class is likely to alleviate the expected cool-off in the high-end demand. Future additional demand and supply Additional Urban Supply 600,000 Additional Urban Demand Middle-income group; “every cloud has a silver lining” 500,000 400,000 300,000 200,000 100,000 0 2006 2007 2008 2009 2010 2011 2012 The GoE's commitment to support local investments – namely SMEs - and building commercial and industrial zones in many governorates highlights the potential for office and commercial segments, which are still undersized. A bright side for the retail segment 66
Slide 69: November 11, 2008 EGYPT | STEEL REBARS IS MORE LIKELY TO WITHSTAND THE STORM THAN FLAT STEEL Against the backdrop of anticipated downturn in the global economy and a slowdown in trade activities, flat steel is expected to be more affected than rebars, as the former is highly involved in the export markets with 56% of its sales is directed internationally in 2007. On the other hand, the demand for rebars will be secured by the massive backlog of real-estate projects. In addition to the GoE’s commitment to push further local investments through building commercial and industrial zones in many governorates which will increase the demand for the retail segment. In an effort to give local steel products a competitive edge against competition in the global market, the GoE removed the LE 160/ton export tariffs on steel exports. Another forward move is the vertical integration enforcement through the GoE issuance of license for the production of billets, sponge iron and direct reduced iron (DRI), key raw materials in steel production. Such move should alleviate the impact of the volatile steel raw materials prices on the local product, as Egypt’s steel industry heavily relies on imported raw materials. Flat steel is expected to be highly affected: As 56% of flat steel sales is directed to the export markets, the anticipated global downturn is expected to highly affect the flat steel companies’ sales. Removal of export tariffs will give steel products a competitive edge: In mid-October 2008, the levied LE 160/ton export tariff on steel exports was removed, in an effort to make steel prices more competitive in the international markets – against the backdrop of an anticipated global recession spurred by the financial turmoil. Local industry is moving towards more integration: Egypt's heavy reliance on imported raw materials drove the GoE to issue in 2007 four licenses for the production of billets and sponge iron with a combined annual production capacity of 8 mn tons, and an investment cost of US$15 bn. The four winners are Ezz Steel (ES), Suez Steel Company, Tiba for Iron & Steel and the Egyptian Company for Sponge Iron. Most notably, two licenses were offered to two foreign investors for the first time. With investments flowing to steel feeding industry, margins are expected to improve. Rebars demand is to be secured by the backlog: In light of the expected slowdown in real-estate demand rebars consumption is to be secured by the backlog of the developers projects. Yet, with the anticipated pick-up in the economy which will trigger the inflow of projects the demand for rebars will regain its strength. DRIVERS Outstanding real estate projects secure demand. Strengthened margins. Declining raw materials prices, coupled with declining freight costs. Removal of export ban. Foreign companies' entry is expected to improve the industry's efficiency. RISKS Heavy reliance on imported raw materials. Sudden governmental decisions as imposing duties on steel exports. Anticipated slowdown in the global and local economies. KEY PERFORMANCE INDICATORS Rebars production CAGR (04-07,%) Rebars consumption CAGR (04-07,%) Flat production CAGR (04-07,%) Flat consumption CAGR (04-07,%) 10.8 11.6 6.2 10.7 COMPANIES COVERED PAGE # Ezz Al-Dekheila Steel-Alex. Ezz Steel 123 125 BASMA SHEBETA BASMA.SHEBETA@CICH.COM.EG SECTOR PERFORMANCE|REBARS2003-2008 mn tons 5.0 4.5 18% 4.0 3.5 3.0 12% 2.5 2.0 1.5 1.0 3% 0.5 0.0 2003 2004 2005 2006 2007 2008E 0% 9% 15% Local Sales Exports Share of exports/ total sales 21% 6% SECTOR PERFORMANCE|FLAT 2003-2008 mn tons 1.2 Local Sales consumption Imports mn tons 0.25 1.0 0.20 0.8 0.15 0.6 0.10 0.4 0.05 0.2 0.0 2003 2004 2005 2006 2007 2008E 0.00 67
Slide 70: November 11, 2008 EGYPT | STEEL STEEL GLOBAL DYNAMICS CRUDE STEEL Both sides of crude steel market – supply and demand – witnessed strong growth; with the former increasing by a CAGR of 7.6% and the latter growing by a CAGR of 7.4% over 2001-2008, reaching the respective levels of 1,420 mn tons and 1,279 mn tons in 2008. Strong growth on both, demand and supply sides Global crude steel demand & production (2001- Global added capacity, demand & operating rates 2008) (2002-2008) mn tons 1,600 1,400 120 1,200 100 1,000 80 800 600 400 200 0 2001 2002 2003 2004 2005 2006 2007 2008E 60 40 20 82.5% 0 2002 2003 2004 2005 2006 2007 2008E 82.0% 85.0% 84.5% 84.0% 83.5% 83.0% 86.0% 85.5% Production Demand mn tons 140 Added capacity Utilization Rate Added demand 87.0% 86.5% Source: www.worldsteel.org & CICR Database Source: www.worldsteel.org, Tata & CICR Database Over 2001-2007, Asia and the Middle East recorded the highest production growth rates with respective CAGRs of 13.4% & 5.8%. Moreover, in terms of consumption, both regions recorded the highest CAGRs of 11.2% and 10.3%, respectively, during the same time span. Asia was ranked as the largest steel producing & consuming region with respective shares of 56.1% & 56.7% of global steel production & consumption in 2007. Developing regions are the industry's growth engine CAGRs of regional crude steel production & con- Regional share in global steel production & consumption (2001-2007) sumption in 2007 CAGR of Production 16% Oceania CAGR of Consumption Share in Global Steel Production Share in Global Steel Consumption 14% 12% 10% 8% 6% North America Africa Middle East South America 4% Europe 2% Asia 0% Asia Middle East South America Africa Europe Oceania North America World 0% 10% 20% 30% 40% 50% 60% Source: www.worldsteel.org Source: www.worldsteel.org Asia's prominence in the world's steel industry was mainly attributable to the presence of China; which witnessed an outstanding growth in its steel production & consumption levels over 2001-2007 with the former growing by a CAGR of 21.6% and the latter enjoying a CAGR of 17.1%, thus, contributing with 36.4% & 33.8% respectively in global steel production & consumption in 2007. It is worth noting that steel is a considered a concentrated market, with the top 4 countries representing 54% of the global steel consumption. With China leading such growth 68
Slide 71: November 11, 2008 EGYPT | STEEL World's largest steel producing countries in 2007 Others 22.8% China 36.3% World's largest steel consuming countries in 2007 Others 28.4% China 33.8% Italy 2.4% Brazil 2.5% Ukraine 3.2% Germany 3.6% India 3.8% Japan 8.9% South Korea 3.8% Russia 5.4% United States 7.3% Turkey 2.0% Spain 2.0% Italy 3.1% Germany 3.2% Japan 6.6% United States 9.0% Russia 3.3% India 4.2% South Korea 4.5% Source: www.worldsteel.org Source: www.worldsteel.org Towards the end of 2008, steel prices shifted their hiking trend that was witnessed throughout the first eight months of 2008, mimicking the pattern of the raw materials prices. It is worth noting that such declining pattern is namely due to the slowdown in global demand. International steel prices vs. raw materials prices (Feb 2006-Oct 2008) US$/ton 1,200 1,100 1,000 900 800 700 600 500 400 300 200 100 0 US Hot Rolled Coils Scrap US Import Rebar Price Pig Iron A shift in steel prices hiking trend Source: Bloomberg STEEL MARKET IN EGYPT MARKET STRUCTURE At present, there are 20 steel producers in the local market with a total capacity of 9.60 mn tons split between rebars and flat steel products, with the former holding a share of 72.9% of local steel capacity in 2008 and the latter had a share of 27.1%. Rebars segment bears the lion's share in local steel capacity 69 Fe M b-0 ar 6 A -06 p M r-0 ay 6 Ju -06 n Ju -06 A l-0 ug 6 S -0 ep 6 O -06 c N t-0 o6 D v-0 ec 6 Ja -06 n Fe -0 7 M b-0 ar 7 -0 A7 p M r-0 ay 7 Ju -07 nJu 07 A l-0 ug 7 S -0 ep 7 O -07 c N t-0 o7 D v-0 ec 7 Ja -07 n Fe -0 8 M b-0 ar 8 A -08 p M r-0 ay 8 Ju -08 n Ju -08 A l-0 ug 8 S -0 ep 8 O -08 ct -0 8
Slide 72: November 11, 2008 EGYPT | STEEL Local steel capacity by product type in 2008 Flat 27.1% Rebars 72.9% Source: ES After acquiring a stake in Al Ezz Dekheila Steel Company-Alexandria (EDZK) and establishing a new steel company in Al-Sokhna free zone area namely Al Ezz Flat Steel (EFS), Al Ezz Steel (ES) -previously known as Al Ezz Steel Rebars (ESR) – became the largest player in the domestic market with respective shares of 65% & 60% of rebars & flat steel local sales during 9M08. Currently, ES owns 90.73% of Al Ezz Steel Mills (ESM); 75.15% of EFS and 53.24% of EDZK. It is worth mentioning that the Egyptian Iron & Steel Company (EISCO) is the only public sector player in the flat steel market, while Delta Steel Mills is the only state-owned company in the rebars steel market. 9M08 Local rebars market shares* Others 14.0% Kouta 1.9% El Bourieni 2.1% Al Attal 5.0% EISCO 22% Beshay 12.0% El EZZ Steel 65.0% Ezz Steel has the upper hand in local steel market 9M08 Local flat steel market shares* Imports 18% El EZZ Steel 60% Source: ES Source: ES Raw materials account for the highest contribution to the total production cost, yet their shares vary depending upon the producer's level of integration. Raw materials accounted for the respective shares of 68% & 75% in EZDK & in ES of the total production cost in 1H08. The variance in feedstock's share in the cost structure between EZDK & ES is due to the variances between feedstock mixes used by EZDK and ESR & EFS, as the former uses a DRI/scrap mix of 80/20 while ESR & EFS use a DRI/scrap mix of 15/85 and 25/75, respectively. Worthy to mention is that local manufacturers fully import their raw materials either in the form of iron ore, scrap or billets exemplifying Egypt's heavy reliance on imported raw materials. Raw materials, a key contributor to production cost * market shares are in terms of local sales. 70
Slide 73: November 11, 2008 EGYPT | STEEL EZDK cost structure in 1H08 Salaries 3% ES* –consolidated - cost structure in 1H08 Depreciation 6% Energy 7% Salaries 2% Depreciation 8% Energy 10% Overhead 10% Overhead 11% Raw Materials 68% Raw Materiald 75% Source: ES Source: ES REBARS SEGMENT Rebars demand grew at a higher pace than that of capacity over 2003-2008 recording respective CAGRs of 7.6% and 1.6%. Hence, reaching 4.40 mn tons for the former & 7 mn tons in 2008 for the latter. Capacity expansion was due to the entrance of new players, such as Al Attal, Sarhan Steel, Al Megharbel, Fair Trade and Al Marakbi; in addition to the upgrading of one of the existing facilities namely, Beshay Steel raising its capacity from 400k tons in 2000 to 1.4 mn tons in 2002. In 2005, utilization rates started witnessing an up-trend triggered by an unmatched added demand. Rebars capacity & demand (2003-2008) mn tons 8 7 6 5 4 3 2 -0.2 1 -0.4 0 2003 2004 2005 2006 2007 2008E -0.6 0% 10% Capacity Demand Demand exceeded capacity growth that of Rebars added capacity, demand & utilization rate (2003-2008) mn tons 1.0 0.8 0.6 0.4 0.2 0.0 2003 2004 2005 2006 2007 2008E 20% 62.8% Added Capacity Added Demand Utilization Rate % 80% 67.1% 72.0% 70.3% 70% 60% 50% 40% 30% 53.8% 50.7% Source: ES & CICR estimates Source: ES & CICR estimates About 85% on average approximately of steel rebars sales were directed to the local market over the period 2003-2006. Yet in 2007 & 2008, local sales share increased reaching 87% & 91% due to the flourishing of the real-estate activity over these two years. As for rebars exports, they reached their peak in 2006 with 950k tons, representing 20.7% of total market sales. However, exports' share decreased to 12.9% in 2007 and is estimated to reach 9% only in 2008, due the robust local demand on steel, and to the imposition of duties on steel exports in 2007 –which lasted from February 2007 until October 19, 2008. The majority of rebars production is sold in the local market *Al Ezz Steel is the consolidation of Al Ezz Dekheila, Al Ezz Steel Rebars & Al Ezz Flat Steel 71
Slide 74: November 11, 2008 EGYPT | STEEL Rebars local sales & exports (2003-2008) mn tons 5.0 4.5 18% 4.0 3.5 3.0 2.5 2.0 1.5 1.0 3% 0.5 0.0 2003 2004 2005 2006 2007 2008E 0% 9% 6% 15% 12% Local Sales Exports Share of exports/ total sales 21% Source: ES & CICR estimates FLAT STEEL SEGMENT Exports represented a considerable share – an average of 59%- in total Flat steel sales over 2003-2007. Such high exports contribution is mainly attributed to the fact that flat steel is used in the advanced industries, besides EFS- the largest flat steel producer in the local market- is located in Al-Sokhna free zone directed around 82% of its sales to the international markets in 1H08. Yet since 2004, flat steel consumption have showed growth potentials growing by a CAGR of 10.7% over 2004-2007 compared with a CAGR of 5.2% over 2001-2004, thus increasing local sales from 0.49 mn tons in 2001 to 0.88 mn tons in 2007. Flat steel production vs. local sales (2003-2008) mn tons 2.7 2.4 1.2 2.1 1.0 1.8 1.5 1.2 0.9 0.4 0.6 0.3 0.0 2003 2004 2005 2006 2007 2008E 0.2 52% 50% 48% 2003 2004 2005 2006 2007 2008E 0.8 60% 58% 56% 54% Production Local Sales Exports dominate flat steel sales, yet potential growth appears locally Flat steel exports and its contribution to total sales (2003-2008) mn tons 1.4 Exports Share of Exports/Total sales 66% 64% 62% 0.6 0.0 Source: ES & CICR estimates Source: ES & CICR estimates Despite growing flat steel production, the gap between local sales & demand widened from 33k tons in 2003 to 167k tons in 2007, and an estimated gap of 193K tons in 2008. The widened gap is mainly attributed to the expanded demand in the local market by a CAGR of 13.3% over 2003-2007, in addition to an estimated growth of 2.5% in 2008. It is worth noting that such growth in local demand is driven by the country's strengthening economy, resulting in an increasing imports reaching 167k tons in 2007. Flat steel supply shortfall is widening 72
Slide 75: November 11, 2008 EGYPT | STEEL Flat steel consumption vs. local sales & imports (2003-2008) mn tons 1.2 Local Sales consumption Imports mn tons 0.25 Flat steel utilization rates (2003-2008) 100% 90% 89.2% 85.4% 80.5% 75.8% 67.2% 57.0% 1.0 80% 0.20 70% 0.8 0.15 0.6 0.10 0.4 0.05 60% 50% 40% 30% 20% 10% 0.2 0.0 2003 2004 2005 2006 2007 2008E 0.00 0% 2003 2004 2005 2006 2007 2008E Source: ES & CICR estimates Source: ES & CICR estimates RECENT DEVELOPMENTS On October 19, 2008, the levied LE 160/ton tariff on steel exports was removed, in an effort to make steel prices more competitive in the international markets – against the backdrop of the anticipated global recession spurred by the financial turmoil. Egypt's heavy reliance on imported raw materials drove the GoE to issue in 2007 four licenses for the production of billets and sponge iron with a combined annual production capacity of 8 mn tons, and an investment cost of US$15 bn. The four winners are Ezz Steel (ES), Suez Steel Company, Tiba for Iron & Steel and the Egyptian Company for Sponge Iron. Most notably, by the beginning of 2008, another two licenses were offered to two foreign investors for the first time. The first was awarded by Arcelor Mittal – the world's largest steel producer – won the bid in February 2008 with planned annual capacity of 3 mn tons in direct reduced iron (DRI) and billets. The former's capacity is set at 1.6 mn tons, while that of the latter is planned to reach 1.4 mn tons. The second license was awarded by MAC Holding for Industries; a subsidiary of the Kuwaiti-based Al Kharafi Group, for the production of direct reduced iron with planned capacity of 1.6 mn tons and at the same price at which Arcelor Mittal won the tender Through its license acquisition, ES will establish, at EFS, an electric furnace to produce DRI with an annual capacity of 1.7 mn tons and a melt shop to produce 1.35 mn tons of molten steel distributed as follows: 0.8 mn tons for flat steel at EFS, and 0.55 mn tons for billets which will be directed to ESR to replace its imported billets. It is worth mentioning that said expansion is expected to commence operation by the beginning of 2011 and is expected to positively impact ESR relative margins. Local steel prices are closely tied with international raw materials trends, as around 85-90% of it are imported. The slowdown in global demand reversed the up-trend followed by international steel prices since July 2008; by which a drop of 56% & 42% respectively in scrap & pig iron prices was witnessed over the past three months. Consequently, a sharp decline of 41% occurred in local rebars prices during the same period, reaching LE 3,900/ton by the end of October Lifting up duties imposed on exports Investment inflow in the feeding industry with a foreign tint, for the first time A move towards integration The decline in international raw materials prices reversed the steel prices' uptrend 73
Slide 76: November 11, 2008 EGYPT | STEEL Local rebars prices vs. international pig iron prices (Mar 08-Oct 08) LE/ton 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 24-Oct- 25-Oct08 08 Local Rebar Price Pig Iron US$/ton 1,100 1,000 900 800 700 600 500 400 300 200 100 0 0 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 24-Oct- 25-Oct08 08 0 2,000 1,000 200 100 4,000 3,000 400 300 6,000 5,000 600 500 Local rebars prices vs. international scrap prices (Mar 08-Oct 08) LE/ton 7,000 Local Rebar Price Scrap US$/ton 700 Source: ES & Bloomberg Source: ES & Bloomberg MARKET DYNAMICS Domestic Market Governmental Measures - Removal of export duties - Modifying anti-monopoly law - Offering licenses for steel feeding industries Supply-Related Factors - Strengthening EBITDA - New capacities for steel feeding industries on stream - Impact from export tariffs Demand Driver - Construction boom - Solid growth in dependant industries GOVERNMENTAL MEASURES Since 2007, the government has been taking several actions and decisions to regulate the steel industry's expansions & trading activity which greatly influenced the steel industry. The following table summarized the recent actions taken by the GoE: Recent governmental measures Measure Revoking the export duties Date 19-Oct-08 Description Calling-off the LE 160/ ton duties previously imposed by the Ministry of Trade & Industry on steel exports. Raising fines the minimum level of fines charged per violator from LE 30k to LE 100k and the maximum level from LE 10 mn/violator to LE 300 mn. the first to Arcelor Mittal and the second to MAC Holding for Industries in order to produce direct reduced iron & billets. Impact POSITIVE Modifying Anti Monopoly Law Jul-08 POSITIVE Offering 2 licenses for steel feeding industries to foreign investors for the first time Source: CICR Database Feb-08 POSITIVE 74
Slide 77: November 11, 2008 EGYPT | STEEL Measure Offering 4 licenses for steel feeding industries Imposing duties on steel exports Source: CICR database Date Oct-07 Description Lienses were offered to local producers for the production of billets and sponge iron. Imposing an export duty of LE 160/ton on steel exports. Impact POSITIVE Feb-07 NEGATIVE SUPPLY-RELATED FACTORS The monopolistic status of the steel industry, as ES currently controls 44.3% and 84.6% of rebars and flat steel capacities, respectively, enables the industry players to pass the increased production cost to the consumer. Despite that raw materials prices hiked by 55.3% during 1Q08, ES EBITDA margin increased to 26.7% vs 24.1% in 2007. Yet, the company's EBITDA margin decreased to 23.7% in 2Q08 due to the 58.6% increase in raw materials prices over the same period. Nevertheless, in terms of absolute values, the company's Earnings before Interest Taxes Depreciation & Amortization (EBITDA) grew by 32.7% and by 25% during 1Q08 and 2Q08 compared to the same period one year earlier, reaching the respective levels of LE 1.3 bn and LE 1.4 bn. Strengthening EBITDA ES EBITDA margin vs. imported raw materials prices by quarter (1H07-1H08) US$/ton 800 700 600 500 400 314 300 200 100 0 1Q07 2Q07 1Q08 2Q08 323 23.7% 23% 24% 26.3% 26% 463 25% Raw Materials Prices EBITDA Margin 28% 734 27.3% 26.7% 27% ES EBITDA vs. raw materials prices by quarter (1H07-1H08) US$/ton 800 700 1.3 600 1.1 500 1.0 400 314 300 200 100 0 1Q07 2Q07 1Q08 2Q08 323 0.6 0.4 0.2 0.0 0.8 463 1.0 1.2 Raw Materials Prices EBITDA 734 1.4 1.4 LE bn 1.6 22% 21% Source: ES & Bloomberg Source: ES & Bloomberg The LE 160/ton export tariff which was levied on steel producers by the end of February 2007, led to a 34.6% drop in Egypt's rebars exports during 2007 reaching 0.62 mn tons. Similarly, after imposing said tariffs, the share of exports in ES total sales decreased from 47.4% in 1H07 to 26.4% by the end of 2007, followed by a further decline to 22.9% in 1H08. Yet, to mitigate the negative impact of the anticipated global economic slowdown the GoE decided to call off the export duties on steel exports on October 19, 2008. Imposing the export duties led to a huge drop in exports 75
Slide 78: November 11, 2008 EGYPT | STEEL Egyptian rebars export pattern (2006-1H08) mn tons 1.0 0.9 0.95 ES rebars export pattern (2006-1H08) 50% 45% 40% 47.4% 0.8 0.7 0.62 0.6 0.5 0.4 0.3 0.2 0.1 0.0 2005 2006 2007 0.45 35% 30.8% 30% 25% 20% 15% 10% 5% 0% 2006 2007 1H07 1H08 26.4% 22.9% Source: ES & CAPMAS Source: ES DEMAND-PULL FORCES Steel consumption is closely tied to the mushrooming construction activity evidenced in the correlation co-efficient of 0.871 between both factors. Construction activity in Egypt grew by a CAGR of 7.4% over 2004-2007, triggering rebars consumption to grow by a CAGR of 15.9% over the same time span Construction activity vs. rebars consumption (2004-2008) LE bn 40 35 30 3.5 25 20 15 10 1.0 5 0 2004 2005 2006 2007 2008E 0.5 0.0 3.0 2.5 2.0 1.5 Construction Activity Rebars Consumption mn tons 5.0 4.5 4.0 Construction boom Source: ES & CAPMAS Consumer goods and the locally assembled vehicles (Completely Knock down – CKD) are key consumers of flat steel, hence, exhibiting strong co-efficient correlation of 0.952 and 0.961, respectively. Growing production levels in both industries drove up the demand for flat steel which enjoyed a CAGR of 13.3% over 20042007. Flat steel is closely tied with manufacturing industries 76
Slide 79: November 11, 2008 EGYPT | STEEL Flat steel consumption vs. consumer goods production (2004-2008) mn units 9.9 9.6 1.0 9.3 0.8 9.0 25 8.7 8.4 0.4 8.1 0.2 7.8 7.5 2004 2005 2006 2007 2008E 0.0 5 0 2004 2005 2006 2007 2008E 0.0 15 10 0.2 0.4 0.6 20 0.6 35 30 0.8 Consumer goods production Flat Steel Consumption mn tons 1.2 Flat steel consumption vs. completely knockdown (CKD) vehicles (2004-2008) 000 units 45 40 1.0 Locally Assembled Vehicles Flat Steel Consumption mn tons 1.2 Source: ES & CICR estimates Source: ES & CICR estimates FUTURE OUTLOOK With an anticipated slow down in economic activities over the coming two years, the real-estate market, the main driver for steel rebars, will witness depressed growth, as it will mainly depend on existing projects. Hence, the demand for steel rebars is expected to grow with an AAGR of % over 2009 and 2010. Yet, afterwards the market will resume higher growth levels of 9.7% over 2011 and 2012, as the economy regains its strength. It is worth noting, that as there is no stated capacity additions in the rebars segment, utilization rates are expected to strongly decline over 2009 & 2010, yet as the economy regains its strength utilization rates will record high levels. Rebars consumption, production & utilization rate (2006-2012) mn tons 7 Rebars Production Rebars Consumption Utilization Rate 90% 83.8% 80% 72.0% 69.8% 5 70.3% 67.1% 66.9% 60% 50% 40% 30% 2 20% 1 10% 0% 2006 2007 2008E 2009F 2010F 2011F 2012F 76.2% 70% Rebars market will be mainly targeting existing projects, as the economy slows down over the coming two years 6 4 3 0 Source: ES & CICR estimates The coming two years will have much of an impact on flat steel rather than on rebars steel, as the former is extensively involved in the export market (around 56% of its sales is directed to the international markets in 2007) besides its sales to the local market. As the economy slows down, growth in manufacturing industries – namely consumer goods and CKD – will follow a depressed pace. Local flat steel market and exports are expected to decline by an average of 157k tons tons over 2009 and 2010, yet with an expected recovery in both, local and international markets, demand for flat steel is to gain its strength, with demand & exports growing by a CAGR of 13.5% & 17.4% respectively over 2011 and 2012. It is worth mentioning that the decrease in capacity utilization rate in 2011 is mainly due to the start of the commercial production of the added 0.8 mn tons of flat steel at EFS by the beginning of 2011. The country's anticipated economic slowdown coupled with an expected decelerated global trade will have a dual impact on flat steel over the coming two years 77
Slide 80: November 11, 2008 EGYPT | STEEL Flat steel consumption, production & utilization rates (2006-2012) mn tons 2.5 Flat Production Flat Consumption Utilization Rate % 100% 89.2% 2.0 85.4% 80.5% 71.7% 61.6% 1.5 59.6% 62.3% 90% 80% 70% 60% 50% 1.0 40% 30% 0.5 20% 10% 0.0 2006 2007 2008E 2009F 2010F 2011F 2012F 0% Source: ES & CICR estimates As it has been the case in historical trends, local & export rebars and flat steel prices are expected to follow the same pattern as the international raw materials prices over 2008-2012. It is worth mentioning that international raw materials prices are expected to continue declining in 2009 due to the slow down in global demand, yet starting from 2010; their prices will pick up to grow by a CAGR of 15.5% with the global economy gaining back its momentum. Local & export rebars prices are expected to decline in 2009, then to grow by a CAGR of 10.8% & 8.7% respectively over 2010-2012. As for flat steel, its local & export prices are expected to decline in 2009, then to grow by a CAGR of 8.7% & 9.9% respectively over the same time span. Local & export rebars and flat prices will follow international raw materials prices Rebars local prices vs. international raw materials Rebars exports prices vs. international raw mateprices (2006-2012) rials prices (2006-2012) LE/ton 6,000 Rebars Local Raw Materials Prices US/ton 1,000 900 5,000 800 700 600 3,000 500 400 2,000 US$/ton 1,200 Raw Materials Prices Rebars Exports 1,000 4,000 800 600 400 300 200 100 1,000 200 0 2006 2007 2008E 2009F 2010F 2011F 2012F 0 0 2006 2007 2008E 2009F 2010F 2011F 2012F Source: ES & CICR estimates Source: ES & CICR estimates 78
Slide 81: November 11, 2008 EGYPT | STEEL Flat local prices vs. international raw materials prices (2006-2012) LE/ton 7,000 6,000 800 5,000 4,000 3,000 2,000 1,000 100 0 2006 2007 2008E 2009F 2010F 2011F 2012F 0 0 2006 2007 2008E 2009F 2010F 2011F 2012F Flat exports prices vs. international raw materials prices (2006-2012) US$/ton 1,200 Flat Local Raw Materials Prices US$/ton 1,000 900 Flat Exports Raw Materials Prices 1,000 700 600 500 400 300 200 800 600 400 200 Source: ES & CICR estimates Source: ES & CICR estimates 79
Slide 82: November 11, 2008 EGYPT | SUGAR UPBEAT FOR BEET Despite the looming fear of global recession and the anticipated slowdown in the country’s economic performance, the demand for a strategic commodity as sugar counts as a safe bet. The GoE’s promotion for beet cultivation over cane as a means of mitigating the challenges posed by the scarce water resources and land; coupled with the former’s high tolerance to salinity and ability to produce high yields under saline soil, the focus has been directed to sugar beet. Hence, uplifting its share of total sugar production from 13% to 39% over 1998-2007. With the country’s growing population and expanding GDP/ capita, and the increasing demand for bio-fuels, further room for growth is anticipated—especially that around 42% of the country’s sugar demand is imported. Most notably, the current decline in wheat procurement prices add to the beet’s growth potential. It is worth noting that the local beet industry enjoys higher margins than its peers. A defensive industry with Strong demand drivers: Egypt’s growing population and strengthening GDP/capita ensures a strong demand for sugar. Good prospects for beet: Against the backdrop of a highly supportive government towards an expanded beet cultivation areas and higher productivity levels, beet cultivated areas grew with a CAGR of 12.7% over 2004-2008 reaching 228k feddans versus a declining trend in cane cultivated areas recording 310k feddans in 2008 down from 322k feddans in 2004. Enhanced yield and supply shortfall support an inflow of investments: Besides the government support to expand beet cultivation areas, higher yields are targeted. Moreover, supply shortfall—with imports covering almost 42% of sugar demand— encouraged fresh investments. A new license was granted to Nile Company for sugar beet production which will be located at Nubareya. The company's annual production capacity is 125k tons and is expected to commence operations by 2009, starting off with refining activities and then followed by sugar beet production by 2010. Another line is expected to come on-stream in 2010 by Dakahlia Sugar Co. with an annual capacity of 120K tons. Wheat is a key competing crop, yet beet’s increasing yield gives it a more competitive stance: The increase in wheat procurement price, definitely, has its negative impact on expanding beet cultivated areas. The rise in wheat procurement price in 2008 to LE 380/ardab versus LE 225/ton for beet procurement price dropped the beet cultivated areas by around 8%. Yet, the current decline in wheat procurement prices of LE 180/ardab versus an announced beet procurement price for 2009 of LE 335/ton adds to the beet’s potential. Moreover, the enhanced beet productivity by 8% throughout 2004-2007 compared with a declining pattern of 1.4% for wheat, fosters the beet’s future growth. Higher margins than peers: EBITDA margin for the beet industry in Egypt enjoyed a strong average of 37% in 2007, registering a higher margin than that of its international peers that recorded 28% during the same year. DRIVERS GoE’s plan to expand beet cultivated area (horizontal) and enhance beet productivity (vertical). The planned increase in automated beet planting will ensure higher yield. The growing sales of dependant-industries will ensure strong sugar demand. Growing population and GDP/Capita will maintain a strong demand for sugar. As sugar producers can shift to refining, it acts as a hedge in case the amount of crops supplied declines. RISKS The ease of shifting to wheat cultivation forces producers to increase their beet procurement price, which impacts their margins, as procurement cost constitutes the bulk of sugar beet production cost. As beet seeds are imported, exposure to FX risk exists. Exogenous factors as bad weather and crop diseases can impact the amount of supplied crop to producers. The expected decline in shipping cost might intensify competition from imported sugar. The anticipated decline in sugar by-products prices may impact the overall margin. KEY PERFORMANCE INDICATORS Total sugar production CAGR (04-07) Sugar beet production CAGR (04-07) Beet procurement price (2008,LE/ton) Added annual capacities (2010,k tons) Self-sufficiency ratio (2007,%) 5.7 19.5 225 245 67 COMPANY COVERED Delta Sugar PAGE # 115 BASMA SHEBETA BASMA.SHEBETA@CICH.COM.EG FADWA HOSSAM ISSA FADWA.HOSSAM@CICH.COM.EG SECTOR PERFORMANCE | 2004-2008 Sugar Cane Production Growth in beet 000 tons 1,200 1,000 800 600 400 200 0 2004 2005 2006 2007 2008E Sugar Beet Production Growth in cane 40% 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% 80
Slide 83: November 11, 2008 EGYPT | SUGAR EGYPT SUGAR INDUSTRY IN EGYPT AN ADVANCED GLOBAL RANKING Egypt's cane yield per feddan recorded 50.8 tons in 2007/08 - about 1.5 times as high as that of the world's cane yield-placing the country at the second rank after Peru, which achieved a yield of 51.1 tons per feddan Top 20 countries in cane yield per feddan in FY07/08 World Swaziland Ethiopia Burkina Faso Sudan Zambia Malawi Senegal Tanzania Egypt Peru 0 10 20 30 40 50 29.8 39.6 41.5 42.0 43.8 43.8 45.7 48.8 50.2 50.8 51.1 60 Tons/Feddan Ranked 2nd in terms of cane yield Source: USDA & CICR estimates Egypt is ranked 15th worldwide, in terms of sugar per-capita consumption which recorded 36.1 Kg in FY07/08 - about 1.6 times as high as the worldwide's per capita consumption during the same year. Such manifested jump (from a rank of 21 in FY1997/98) of per capita consumption pushed Egypt to be among the world's top 20 sugar producing countries in FY07/08, with a total sugar production of 1.66 mn tons - representing a share of 1% in global sugar production. On the regional level, Egypt enjoys the highest contribution of 24.1% in terms of consumption, while is ranked 2nd with its 31.9% share in terms of sugar production, following Turkey Top 20 countries in sugar per capita consumption in FY07/08 Kg 70 60 50 40 30 20 10 0 Ranked 15th in terms of per capita consumption Top 20 countries in sugar production in FY07/08 000 tons 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Malaysia Mexico Morocco Venezuela Brazil Australia South Africa Russia & Ukraine South Korea Argentina Canada Indonesia Thailand Guatemala Colombia Mexico Algeria Cuba Peru USA Pakistan South Africa Indonesia Australia Thailand Turkey Egypt Brazil India China Iran Cuba Russia & Uraine Guatemala Colombia Philippines Egypt Source: USDA & CICR estimates Source: USDA & CICR estimates 81 Argentina World Japan USA
Slide 84: November 11, 2008 EGYPT | SUGAR MARKET STRUCTURE At present, the market consists of five public companies with a combined production capacity of 1.64 mn tons divided between cane & beet companies with the former holding a share of 61% and the latter a share of 39%. There is only a sole sugar cane producer in the local market namely, Sugar Integrated Industries Company (SIIC) which controls 62.83% of total sugar capacity, 61% through its sugar cane facility and 1.83% through its sugar beet facility. The remaining four companies in the market use beet in producing sugar and hold a combined share of 37.2% of total sugar capacities. It is worth mentioning that Delta sugar is the largest Egyptian sugar beet producer with a share of 38.3% in local sugar beet capacities. Local sugar capacity in 2008 Cane holds the lion's share Local sugar beet capacity in 2008 Dakahlia Sugar 7.33% Nubareyya Sugar 19.53% SIIC 4.69% Sugar cane SIIC 61% Sugar beet 39% Fayyoum Sugar 7.33% Delta Sugar 38.28% Fayyoum Sugar 18.75% Delta Sugar 14.94% SIIC 1.83% Nubareyya Sugar 7.57% Dakahlia Sugar 18.75% Source: CICR Database Source: CICR Database MARKET DEVELOPMENTS Cane and beet cultivated areas grew by a CAGR of 3.8% during 2004-2008, triggered by the rise in beet cultivated areas which recorded a CAGR of 12.7% reaching approximately 228k feddans in 2008 up from 141k feddans in 2004, whereas cane cultivated areas decreased from 322k feddans to 310k feddans over the same time span primarily due to its low procurement price amounting to LE 182/ton, in addition to the continuous decline in the amount of water per capita in Egypt reaching 850cu.m in 2008 down from 927cu.m in 1995. Such growth pattern contributed in raising beet's share in both, cane and beet cultivated areas combined to 42.3% in 2008 up from 30.4% in 2004 and reducing cane's share from 69.6% in 2004 to 57.7% in 2008. Yet, in 2008 beet cultivated areas declined by 8.3% versus 2007 due to the significant rise in wheat procurement prices -the major competitor crop to beet- reaching LE 380/ardab (where 1 ton = 6.7 ardab) surpassing that of beet which amounted to LE 225/ ton. Therefore, farmers were more inclined to grow wheat than beet during that season Beet cultivated areas were on the rise, yet a drop was witnessed in 2008 82
Slide 85: November 11, 2008 EGYPT | SUGAR Beet and cane cultivated areas (2004-2008) 000 feddans 400,000 350,000 300,000 250,000 200,000 10% 150,000 100,000 50,000 0 2004 2005 2006 2007 2008E 5% 0% -5% -10% -15% Beet Cultivated Area Growth in Beet Cultivated Areas Cane Cultivated Area Growth in Cane Cultivated Areas 40% 35% 30% 25% 20% 15% Share of beet & cane in the combined (cane & beet) cultivated areas (2004-2008) Cane Share 2008E Beet Share 2007 2006 2005 2004 0% 10% 20% 30% 40% 50% 60% 70% 80% Source: Ministry of Agriculture & CICR estimates Source: Ministry of Agriculture & CICR estimates Over 2004-2007 sugar production grew by a CAGR of 5.7% over 2004-2007 to reach 1,757k tons in 2007, driven by the rising sugar beet production which increased by a CAGR of 19.5% over the same period to reach 682k tons in 2007; while sugar cane production declined by 0.4% reaching 1,075k tons in 2007, production is thus expected to record a decline of 5.5% in 2008 reaching 1,660K tons down from 1,757K tons in 2007. Said growth pattern of sugar beet & sugar cane over 2004-2008 contributed in raising the former's share from total sugar production to 37.8% in 2008 up from 26.9% in 2004 on the account of the latter's share in total sugar production which decreased from 73.1% to 62.2% over the same period Sugar beet & sugar cane production growth pattern (2004-2008 000 tons 1,200 Sugar Cane Production Growth in beet Sugar Beet Production Growth in cane 40% 2008E 35% 1,000 30% 25% 800 20% 15% 600 10% 400 5% 2005 0% 200 -5% -10% 0 2004 2005 2006 2007 2008E -15% 0% 10% 20% 30% 2004 2006 2007 Rising sugar beet production drives up sugar production Share of sugar beet & sugar cane production in total sugar production (2004-2008) Sugar Beet Share Sugar Cane Share 40% 50% 60% 70% 80% Source: Bloomberg, Al Ahram El Ektesady & CICR estimates Source: Bloomberg, Al Ahram El Ektesady & CICR estimates 83
Slide 86: November 11, 2008 EGYPT | SUGAR Sugar consumption is not expected to follow suit production in 2008, growing by 2.5% to reach 2,682k tons vs. a 5.5% decline in sugar production to reach 1,660k tons; thus reducing local production coverage from sugar to 61.9% in 2008 down from 67.2% in 2007. It is worth noting that ever since 2005 production growth has been outstripping that of consumption with the former recording an AAGR of 5.8% vs. 2.3% for the latter. Concurrently, local production coverage from sugar has been on the rise reaching its peak of 67.2% in 2007 Sugar production & consumption growth pattern (2004-2008) 000 tons 3,000 Sugar Production Sugar Production Growth Rate Sugar Consumption Sugar Consumption Growth Rate 14% 12% 2,500 10% 8% 2,000 6% 4% 1,500 2% 1,000 0% -2% 500 -4% -6% 0 2004 2005 2006 2007 2008E 56% 58% 60% 62% 64% 66% 68% -8% 2004 60.9% 2005 61.1% 2006 61.6% 2007 67.2% Rising production coverage, with a drop in 2008 Local sugar production coverage ratio (2004-2008) 2008E 61.9% Source: Bloomberg , Al Ahram El Ektesady & CICR estimates Source: Bloomberg, Al Ahram El Ektesady & CICR estimates In an attempt to meet up with rising demand, most sugar companies engage in sugar refining activities during the beet off season which starts from July till December amounting to a total capacity of 2 mn tons. It is worth mentioning that in early 2008, a new company specialized in sugar refining began operations namely the Saudi based Savola at Ain El Sokhna with an annual capacity of 750K tons Egypt has been a major importer of sugar due to the widening gap between local production and consumption, which pushed the country to rely on imported raw & refined sugar to cover approximately 42% of its needs. Moreover, raw sugar used to hold the lion's share 75% of total sugar imports with the remaining 25% directed to refined sugar. Yet, 2008 witnessed a significant rise in refined imports reaching a share of 56% of total imported sugar, mainly due to the arrival of the heavily subsidized refined sugar from India which was sold locally at a cheaper price of LE 2,200/ton versus that of LE 2,500/ton for the Egyptian sugar Sugar imports pattern (2004-2008) 000 tons 1,400 Beet companies engage in refining activity during off season Imports cover approximately 42% of Egypt's sugar requirements Share of refined & raw sugar imports in total sugar imports (2004-2008 Share of Raw Sugar Imports 25% 2008E Share of Refined Sugar Imports Sugar Imports Imports Growth Rate 20% 1,200 15% 1,000 10% 800 2007 5% 2006 600 0% -5% 400 -10% 200 -15% 2004 2005 0 2004 2005 2006 2007 2008E -20% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% Source:USDA & CICR estimates Source: CAPMAS, Delta Sugar & CICR estimates 84
Slide 87: November 11, 2008 EGYPT | SUGAR Market Dynamics Sugar Market Supply Factors Cost-Related Factors Demand Factors Government Initiatives Facilities to Farmers Beet Procurement Price Cost of Beet Seeds Prices of Sugar By-products Population Growth Promoting Beet over Cane Wheat Competition GDP per Capita High Procurement Prices Horizontal & Vertical Expansion Sugar Dependant Industries Supply-Push Forces Sugar beet production is closely tied to beet yield, evidenced in the correlation coefficient of 0.997 between both factors. Beet yield has been on the rise recording a CAGR of 2.7% during 2004-2007 to record 21.98 tons/feddan in 2007; thus boosting sugar beet production to grow by a CAGR of 19.5% over the same period reaching 682k tons in 2007. It is worth mentioning that sugar beet companies offer farmers several facilities to lure them to expand beet cultivation and prevent them from shifting into its main competing crops, namely wheat. Facilities offered include: providing farmers with beet seeds on credit to be repaid when the crop is harvested; supplying farmers with the needed pesticides and fertilizers' usage guide; and Beet yield development pattern (2004-2007) Tons/Feddan 22.5 22.0 21.5 CAGR 2.7% 21.0 400 20.5 300 20.0 19.5 19.0 2004 2005 2006 2007 200 100 0 2004 2005 2006 2007 20.0 19.5 20.5 Facilities offered by sugar beet companies triggered increase in beet yield Beet yield vs. sugar beet production (20042007) 000 tons 800 700 600 500 21.0 Sugar Beet Production Beet Yield Tons/Feddan 22.5 22.0 21.5 19.0 Source: Ministry of Agriculture Source: Ministry of Agriculture & Al Ahram El Ektesady 85
Slide 88: November 11, 2008 EGYPT | SUGAR Over the last few years, wheat has become a major competitor to beet as they are both winter crops and farmers can easily shift between them. The relation between both crops is reflected in strong inverse correlation co-efficient of 0.9997, implying that the increase in the former's cultivated areas lead to a decrease in the latter's cultivated areas. In 2008, the decline in beet cultivated areas is mainly due to the significant rise in wheat procurement price by almost 73% over 2007 reaching LE 380/ardab compared with LE 225/ton for beet. A pattern that occurred before in 2006 when beet procurement price reached LE 188/ ton compared with LE 169/ardab for wheat, as such the former's cultivated areas recorded a growth of 11.4% vs a mere 2.6% growth for the latter. It is worth mentioning that in an attempt to enhance beet cultivation, sugar beet companies decided as of 2009 to increase beet procurement price by 49% to reach LE 335/ton. Growth in beet cultivated area vs. growth in wheat cultivated areas (2006-2008) Growth in Beet Cultivated Area 40% 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% 2006 2007 Wheat procurement price LE 220/ardab Wheat procurement price LE 169/ardab Beet procurement price LE 188/ton Beet procurement price LE 191/ton Wheat competes heavily with sugar beet, especially in 2008 Sugar beet production vs. wheat production (2006-2008) 000 tons 800 700 8,500 600 Sugar Beet Production wheat production 000 tons 9,000 Growth in Wheat Cultivated Area Wheat procurement price LE 380/ardab 500 400 300 200 8,000 7,500 2008E 100 Beet procurement price LE 225/ton 7,000 0 2006 2007 2008E 6,500 Source: Ministry of Agriculture, FAPRI & CICR estimates Source: Al Ahram El Ektesady, Ministry of Agriculture, FAPRI & CICR estimates COST-RELATED FACTORS The rising costs of imported beet seeds, farmers cultivating beet witnessed an in- Beet procurement creasing cost of beet seeds/feddan over the period 2004-2007 recording a CAGR of price bears a key 8% reaching LE 285/feddan in 2007 compared with LE 226/feddan in 2004. More- contribution over, the cost of beet seeds per feddan coupled with the procurement price are the major factors farmers take into consideration while determining beet cultivation, thus exposing sugar beet companies to the consistent pressure of raising beet procurement price following the increase in the seeds' cost. Such link was illustrated in the strong correlation co-efficient of 0.723 between the change in beet procurement price and the cost of beet seed/feddan. As such beet procurement price holds the lion share in total sugar beet production cost amounting to 71% followed by industrial costs (which includes fuel cost and spare parts) holding a share of 10.6% while the remaining 18.4% falls to wages, transportation, subsidies, packaging and depreciation costs. 86
Slide 89: November 11, 2008 EGYPT | SUGAR Growth pattern of beet procurement price vs. seed cost/feddan (2003-2007) Change in Cost/feddan 160% 140% 120% 100% 80% 25% 60% 20% 40% 20% 0% 2003 -20% -40% 2004 2005 2006 2007 15% 10% 5% 0% Beet related cost (subsidy+transportat ion), 5.6% Beet procurement price & bonus for early harvesting, 71.0% Delta Sugar production cost breakdown (2007) Depreciation, 4.9% Packaging material, 2.4% Wages, 5.4% Industrial costs (fuel+spare parts), 10.6% Change in Procurment Price/feddan 45% 40% 35% 30% Source: CAPMAS & Ministry of Agriculture Source: Delta Sugar Co The rising prices of sugar beet by products-molasses and fodder- which took place Increasing prices of in 2007 helped sugar beet companies mitigate the squeeze in their margins resulting sugar beet byfrom the sugar beet production rise. Delta's gross profit from sugar declined from products 43% in 2006 to an expected 23% in 2008 yet, the company's overall gross profit margin (including molasses and fodder in addition to sugar) did not witness the same decline reaching 40% in 2008 down from 42% in 2006. It is worth mentioning that both molasses & fodder are directed mainly to the export market since the former is mainly used in the manufacturing of alcoholic beverages as well as in the manufacturing of bio-fuels namely, ethanol, while the latter is used in feeding livestock. Furthermore, the local industry's EBITDA margin scored an average of 37% over 2007, compared with an average of 28% for international peers. Sugar beet gross profit margins vs overall gross profit margins (2006-2008) Overall Gross Profit Margin 45% 40% 35% 30% 26.4% 25% 20% 15% 15% 10% 10% 5% 0% 2006 2007 2008E 5% 0% Local Margins International Peers 23% 20% 42.0% 42.8% 41.3% Sugar Beet Gross Profit Margin 40% 40% 35% 30% 25% 28% 37% Sugar beet margins vs. International Peers 2007 Source: Delta Sugar Co Source: Delta Sugar Co & Bloomberg DEMAND-PULL FORCES Rising sugar consumption has long been fueled by rising population and GDP per capita registering a strong correlation of 0.998 with the former and 0.984 with the later. Over the period 2005-2008, population increased to reach 75 mn in 2008 followed by a rising level of income reaching US$2,247 up from US$1,412 in 2005 stimulating sugar per capita consumption from 35 kg/annum to 36 kg/ annum over the same time span. Population growth along with evolving GDP per Capita spur sugar consumption 87
Slide 90: November 11, 2008 EGYPT | SUGAR Population vs. sugar consumption (2005-2008) 000 Inhabitants 76,000 75,000 74,000 73,000 72,000 71,000 70,000 69,000 68,000 2005 2006 2007 2008E 000 tons 2,700 2,650 2,000 2,600 2,550 2,500 2,450 2,400 500 2,350 2,300 0 2005 2006 2007 2008E 2,350 2,300 1,000 2,600 2,550 2,500 2,450 2,400 GDP per capita vs. sugar consumption (20052008) US$ 2,500 GDP Per Capita Sugar Consumption 000 tons 2,700 2,650 Population Sugar Consumption 1,500 Source: IDSC, Bloomberg & CICR estimates Source: CBE, Bloomberg & CICR estimates Said increase in per capita income is mostly accompanied with a rise in the average consumer spending, thus boosting sales of confectionary products & soft drinks i.e. expanding sugar consumption. Correlation co-efficient between sugar consumption and the former is 0.993 while with the latter is 0.986. Confectionary sales vs. sugar consumption (2005-2008) 000 tons 87.5 Confectionary Sales Sugar Consumption 000 tons 2,700 2,650 87.0 2,600 86.5 2,550 86.0 2,500 2,450 85.5 2,400 85.0 2,350 84.5 2005 2006 2007 2008E 2,300 100 0 2005 2006 200 600 500 400 300 Expanded demand by sugar-dependant industries Soft drinks sales vs. sugar consumption (20052008) US$ mn 800 700 Soft Drink sales Sugar Consumption 000 tons 2,700 2,650 2,600 2,550 2,500 2,450 2,400 2,350 2,300 2007 2008E Source: BMI , Bloomberg & CICR estimates Source: BMI, Bloomberg & CICR estimates GOVERNMENT-INITIATIVES Despite that Egypt's cane yield is ranked among the highest worldwide, the GoE's policy has been recently promoting beet cultivation, in an attempt to mitigate the challenges posed by scarce water and land resources. The GoE is promoting beet cultivation through vertical (yield) and horizontal (acreage) expansions. Although beet crop is relatively new as it was first introduced in 1981; it has gained wide importance due to its tolerance to salinity along with its ability to produce high yields under saline soil compared with most other traditional winter crops In order to endorse farmers to cultivate beet and to control cane cultivation, the government increased the former's procurement price from LE 191/ton in 2007 to LE 225/ton in 2008 whereas it increased the latter's procurement price by LE 17/ ton to LE 182/ton in 2008. Promoting beet cultivation over that of cane …through higher procurement prices 88
Slide 91: November 11, 2008 EGYPT | SUGAR It is worth mentioning that beet cultivated in newly reclaimed lands grew by a CAGR of 74.8% over the period 2004-2007 reaching 14.6k feddans, whereas cane cultivated areas in newly reclaimed land witnessed a CAGR of 5.7% over the same time span. Beet cultivated areas in newly reclaimed lands (2004-2007) Feddans 25,000 …horizontal expansion Cane cultivated areas in newly reclaimed lands (2004-2007) Feddans 40,000 39,000 20,000 CAGR 74.8% 38,000 37,000 36,000 35,000 CAGR 5.7% 15,000 10,000 34,000 33,000 5,000 32,000 31,000 0 2004 2005 2006 2007 30,000 2004 2005 2006 2007 Source: Ministry of Agriculture Source: Ministry of Agriculture FUTURE OUTLOOK To meet unsatisfied demand plans are underway to establish new sugar beet production plants . By 2010 Dakahlia Sugar Company will begin operating its second production line with a capacity of 120K tons, while Nile Company (Sawiris) will start operating its 125K ton production line raising total sugar beet production capacities from 1,390K tons in 2008 to 1,635K tons in 2010 including the 750K tons of Savola's sugar beet refinning plant which began operation early 2008. Following the government plan to promote beet area over cane, no sugar cane capacity expansions are expected in the future thus total sugar capacities are expected to reach 2,635K tons by 2010 up from 2,390K tons in 2008 driven only by expansions in sugar beet Beet drives future capacity expansions The existence of a production-consumption gap amounting to 1,022K tons in 2008 being satisfied by imports, represents potential for further investments in the sugar industry – not only to meet up with the rising sugar consumption but also to eat up from the imports bulk. Given the GoE plans to expand beet cultivated areas, it is expected that over 2008-2012 beet cultivated areas will grow by a CAGR of 10.7% - pushing production to reach around 2 mn tons by 2012 Growth potential resides in sustainable sugar demand 89
Slide 92: November 11, 2008 EGYPT | SUGAR Sugar production vs sugar deficit (2006-2012) 000 Tons 2,500 Sugar Production Production-Consumption Deficit Sugar consumption vs. sugar imports (20062012) 000 Tons 3,500 3,000 Sugar Consumption Sugar Imports 2,000 2,500 1,500 2,000 1,500 1,000 500 500 2006 2007 2008 2009 2010 2011 2012 2006 2007 2008 2009 2010 2011 2012 1,000 Source: CICR estimates Source: CICR estimates Sugar beet ex-factory prices are expected to record an upward trend over the coming five years recording a CAGR of 10.3% over 2008-2012 reaching LE 3,862/ton in 2012 up from LE 2,606/ton in 2008 driven by the increase in beet procurement prices recording an expected CAGR of 18.6% over the same period Beet procurement prices vs sugar beet ex-factory prices (2008-2012) Beet Procurment Prices 500 450 400 350 300 2,500 250 2,000 200 150 100 50 0 2008 2009 2010 2011 2012 1,500 1,000 500 0 Sugar Beet Ex-Factory Prices 4,500 4,000 3,500 3,000 Beet procurement prices drive future sugar beet ex-factory prices Source: CICR estimates 90
Slide 93: November 11, 2008 EGYPT | TELECOM MOBILE, A RISING RING AMID AN ECONOMIC SWING The global telecom segment has been generating colossal revenues, which grew by a CAGR of 9% over 2004-2007 reaching US$1.8 trillion in 2007. Nevertheless, the outbreak of the global credit crunch and the subsequent regional economic slowdown are expected to derail the sector from its accelerating pace. However, the Egyptian telecom sector growth is expected to deviate from such path exhibiting resilience to the upcoming storm; driven by its competitive burgeoning mobile segment – registering a CAGR of 51% over 2003-2007 - which is expected to stimulate a spillover effect in the other segments; primarily growth in the internet segment, driven by the recent application of 3G technologies which enabled mobile operators to provide high speed internet services in new guise. Secondly, competition in the fixed-line segment which, despite its monopolistic status and delayed liberalization, has been witnessing successive promotions by its incumbent operator to counter the flow of fixed-mobile substitution (FMS). Subsequently, the sector's growth potential mainly resides in the mobile segment whose services are still not yet accessible to half of the population, and the under penetrated internet market, with its registered 13% penetration rate in 2Q08. Defensive demand sustained by socio-economic drivers: Escalating GDP per capita coupled with the expanding youth population have been generating sustainable demand for telecom services. Intensifying competition fuels growth in the mobile: The introduction of competition following the entrance of the third mobile operator, Etisalat Misr (EM), have triggered exceptional mobile subscribers growth registering a Y-o-Y growth of 47% reaching 41 mn subscribers and 54.4% penetration rate in 3Q08. 3G technology opens new battlegrounds for mobile operators: The acquisition of 3G license, which entails the transfer of non-voice data in addition to voice data, allowed mobile operators to enter the internet market and compete over the provision of high speed connection in new guise—via mobile internet and portable USB modems. Accordingly, Vodafone Egypt (VFE) revealed that around 12% of its mobile subscribers had used mobile internet in October 2008. Broadband stimulates internet growth: High-speed internet connections (broadband) have been the primary driver behind the growth in internet users registering a CAGR of 206% compared to 36% recorded by free users, over 2003-2007. Mobile mania sweeps fixed-line: The exceptional growth in mobile came at the expense of a contracting fixed-line market triggered by fixed to mobile substitution wave. Hence, TE has been launching a number of promotional campaigns to counter such trend. DRIVERS Egypt youth-based population secures a sustainable market for telecom services. Relatively low mobile penetration, compared to other regional peers, provides room for growth. Narrow broadband penetration rate provides significant growth potential. Acquisitions of 3G licenses by three operators will open door for the provision of new services. RISKS Global credit crunch are likely to limit the inflow of investments. Fluctuating GDP per capita is expected to decelerate growth in internet subscribers. The delayed introduction of competition to the fixed-line market will sustain the diminishing growth rate of fixed-line subscribers. KEY PERFORMANCE INDICATORS Mobile subscribers CAGR (03-07,%) Internet Users CAGR (03-07,%) Fixed-line subscribers CAGR (03-07,%) Mobile penetration rate (3Q08,%) Internet penetration rate (2Q08,%) 51 30 7 54.4 13 COMPANIES COVERED Mobinil Orascom Telecom (OT) Telecom Egypt (TE) PAGE# 133 143 155 NORAN ALI NORAN.ALI@CICH.COM.EG MAYAN EL MENSHAWY MAYAN.ELMENSHAWY@CICH.COM.EG SECTOR PERFORMANCE | 2004-2Q2008 60 mn subs Telecom subs Mobile GR Fixed-line GR Internet users GR 80% 70% 50 60% 40 50% 30 40% 30% 20 20% 10 10% 2004 2005 2006 2007 2Q08 0% 91
Slide 94: November 11, 2008 EGYPT | TELECOM GLOBAL TELECOMMUNICATIONS INDUSTRY Telecommunications have played a vital role in spurring economic development through the generation of substantial revenues which grew by a CAGR of 9% in only three years time, reaching US$1.8 trillion in 2007 compared to US$1.4 trillion in 2004. Looming global recession started to impose some obstacles on the accelerating path of the telecom industry, most notably investments - given the capital-intensive nature of such industry. This was manifested in cases of major companies that started to reconsider expanding their activities in other area, such as Vodafone which decided to delay its service initiation in Qatar to 1Q09, due to lack of liquidity. Telecom: a key role in the economy, yet such growth may be hindered by expected global recession The telecommunications market has been driven by mobile and internet users; which scored above average growth records, registering a CAGR of 24% and 19%, respectively over 2000-2007. Fixed lines lagged way behind with its 4% CAGR during the same time span. CAGRs of the global telecom market segments by number of subscribers over (2000-2007) 30% Mobile and internet, the engine for telecom growth 25% 24% 20% 16% 15% 19% 10% 5% 4% 0% World Total subs. Fixed line subs. Mobile subs. Internet subs. Source: ITU Despite the fact that the developed countries are the most penetrated region in mobile services with a rate of 95% in 2007, developing countries have been achieving a faster growth with subscribers base growing by a CAGR of 36.6% during 2000-2007 compared to 12.1% recorded by developed countries over the same time span. The same applies for the internet segment; by which developing region enjoyed a CAGR of 32% during 2000-2007, compared with 12% for developed countries. Developing region is driving mobile and internet growth EGYPT TELECOM MARKET PROFILE Over FY05/06-07/08, the exceptional telecommunications growth has been a key driving force to the Egyptian economy registering a CAGR of 51% - outpacing the 19% CAGR witnessed by the country's GDP, during the same period. Accordingly, telecom revenues surged by 42% reaching LE 27.2 bn in FY07/08 up from LE 11.9 bn in FY05/06 ; thus enlarging its share of GDP from 1.9% to 3 %, over the same time span An engine for growth 92
Slide 95: November 11, 2008 EGYPT | TELECOM In line with the global developments, mobile expansions led telecommunications growth with a CAGR of 51% over 2003-2007, followed by internet users. Mobile, the flagship for telecom growth Growth of telecom market segments' subscribers (CAGR 2003-2007) Mobile subs. 51% Internet users 30% Fixed line subs. 7% 0% 10% 20% 30% 40% 50% 60% Source: ITU; Telecom Operators, MCIT KEY RECENT DEVELOPMENTS : THE MOBILE SEGMENT May 2007 witnessed the entrance of the third mobile operator - EM - following its license acquisition a year earlier for LE16.7 mn; entailing the provision of 2G/3G technologies. Such act triggered VFE to acquire the 3G license in January 2007 yet, operation started following EM. Eventually, Mobinil which launched its 3G service by September 2008. It is worth mentioning that the entrance of EM has eaten up the market shares of both operators with VFE incurring the largest drop of 5% compared to 3% in Mobinil’s share in 3Q08 compared to the same period a year earlier. Yet, Mobinil continues to dominate 46% of the market with 18.9 mn subscriber’s base, followed by VFE with 41% market share and a total of 16.6 mn subs, and then EM with its 13% market share and a total of 5.3 mn subs. Progressive market shares of mobile operators’ (2006-3Q08) EM VFE Mobinil The entrance of the third mobile operator with its 3G technology 3Q08 2007 2006 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% Source: Telecom Operators 93
Slide 96: November 11, 2008 EGYPT | TELECOM The last obstacle on the path of free competition was removed in April 2008 with MNP paves the road the launch of Mobile Number Portability (MNP) service by the National Telecom for free competition Regulatory Authority (NTRA) for LE 75 service charge for subscribers who have at least one year subscription with a mobile operator, thus excluding EM subscribers*. Subsequently, MNP intensified subscribers transfer to the new operator, reflected in the growth in EM subscribers which registered an exceptional Q-o-Q growth of 110% in 3Q08, reaching 5.3 mn subscribers. Thus, nearly doubling its market share to 13% in 3Q08 compared to 7% a quarter earlier, in addition to the escalating churn rates borne by other operators, most notably Mobinil whose rate surged to 9.5% in 3Q08 up from 5.8% in 2Q08.** On the whole, subscribers recorded a 16% Q-o-Q growth reaching 40.8 mn subscribers, over the same time span. QoQ Mobile Subscribers by operator mn Subs. 45 40 35 30 25 20 15 10 5 0 4Q07 1Q08 2Q08 3Q08 Mobinil VFE EM Source: Telecom Operators MARKET DYNAMCIS Basic Drivers Internet Drivers Growing IT clubs & ISPs Broadband growth Expanding youth GPD per capita Telecom Drivers Mobile Drivers Pre-paid growth Intensified competition Technological advancement * Mobile Number Portability (MNP) is a newly-developed telecom service that enables the mobile subscriber to change his operator without changing his own number. The MNP gives the subscriber all freedom to port his number to another operator without forcing him to lose his number. ** Al Gomhuria, 30 October 2008 94
Slide 97: November 11, 2008 EGYPT | TELECOM Egypt's favorable demographics acts as a driving force for mobile and internet services, especially that the country's innate demographic structure entails a significant share of youth within the age bracket of 15-45 years accounting for 50% of the total population. Powerful links exist between mobile subscribers, internet users and population growth, exhibited in strong co-efficient correlations of 0.88 and 0.98, respectively. In addition, the significant share of 21% held by the age group of 5-15 years lays solid potential for expanding demand. Rising per capita income, namely following the cut in income tax to a flat rate of 20% in July 2006, fostered the affordability of telecom services. Accordingly GDP per capita has been strongly correlated with mobile subscribers' and internet users with a coefficient correlation of 0.99 for both factors. Mobile subscribers & internet users vs. GDP per capita 35 mn Mob subs Internet users GDP per capita US$ 2,000 1,800 30 1,600 25 1,400 1,200 1,000 15 800 600 400 5 200 2005 2006 2007 - Expanding youthdenominated population Growing GDP per capita 20 10 Source: IMF, Mobile Operators MOBILE-RELATED DRIVERS The pre-paid segment is the key driving force behind increasing mobile subscribers, which recorded an extraordinary Y-o-Y growth of 74%, compared to 17% recorded by post-paid in 2007. Consequently, pre-paid segment held the lion’s share of 95% of the total mobile subscribers' base compared to 5% held by postpaid segment in 3Q08.* Pre-paid dominance is attributed to Egypt's low income level; in addition to the intensified competition initiated by EM’s price war on the pre-paid front by removing 15% sales taxes on recharge cards. Thereafter, the other two operators pursued the same price cuts on pre-paid cards to secure their wide pre-paid base. Mobile market subscribers quarterly market mix over 4Q07-3Q08 40 35 30 25 20 15 10 5 0 4Q07 1Q08 2Q08 3Q08 mn Pre-paid driven market Prepaid Post-paid Source: IMF, Mobile Operators * Etisalat Misr subscribers mix is estimated from actual 3Q08 subscribers' figures. 95
Slide 98: November 11, 2008 EGYPT | TELECOM Intensified competition characterizes the mobile market, namely in the pre-paid segment – offering lower per minute tariff and additional benefits in the form of free minutes, SMS and cheaper handsets; thus, fostering mobile affordability and widening the addressable mobile market. Yet, competition was extended to the international call market when the NTRA offered the license to operators in October 2007 for a payment of LE 100 for each existing subscriber and LE 20 for each additional subscriber in addition to revenue sharing fees at a maximum of 6%. EM was the only operator to acquire the license for LE 200 mn, while the other operators continued providing the services through Telecom Egypt (TE). Quarterly growth in mobile subscribers 20% VFE Free Bouquet LE 0.3/min+free mins Mobinil Star & Business offer LE0.22/min+free mins Mobinil & VFE Life time validity Intensified competition extends to the international market 18% Mobinil Alohat per sec. bill & removal of admin fees VFE Super 16% EM combined Options offer controlled monthly bill+ LE0.32 /min rate+free sms VFE on-net promotion LE 0.20 mobile-tomobile 14% 12% 10% 8% EM Ahlan LE 0.39/min+removal of pre-paid card sales taxes VFE Easy Mobinil Ahsan nas LE0.20/min for selected nos. Mobinil on-net promotion LE 0.20 mobile-to-mobile EM on-net promotion LE 0.15 mobile-to-mobile 6% 4% 2% 0% 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 Source: Newspapers; Telecom operators The adoption of advanced technology—namely the 3G - is another front through which mobile market growth was boosted. 3G technology is a key for upgrading operators’ capacities and the provision of data services such as mobile TV, video calling and high internet speed. EM initiated competition in technology adoption through adopting its 3.5G technology in May 2007, followed by its 3.75G adoption in November 2007. Launch date of 3G technologies in Egypt Operator EM VFE EM Mobinil Opting for technological edge Technology 3.5G 3G 3.75G 3G Operation Date May 07 May 07 Nov 07 Sept 08 Source: CICR 96
Slide 99: November 11, 2008 EGYPT | TELECOM To accommodate the rapid technological advancement, mobile operators have been keen to allocate considerable investments. For instance, to expand its network that currently covers 95% of Egypt, EM is expected to pump LE 2.5 bn by * 2009. Invest to grow INTERNET DRIVERS Over 2003-2007, internet users grew by a 30% CAGR. 2007 witnessed a pick up in users' growth which surged by a 43% Y-o-Y growth to 8.6 mn subscribers and 12% penetration rate. Such growth was triggered by the rise in free users which grew by 52% in 2007 compared to 24% a year earlier, as a result of regained rise in the number of IT clubs that grew by 30% in 2007 compared to 14% a year earlier.** In 2Q08, internet users reached 9.7 mn and a 13% penetration rate. The growth in internet users was supported by increasing Internet Service Providers (ISPs) which reached 222 providers in 2007 up from 214 providers in 2004 and an expanding international internet bandwidth which grew by eight folds reaching 14866 Mb/s in 2007 up from 1595 Mb/s, over the same time span. Despite growth in numbers, internet adoption is still growing at a slow rate reflected in the drop in Egypt's e-readiness rank from the 55th rank in 2006, out of a total of 69 countries, with an index score of 4.30 to the 58th rank in 2007 with a score of 4.26.*** Limited adoption was attributed to low PC penetration rate estimated to be currently around 7% of the families****; the concentration of government initiative such as the PC for Every home and IT clubs initiatives in large metropolitans, Cairo and Alexandria; language barrier and the unavailability of enough Arabic content and the relatively expensive access fees. Internet users' growth pattern and penetration rate (2003-2007) 10 9 60% 8 7 6 5 4 3 2 10% 1 0 2003 2004 2005 2006 2007 0% 30% 20% 50% mn subs Internet Users P t ti t Internet Users GR 70% A growing IT clubs and ISPs, the backbone for internet growth 40% Source: MCIT, ITU * ** Al-Gomhuria, October 30th 2008 IT Clubs are units established by MCIT, in collaboration with the private sector, to offer access to computers and the Internet at nominal fees, as well as IT training programs and electronic libraries. The purpose of the initiative is to offer communal solution to the problems of IT accessibility and awareness. *** E-readiness index is a ranking composed annually by the Economist Intelligence Unit EIU which measures the country’s information and communications technology (ICT) infrastructure and the ability of its consumers, businesses and governments to use ICT to their benefits. The e-readiness rankings are a weighted collection of nearly 100 quantitative and qualitative criteria, organized into six distinct categories measuring the various components of a country’s social, political, economic and of course technological development. **** BMI, "Egypt Telecommunications Report Q32008." 97
Slide 100: November 11, 2008 EGYPT | TELECOM Over 2003-2007, the growth in internet users have been fueled by broadband subscribers which recorded the highest growth rate of a CAGR of 206%, replacing dial-up users which grew by 36% CAGR. Broadband growth was stimulated by a number of government-led tariff restructuring initiatives. Recently, TE allowed customers to jointly apply for a fixed-line and broadband line through its partnership with TEData. * Broadband subscribers vs. internet users (2003-2007 ) 10 9 8 7 6 5 4 200 3 2 100 1 0 2003 2004 2005 2006 2007 Mar-08 0 Broadband initiative 50% drop in monthly charge to LE 150 37% drop in monthly charge to LE 95 400 mn Users Internet users Broadband subs 53% drop in monthly charge to LE 45 000 subs 600 High speed internet generates high growth 500 300 Source: MCIT, ITU, NTRA Mobile operators have recently entered the internet services market via the 3G technology, which entails the transfer of both voice data (a telephone call) and non-voice data (such as downloading information, exchanging email, and instant messaging). Accordingly, mobile operators started a wave of buying stakes in operating ISPs, mainly Class A **, exemplified in EM’s acquisition of leading stakes in Nile Online (NOL) and the Egyptian Company for Networks (EgyNet) in 2008; VFE's acquisition of 69.9% in Raya Telecommunications 2007; and Mobinil's strong affiliation to LINKdotNET through their common parent company, Orascom. Since May 2007, mobile operators have been racing in providing advanced services at competitive prices such as mobile internet, currently for LE1/day, USB modems and associated bundle services such as EM's offer which entails paying 6 or 12 months subscription fees and getting the USB for free; recent Mobinil's offer providing a laptop and USB modem for an average price of LE 1,600.*** Customers started to gravitate towards these services, in October 2008 VFE reported that almost 12% of its 17 mn customer base had used mobile internet service. Mobile operators, new comers to the internet market * Al-Gomhuria, 30 October 2008 ** Three categories of license are granted to those ISPs as follows: Class A are entitled to points of presence (POPs) in TE’s exchanges and the right to lease ports to other ISPs; Class B data carriers are given the same rights as Class A except for the leasing rights of ports to other ISPs; Class C provide Internet services to customers. Richard Daly, CEO Vodafone Egypt , Euro-money conference *** 98
Slide 101: November 11, 2008 EGYPT | TELECOM FIXED LINE MARKET Fixed-line subscribers have been growing at a diminishing annual rate which significantly slumped to 3.8% in 2006 compared to 9.5% a year earlier. Such drop was fueled by the intensified competition between mobile operators which had taken its toll on Telecom Egypt (TE)'s retail revenues which witnessed escalating drops from 2% in 2007 to 3% in 2Q08. Contraction in fixed-line growth can be also attributed to low rural penetration reaching 7% in 2006, despite the concentration of the majority of 57% of the population in these areas. TE has launched a number of promotional campaigns to reduce the fixed-mobile substitution (FMS) trend ending with its recent offer to remove the installation and administrative fees for new residential and commercial fixed lines till end of November 2008. Previous offers had negligible impact on subscribers' growth, illustrated in its 70% discount on installation fees promotion offered till December 2007, after which subscribers grew by declining Y-o-Y rate of 3.7% compared to 3.8% a year earlier. Fixed line pattern (2001-2007) Fixed-line subs 16 14 12 10 8 6 4 2 0 2001 2002 2003 2004 2005 2006 2007 Jan-08 mn subs Available lines Penetration rate 16% 14% 12% 10% 8% 6% 4% 2% 0% A diminishing growth due to FMS trend Source: Telecom Egypt (TE) In July 2008, TE adopted a new fixed-line tariff rebalance that aimed to stimulate added fixed-lines by slashing installation fees by 50% for both residential and commercial lines to LE 250 and LE 500 respectively; cutting fixed-to-mobile minute tariff by 33% in peak times and 14% in off-peak times to LE 0.30/min lower than the average LE 0.40/min charged by the mobile operators on mobile-to-fixed calls; in addition to reducing long distance call per minute rate by 20% to reach LE 0.16 (for more than 60 km) and LE 0.08 ( for less than 60 km). Such tariff is expected to marginally lift up the number of added lines which was reflected in 1% growth recorded in September 2008 compared to July, two months after new tariffs implementation. In September 2008, the National Telecommunication Regulatory Authority (NTRA) decided to finally postpone the auction for the second fixed-line license, after several delays, for a year due to uprising inflation in addition to the recent financial turmoil which made lending more difficult, especially in sectors requiring huge investments as the telecom sector (initial investments reach around US$1 bn for fixed-line network). The delay is expected to be extended for a period of two years until the next upturn in the global economy which is projected to occur by 2010. New tariff rebalance and a mild growth in fixed-line subscribers Delayed competition due to credit crunch 99
Slide 102: November 11, 2008 EGYPT | TELECOM FUTURE OUTLOOK The recent entrance of the new operator and the subsequent aggressive competition has recently boosted mobile proliferation with penetration rate reaching 54.4% in 3Q08. Over 2008-2009, mobile subscribers are projected to strongly rise by an average of 33% , due to the rolling-out of 3G network and services coupled with the existence of a considerable addressable market. Such trend will be reversed by 2010, as the market reaches its saturation stage; accordingly mobile growth is projected to grow by a diminishing rate. By 2012, mobile subscribers will approach the addressable market level estimated to reach 84% of the population, due to existence of inaccessible impoverished segment; thus, reaching 66.2 mn subscribers and an 82% penetration rate. Mobile outlook ( 2008-2012) Thousands 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 2008 2009 2010 2011 2012 Population Addressable subs Mobile Subs. Mobile growth on the peak for the short-run Source: CICR Growth in internet users will be driven by the broadband segment, projected to grow by a CAGR of 34% compared to 15% by free users during the period of 2008-2012. Internet users' growth rate is expected to level off during 20082010, due to anticipated economic slowdown, growing by a projected annual growth rate of 18% compared to 31% recorded over 2005-2007; with internet users projected to reach 14.2 mn users and 18% penetration rate by 2010. Such trend will be reversed in 2011, driven by the anticipated pick-up in GDP per capita. Accordingly, internet penetration is expected to reach 24%, and that of broadband to reach 2.5% by 2012, given the existence of internet barriers manifested in high illiteracy rates and low income. Internet outlook ( 2008-2012) Internet users 25 mn Users Broadband subs mn Subs 2.50 Internet growth :an upward trend stifled by short downturn 20 2.00 15 1.50 10 1.00 5 0.50 0 2008 2009 2010 2011 2012 - Source: CICR 100
Slide 103: November 11, 2008 EGYPT | WHITE CONSUMER GOODS (WCG) EGYPT | WHITE CONSUMER GOODS (WCG) LIMITED EXPORTS IS A BLESSING Until recently, limited export potential has been one of the main deficiencies of the WCG industry and a key challenge. Yet, nowadays given the anticipated global downturn which is expected to reflect negatively on trade activities, limited exports seems to be the industry's life-jacket amid the global storm. The white consumer goods industry (WCG) is a defensive industry, gaining particular strength with Egypt's growing population and the developed base of feeding industries. However, driven by its strong correlation with GDP per capita and interrelation with the realestate market that are expected to witness lower growth levels; WCG demand is expected to continue growing yet with a slower pace registering 3% in 2009. Limited exports: Despite of the increasing WCG exports still they represent a minimal contribution averaging 6% of total local production over 2004-2007. Resilience stemming from targeting different social classes: The WCG market features a wide range of products with varying prices that suit the different social income classes, whereas imports - due to its relatively high price scheme - target mainly the high end consumers constituting class A that represents only 2% of the population. Real-estate boom pushed demand higher: The real-estate boom witnessed in the past couple of years along with the strengthened GDP per capita and increasing marriage contracts exerted a pull towards WCG demand that registered a CAGR of 4.5% over 2004-07. Electric water heaters, a star performer: The move to the outskirt destinations as 6th of October and New Cairo and the absence of natural gas distribution networks in these destinations diverted the demand from gas to electric water heaters that was ranked the first in terms of growth registering a CAGR of 12.4% over 2004-07. POTENTIALS Growing population with favorable demographic structure, as 48% of the population is below the age of 45, thus expanding marriage rates prospects. Limited exposure to international markets. Well established base of feeding industries (components and packaging). Various products targeting different social classes. Despite the rising cost of energy it is still lower than the global average. GoE's plan to pump LE 300 mn new investments in stoves production. RISKS Economic slowdown. Growing competition with a minimal cost passing ability. Decrease in propensity to purchase with the overall slowdown in the economy. KEY PERFORMANCE INDICATORS WCG production CAGR (04-07,%) WCG consumption CAGR (04-07,%) Imports CAGR (04-07,%) Coverage ratio (2007,%) 4.6 4.5 24 104 COMPANY COVERED Olympic Group PAGE # 139 ALIA MAMDOUH ALIA.MAMDOUH@CICH.COM.EG SECTOR PERFORMANCE | 2004-2008 WCG Demand WCG Production 2008E 2007 2006 2005 2004 0 2,000 4,000 K Units 6,000 8,000 10,000 101
Slide 104: November 11, 2008 EGYPT | WHITE CONSUMER GOODS (WCG) The White Consumer Goods (WCG) market bears a number of special characteristics: A high level of seasonality by nature where the summer usually witnesses strong levels of demand due to the high marriage rates; the increasing demand for touristic real estate units. Moreover, the time span of religious feasts witness high levels of marriages. A relatively strong consumers' bargaining power due to the variety of products matching different income levels. On the other hand, the well-established feeding industries with various suppliers tend to give suppliers a low bargaining power before consumer goods manufacturers. A cyclical industry, driven by the health of the economy in general and activity in the real estate and housing sector in particular Starting 2006 the WCG market leapfrogged by 5.1% versus a growth of 3.4% in 2005 – fueled namely by the jump in GDP/capita growth rate which recorded 8.2% in 2006 compared to 5.8% in 2005. 2007 followed through with an increase of 4.8% reaching 8.4 mn units. Electric water heaters led such growth with 18.9% in 2007— attributed to the move to the outskirt destinations as 6th of October and New Cairo and the absence of natural gas distribution networks in these destinations which diverted the demand from gas to electric water heaters. WCG Market K Units 9,000 20% A special industry enjoying a strong consumer leverage Strong demand led by electric water heaters Demand Growth by segment WCG Production WCG Demand Washing machines Stoves Gas Water Heaters 18% 16% Refrigerators Electric Water Heaters Total Market 8,500 8,000 14% 12% 10% 7,500 8% 6% 7,000 4% 2% 6,500 2004 2005 2006 2007 0% 2006 2007 Source: IDA & CAPMAS Source: IDA & CAPMAS Due to the necessity of after-sales services and the need to have an easy access Demand is mostly to maintenance centers, production coverage maintained its high level of 1.04x. covered by local production 2007 imports registered higher growth rate of 52% - representing 83.5k of the 2007 witnessed a added units – compared to an increase of 36% in 2006. Yet, imports still hold a higher growth in imminimal share of 3% from the total WCG market. It is worth noting that the major- ports ity of imported products target the high-end consumers. Despite the minimal share of 8% in the total imports, stoves registered the highest growth of 108% in 2007 – driven by the modern hi-tech stoves. On the other hand, exports witnessed slower growth of 3.9% than that of 2006 (14%), led by the electric water heaters accounting for 38% of total exports. Generally, WCG market features a limited number of companies that bear a large size as it is the case in Olympic Group and El-Araby; followed by a second tier of companies as Kiriazi, Electrostar, Alaska, Universal and Fresh. Olympic Group and Kiriazi dominate the washing machines and refrigerators segments, while Olympic Group and Fresh dominate the electric water heaters segment. However, when it comes to stoves, the market is very fragmented giving consumers a relatively strong bargaining power due to the presence of a number of producers with products addressing different segments of the society. A private sector oriented industry with different concentration levels throughout each segment 102
Slide 105: November 11, 2008 EGYPT | WHITE CONSUMER GOODS (WCG) WCG main players Refrigerators One-door Olympic Group Alaska Toshiba Two-door Kiriazi Olympic Group Electro Star Alaska Stoves Universal Olympic Group Kiriazi Fresh Washing Machines Olympic Group Kiriazi Zanussi GMC Fresh GMC Gas El Masanaa Universal Olympic Group Fresh National Water Heaters Electric Olympic Group Source: Kompass GROWTH DRIVERS Urban housing demand—marriage contracts and the demand for 2nd housing units — highly affects WCG consumption . Urban demand has been witnessing a CAGR of 3.1% over 2004-07 which contributed to the growth in WCG market. It is worth highlighting that the expanding demand for second housing units – namely in the outskirt destinations – coupled with the demand for touristic realestate units in the coastal areas act as driver to the rising WCG consumption. Urban Demand vs. WCG Demand K units 8,600 8,400 8,200 8,000 7,800 7,600 7,400 7,200 7,000 6,800 2004 2005 2006 2007 WCG Demand Total Urban Demand units 560,000 550,000 540,000 530,000 520,000 510,000 500,000 490,000 480,000 470,000 Urban housing demand affects the demand for WCG Source: IDA& IDSC Strong ties exist between WCG demand and levels of GDP/capita bearing a correlation coefficient of 0.997. Over 2004-07, levels of GDP/capita registered robust growth of 7% (CAGR) peaking in 2006 with a y-o-y growth of 8.2% - hence, strengthening consumer purchasing power where private consumption/head witnessed a CAGR of 15.4% over 2004-07. GDP/capita vs. WCG consumption US$ 6,000 GDP per Capita WCG Demand K units 8,600 8,400 5,000 8,200 4,000 8,000 7,800 3,000 7,600 2,000 7,400 7,200 1,000 7,000 0 2004 2005 2006 2007 6,800 High GDP/capita strengthened the purchasing power Source: IDA& CAPMAS 103
Slide 106: November 11, 2008 EGYPT | WHITE CONSUMER GOODS (WCG) KEY CHALLENGES Steel prices, one of the main components of the WCG cost of production, skyrocketed over 2003-07 where flat steel prices grew at a CAGR of 16% recording a high level in 2007, reaching LE 3,601/ton with a y-o-y growth of 19% driven by the increase in its raw materials prices (iron ore, scrap and billets). Over and above, WCG production utilizes a more fine tuned type of flat steel that is relatively more expensive. Combined with the increasing plastic prices, another raw material used in the production process, moving in line with the increase in polyethylene price level driven by the recent surge in oil prices, WCG producers face immense risk with respect to their margins. However, with the current decline in oil and commodities prices, production costs challenges should fade away. Flat steel prices LE 3,700 3,600 3,500 3,400 3,300 3,200 3,100 3,000 2,900 2,800 2,700 2004 2005 2006 2007 Increase of 19% due to the hike in raw materials prices (iron ore, billets, ect..) Risk lies in rising raw materials prices, yet, not for long Decline of 3% due to the transformation of China from net importer to net exporter Source: Bloomberg Increasing competition is another threat facing both the concentrated and the fragmented segments of the WCG market. Within the concentrated segments of the market - washing machines, refrigerators and electric water heaters – the main players face competition from foreign producers in terms of high tech imported products. Nevertheless, stoves - one of the highly fragmented segments in the market - are relatively competitive as well due to the presence of a number of local producers offering different categories that match the varying income levels. Such expanding competition is the main reason behind the industry’s partial cost passing ability, where main players could not pass on the entire increase in production costs over the past year in order to ensure maintaining their market shares. Growing competition and the minimal cost passing ability Despite the slight improvement in the factors that hindered export contribution in the past years represented mainly in the inactive trade agreements, the market is still faced by a number of challenges within this respect. One of the main deficiencies within the produced goods is the limited designs within each segment along with the appreciating Egyptian pound versus the US$ which might exert more pressure on the industry's export potential. Yet, nowadays this pitfall turned out to be this industry’s life-jacket amidst the expected decline in exports driven by the global slowdown and shrinking external demand. Limited export now acts as the only rescue 104
Slide 107: November 11, 2008 EGYPT | WHITE CONSUMER GOODS (WCG) FUTURE OUTLOOK Affected by the slowdown in urban housing units demand; the expected slow growth in GDP/capita shedding its reflections on marriages rate, demand on WCG is expected to continue growing, yet at a slower pace of 3% in 2009. A growing industry serving domestic demand Demand outlook K units 3,500 Washing Machines Elec Water Heat. Refrigerators Gas Water Heat. Stoves 3,000 2,500 2,000 1,500 1,000 500 0 2007 2008 2009 2010 2011 Source: IDA, CAPMAS, CICR Forecasts 105
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Slide 109: November 11, 2008 EGYPT | FURNISHING AL-EZZ CERAMICS & PORCELAIN (GEMMA) Al-Ezz Ceramics & Porcelain (GEMMA) is a well-known brand of tiles in Egypt. Its main activities include producing ceramics and porcelain tiles in addition to trading sanitary ware. GEMMA targets the replacement market, with a 6% market share, so any expected slowdown in the real estate sector should have no effect on GEMMA's sales. Expansion of the company’s 6-mn sqm p.a. is underway and expected to start production early 2009. We believe said expansion will boost GEMMA's sales in both the local and international markets. Our DCF-led valuation indicates a 52% upside to LE 7.59, warranting a BUY with a MODERATE RISK rating. 12M FAIR VALUE | LE 7.59 BUY | MODERATE RISK SHARE DATA Reuters; Bloomberg Recent price as of 6-Nov-08 No. of O/S shares Market cap 52-wk high / low Avg. daily volume / turnover ECAP.CA , ECAP EY LE 4.98 51.1 mn LE 0,254.2 mn LE 19.62/ LE 3.2 0.46 mn / LE 6.62 mn COMPANY SYNOPSIS Al-Ezz Porcelain (GEMMA) was established in 1981 under Law No. 159/1981 for the purpose of manufacturing, trading and distributing ceramics, porcelain, sanitary ware, taps and its related contracting works. Currently, it is specialized in the production and trade of high-quality ceramics and porcelain tiles. In 1998, Al-Ezz Porcelain bought a 97.82% stake in Al-Ezz Ceramics and, accordingly, its name was changed into Al-Ezz Ceramics & Porcelain (GEMMA). In 2004, Al-Ezz Ceramics was merged in Al-Ezz Ceramics & Porcelain (GEMMA). On the operational front, GEMMA has a 6% market share with a total production capacity of 12 mn sqm per annum. Currently, GEMMA has an authorized capital of LE 1.8 bn and an issued capital of LE 255.2 mn, distributed over 51.05 mn fully paid shares at a par value of LE 5/share. New factory expansion expected to start in 2009 with LE 270 mn in capex: A 50% capacity increase from 12 mn sqm to 18 mn sqm is in process in order to meet expected local and international growth in demand for ceramic and porcelain products. Having reached the maximum production capacity with a utilization rate of around 91%, GEMMA was in need for expansion - as we noted in our report dated May 3, 2007. Exports are a strategic target: GEMMA’s strategic target is to penetrate new markets, such as the US - the largest importer of tiles all over the world, to benefit off higher selling prices in addition to maintain existing markets in Greece, Saudi Arabia, and the Middle East. Similar to other local companies, GEMMA has a comparative advantage of low manufacturing cost, especially labor. We believe said advantage will be a positive catalyst for GEMMA to penetrate these markets, especially the US which has a higher labor cost. Distribution channels: GEMMA’s sales are generated through four channels: showrooms, projects (such as hospitals, hotels, and touristic villages), agents, and exports. In 2007, said projects and showrooms accounted for around 14% of GEMMA's total sales. Has been a tax payer since 2007: GEMMA has historically benefited off a 10-year tax exemption (for its factory located in Al-Sadat City) which ended in December 2006. Starting 2007, GEMMA began paying income taxes. Growth drivers: While demand for tiles should be driven in part by growth in the real estate sector, GEMMA mainly targets the replacement market. We believe that GEMMA's effective distribution channels, targeting exports, in addition to its capacity increase should all reflect positively on its sales growth. Valuation and recommendation: On a DCF basis, we reached a 12-month target fair value of LE 7.59/share for GEMMMA, implying a 52% upside potential. Traded at 12.6x 2009 expected earnings. Accordingly we rate this stock at BUY at MODERATE RISK. SHAREHOLDER STRUCTURE Al-Ezz Holding Financial Holding Int'l Limited Others Free Float Total 63.9% 5.7% 0.1% 30.3% 100.0% AHMED ABDEL-GHANI AHMED.ABDELGHANI@CICH.COM.EG STOCK PERFORMANCE | 52 WEEKS Volume 20 18 16 14 12 10 8 6 4 2 0 Nov-07 LE ECAP CASE 30 - rebased mn shares 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 - Jan-08 Jun-08 Jul-08 Mar-08 May-08 Dec-07 Feb-08 Aug-08 107 Sep-08 Oct-08 Apr-08
Slide 110: November 11, 2008 EGYPT | FURNISHING | GEMMA Balance Sheet (LE mn) Assets Cash & Cash Equivalent Net Receivables Total Inventory Advance Payments Other Trading Assets Other Current Assets Total Current Assets Net Plant Long-Term Investments Other Trading Non-Current Assets Other Non-Current Assets Intangibles Total Assets Liabilities & Shareholders' Equity Short-Term Debt Current Portion Of LTD Accounts Payable Accrued Expenses Down Payments Taxes Payable Dividends Payable Other Spontaneous Finance Other Current Liabilities Total Current Liabilities Total Long-Term Debt Other Non-Current Liab. LTerm Spontaneous Fin. Total Liabilities Deferred Taxes Other Provisions Minority Interest Shareholders' Equity Total Liabilities & Net worth Income Statement (LE mn) Capacity '000 Units Units Sold '000 Revenues COGS Gross Profits SG&A EBITDA Dep. & Amort. EBIT Interest Expense Provisions Interest Income Investment Income Other Non-Operating Inc. Other Non-Operating Exp. EBT Taxes (including deferred taxes) NPAT Minority Interest Extraordinary Items Attributable Profits 2007A 12.3 149.3 118.5 7.2 0.0 0.0 287.4 257.6 1.1 2.9 2.3 0.0 551.3 2008F 14.1 122.6 131.0 8.2 0.0 0.0 276.0 435.5 1.1 2.9 2.3 0.0 717.7 2009F 19.6 178.7 182.5 11.4 0.0 0.0 392.3 465.5 1.1 2.9 2.3 0.0 864.0 2010F 24.3 226.9 226.9 14.2 0.0 0.0 492.4 442.9 1.1 2.9 2.3 0.0 941.6 72.2 46.7 50.3 3.9 15.2 5.5 0.0 2.4 1.8 198.1 117.7 0.0 0.0 315.8 9.6 1.4 0.0 224.6 551.3 2007A 12,000 10,659 313.2 (201.0) 112.2 (46.2) 65.9 (19.1) 46.8 (32.1) 0.0 0.0 0.0 (0.6) (3.2) 10.9 (1.3) 9.7 0.0 0.0 9.7 81.4 41.6 50.0 5.3 17.3 5.5 0.0 2.4 1.8 205.3 183.7 0.0 0.0 389.0 10.8 1.4 0.0 316.5 717.7 2008F 12,000 11,326 357.5 (228.8) 128.7 (53.0) 75.7 (19.3) 56.4 (31.5) 0.0 0.0 0.0 0.0 0.0 25.0 (6.0) 19.0 0.0 0.0 19.0 219.2 47.2 69.7 7.4 24.1 5.5 0.0 2.4 1.8 377.4 136.5 0.0 0.0 513.9 12.1 1.4 0.0 336.7 864.0 2009F 18,000 14,820 495.9 (317.9) 178.0 (73.7) 104.3 (26.8) 77.5 (51.0) 0.0 0.0 0.0 0.0 0.0 26.5 (6.3) 20.2 0.0 0.0 20.2 256.7 45.0 86.6 9.2 29.9 5.5 0.0 2.4 1.8 437.2 117.3 0.0 0.0 554.5 13.4 1.4 0.0 372.3 941.6 2010F 18,000 17,496 615.6 (395.2) 220.4 (91.8) 128.5 (34.4) 94.1 (48.4) 0.0 0.0 0.0 0.0 0.0 45.7 (10.2) 35.6 0.0 0.0 35.6 Cash Flow NOPAT Dep. & Amor. COPAT WI Change Other Current Items CF After Current Oper. Financing Payments Cash Before LT. Use Net Plant Change FCFF Others CF Before Financing Short-Term Debt Long-Term Debt Net-worth Grey Area Dividends Change in Cash 2007A 45.4 19.1 64.5 29.0 0.1 93.5 (65.1) 28.4 (40.7) 52.7 (2.0) (14.3) (5.1) 19.2 0.0 1.3 0.0 1.1 2008F 50.4 19.3 69.7 16.4 0.0 86.1 (78.2) 7.9 (197.1) (111.0) 0.0 (189.2) 9.2 107.6 72.9 1.3 0.0 1.8 2009F 71.2 26.8 98.0 (82.3) 0.0 15.7 (92.6) (76.9) (56.8) (41.1) 0.0 (133.7) 137.9 0.0 (0.0) 1.3 0.0 5.5 2010F 84.0 34.4 118.4 (70.8) 0.0 47.6 (95.6) (48.1) (11.9) 35.7 0.0 (59.9) 37.5 25.8 0.0 1.3 0.0 4.7 Fact Sheet ROE ROS ROA ROIC 2007A 4.3% 3.1% 1.8% 9.6% 2008F 6.0% 5.3% 2.6% 7.9% 2009F 6.0% 4.1% 2.3% 9.5% 2010F 9.6% 5.8% 3.8% 10.4% EBITDA Margin ATO WI/ Sales ALEV Debt/ Tangible Networth Current Ratio Per Share Ratios Share Price No. Of Shares '000 EPS Div/Share Revenues/Share BV/Share Gross Cash Flow/Share FCFF/Share EBITDA/Share EV/Share 21.1% 0.6 65.8% 2.5 1.4 1.5 2007A 4.98 51,045 0.19 0.00 6.13 4.40 1.26 1.03 1.29 9.37 21.2% 0.5 53.1% 2.3 1.2 1.3 2008F 4.98 51,045 0.37 0.00 7.00 6.20 1.37 -2.17 1.48 10.71 21.0% 0.6 54.8% 2.6 1.5 1.0 2009F 4.98 51,045 0.40 0.00 9.71 6.60 1.92 -0.81 2.04 12.49 20.9% 0.7 55.7% 2.5 1.5 1.1 2010F 4.98 51,045 0.70 0.00 12.06 7.29 2.32 0.70 2.52 12.71 Multiples P/E Div Yield % P/ Revenue EV/ Revenues P/ COPAT EV/ COPAT 2007A 26.3 0.0% 0.8 1.5 3.9 7.4 2008F 13.4 0.0% 0.7 1.5 3.6 7.8 2009F 12.6 0.0% 0.5 1.3 2.6 6.5 2010F 7.1 0.0% 0.4 1.1 2.1 5.5 P/ FCFF 4.8 EV/ FCFF 9.1 P/ EBITDA 3.9 EV/ EBITDA 7.3 P/ BV 1.1 Source: Company reports and CICR estimates. -2.3 -4.9 3.4 7.2 0.8 -6.2 -15.5 2.4 6.1 0.8 7.1 18.2 2.0 5.0 0.7 108
Slide 111: November 11, 2008 EGYPT | TEXTILES ARAB COTTON GINNING CO. (ACGC) DNA change 12M FAIR VALUE | LE 10.1 BUY | MODERATE RISK SHARE DATA Reuters; Bloomberg Recent price as of 6-Nov-08 No. of O/S shares Market cap 52-wk high / low Avg. daily volume / turnover ACGC.CA; ACGC EY LE 4.10 251.7 mn LE 1,032.0 mn LE 14.44/ LE 3.17 4.15 mn / LE 40.15 mn Unlike other ginning companies, Arab Cotton Ginning Co. (ACGC) is now recognizing business opportunities that would be better achieved through a holding company. Indeed, ACGC revealed its intention to establish a holding company with ginning being one of the new entity's activities. We believe this “DNA change" will positively affect ACGC's share allocation in investors' portfolios. To press ahead, the company retained most of its 2007 profits for future planned expansions including c. 16% (direct and indirect) stakes in Upper Egypt Flour Mills (UEFM), which has a large base of unutilized assets. Excess liquidity: ACGC formed a consortium to acquire UEFM, which has unutilized assets - cash, land bank, warehouses, and cargo fleet. The latter allows UEFM to have a sizable market share in the shipping business in Upper Egypt. Also, ACGC is studying several other investment opportunities , including real estate, according to which the company will diversify its operations and to press ahead with its holding company concept. Simple company structure: ACGC acquired 56.75% of Amwal Al-Arabia through a share swap with Amwal El-Khaleej, bringing its total ownership in Amwal Al-Arabia to 100%. In addition, Amwal Al-Arabia acquired 39.64% of El-Nasr Clothes & Textiles (KABO) in June 2008 from its fully-owned subsidiary Modern Nile Cotton (MNC). Thus, ACGC had grouped its operations under two main subsidiaries: Amwal Al-Arabia and Egypt Cotton Ginning. Such a strategic move should further simplify the group's structure and management. Vertical integration: Investment in Amwal Al-Arabia will facilitate ACGC’s both backward and forward integrations through its newly-restructured group of companies within the textiles and clothes industry. With this vertical integration, ACGC will be operating throughout the cotton value chain from ginning, exporting raw cotton, to spinning and weaving and textiles. Financial summary: Separate revenues grew by 58% to LE 62.4 mn in FY07/08 ended June 30, 2008 vs. LE 39.5 mn in FY06/07. Said increase was driven by a 50% increase in the quantity ginned and pressed in addition to price increases. On a consolidated basis, the company’s financial results were not comparable to those of previous years’ as ACGC has undergone major restructuring. Valuation and recommendation: Based on our DCF valuation on a consolidated level, we reached a 12-month fair value of LE 10.1/share, hence we rate the stock a BUY. Said price implies an upside potential of 146%. Our DCF valuation includes consolidated operations, company’s investments, and land values. We believe the company’s land makes up over 50% of the stock’s value, which explains management’s intension to set-up its own real-estate company. COMPANY SYNOPSIS Arab Cotton Ginning Company is a shareholding service company established in 1977 according to ministerial decree #411/1963. The company’s main activities are cotton ginning, pressing, trading & marketing, exporting & importing, in addition to spinning synthetics, silk, and polyester. After a series of changes and capital increases, ACGC current authorized capital is LE 5,000 mn and the paid-in capital is LE 1,258.7 mn distributed over 251.7 mn shares with a par value of LE 5/share. According to its AGM dated October 8, 2008, the company announced its intent to establish a holding company by which ACGC’s management is considering changing its main activities from a pure ginning company to a holding company with ginning being one of its activities. It is expected that a share swap will be offered to existing company’s shareholders in the “will be” new formed holding company. SHAREHOLDER STRUCTURE ACGC BoD Public sector Companies Employees shareholders Association Free Float Total 2.4% 3.9% 20.7% 5.0% 68.0% 100.0% MUHAMMAD EL EBRASHI MUHAMMAD.ELEBRASHI@CICH.COM.EG STOCK PERFORMANCE | 52 WEEKS Volume 16 14 12 10 8 6 4 2 0 Nov-07 Jan-08 Jun-08 Jul-08 Feb-08 Mar-08 May-08 Dec-07 Aug-08 Sep-08 Oct-08 Apr-08 LE ACGC CASE 30 - rebased mn shares 35.0 30.0 25.0 20.0 15.0 10.0 5.0 - 109
Slide 112: November 11, 2008 EGYPT | TEXTILES | ACGC Balance Sheet (LE mn) Assets Cash & Cash Equivalent Net Receivables Total Inventory Advance Payments to Suppliers Other Trading Assets Other Current Assets Total Current Assets Net Plant Long-Term Investments Other Trading Non-Current Assets Other Non-Current Assets Intangibles Total Assets Liabilities & Shareholders' Equity Short-Term Debt Current Portion Of Long-Term Debt Accounts Payable Accrued Expenses Down Payments to Customers Taxes Payable Dividends Payable Other Spontaneous Finance Other Current Liabilities Total Current Liabilities Total Long-Term Debt Other Non-Current Liabilities Long-Term Spontaneous Finance Total Liabilities Deferred Taxes Other Provisions Minority Interest Shareholders' Equity Total Liabilities & Equity Jun-08 786.4 168.6 398.5 8.7 36.6 24.0 1,422.8 1,115.7 87.2 40.1 0.8 511.3 3,177.9 Jun-09 902.0 211.1 395.8 2.4 36.6 24.0 1,571.9 1,040.8 87.2 38.2 0.8 511.3 3,250.1 Jun-10 1,031.5 268.2 475.6 13.6 36.6 24.0 1,849.5 914.8 87.2 38.2 0.8 511.3 3,401.6 Jun-11 1,157.7 326.0 527.0 14.5 36.6 24.0 2,085.8 779.8 87.2 38.2 0.8 511.3 3,503.0 Fact Sheet ROE ROS ROA ROIC EBITDA Margin ATO WI/ Sales ALEV Debt/ Tangible Networth Current Ratio Jun-08 14.5% 25.4% 9.2% 0.1% 16.8% 0.4 52.5% 2.1 0.4 2.8 Jun-09 6.0% 10.1% 3.9% 3.8% 20.8% 0.4 50.1% 2.0 0.3 3.3 Jun-10 6.3% 10.2% 4.1% 4.3% 20.5% 0.4 56.9% 2.0 0.3 3.7 Jun-11 6.8% 10.9% 4.5% 4.1% 20.1% 0.4 61.0% 1.9 0.3 4.5 317.3 25.8 45.8 0.0 0.1 17.0 13.0 0.0 85.2 504.3 91.0 9.7 0.0 605.0 15.1 56.3 482.9 2,018.5 3,177.8 307.4 18.9 47.9 0.0 0.1 0.0 13.0 0.0 85.2 472.5 73.3 1.2 0.0 547.0 15.1 90.8 482.9 2,114.3 3,250.1 331.3 21.3 52.0 0.0 0.1 0.0 13.0 0.0 85.2 502.9 52.3 1.2 0.0 556.4 15.1 128.0 482.9 2,219.2 3,401.6 293.9 18.9 55.4 0.0 0.1 0.0 13.0 0.0 85.2 466.4 33.5 0.0 0.0 499.9 15.1 167.5 482.9 2,337.7 3,502.9 Cash Flow (LE mn) NOPAT Depreciation & Amortization Gross Cash Flow (COPAT) WI Change Other Current Items Cash After Current Operations Financing Payments Cash Before Long-Term Use Net Plant Change FCFF Others Cash Before Financing Short-Term Debt Long-Term Debt Net-worth Grey Area Dividends Change in Cash Jun-08 1.7 116.2 117.8 (497.4) 55.8 (323.8) (52.7) (376.5) (1,014.6) (1,394.1) 182.6 (1,208.5) 315.6 116.4 1,215.8 35.9 (194.4) 280.8 Jun-09 97.9 117.9 215.7 (31.5) 2.0 186.2 (78.2) 108.0 (42.9) 141.3 91.2 156.3 (10.0) 1.2 6.4 0.0 (38.3) 115.6 Jun-10 117.1 128.8 245.9 (143.9) 0.0 102.0 (72.8) 29.2 (2.8) 99.2 113.9 140.3 24.0 0.2 7.0 0.0 (42.0) 129.5 Jun-11 115.1 138.0 253.0 (106.8) 0.0 146.3 (67.8) 78.5 (3.0) 143.2 127.6 203.0 (37.4) 0.1 7.9 0.0 (47.4) 126.2 Income Statement (LE mn) Revenues COGS Gross Profits SG&A EBITDA Depreciation & Amortization EBIT Interest Expense Provisions Interest Income Investment Income Other Non-Operating Income Other Non-Operating Expenses EBT Taxes NPAT Minority Interest Extraordinary Items Attributable Profits Jun-08 1,154.5 (879.6) 274.9 (80.4) 194.4 (116.2) 78.3 (52.7) (31.3) 64.1 260.5 9.7 (11.9) 316.7 (22.4) 294.3 (7.5) 6.2 292.9 Jun-09 1,269.9 (916.8) 353.1 (88.4) 264.7 (117.9) 146.8 (52.4) (34.5) 86.3 15.6 9.7 (11.9) 159.6 (31.9) 127.7 0.0 0.0 127.7 Jun-10 1,371.5 (995.1) 376.4 (95.5) 280.9 (128.8) 152.1 (53.9) (37.2) 98.9 17.1 9.7 (11.9) 174.9 (35.0) 139.9 0.0 0.0 139.9 Jun-11 1,453.8 (1,060.1) 393.7 (101.3) 292.5 (138.0) 154.5 (46.5) (39.5) 112.2 18.8 9.7 (11.9) 197.4 (39.5) 157.9 0.0 0.0 157.9 Per Share Ratios Share Price Actual No. Of Shares '000 New No. Of Shares '000 EPS Diluted EPS Div/Share Revenues/Share Units Sold/Share BV/Share Gross Cash Flow/Share FCFF/Share EBITDA/Share EV/Share Jun-08 4.10 251,744 251,744 1.16 1.16 0.30 4.59 2.4 8.02 0.47 (5.54) 0.77 1.22 Jun-09 4.10 251,744 251,744 0.51 0.51 0.15 5.04 2.2 8.40 0.86 0.56 1.05 1.22 Jun-10 4.10 251,744 251,744 0.56 0.56 0.17 5.45 2.2 8.82 0.98 0.39 1.12 1.22 Jun-11 4.10 251,744 251,744 0.63 0.63 0.19 5.78 2.0 9.29 1.01 0.57 1.16 1.22 Multiples P/E Diluted P/E Div Yield % P/ Revenue EV/ Revenues [ EV/ Rev] P/ COPAT EV/ COPAT P/ FCFF EV/ FCFF P/ EBITDA EV/ EBITDA P/ BV Note: A = Actual; F = Forecasted Source: ACGC and CICR forecasts Jun-08 3.5 3.5 7.3% 0.9 0.3 8.8 2.6 (0.7) (0.2) 5.3 1.6 0.5 Jun-09 8.1 8.1 3.7% 0.8 0.2 4.8 1.4 7.3 2.2 3.9 1.2 0.5 Jun-10 7.4 7.4 4.1% 0.8 0.2 4.2 1.2 10.4 3.1 3.7 1.1 0.5 Jun-11 6.5 6.5 4.6% 0.7 0.2 4.1 1.2 7.2 2.1 3.5 1.0 0.4 110
Slide 113: November 11, 2008 EGYPT | BANKS COMMERCIAL INTERNATIONAL BANK (CIB) Re-asserting leadership SHARE DATA 12M FAIR VALUE | NA* Reuters; Bloomberg Commercial International Bank (CIB) has successfully maintained its position as Egypt’s largest and most profitable private bank. Despite strong inflationary pressures, CIB has maintained a cost-to-income ratio of 31.9%. Amidst the global financial crisis, CIB is a bank that delivers double-digit growth with an ROAE of 42.6% vs. an industry average of around 16%. Against the looming global liquidity, CIB is highly liquid with a loans-todeposits ratio of 53%, holding the leading market share in both amongst private banks. The stock trades at 2009 PER and PBV of only 4.3x and 1.3x, respectively. Recent price as of 6-Nov-08 No. of O/S shares Market cap 52-wk high / low Avg. daily volume / turnover COMI.CA/ COMIQ.L; COMI EY LE 30.73 292.5 mn LE 8,988.5 mn LE 65.99/ LE 23.87 0.88 mn / LE 46.5 mn COMPANY SYNOPSIS Commercial International Bank (CIB) was founded by National Bank of Egypt (NBE) and Chase Manhattan Bank (CMB) in 1975 under the Open Door Policy. CIB became the leading private-sector bank in Egypt, providing diversified services to multinationals along with privatesector industrial companies. Since its successful IPO in September 1993, the bank’s stock had represented one of the blue chips in the Egyptian stock market. CIB offers a high quality exposure to a full-fledged business varying among corporate and retail banking, investment banking, securities brokerage, mutual funds, asset management, and insurance. Global finance magazine recently accredited CIB with 3 awards namely “Best Bank in Egypt”, “Best Trade Finance Provider in Egypt” and “Best Foreign Exchange Provider in Egypt” for 2008. CIB is currently present with 147 branches and units and targets 155 by year-end 2008. Growth across the board with an eye on the capital market: Following a stellar performance in 1H08 where the balance sheet revealed an 18% expansion in assets to in excess of LE 56 bn and bottom-line growth of 45% to LE 962 mn, CIB increased its stake in CI Capital Holding (CICH) from 50.09% to 100%. CICH is a full-fledged investment bank with brokerage, asset management, investment banking, and research arms. Efficient cost-to-income ratio despite slight upward pressures filtered through 1H08: In spite of pressures related to headcount increase, benefits adjustments, and inflation, the cost-to-income ratio still settled at a reasonable level of 31.9%. Loan growth potential, high asset quality: With a CAR ratio of 12.8% (excluding interim profits), 1H08 showed a net loansto-deposits ratio of 53% - indicative of liquidity - next to a superb asset quality as evident in a 2.8% NPLs/loans ratio and a 167% provisions coverage ratio. As we expect a riskconscious growth in Egypt as inflationary pressures start easing, CIB is poised to benefit from its strict risk assessment policy which qualifies it for corner-to-corner loan growth including corporate, private, SMEs, retail, and mortgage loans. It is worth highlighting that CIB has neither sub-prime exposure nor any positions in banks currently under duress. Regional agenda: CIB’s regional expansion plans include Algeria through two phases: (1) filing for the license which had been done and (2) start of operations pending the Algerian approval. Low multiples despite strong performance: CIB currently trades at 2009 PER and P/BV of 4.3x and 1.3x versus a MENA average of 10.6x and 2.2x, respectively. We forecast YoY earnings growth of 37% for 2008: In line with strong 1H08 performance, we expect 2008 to exhibit a 37% growth to LE 1,759.3 mn. We project a 5-year CAGR of 25% for both net banking income (NBI) and earnings. SHAREHOLDER STRUCTURE Ripplewood Consortium Free Float Total 18.7% 81.3% 100.0% ALIA ABDOUN ALIA.ABDOUN@CICH.COM.EG STOCK PERFORMANCE | 52 WEEKS Volume 80 70 60 50 40 30 20 10 0 Nov-07 Jan-08 Jun-08 Jul-08 Feb-08 Mar-08 May-08 Dec-07 Aug-08 Sep-08 Oct-08 Apr-08 LE COMI CASE 30 - rebased mn shares 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 - *We have discontinued making a recommendation or target price on CIB since CIB now owns 100% of CI Capital. 111
Slide 114: November 11, 2008 EGYPT | BANKS | CIB Balance Sheet (In LE mn) Assets Cash & Due from Banks Interbank Assets T-Bills & Government Securities Net Trading Investments Available for Sale Investments Brokers-Debit Balances Reconcilation Accounts Net Loans & Advances Held-to-Maturity Investments Investments in Subsidiaries Accrued Income & Other Assets Deferred Tax Net Fixed Assets Good Will Total Assets Liabilities and Shareholders' Equity Interbank Liabilities Customer Deposits Accrued Expenses & Other Liabilities Brokers-Credit Balances Reconcilation Accounts Dividends Payable Provisions Medium-/Long-Term Loans Debt Securities Total Liabilities Paid-in Capital Reserves Retained Earnings Minority Interest Dec-07 Dec-08 Dec-09 Dec-10 Profitability & Efficiency Ratios Net Interest Margin (NIM) RoAA RoAE Cost/Income Earning Assets / Total Assets Dec-07 3.23% 3.01% 34.62% 31.11% 85.46% Dec-07 51.88% 5.8 62.72% 10.03% 8.48% 3.00% 166.3% Dec-07 Dec-08 3.53% 3.27% 37.54% 34.23% 82.37% Dec-08 51.90% 6.0 60.91% 10.28% 8.91% 2.80% 176.7% Dec-08 Dec-09 3.81% 3.26% 34.20% 32.80% 82.45% Dec-09 53.70% 8.5 57.91% 10.29% 10.11% 2.80% 176.5% Dec-09 17.0% 13.1% 7.09 4.3x 1.25 4% 23.26 1.3x Dec-10 4.23% 3.66% 33.86% 31.54% 82.53% Dec-10 55.25% 11.5 56.62% 10.80% 11.42% 2.80% 175.3% Dec-10 15.9% 12.6% 8.97 3.4x 1.50 5% 29.74 1.0x 4,953.2 13,883.2 2,951.6 683.8 2,286.2 122.9 21.1 20,478.6 443.9 90.7 1,035.2 51.9 620.2 140.6 47,763.2 7,665.0 14,401.7 3,784.5 892.8 3,674.0 227.1 5.8 25,919.7 494.7 70.2 1,442.5 25.8 909.7 260.4 59,774.0 8,177.8 14,562.9 4,737.3 1,004.9 4,216.1 255.9 6.5 30,322.4 557.3 70.2 1,616.0 28.9 1,459.6 260.4 67,276.2 8,979.0 15,054.7 5,999.8 1,131.0 4,838.0 289.9 7.4 35,133.1 631.6 70.2 1,820.9 32.6 1,913.5 260.4 76,162.0 Productivity & Asset Quality Ratios Net Loans / Customer Deposits Interbank Ratio Liquid Assets / Total Deposits Assets Utilization Capitalization Ratio NPLs / Total Loans Provision Coverage Ratio 2,378.6 39,476.1 798.4 162.4 1.3 336.7 397.9 161.4 0.0 43,712.7 1,950.0 2,095.2 0.0 5.3 2,400.3 49,941.7 827.3 234.3 0.0 486.4 441.0 119.7 0.0 54,450.6 2,925.0 2,389.7 0.0 8.7 1,713.3 56,466.3 832.3 260.2 0.0 594.2 499.0 108.2 0.0 60,473.4 2,925.0 3,859.5 0.0 18.2 1,309.1 63,589.3 889.4 290.3 0.0 728.0 559.2 97.7 0.0 67,463.0 2,925.0 5,745.2 0.0 28.7 Growth & Market Ratios Net Loans Growth 17.3% 26.6% Customer Deposits Growth 25.1% 26.5% EPS (LE) * 6.59 6.01 P/E 7.0x 5.1x DPS (LE) 1.00 1.00 Dividend Yield 2% 3% Retroactive BV/Share (LE) 13.85 18.20 P/BV 2.2x 1.7x * EPS based on NPAUI ** Cost/Income is based on Total non interest expense/ Total interest & non-interest income Source: CIB and CICR forecasts Tier I Capital Tier II Capital Total Shareholders' Equity Total Liabilities & Shareholders' Equity 4,045.2 0.0 4,050.5 47,763.2 5,314.7 0.0 5,323.4 59,774.0 6,784.5 0.0 6,802.8 67,276.2 8,670.2 0.0 8,699.0 76,162.0 Contingent Liabilities Total Footing 11,529.0 59,292.2 13,664.4 73,438.3 15,985.4 83,261.5 18,700.6 94,862.6 Income Statement (In LE mn) Total Interest Income Interest Paid to Clients & Banks Net Interest Income (NII) Provisions Net Interest Income AP Fees and Commissions Income Investment Income Foreign Exchange Income Other Incomes Ownership profits from subidiary company Non-Interest Income Operating Income (BP) Operating Income (AP) G&A Expenses and Depreciation Other Expenses Non-Interest Expense Net Operating Income Taxation NPAT Unusual Items Net Profit Before Minority Interest Minority Interest Net Profit After Minority Interest Less: Non-Appropriation Items Net Attributable Income (NAI) Dec-07 2,998.4 1,797.8 1,200.5 251.0 949.5 665.2 71.5 167.8 374.6 0.0 1,279.2 2,479.7 2,228.7 697.7 73.6 771.4 1,457.4 170.1 1,287.3 1.3 1,288.5 -2.7 1,285.8 0.0 1,285.8 Dec-08 3,574.9 1,938.1 1,636.7 317.0 1,319.8 883.1 274.5 384.2 410.4 0.0 1,952.2 3,589.0 3,272.0 973.7 254.9 1,228.7 2,043.3 282.9 1,760.5 5.0 1,765.5 -6.3 1,759.3 193.9 1,565.4 Dec-09 4,320.4 2,258.6 2,061.8 357.2 1,704.6 1,071.8 355.1 518.9 273.4 0.0 2,219.2 4,281.0 3,923.8 1,171.3 232.7 1,404.0 2,519.8 436.7 2,083.1 0.0 2,083.1 -9.5 2,073.6 228.5 1,845.0 Dec-10 5,105.4 2,520.5 2,584.9 377.6 2,207.3 1,289.0 444.2 615.5 293.6 0.0 2,642.4 5,227.2 4,849.7 1,393.1 255.7 1,648.8 3,200.9 566.2 2,634.7 0.0 2,634.7 -10.5 2,624.2 289.2 2,335.0 112
Slide 115: November 11, 2008 EGYPT | BANKS CREDIT AGRICOLE EGYPT (CAE) Cheap rating as growth re-ignites 12M FAIR VALUE | LE 15.32 BUY | MODERATE RISK SHARE DATA Reuters; Bloomberg Recent price as of 6-Nov-08 No. of O/S shares Market cap 52-wk high / low Avg. daily volume / turnover [CIEB.CA; CIEB EY] LE 10.31 287.0 mn LE 2,959.0 mn LE 28.48/ LE 8.94 0.29 mn / LE 6.7 mn Crédit Agricole Egypt (CAE) is a successful medium sized Egyptian bank with an asset base of LE 22 bn and a NIM of 2.7%, generating a ROAE of 26% vs. a market average of 16%, amid concerns of a global recession. Despite global liquidity issues, CAE is highly liquid with a loansto-deposits ratio of only 35% which it plans to expand in an under-penetrated and profitable market. The bank’s stock trades at projected 2009 PER and PBV of 4.9x and 1.5x, respectively. Our DCF-based 12-month fair value implies a 49% upside potential, therefore we rate it BUY with MODERATE RISK. Gifted good; capturing the fundamentals: 1H08 witnessed tapering growth largely due to a one-off expense related to the restructuring cost of an interest rate SWAP transaction worth LE 48 mn. Yet, we believe CAE enjoys the necessary fundamentals to have a growth story. Apart from its high profitability ratios, CAE enjoys a reasonable asset quality including an NPLs/loans ratio of 6.5%, a provisions coverage ratio of 91%, and a CAR of 19.3% as of 1H08. With one-off costs behind, we believe CAE will start showing an improvement in 2009. Loan growth opportunities for a highly liquid bank: CAE is well positioned for loan growth leveraging on a high CAR ratio of 19.3% and a strong liquidity position through a loans-todeposits ratio of only 35%. Its loans portfolio exhibited a strong expansion of 45% in 1H08. CAE targets full-fledged loan growth across all LoBs. Significant cost-to-income ratio, but benefited from provision reversals & tax losses carried forward: 1H08 unraveled a cost-to-income ratio of 58.8% (or 48.6% excluding one-off charges) vs. 48.2% in 1H07. We expect the ratio to start improving starting 2009 onwards. Counteracting this, CAE had been benefiting from some positive surprises in its P&L during 2H07 including provision reversals and nil tax charges triggered by tax losses carried forward. Cheap multiples as growth reignites: CAE trades at 2009 PER and P/BV of 4.9x and 1.5x compared to a MENA average of 10.6x and 2.2x, respectively. Valuation and recommendation: We lowered our 12M target to LE 15.3/share mainly due to (1) a higher risk-free rate on the back recent hikes in benchmark rates by the Central Bank of Egypt (CBE) and (2) a higher risk premium to reflect the ongoing global financial crisis and potential consequences on Egypt. Still, the stock offers a 49% upside potential, urging us to maintain our BUY recommendation with its MODEARATE RISK rating. COMPANY SYNOPSIS Crédit Agricole Indosuez-Egypt started operations in 2001 when it acquired, along with El Mansour & El Maghraby for Investment & Development (MMID) 93.3% of Crédit International d’Egypte (CIE), previously owned by Crédit Commercial de France (CCF) and the National Bank of Egypt (NBE). In 2005, Crédit Agricole Indosuez-Egypt merged with Crédit Lyonnais (Egypt Branch), thus jointly founding CALYON Bank-Egypt, this came after France’s Crédit Agricole acquired France’s Crédit Lyonnais. In February 2006, Crédit Agricole Group along with MMID acquired 74.6% of Egyptian American Bank (EAB). Based on the decision of the EGM held on June 2006, the merge of the operations of EAB and CALYON Bank-Egypt under the name of Crédit Agricole Egypt (CAE) took place in September 2006. CAE currently operates a network of 56 branches. SHAREHOLDER STRUCTURE Crédit Agricole S. A. MMID Local institutions Retail Total 59.4% 17.1% 7.0% 16.6% 100.0% ALIA ABDOUN ALIA.ABDOUN@CICH.COM.EG STOCK PERFORMANCE | 52 WEEKS Volume 30 25 20 15 10 5 0 Nov-07 Jan-08 Jun-08 Jul-08 Feb-08 Mar-08 May-08 Dec-07 Aug-08 Sep-08 Oct-08 Apr-08 LE CIEB CASE 30 - rebased mn shares 6.0 5.0 4.0 3.0 2.0 1.0 - 113
Slide 116: November 11, 2008 EGYPT | BANKS | CAE Balance Sheet (In LE mn) Assets Cash & Due from Banks Interbank Assets T-Bills & Government Securities Net Trading Investments Available for Sale Investments Net Loans & Advances Held-to-Maturity Investments Investments in Subsidiaries Accrued Income & Other Assets Net Fixed Assets Good Will Total Assets Liabilities and Shareholders' Equity Interbank Liabilities Customer Deposits Accrued Expenses & Other Liabilities Dividends Payable Provisions Medium-/Long-Term Loans Debt Securities Total Liabilities Paid-in Capital Reserves Retained Earnings Dec-07 Dec-08 Dec-09 Dec-10 Profitability & Efficiency Ratios Net Interest Margin (NIM) RoAA RoAE Cost/Income Earning Assets / Total Assets Dec-07 2.99% 2.81% 35.18% 49.25% 89.84% Dec-07 24.89% 37.6 85.91% 9.29% 7.32% 9.00% 101.0% Dec-07 Dec-08 2.90% 2.30% 31.67% 50.20% 86.86% Dec-08 34.95% 30.2 75.98% 8.82% 7.19% 6.16% 94.6% Dec-08 Dec-09 3.05% 2.29% 32.53% 44.09% 86.94% Dec-09 38.10% 30.2 72.18% 8.98% 6.91% 4.76% 97.2% Dec-09 26.2% 15.8% 2.11 4.9x 1.25 12% 6.80 1.5x Dec-10 3.12% 2.30% 34.13% 43.04% 87.02% Dec-10 40.30% 30.2 69.42% 8.93% 6.61% 3.96% 99.0% Dec-10 22.7% 16.0% 2.44 4.2x 1.50 15% 7.52 1.4x 1,703.9 10,700.1 3,421.1 223.8 46.1 4,662.3 232.6 25.3 334.7 145.7 0.0 21,495.6 2,691.4 10,722.5 2,438.5 301.7 88.0 7,471.1 263.6 25.7 364.7 166.8 0.0 24,534.1 3,076.0 11,191.1 3,155.7 339.6 107.0 9,432.2 321.2 25.7 417.6 196.5 0.0 28,262.4 3,523.0 12,053.9 3,850.0 382.2 130.0 11,574.4 371.0 25.7 479.0 230.9 0.0 32,620.2 Productivity & Asset Quality Ratios Net Loans / Customer Deposits Interbank Ratio Liquid Assets / Total Deposits Assets Utilization Capitalization Ratio NPLs / Total Loans Provision Coverage Ratio Growth & Market Ratios 284.9 18,735.2 434.7 336.8 130.8 0.0 0.0 19,922.4 1,148.0 162.2 262.9 355.0 21,376.7 562.5 337.2 138.3 0.0 0.0 22,769.7 1,148.0 353.5 262.9 370.5 24,756.3 618.9 416.2 147.7 0.0 0.0 26,309.6 1,148.0 541.9 262.9 399.1 28,720.6 689.1 497.1 157.4 0.0 0.0 30,463.3 1,148.0 746.0 262.9 Net Loans Growth 27.9% 60.2% Customer Deposits Growth 36.5% 14.1% EPS (LE) * 1.83 1.84 P/E 5.6x 5.6x DPS (LE) 1.00 1.00 Dividend Yield 10% 10% Retroactive BV/Share (LE) 5.48 6.15 P/BV 1.9x 1.7x * EPS based on NPAUI ** Cost/Income is based on Total non interest expense/ Total interest & non-interest income Source: CAE and CICR forecasts Tier I Capital Tier II Capital Total Shareholders' Equity Total Liabilities & Shareholders' Equity 1,573.2 0.0 1,573.2 21,495.6 1,764.4 0.0 1,764.4 24,534.1 1,952.8 0.0 1,952.8 28,262.4 2,156.9 0.0 2,156.9 32,620.2 Contingent Liabilities Total Footing 16,363.6 37,859.2 10,581.6 35,115.7 12,862.0 41,124.5 15,633.9 48,254.1 Income Statement (In LE mn) Total Interest Income Interest Paid to Clients & Banks Net Interest Income (NII) Provisions Net Interest Income AP Fees and Commissions Income Investment Income Foreign Exchange Income Other Incomes Non-Interest Income Operating Income (BP) Operating Income (AP) G&A Expenses and Depreciation Other Expenses Non-Interest Expense Net Operating Income Taxation NPAT Unusual Items NPAUI Less: Non-Appropriation Items Net Attributable Income (NAI) Dec-07 1,320.7 811.7 509.1 -57.4 566.5 196.1 50.2 77.1 85.7 409.0 918.1 975.6 449.0 3.2 452.2 523.4 0.0 523.4 0.5 523.9 0.0 523.9 Dec-08 1,572.6 971.4 601.2 -3.2 604.4 229.3 9.2 144.0 74.9 457.3 1,058.5 1,061.7 494.5 36.9 531.4 530.4 2.0 528.4 0.1 528.4 50.2 478.2 Dec-09 1,820.5 1,102.7 717.8 23.0 694.8 266.5 10.1 173.2 100.5 550.3 1,268.2 1,245.1 556.4 2.7 559.2 686.0 81.4 604.6 0.0 604.6 57.4 547.1 Dec-10 2,093.5 1,245.3 848.3 40.3 808.0 306.5 11.1 199.2 107.1 623.9 1,472.2 1,431.9 630.7 2.9 633.6 798.3 97.1 701.2 0.0 701.2 66.6 634.6 114
Slide 117: November 11, 2008 EGYPT | FOOD & BEVERAGES DELTA SUGAR Sugar beet leader taps the bio-fuel market 12M FAIR VALUE | LE 32.8 BUY | LOW RISK SHARE DATA Reuters; Bloomberg Recent price as of 6-Nov-08 No. of O/S shares Market cap 52-wk high / low Avg. daily volume / turnover SUGR.CA; SUGR EY LE 22.00 98.7 mn LE 2,170.3 mn LE 64.7/ LE 13.11 0.18 mn / LE 7.08 mn Delta Sugar (SUGR) is the local market leader in sugar beet manufacturing. The company managed over the last three years to operate above 100% utilization rate, while maintaining a low finished goods inventory level at yearends. With a global market that started to use agricultural crops for the production of bio-fuel, SUGR is conducting feasibility studies for the establishment of an ethanol unit to start operations in 2010. We estimate said new revenue stream directed to exports will add 3% increase to our DCF 12-month fair value to LE 32.8/share, which implies a 49% upside potential, hence we rate it a BUY at LOW RISK. An ongoing study for the establishment of an ethanol unit with an initial capex of US$15 mn, a new revenue stream directed to the export market. With rising oil prices and the global trend towards bio-fuel usage, SUGR is conducting feasibility studies for the establishment of an ethanol unit located in its current factory. According to its recent study, the unit will start operations by 2010 with an initial production capacity of 10k tons of ethanol manufactured from molasses and an initial investment cost of US$15 mn, entirely financed from the shareholders' equity. Investment update: SUGR has currently frozen its expansion for the establishment of a new sugar beet factory in Sharkia as the company did not obtain the regulatory approvals for the required land. Said freeze will jeopardize SUGR's market share in view of the entry of new capacities, namely Nubaria Sugar - 30% owned by SUGR - which started operations in 2008, Dakahlia Sugar's expansion of a second production line, and the Greenfield Nile Sugar starting in 2010. Growth drivers: As sugar is a strategic commodity with an inelastic demand, SUGR's revenues will grow at a 4-year CAGR of 14% over 2008-2012 with sugar beet sales leading the lion's share contributing with an average 72% of the sales mix. Risks: SUGR has encountered a harsh 2008 season due to the shortage of beet crop as farmers converted to wheat cultivation, enjoying a higher procurement price. Hence, sugar beet companies raised the beet procurement price for the following season, implying a 38% increase in beet costs per 1 ton of sugar. Said increase will be partially passed on through selling prices with the other part absorbed by the company, pressuring SUGR's margins downward. Valuation and recommendation: SUGR stock is traded at 8.9x expected 2009 earnings compared to a peer average of 10.2x. In our DCF, we used a WACC of 14.5%, suggesting a 49% upside potential to LE 32.8/share. This valuation takes into account the establishment of the ethanol unit which would add 3% upside potential to our valuation. Accordingly, we initiate coverage on the stock with a BUY at LOW RISK. COMPANY SYNOPSIS Delta Sugar was established in 1978 as an Egyptian joint stock company under the provision of investment law No. 230 of 1989 amended by Investment Guarantees and Incentives Law No. 8 of 1997 for the manufacturing of sugar beet and its byproducts namely molasses and fodder. SUGR contracts with farmers during the last quarter of the year for the quantity supplied of beet as it does not own cultivated lands and starts production from February to June, During its off-season period extending from July to December, SUGR refines raw sugar for others in exchange of a fee. SUGR operates one factory located in Kafr El-Sheikh comprising of two production lines with a combined annual production capacity of 245K tons of sugar beet, 100K tons of molasses and 100K tons of fodder. The company is the second key player in the Egyptian sugar market occupying 19% market share in 2007 following Sugar and Integrated Industries Co. (SIIC) - the sole sugar cane producer-while occupying the lion's share in sugar beet manufacturing with a market share of 48% in 2007. SUGR's authorized capital is LE 1 bn and an issued and paid-in capital of LE 493,252,500 distributed over 98,650,500 shares at a par value LE 5/share. SHAREHOLDER STRUCTURE Sugar & Integrated Industries C Misr Insurance Company Public Banks Egyptian Endowment Auth. KIMA Free Float Total 55.7% 13.0% 9.6% 6.4% 6.3% 9.1% 100.0% MIRETTE MOHAMED GHOZZI MIRETTE.GHOZZI@CICH.COM.EG STOCK PERFORMANCE | 52 WEEKS Volume 70 60 50 40 30 20 10 0 Nov-07 Jan-08 Jun-08 Jul-08 Feb-08 Mar-08 May-08 Dec-07 Aug-08 Sep-08 Oct-08 Apr-08 LE SUGR CASE 30 - rebased mn shares 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 - 115
Slide 118: November 11, 2008 EGYPT | FOOD & BEVERAGES | DELTA SUGAR Balance Sheet (LE mn) Assets Cash & Cash Equivalent Net Receivables Total Inventory Advance Payments Other Trading Assets Other Current Assets Total Current Assets Net Plant Long-Term Investments Other Trading Non-Current Assets Other Non-Current Assets Intangibles Total Assets Liabilities & Shareholders' Equity Short-Term Debt Current Portion of LT Debt Accounts Payable Accrued Expenses Down Payments Taxes Payable Dividends Payable Other Current Liabilities Total Current Liabilities Total Long-Term Debt Other Non-Current Liab. Total liabilities Deferred Taxes Other Provisions Minority Interest Shareholders' Equity Total Liabilities & Equity Dec-07 A Dec-08 F Dec-09 F Dec-10 F Cash Flow (LE mn) NOPAT Dep. & Amor. COPAT WI Change Other Current Items CF After Current Oper. Financing Payments Cash Before LT. Use Net Plant Change FCFF Others CF Before Financing Short-Term Debt Long-Term Debt Net-worth Grey Area Dividends Change in Cash Fact Sheet ROE ROS ROA ROIC Gross Margin EBITDA Margin ATO WI/ Sales Net Debt/EBITDA Debt/ Tangible Equity Current Ratio Per-Share Ratios (LE) Share Price Recent no. of shares (000) EPS DPS Revenues/Share BV/Share Gross Cash Flow/Share FCFF/Share EBITDA/Share EV/Share Dec-07 A 312.9 33.1 346.0 (4.3) 16.6 358.3 (36.2) 322.1 (17.9) 323.8 (16.1) 288.0 0.0 (22.7) (37.9) 14.9 (69.5) 172.9 Dec-07 A 38.3% 29.8% 26.3% 35.3% 41.3% 40.1% 0.9x 7.6% (0.7x) 0.4x 1.5x Dec-07 A 22.00 98,651 3.25 1.35 10.90 8.48 3.51 3.28 4.37 18.86 Dec-08 F 248.4 33.9 282.3 (2.7) 0.0 279.6 (4.3) 275.3 (17.1) 262.5 (9.7) 248.5 (0.0) 0.0 0.0 39.8 (171.1) 117.1 Dec-08 F 26.8% 26.5% 18.0% 25.2% 40.1% 38.9% 0.7x 9.3% (1.2x) 0.4x 1.8x Dec-08 F 22.00 98,651 2.44 1.37 9.22 9.09 2.86 2.66 3.59 17.67 Dec-09 F 223.8 35.4 259.2 (9.6) 0.0 249.5 (4.3) 245.3 (80.1) 169.4 24.6 189.8 0.0 0.0 0.0 7.2 (180.5) 16.4 Dec-09 F 25.5% 19.7% 17.0% 21.2% 27.8% 26.6% 0.9x 7.6% (1.3x) 0.4x 1.8x Dec-09 F 22.00 98,651 2.47 1.39 12.53 9.71 2.63 1.72 3.33 17.50 Dec-10 F 248.7 36.7 285.4 (3.5) 0.0 281.8 (4.3) 277.6 (53.3) 228.6 26.8 251.1 0.0 0.0 0.0 9.1 (183.1) 77.2 Dec-10 F 26.4% 20.5% 17.6% 22.0% 28.8% 27.6% 0.9x 7.4% (1.4x) 0.4x 1.9x Dec-10 F 22.00 98,651 2.75 1.55 13.38 10.40 2.89 2.32 3.69 16.72 310.0 3.1 143.1 3.6 0.0 41.4 501.2 481.6 235.4 0.0 0.0 0.0 1,218.1 427.1 3.1 147.6 10.4 0.0 41.4 629.5 466.1 240.4 0.0 0.0 0.0 1,335.9 443.5 4.2 178.3 17.1 0.0 41.4 684.5 510.8 240.4 0.0 0.0 0.0 1,435.6 520.7 4.4 187.7 18.0 0.0 41.4 772.2 527.4 240.4 0.0 0.0 0.0 1,539.9 0.0 0.0 4.0 0.0 64.0 0.0 171.1 91.8 330.9 0.0 0.0 330.9 15.0 35.5 0.0 836.7 1,218.1 0.0 0.0 4.4 0.0 72.1 0.0 180.5 91.8 348.8 0.0 0.0 348.8 24.8 65.5 0.0 896.9 1,335.9 0.0 0.0 7.2 0.0 98.2 0.0 183.1 91.8 380.3 0.0 0.0 380.3 31.5 65.9 0.0 957.9 1,435.6 0.0 0.0 7.6 0.0 104.8 0.0 203.4 91.8 407.6 0.0 0.0 407.6 40.2 66.4 0.0 1,025.7 1,539.9 Income Statement (LE mn) Revenues COGS Gross Profits SG&A EBITDA Dep. & Amort. EBIT Interest Expense Provisions Interest Income Investment Income Net Other Non-Operating Inc./(Exp.) EBT Taxes NPAT Minority Interest Extraordinary Items Attributable Profits Dec-07 A 1,075.5 (630.8) 444.7 (13.2) 431.5 (33.1) 398.4 (10.4) (0.4) 5.7 4.0 8.7 406.0 (85.5) 320.5 0.0 0.3 320.8 Dec-08 F 909.9 (544.6) 365.3 (11.0) 354.4 (33.9) 320.5 (4.3) (30.0) 12.0 4.0 8.7 310.9 (72.0) 238.9 0.0 1.8 240.7 Dec-09 F 1,236.5 (892.9) 343.6 (15.0) 328.6 (35.4) 293.3 (4.3) (0.4) 12.3 4.0 8.7 313.6 (69.5) 244.1 0.0 0.0 244.1 Dec-10 F 1,320.2 (940.1) 380.0 (16.0) 364.0 (36.7) 327.4 (4.3) (0.5) 14.6 4.0 8.7 349.9 (78.7) 271.2 0.0 0.0 271.2 Multiples Dec-07 A P/E 6.8x Div Yield % 6.1% P/ Revenue 2.0x EV/ Revenues 1.7x P/ COPAT 6.3x EV/ COPAT 5.4x P/ FCFF 6.7x EV/ FCFF 5.7x P/ EBITDA 5.0x EV/ EBITDA 4.3x P/ BV 2.6x Source: Company reports and CICR estimates. Dec-08 F 9.0x 6.2% 2.4x 1.9x 7.7x 6.2x 8.3x 6.6x 6.1x 4.9x 2.4x Dec-09 F 8.9x 6.3% 1.8x 1.4x 8.4x 6.7x 12.8x 10.2x 6.6x 5.3x 2.3x Dec-10 F 8.0x 7.0% 1.6x 1.2x 7.6x 5.8x 9.5x 7.2x 6.0x 4.5x 2.1x 116
Slide 119: November 11, 2008 EGYPT | FOOD & BEVERAGES EASTERN COMPANY (EC) Back to a defensive company 12M FAIR VALUE | LE 306 BUY | LOW RISK SHARE DATA Reuters; Bloomberg Recent price as of 5-Nov-08 No. of O/S shares Market cap 52-wk high / low Avg. daily volume / turnover EAST.CA; ESTC EY LE 217.99 25.0 mn LE 5,449.8 mn LE 530/ LE 177.91 0.02 mn / LE 5.8 mn Eastern Company (EC) is a state monopoly tobacco producer in Egypt, producing its own brands with an 83% market share. The remaining balance is covered by foreign brands also produced in EC through toll manufacturing for international producers. Owing to the non-cyclical nature of its goods, demand is expected to be maintained in the future. Yet, importing tobacco leaves remains the company's main concern. EC is expected to grow its net income at a 5-year CAGR of 11%. Trading at 7x 2008/09 earnings vs. a peer average of 12.6x, EC is trading at a 45% discount. We reached a 12-month DCF fair value of LE 306, implying a 40% upside potential, hence we reiterate our BUY recommendation at LOW RISK. COMPANY SYNOPSIS Eastern Company (EC) is a state monopoly tobacco producer with an 83% local market share for its own branded portfolio and the balance also catered through EC's toll manufacturing for foreign producers like Philip Morris (PM), British American Tobacco (BAT) and International Tobacco and Cigarette Company (ITCC) of Jordan. Its product range includes cigarettes, water pipe tobacco, cigars and minced tobacco. EC operates 20 factories in Giza, Talbeya, Alexandria, Monouf, Tanta, and Assuit. Currently, EC is establishing a new integrated industrial complex in the Sixth of October City over a land with a size of 357 acres. Total estimated investment cost of the said complex is LE 3.2 bn. EC's major raw material is imported tobacco leaf, which represents about 60% of EC's total cost. Forbidden by law from growing tobacco in Egypt, EC imports all its needs of tobacco leaves from Zimbabwe, Malawi, China, India, Europe and Brazil. Lately when the COMESA agreement became effective, EC started importing 35% of its leaf requirements from the COMESA region. EC is subject to the volatility in the cultivation environment, price fluctuations of the imported tobacco leaf, in addition to the intensifying exposure to FX risk. A defensive producer of a strategic commodity: Cigarettes (a cheap source of pleasure) are considered a strategic commodity in Egypt where a healthy growth potential for the tobacco business is provided even if the economy slows. Given the inelastic demand for its products, we expect top-line to maintain its growth post the recently-announced September price increase of LE 0.25/pack on eight local brands. However, a slight shift from foreign to local brands is anticipated this year in the wake of May 5 measures which applied an average of 22% sales tax on the former versus only 11% on the latter. Relocation to a new complex late 2010: Currently, EC is establishing a new industrial complex in the Sixth of October City with an estimated capex of LE 3.2 bn. New production techniques will be fully implemented once the factories are relocated, resulting in higher cost savings. Going forward, we believe demand for tobacco will be sustained, driven mostly by a low health awareness, a growing population, and increasing smoking habits among youth in the 15-35 age bracket, 34% of Egypt’s population. An acquisition target? British American Tobacco (BAT), an international tobacco manufacturer, was said to be interested in Egyptian and Algerian cigarette monopolies as reported early 2008. BAT has effected a few M&A deals in 2008 for Turkish and Scandinavian tobacco companies, executed at an average of 11.3x 2007 EBITDA. We believe there is no intention to sell EC in the short- to medium-term having postponed the establishment of its real estate company - prerequisite to privatization - to manage the sale of its LE 2 bn-worth land plots till relocation is completed. Valuation and recommendation: We lowered our DCF valuation by 40% to LE 306/share vs. our previous 12-month fair value of LE 508/share dated November 28, 2007. This mainly came as a result of the 300-bps increase in risk-free rate and market risk premium apiece used in our DCF model in addition to the inclusion of debt and lease needed to finance the expansions. Our 12 month value under the sale of land scenario is LE 386/share. EC is traded at 7x 2008/09 earnings vs. a peer average of 12.6x, a 45% discount. 117 SHAREHOLDER STRUCTURE Holding Co. for Chemical Ind. Empl. Shareholders' Assoc. Public sector Free Float 52.8% 5.3% 4.7% 37.2% INGY EL-DIWANY INGY.ELDIWANY@CICH.COM.EG STOCK PERFORMANCE | 52 WEEKS Volume 600 500 400 300 200 100 0 Nov-07 Jan-08 Jun-08 Jul-08 Dec-07 Mar-08 Feb-08 Sep-08 Oct-08 Apr-08 LE EAST CASE 30 - rebased mn shares 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 -
Slide 120: November 11, 2008 EGYPT | FOOD & BEVERAGES | EASTERN COMPANY Balance Sheet (LE mn) Assets Cash & Cash Equivalent Net Receivables Total Inventory Advance Payments to Suppliers Other Trading Assets Other Current Assets Total Current Assets Net Plant Long-Term Investments Other Trading Non-Current Assets Other Non-Current Assets Intangibles Total Assets Liabilities & Shareholders' Equity Short-Term Debt Current Portion Of Long-Term Deb Accounts Payable Accrued Expenses Down Payments to Customers Taxes Payable Dividends Payable Other Spontaneous Finance Other Current Liabilities Total Current Liabilities Total Long-Term Debt Other Non-Current Liabilities Long-Term Spontaneous Finance Total Liabilities Deferred Taxes Other Provisions Minority Interest Shareholders' Equity Total Liabilities & Equity Jun-08 A 224 36 2,043 0 0 0 2,304 3,288 53 0 49 0 5,694 Jun-09 P 726 33 2,054 0 0 0 2,814 3,679 53 0 52 0 6,598 Jun-10 P 746 35 2,085 0 0 0 2,866 4,010 53 0 55 0 6,984 Jun-11 P 1,080 37 2,151 0 0 0 3,268 4,085 53 0 58 0 7,463 538 0 208 90 9 1,086 24 0 467 2,423 0 0 0 2,423 241 363 0 2,667 5,694 0 120 220 92 10 1,086 372 0 494 2,395 480 0 0 2,875 244 363 0 3,117 6,598 0 120 234 98 10 1,086 389 0 520 2,457 360 0 0 2,817 246 363 0 3,559 6,984 0 120 242 101 11 1,086 443 0 547 2,550 240 0 0 2,790 248 363 0 4,062 7,463 Cash Flow (LE mn) NOPAT Depreciation & Amortization Gross Cash Flow (COPAT) WI Change Other Current Items Cash After Current Operations Financing Payments Cash Before Long-Term Use Net Plant Change FCFF Others Cash Before Financing Short-Term Debt Long-Term Debt Net-worth Grey Area Dividends Change in Cash Fact Sheet ROE ROS ROA ROIC Gross Profit Margin EBITDA Margin ATO WI/ Sales ALEV Debt/ Tangible Networth Current Ratio Per Share Ratios Share Price Actual No. Of Shares '000 EPS Diluted EPS Div/Share Revenues/Share BV/Share Gross Cash Flow/Share FCFF/Share EBITDA/Share EV/Share Multiples P/E Diluted P/E Div Yield % P/ Revenue EV/ Revenues [ EV/ Rev] P/ COPAT EV/ COPAT P/ FCFF EV/ FCFF P/ EBITDA EV/ EBITDA P/ BV Note: A = Actual; P = Projected Source: EC and CICR forecasts Jun-08 A 1,314 161 1,475 (351) 18 1,142 (28) 1,113 (1,406) (282) 4 (288) 538.4 0 328 (24) (710) (156) Jun-08 A 28.2% 19.7% 13.2% 34.5% 31.1% 29.1% 0.7 46.4% 2.1 0.9 1.0 Jun-08 A 217.99 25,000 30.1 30.1 14.0 152.8 106.7 59.0 -11.3 44.4 230.6 Jun-08 A 7.3 7.3 6.4% 1.4 1.5 3.7 3.9 -19.3 -20.4 4.9 5.2 2.0 Jun-09 P 803 161 964 7 27 999 (48) 951 (553) 419 27 425 (538.4) 600 39 0 (24) 502 Jun-09 P 25.1% 19.4% 11.9% 18.6% 30.7% 28.7% 0.6 43.7% 2.1 0.9 1.2 Jun-09 P 217.99 25,000 31.3 31.3 14.9 161.7 124.7 38.6 16.7 46.4 212.9 Jun-09 P 7.0 7.0 6.8% 1.3 1.3 5.7 5.5 13.0 12.7 4.7 4.6 1.7 Jun-10 P 834 164 998 (13) 25 1,011 (192) 819 (495) 491 28 353 0.0 0 40 0 (372) 20 Jun-10 P 22.2% 18.6% 11.3% 18.0% 30.1% 28.2% 0.6 41.8% 2.0 0.8 1.2 Jun-10 P 217.99 25,000 31.6 31.6 15.5 170.0 142.3 39.9 19.6 47.8 207.3 Jun-10 P 6.9 6.9 7.1% 1.3 1.2 5.5 5.2 11.1 10.6 4.6 4.3 1.5 Jun-11 P 930 167 1,097 (56) 27 1,068 (178) 891 (242) 799 29 678 0.0 0 45 0 (389) 334 Jun-11 P 22.2% 20.2% 12.1% 18.5% 31.6% 29.6% 0.6 41.0% 1.8 0.7 1.3 Jun-11 P 217.99 25,000 36.1 36.1 17.7 178.9 162.5 43.9 32.0 52.9 189.2 Jun-11 P 6.0 6.0 8.1% 1.2 1.1 5.0 4.3 6.8 5.9 4.1 3.6 1.3 Income Statement (LE mn) Net Sales COGS Gross Profits SG&A EBITDA Depreciation & Amortization EBIT Interest Expense Provisions Interest Income Investment Income Other Non-Operating Income Other Non-Operating Expenses EBT Taxes NPAT Minority Interest Extraordinary Items Attributable Profits Jun-08 A 3,819 (2,633) 1,186 (76) 1,110 (161) 949 (28) (2) 13 1 44 (44) 932 (181) 751 0 0 751 Jun-09 P 4,041 (2,802) 1,240 (80) 1,160 (161) 999 (48) (2) 13 1 44 (27) 978 (196) 783 0 0 783 Jun-10 P 4,249 (2,969) 1,280 (84) 1,196 (164) 1,032 (72) (2) 14 1 44 (27) 989 (198) 791 0 0 791 Jun-11 P 4,473 (3,062) 1,411 (89) 1,323 (167) 1,155 (58) (2) 14 1 44 (27) 1,127 (225) 901 0 0 901 118
Slide 121: November 11, 2008 EGYPT | CHEMICALS EGYPTIAN FINANCIA & INDUSTRIAL CO. (EFIC) Leading the way through expansion 12M FAIR VALUE | LE 50.10 BUY | LOW RISK SHARE DATA Reuters; Bloomberg Recent price as of 6-Nov-08 No. of O/S shares Market cap 52-wk high / low Avg. daily volume / turnover EFIC.CA; EFIC EY LE 29.79 69.3 mn LE 2,064.4 mn LE 75/ LE 21.08 0.5 mn / LE 23.29 mn EFIC is a successful fertilizers company, specialized mainly in the production of phosphate fertilizers with a 70% local market share in SSP. In view of concerns over global recession, we believe slower sales growth would mostly be driven by selling prices rather than volumes, thanks to demand inelasticity of fertilizers. Moreover, Egypt is the largest country in the Middle East producing high-quality SSP, unlike other countries in the region which produce mainly other types of phosphate fertilizers. Hence, we do not expect demand for EFIC’s products to falter. Our DCF-based 12-month fair value indicates a 68% upside potential to LE 50.1, hence we rate the stock a BUY with LOW RISK. Locking sulfur cost: Global sulfur prices have decreased by 24.7% to US$550/ton in September 2008 vs. US$730 in July 2008. However , EFIC will not benefit from said decline having locked its sulfur requirements till June 2009 at US$700/ton. We believe that EFIC exports’ sales (around 30% of sales) will be slightly affected. On the local front, such a decrease in sulfur prices will not affect EFIC’s local sales, thanks to its 70% market share of SSP and no price caps levied by the government on phosphate fertilizers. Thus, we believe that local EBITDA margin will balance the export EBITDA decrease. New factory expansion: In order to increase its capacity, EFIC acquired a 256k-sqm land plot in Ain Al-Sokhna through its wholly-owned subsidiary Suez Company for Fertilizers Production (SCFP) for LE 38.4 mn. Diversifying the product mix: EFIC will start the production of di-calcium phosphate in November 2008 with a total capacity of 20k tpa, split evenly between the local and export markets. A new fertilizers project: With six other companies, EFIC signed a memorandum of understanding (MoU) to establish a new plant - Egyphos - to produce phosphate fertilizers in Egypt. The new plant will be established in the city of Edfu in two phases, the first of which has a total investment cost of US$680 mn (split US$300 mn and US$380 mn in equity and debt, respectively) and an authorized capital of US$1.5 bn. Growth drivers: While fertilizers consumption should be driven in part by population growth, EFIC's revenue growth should be positively affected by its diversified product mix and the Government of Egypt's plan to increase arable land over the coming few years. Moreover, growing demand for bio-fuels will drive demand for fertilizers as farmers look to improve land productivity and yield. In our opinion, this will be an opportunity for EFIC to take an advantage of, as the company embarks on a strategic plan to grow its exports. Valuation and recommendation: Our DCF-based model yielded a 12-month fair value of LE 50.1/share, implying a 68% upside potential. EFIC’s stock is currently traded at 4.5x 2009 expected earnings, a 41% discount to regional peers. Accordingly, we rate the stock a BUY with LOW RISK. 119 COMPANY SYNOPSIS Egyptian Financial & Industrial Company (EFIC) is a joint-stock company founded in 1929. EFIC's main activities are producing and trading phosphate fertilizers and chemicals. It produces two main products: i. ii. Single super phosphate (SSP) in two forms powdered (PSSP) and granulated (GSSP) Sulfuric acid. EFIC is the largest producer of phosphate fertilizers in Egypt, dominating around 70% of SSP local market sales volume in 2007. Such a market share takes into account sales from Suez Co. for Fertilizers Production (SCFP), EFIC's 99.88%owned subsidiary. EFIC has an authorized capital of LE 700 mn and an issued capital of LE 693 mn, distributed over 69.3 mn shares at a par value of LE 10/share. SHAREHOLDER STRUCTURE Holding Company Banks Insurance Companies Others Free Float Total 25.3% 12.8% 0.9% 12.0% 49.0% 100.0% AHMED ABDEL-GHANI AHMED.ABDELGHANI@CICH.COM.EG STOCK PERFORMANCE | 52 WEEKS Volume 80 70 60 50 40 30 20 10 0 Nov-07 Jan-08 Jun-08 Jul-08 Feb-08 Mar-08 May-08 Dec-07 Aug-08 Sep-08 Oct-08 Apr-08 LE EFIC CASE 30 - rebased mn shares 3.0 2.5 2.0 1.5 1.0 0.5 -
Slide 122: November 11, 2008 EGYPT | CHEMICALS | EFIC Balance Sheet (LE mn) Assets Cash & Cash Equivalent Net Receivables Total Inventory Advance Payments Other Current Assets Total Current Assets Net Plant Long-Term Investments Other Non-Current Assets Intangibles Total Assets Liabilities & Shareholders' Equity Short-Term Debt Current Portion Of LTD Accounts Payable Dividends Payable Other Current Liabilities Total Current Liabilities Total Long-Term Debt Other Non-Current Liab. Total Liabilities Deferred Taxes Other Provisions Minority Interest Shareholders' Equity Total Liabilities & Net worth Income Statement (LE mn) Revenues COGS Gross Profits SG&A EBITDA Dep. & Amort. EBIT Interest Expense Provisions Interest & Investment Income Other Non-Operating Inc. Other Non-Operating Exp. EBT Taxes NPAT Minority Interest Extraordinary Items Attributable Profits Dec-07A 69.1 48.0 110.5 3.1 56.2 286.9 923.4 179.2 1.5 0.0 1,390.9 Dec-08F 127.3 107.2 262.7 7.5 56.2 560.8 1,025.4 195.7 1.5 0.0 1,783.4 Dec-09F 216.2 183.6 436.6 12.4 56.2 905.0 1,036.8 213.8 1.5 0.0 2,157.1 Dec-10F 246.1 209.2 489.2 13.9 56.2 1,014.5 1,045.4 233.5 1.5 0.0 2,294.9 Cash Flow NOPAT Dep. & Amor. COPAT WI Change Other Current Items CF After Current Oper. Financing Payments Cash Before LT. Use Net Plant Change FCFF Others CF Before Financing Short-Term Debt Long-Term Debt Net-worth Grey Area Dividends Change in Cash Fact Sheet ROE ROS ROA ROIC Gross margin EBITDA Margin ATO WI/ Sales ALEV Debt/ Tangible Networth Current Ratio Per-Share Ratios Share Price No. Of Shares '000 EPS DPS Revenues/Share BV/Share Gross Cash Flow/Share FCFF/Share EBITDA/Share EV/Share Multiples P/E Dividend Yield P/ Revenue EV/ Revenues P/ COPAT EV/ COPAT Dec-07A 129.2 15.9 145.1 14.5 3.0 162.6 (63.5) 99.0 (93.5) 66.1 0.1 5.7 (0.5) 18.5 (19.3) 0.2 (52.9) (48.3) Dec-07A 18.5% 22.1% 8.4% 10.7% 36.1% 31.3% 0.4 16.6% 2.2 1.1 0.5 Dec-07A 29.79 69,302 1.68 5.00 7.58 9.07 2.09 0.95 2.37 36.47 Dec-07A 17.7 16.8% 3.9 4.8 14.2 17.4 Dec-08F 250.8 21.5 272.3 (113.1) 0.0 159.2 (118.9) 40.3 (123.5) 35.7 4.1 (79.1) 219.4 2.3 (25.5) 0.0 (58.9) 58.2 Dec-08F 30.0% 18.4% 11.9% 17.3% 30.8% 27.5% 0.6 17.3% 2.5 1.4 0.6 Dec-08F 29.79 69,302 3.07 1.54 16.69 10.24 3.93 0.51 4.59 37.95 Dec-08F 9.7 5.2% 1.8 2.3 7.6 9.7 57.9 73.8 6.5 8.3 2.9 Dec-09F 488.3 44.3 532.6 (138.0) 0.0 394.7 (100.0) 294.7 (55.7) 338.9 6.7 245.6 (22.2) (2.5) (55.2) 0.0 (76.8) 88.9 Dec-09F 52.0% 23.4% 21.3% 31.5% 32.5% 30.1% 0.9 17.2% 2.4 1.4 0.8 Dec-09F 29.79 69,302 6.64 3.32 28.36 12.76 7.69 4.89 8.54 35.63 Dec-09F 4.5 11.1% 1.1 1.3 3.9 4.6 6.1 7.3 3.5 4.2 2.3 Dec-10F 569.3 66.8 636.1 (44.2) 0.0 591.9 (83.5) 508.3 (75.4) 516.5 8.5 441.4 (126.1) 0.0 (67.0) 0.0 (218.3) 29.9 Dec-10F 56.7% 25.0% 24.3% 38.4% 33.6% 31.3% 1.0 17.1% 2.3 1.3 0.8 Dec-10F 29.79 69,302 8.06 5.64 32.28 14.21 9.18 7.45 10.09 32.74 Dec-10F 3.7 18.9% 0.9 1.0 3.2 3.6 4.0 4.4 3.0 3.2 2.1 295.6 60.3 74.5 84.4 25.0 539.8 175.7 0.0 715.5 10.5 36.0 0.1 628.7 1,390.9 Dec-07A 525.0 (335.6) 189.4 (25.1) 164.4 (15.9) 148.4 (31.5) 0.0 17.1 1.4 0.0 135.6 (19.3) 116.3 (0.0) 0.1 116.4 515.1 47.2 177.1 132.0 25.0 896.3 130.9 0.0 1,027.2 10.5 36.0 0.1 709.6 1,783.4 Dec-08F 1,157.0 (800.2) 356.8 (38.8) 318.0 (21.5) 296.5 (58.6) 0.0 19.2 1.4 0.0 258.5 (45.7) 212.9 0.0 0.0 212.9 492.9 44.8 294.4 285.3 25.0 1,142.4 83.5 0.0 1,225.9 10.5 36.0 0.1 884.5 2,157.1 Dec-09F 1,965.2 (1,326.4) 638.8 (46.9) 591.9 (44.3) 547.6 (52.8) 0.0 23.3 1.4 0.0 519.5 (59.3) 460.2 0.0 0.0 460.2 366.7 44.8 329.8 458.2 25.0 1,224.5 38.7 0.0 1,263.2 10.5 36.0 0.1 985.1 2,294.9 Dec-10F 2,237.2 (1,486.1) 751.1 (51.8) 699.4 (66.8) 632.6 (38.7) 0.0 26.7 1.4 0.0 622.1 (63.3) 558.7 0.0 0.0 558.7 P/ FCFF 31.2 EV/ FCFF 38.2 P/ EBITDA 12.6 EV/ EBITDA 15.4 P/ BV 3.3 Source: Company reports and CICR estimates. 120
Slide 123: November 11, 2008 EGYPT | PHARMACEUTICALS EIPICO Expansion underway 12M FAIR VALUE | LE 43.68 BUY | LOW RISK SHARE DATA Reuters; Bloomberg Recent price as of 6-Nov-08 No. of O/S shares Market cap 52-wk high / low Avg. daily volume / turnover PHAR.CA;PHAR EY LE 24.50 72.1 mn LE 1,766.5 mn LE 40.95/ LE 18 0.07 mn / LE 2.32 mn EIPICO is a successful generic pharmaceutical company. It is a low-cost producer in a sector of insensitive price demand, and is cash rich benefiting from high interest rates. In a highly volatile market amid concerns of a global recession, this company is capable of producing a steady double-digit growth, and an unrevealed ROE of 23% versus a WACC of 17.10%. With a PER of just 6x 2009 earnings it is undemanding to expect this to expand to 8x. Our DCF led target price indicates some 78% upside to LE 43.68, and our rating therefore is BUY at LOW RISK. Cash-rich, debt-free: EIPICO should benefit in a high interest environment. We also think that EIPICO's growth is robust even if the economy slows, thanks to the inelastic demand for its products. Hence, we do not expect demand for its products to falter; not least that its products are already competitively priced versus private sector peers. New factory expansion to start in 2010 with capex of only LE 80 mn – less than 10% of 2008 revenues: EIPICO's new expansion plans should require around LE 80 mn in capex with target start date in 2010. While management has not revealed which products will be produced in the new extension, we reckon that it will gradually add 30% of incremental revenues starting 2010. Investments update: EIPICO has discontinued its 98.6%owned subsidiary EIPICO Tech, which was mainly established to develop research of incurable diseases (such as AIDS and cancer), due to its high investment cost required. Meanwhile, EIACO started production in July 2007 with an authorized capital of LE 200 mn and a paid-in capital of LE 80 mn. EIACO's current capacity is 100 mn ampoules p.a. and is expected to reach 800 mn ampoules p.a. over the next 3-4 years Growth drivers: While drug consumption should be driven in part by population growth, an increasing health awareness and Egypt's new comprehensive medical insurance program should reflect positively on EIPICO's revenues. Moreover , the inauguration of Technological Center for Pharmaceutical Industries & Cosmetics (TCPIC), will enhance drug companies to improve their research and development. Valuation and recommendation: The stock is traded at a PER of 6x 2009 expected earnings with a current dividend yield of 7%, which we think attractive for defensive 5-year earnings CAGR of 14%. Shorter-term valuation techniques imply it is undemanding to see the price rise 30% to a 8x 2009 expected earnings, and our DCF-based fair value indicates an 78% upside to LE 43.68/share. Both the shorter-term and longer-term valuations are significantly above the 17.10% WACC we use. This valuation does not take into account its 30%-owned Saudi operation, which could indicate further upside potential when sufficient information is available. Accordingly we rate this stock a BUY at LOW RISK. 121 COMPANY SYNOPSIS EIPICO was established in 1980 but started production in 1985. Currently, the company's product mix is comprised of 247 products, with a generic/under-licensed mix of 80%/20%, respectively. The largest local private-sector pharmaceuticals producer, EIPICO’s market share hovers around 8%. It also exports to about 64 countries. Currently, EIPICO is in the process of expanding its factory. EIPICO has two subsidiaries: the first is the Egyptian International Ampoule Manufacturing Company (EIACO), a 99.7% ownership, and the second is Saudi Arabia-based Universal, a 30% ownership. EIPICO has an authorized capital of LE 850 mn and an issued capital of LE 721 mn, distributed over 72.1 mn shares at a par value of LE 10/share. SHAREHOLDER STRUCTURE ACDIMA Medical Union Investment Banks & Insurance Companies Others Free Float Total 43.1% 5.6% 0.4% 0.2% 50.7% 100.0% AHMED ABDEL-GHANI AHMED.ABDELGHANI@CICH.COM.EG STOCK PERFORMANCE | 52 WEEKS Volume 45 40 35 30 25 20 15 10 5 0 Nov-07 LE PHAR CASE 30 - rebased mn shares 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 - Jan-08 Jun-08 Jul-08 Feb-08 Mar-08 May-08 Dec-07 Aug-08 Sep-08 Oct-08 Apr-08
Slide 124: November 11, 2008 EGYPT | PHARMACEUTICALS | EIPICO Balance Sheet (LE Millions) Assets Cash & Cash Equivalent Net Receivables Total Inventory Advance Payment to Suppliers Other Trading Assets Other Current Assets Total Current Assets Net Plant Long Term Investments Other Trading Non-Current Assets Other Non-Current Assets Intangibles Total Assets Liabilities & Shareholders' Equity Short-Term Debt Current Portion of Long-Term Debt Accounts Payable Accrued Expenses Down Payments to customers Taxes Payable Dividends Payable Other Current Liabilities Total Current Liabilities Total Long-Term Debt Other Non-Current Liabilities Long-Term Spontaneous Finance Total Liabilities Deferred Taxes Other Provisions Minority Interest Shareholders Equity Total Liab. & Shareholders' Eq. Income Statement (LE Millions) Revenues COGS (incl. marketing expenses) Gross Profit G&A EBITDA Depreciation & Amortization EBIT Interest Expense Provisions Interest Income Investment Income Other Non-Operating Income Other Non-Operating Expenses Previous year gain/loss EBT Taxes NPAT Minority Interest Extraordinary Items Attributable Profits Dec-07 A 416.9 227.9 338.8 0.0 0.0 0.0 983.5 339.4 39.3 0.0 27.5 217.4 1,607.1 Dec-08 F 483.3 249.0 354.1 0.0 0.0 0.0 1,086.4 413.9 39.3 0.0 27.5 198.9 1,765.9 Dec-09 F 582.8 281.0 395.1 0.0 0.0 0.0 1,259.0 436.8 39.3 0.0 27.5 180.4 1,942.9 Dec-10 F 709.0 323.2 449.2 0.0 0.0 0.0 1,481.3 437.7 39.3 0.0 27.5 161.9 2,147.7 Cash Flow (LE Millions) NOPAT Depreciation & Amortization Gross Cash Flow (COPAT) Working Investments Change Other Current Items Cash After Current Operations Financing Payments Cash Before Long Term Use Net Plant Change FCFF Others Cash Before Financing Short-Term Debt Long-Term Debt Networth Grey Area Dividends Change in Cash Fact Sheet ROE ROS ROA ROIC Gross Margin EBITDA Margin ATO WI/ Sales ALEV Liabilities/Tangible Networth Current Ratio Per Share Ratios Share Price No. Of Shares (mn) EPS Div/Share Revenues/Share BV/Share Gross Cash Flow/Share FCFF/Share EBITDA/Share EV/Share Dec-07 A 247.8 53.1 300.9 (93.6) (10.9) 196.4 (2.2) 194.2 (68.3) 139.0 48.1 174.0 0.0 0.0 (22.4) (10.2) (100.7) 40.7 Dec-07 A 21.7% 27.3% 14.4% 21.5% 45.4% 42.9% 0.5 63.6% 1.9 0.3 4.1 Dec-07 A 24.50 72.1 3.22 1.70 11.79 14.81 4.17 1.93 5.05 18.72 Dec-08 F 277.1 53.9 331.0 (38.2) 0.0 292.8 (0.4) 292.4 (109.9) 182.9 21.3 203.8 0.0 0.0 0.0 0.0 (137.4) 66.4 Dec-08 F 22.8% 28.7% 15.2% 21.2% 46.0% 43.3% 0.5 61.9% 1.8 0.3 4.2 Dec-08 F 24.50 72.1 3.72 2.25 12.97 16.31 4.59 2.54 5.61 17.80 Dec-08 F 6.6 9% 1.9 1.4 7.0 4.4 3.2 1.5 Dec-09 F 310.7 56.2 367.0 (70.5) 0.0 296.5 3.0 299.5 (60.6) 235.9 22.7 261.5 0.0 0.0 0.0 0.0 (162.0) 99.5 Dec-09 F 23.1% 29.0% 15.4% 21.0% 46.2% 43.5% 0.5 62.7% 1.7 0.3 4.4 Dec-09 F 24.50 72.1 4.16 2.54 14.36 18.00 5.09 3.27 6.25 16.42 Dec-09 F 5.9 10% 1.7 1.1 5.0 3.9 2.6 1.4 Dec-10 F 355.4 60.8 416.2 (92.8) 0.0 323.4 6.1 329.5 (43.3) 280.2 23.1 309.3 0.0 0.0 0.0 0.0 (183.2) 126.2 Dec-10 F 23.7% 29.1% 15.9% 21.3% 46.4% 43.7% 0.5 63.3% 1.7 0.2 4.7 Dec-10 F 24.50 72.1 4.73 2.91 16.24 19.94 5.77 3.88 7.10 14.67 Dec-10 F 5.2 12% 1.5 0.9 3.8 3.5 2.1 1.2 0.0 0.0 26.2 0.0 0.0 0.0 137.4 73.7 237.2 0.0 0.0 0.0 237.2 73.8 227.4 0.2 1,068.4 1,607.1 Dec-07 A 850.2 (464.1) 386.1 (21.6) 364.4 (53.1) 311.3 (2.2) (25.2) 16.5 0.0 0.0 0.0 (5.0) 295.4 (63.5) 231.9 0.2 (0.0) 232.2 0.0 0.0 24.3 0.0 0.0 0.0 162.0 73.7 260.0 0.0 0.0 0.0 260.0 73.8 255.5 0.2 1,176.3 1,765.9 Dec-08 F 935.3 (505.0) 430.2 (25.3) 405.0 (53.9) 351.1 (2.2) (28.1) 21.2 0.0 0.0 0.0 0.0 342.0 (73.9) 268.1 0.0 0.0 268.1 0.0 0.0 26.9 0.0 0.0 0.0 183.2 73.7 283.8 0.0 0.0 0.0 283.8 73.8 286.6 0.2 1,298.5 1,942.9 Dec-09 F 1,035.8 (557.3) 478.5 (28.0) 450.6 (56.2) 394.4 (2.2) (31.1) 22.6 0.0 0.0 0.0 0.0 383.7 (83.6) 300.1 0.0 0.0 300.1 0.0 0.0 30.3 0.0 0.0 0.0 209.7 73.7 313.7 0.0 0.0 0.0 313.7 73.8 321.7 0.2 1,438.2 2,147.7 Dec-10 F 1,171.5 (627.9) 543.6 (31.6) 511.9 (60.8) 451.1 (2.2) (35.1) 23.0 0.0 0.0 0.0 0.0 436.8 (95.7) 341.1 0.0 0.0 341.1 Multiples Dec-07 A P/E 7.6 Div Yield % 7% P/ Revenue 2.1 EV/ Revenues 1.6 EV/ FCFF 9.7 P/ EBITDA 4.8 EV/ EBITDA 3.7 P/ BV 1.7 Source: EIPICO and CICR estimates 122
Slide 125: November 11, 2008 EGYPT | STEEL EZZ AL-DEKHEILA STEEL - ALEXANDRIA (EZDK) Company efficiency vs. market deficiency 12M FAIR VALUE | LE 1,502 BUY | MODERATE RISK SHARE DATA Reuters; Bloomberg Recent price as of 6-Nov-08 No. of O/S shares Market cap 52-wk high / low Avg. daily volume / turnover IRAX.CA; IRAX EY LE 896.23 13.7 mn LE 12,251.5 mn LE 1579.99/ LE 706.02 0.02 mn / LE 22.89 mn EZDK is the largest integrated steel plant in Egypt and the lowest cost producer of steel in Egypt and the region, giving the company an edge with the current expected slowdown in global economies. EZDK has a total capacity of 2.8 mtpa of long and flat steel, with no expansion plans. With the current turmoil over the short- to medium-term, we expect EZDK to face a reduction in utilization rates, yet a stable profit margin given the cost-price relationship of its business model. With a WACC of 18%, our DCF model indicates a 68% upside to a 12-month fair value of LE 1,502/share, thus retaining our BUY recommendation at a MODERATE RISK. Competitive advantage: EZDK is considered the lowest cost producer in Egypt with a gross, EBITDA, and net margins of 40.2%, 37.8%, and 26%, respectively. Said cost advantage comes on the back of: (1) utilizing iron ore as the main input in the production process, (2) a higher production per worker (883 tpa vs. an international average of 588 tpa), and (3) a lower labor cost (US$13/ton in 2006 vs. an international average of US$76/ton). Synergies: EZDK is 53.24% owned by Ezz Steel (ES) in June 2008, resulting in synergies via increasing local market share, a better world ranking, strong product recognition, and a reduction in operational and administrative costs that would enhance financial position. Growth drivers: Given Egypt's demographics, local construction activity will always be the main growth driver for EZDK. Yet, we expect the current slowdown in real-estate activity to result in a mild slowdown in the construction activity which should take place over the coming years to fulfill the currentlycontracted real-estate projects. On the global front, we expect a slowdown in the industrialization process*, resulting in a lower rate of utilization. Industry dynamics: Because of international competition, the expected reductions in inputs' costs* will result in lower selling prices; yet, margins are expected to be maintained but with lower bottom line figures. Government intervention: The recent removal of steel export tariffs of LE 160/ton should have a positive impact on EZDK, where 15% of production was exported in 1H08. Valuation and recommendation: Our DCF model - using a perpetual growth rate of 1% and a WACC of 18% - yielded a 12-month fair value of LE 1502/share, implying a 68% upside potential. Commodity plays are currently out of favor, but EZDK is part of the steel quasi-monopoly, and maintains a stable margin. Lower steel prices should therefore stimulate construction volumes, providing a catalyst. Hence, we reiterate our BUY recommendation on EZDK with a MODERATE RISK rating. * Please refer to our industry section. COMPANY SYNOPSIS Al-Ezz Dekheila for Steel - Alexandria (EZDK), previously known as Alexandria National Iron & Steel Company (ANSDK), was established in 1982 under the provisions of law no. 43 as a joint venture between Egyptian public sector companies, Nippon Kokan, Kobe Steel & Tomen, and the International Finance Corporation (IFC). EZDK currently operates under law no. 8/1997. EZDK is the largest fully integrated steel factory in Egypt that produces both long and flat products with a total capacity of 2.8 mtpa, 64% of which is for long products with flat products making up the balance. Ezz Steel owns a majority stake in EZDK amounting to 53.24%, which provided synergies for the whole group, created a strong entity that is capable of competing both locally and internationally. SHAREHOLDER STRUCTURE Ezz Steel National Investment Bank Misr Insurance Co. General Petro. Association Banks, Ins Co. and Others Free Float 53.2% 10.5% 7.8% 4.7% 18.6% 5.2% HANY MOHAMED SAMY, CFM HANY.SAMY@CICH.COM.EG STOCK PERFORMANCE | 52 WEEKS Volume 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 LE IRAX CASE 30 - rebased mn shares 1.4 1.2 1.0 0.8 0.6 0.4 0.2 Nov-07 Jan-08 Jun-08 Jul-08 Feb-08 Mar-08 May-08 Dec-07 Aug-08 Sep-08 Oct-08 Apr-08 123
Slide 126: November 11, 2008 EGYPT | STEEL | EZDK Balance Sheet (LE mn) Assets Cash & Cash Equivalent Net Receivables Total Inventory Advance Payment Other Trading Assets Other Current Assets Total Current Assets Net Plant Long-Term Investments Long-Term Loans Receivalbe Other Non-current Assets Intangibles Total Assets Liabilities & Shareholders' Equity Short-Term Debt CP of Long Term Debt Accounts Payable Accrued Expenses Down Payments Taxes Payable Dividends Payable Royalties Payables / Due to Sister Co. Other Current Liabilities Total Current Liabilities Total Long-Term Debt Other Non-Current Liabilities Total Liabilities Deferred Taxes Other Provisions Minority Interest Shareholders' Equity Total Liab. & Equity Income Statement (LE mn) Sales Cost of Sales Gross Profit SG&A EBITDA Depreciation & Amortization EBIT Interest Expense Provisions Interest Income Investment Income Other Non-Operating Income Other Non-Operating Expenses EBT Taxes NPAT Minority Interest Extraordinary Items Attributable Profits 2007A 1,674.6 326.8 1,390.9 0.0 0.0 0.0 3,392 5,664 62.9 6.0 0.0 0.0 9,125 2008F 514.3 455.2 2,045.6 0.0 0.0 0.0 3,015 5,835 48.9 5.7 0.0 0.0 8,905 2009F 450.7 397.8 1,871.1 0.0 0.0 0.0 2,720 5,907 48.9 5.7 0.0 0.0 8,681 2010F 1,189.7 433.5 2,013.7 0.0 0.0 0.0 3,637 5,983 48.9 5.7 0.0 0.0 9,675 Cash Flow (LE mn) NOPAT Depreciation & Amortization Gross Cash Flow (COPAT) Working Investments Change Other Current Items Cash After Current Operations Financing Payments Cash Before Long Term Use Net Plant Change FCFF Others Cash Before Financing Short-Term Debt Long-Term Debt Networth Grey Area Dividends Change in Cash 2007A 2,431.8 431.7 2,863.5 (17.7) 168.1 3,013.9 (789.3) 2,224.6 (38.0) 2,975.9 419 2,605.6 691.1 (214.5) (816.2) (156.4) (957.7) 1,151,769 2008F 2,671.4 440.2 3,111.6 (561.0) 0.0 2,550.6 (683.3) 1,867.3 (611.9) 1,938.7 (226) 1,029.2 (570.1) (90.2) 435.8 472.3 (2,437.3) (1,160,300) 2009F 2,413.3 452.4 2,865.7 172.7 0.0 3,038.4 (635.6) 2,402.8 (523.9) 2,514.5 51 1,929.9 (58.9) 0.0 114.3 (524.2) (1,524.8) (63,625) 2010F 2,710.8 477.2 3,188.1 (129.9) 0.0 3,058.2 (646.9) 2,411.3 (553.8) 2,504.4 136 1,993.5 332.1 0.0 128.6 0.0 (1,715.1) 739,079 1,353 376.2 427.4 44.7 0.0 579.9 478.8 5.4 22.5 3,288 2,064.7 460.0 5,813 0.0 51.9 0.0 3,260 9,125 2007A 8,826 (5,279) 3,547 (208) 3,339 (432) 2,908 (294) 0 109 0 216 (6) 2,931 (635) 2,296 0 0 2,296 783 372.1 628.5 65.8 0.0 140.7 0.0 5.4 22.5 2,018 1,602.4 85.9 3,706 472.6 51.6 0.0 4,675 8,905 2008F 12,295 (7,764) 4,531 (246) 4,285 (440) 3,845 (307) 0 30 0 103 0 3,671 (734) 2,937 0 0 2,937 724 372.1 574.9 60.2 0.0 140.7 0.0 5.4 22.5 1,900 1,230.3 0.0 3,130 0.0 0.0 0.0 5,551 8,681 2009F 10,774 (7,121) 3,653 (215) 3,437 (452) 2,985 (264) 0 34 0 103 0 2,858 (572) 2,287 0 0 2,287 1,056 372.1 618.7 64.8 0.0 140.7 0.0 5.4 22.5 2,280 858.3 0.0 3,139 0.0 0.0 0.0 6,536 9,675 2010F 11,708 (7,643) 4,065 (234) 3,831 (477) 3,354 (275) 0 33 0 103 0 3,215 (643) 2,572 0 0 2,572 Fact Sheet ROE ROS ROA ROIC 2007A 70.4% 26.0% 25.2% 34.2% 37.8% 1.0 14.1% 2.8 1.8 1.0 2007A 896.23 13,668 22.96 14.25 88.26 N/A 32.60 28.63 29.76 33.39 143.7 2007A 39.0 2% 10.2 1.6 31.3 5.0 30.1 4.8 26.8 4.3 27.5 2008F 62.8% 23.9% 33.0% 33.6% 34.9% 1.4 14.7% 1.9 0.8 1.5 2008F 896.23 13,668 29.37 19.58 122.94 N/A 46.74 31.11 19.39 42.85 144.9 2008F 30.5 2% 7.3 1.2 28.8 4.7 46.2 7.5 20.9 3.4 19.2 2009F 41.2% 21.2% 26.3% 30.6% 31.9% 1.2 15.2% 1.6 0.6 1.4 2009F 896.23 13,668 22.87 15.25 107.73 N/A 55.51 28.66 25.14 34.37 141.2 2009F 39.2 2% 8.3 1.3 31.3 4.9 35.6 5.6 26.1 4.1 16.1 2010F 39.4% 22.0% 26.6% 30.7% 32.7% 1.2 15.1% 1.5 0.5 1.6 2010F 896.23 13,668 25.72 17.15 117.07 N/A 65.36 31.88 25.04 38.31 133.5 2010F 34.8 2% 7.7 1.1 28.1 4.2 35.8 5.3 23.4 3.5 13.7 Gross Profit Margin EBITDA Margin ATO WI/ Sales ALEV Liabilities/Networth Current Ratio Per-Share Ratios Share Price No. Of Shares (000) EPS DPS Revenues/Share Capacity/Share BV/Share Gross Cash Flow/Share FCFF/Share EBITDA/Share EV/Share Multiples P/E Dividend Yield P/ Revenue EV/ Revenues P/ COPAT EV/ COPAT P/ FCFF EV/ FCFF P/ EBITDA EV/ EBITDA P/ BV Note: A = Actual; F = Forecasted Source: EZDK and CICR forecasts 124
Slide 127: November 11, 2008 EGYPT | STEEL EZZ STEEL (ES) The long-term vision Ezz Steel (ES) is a leading local and regional steel producer with a 63% local market share. Even with the current global economic slowdown, ES is taking a longerterm perspective by expanding its capacities from a current 5.3 mtpa to 8 mtpa over the coming five years. Over the short- to medium-term, we expect ES to face a reduction in utilization rates, yet a stable profit margin, given the cost-price relationship of its business model. With a WACC of 18%, our DCF model indicates a 212% upside to a 12-month fair value of LE 34.2/share, thus retaining our BUY recommendation with a MODERATE RISK. More acquisitions: Continuing its expansion strategy, ES increased its stake in Ezz Al-Dekheila for Steel - Alexandria (EZDK) from 50.28% in December 2007 to 53.24% in June 2008 to increase its stake in EZDK's earnings, and to enhance the decision making process. More long-term expansions: From a longer term perspective, ES is in the process of expanding capacities, both locally and regionally. Local expansion is intended to: (1) increase flat steel production by 0.8 mtpa and (2) replace the 0.55 mtpa of imported billets with locally-produced ones to enhance profit margins and reduce FX exposure. Regional expansion of 3 mtpa is intended to diversify markets to mitigate risks. Said expansions will take place over the coming five years, with a total estimated investment cost of US$3 bn. Expansion financing: During 3Q08, ES increased its capital via a 2-to-1 rights issue, representing 11% of total expansion costs with internal financing and external debt making up the balance. As ES has an excellent credit history, local banks will not be reluctant to finance expansions. Additionally, cost of machinery will be financed by the supplier via selling to ES on installment bases. Growth drivers: Given Egypt's demographics, local construction activity will always be the main growth driver for ES. Yet, we expect the current slowdown in real-estate activity to result in a mild slowdown in the construction activity which should take place over the coming years to fulfill the currentlycontracted real-estate projects. On the global front, we expect a slowdown in the industrialization process,* resulting in a lower rate of utilization. Industry dynamics: Because of international competition, the expected reductions in inputs' costs* will result in lower selling prices; yet, margins are expected to be maintained but with lower bottom line figures. Government intervention: The recent removal of steel export tariffs of LE 160/ton should have a positive impact on ES, where 24% of production was exported in 1H08. Valuation and recommendation: Our DCF model - using a perpetual growth rate of 1% and a WACC of 18% - yielded a 12-month fair value of LE 34.2/share, implying a 146% upside potential. Commodity plays are currently out of favor, but ES is a quasi-monopoly steel producer, and maintains a stable margin. Lower steel prices should therefore stimulate construction volumes, providing a catalyst. Hence, we reiterate our BUY recommendation on ES with a MODERATE RISK rating. 125 * Please refer to our industry section 12M FAIR VALUE | LE 34.2 BUY | MODERATE RISK SHARE DATA Reuters; Bloomberg Recent price as of 6-Nov-08 No. of O/S shares Market cap 52-wk high / low Avg. daily volume / turnover ESRS.CA; /AEZDq.L | ALES EY LE 10.95 543.3 mn LE 5,948.7 mn LE 38.53/ LE 8.11 1.34 mn / LE 35.29 mn COMPANY SYNOPSIS Ezz Steel (ES) - previously known as Al-Ezz Steel Rebars Co. (ESR) - is a joint stock company established in April 1994, to manufacture steel rebars in Sadat City. In 1995, ES acquired 90.7% of National Al-Baraka for Iron & Steel, - currently known as Al-Ezz Rolling Mills (ERM) which produces straight and coiled rebars in 10th of Ramadan. ES facilities in Sadat and 10th of Ramadan have a combined production capacity of 1.4 mn tpa. Furthermore, ES owns 75.15% stake in Al-Ezz Flat Steel (EFS), which was established in July 1998 under the provisions of Law no. 8 (free zone systems), with a capacity of 1.2 mn tpa of flat steel, most of which is directed to the export markets. EFS is planning to increase capacity by an additional 0.8 mn tpa by 2011. ES owns a 53.24% stake in Al-Ezz Dekheila for SteelAlexandria (EZDK), previously known as Alexandria National Iron & Steel Company (ANSDK). EZDK is the largest integrated steel plant in Egypt with a capacity of 1.78 mn tpa of long products and 1 mn tpa of flat products. ES is expanding regionally in Algeria with an additional 3 mn tpa of steel rebars. Finally, ES is planning to produce internally the imported billets as to enhance profitability margins. Said structure created a strong entity that is capable of competing both locally (63% market share for long and flat products) and internationally (ranged within the top 60 steel producers worldwide SHAREHOLDER STRUCTURE Al-Ezz Holding Egy Int'l Com Invest Co. Egy Int'l Ind Invest Dev Co For Metal Invest Banks, Ins Co. and others Free Float 38.1% 11.2% 7.4% 7.4% 1.1% 34.8% HANY MOHAMED SAMY, CFM HANY.SAMY@CICH.COM.EG STOCK PERFORMANCE | 52 WEEKS Volume 45 40 35 30 25 20 15 10 5 0 Nov-07 LE ESRS CASE 30 - rebased mn shares 6.0 5.0 4.0 3.0 2.0 1.0 Jan-08 Jun-08 Jul-08 Feb-08 Mar-08 May-08 Dec-07 Aug-08 Sep-08 Oct-08 Apr-08
Slide 128: November 11, 2008 EGYPT | STEEL | EZZ STEEL Balance Sheet (LE mn) Assets Cash & Cash Equivalent Net Receivables Total Inventory Advance Payment Other Trading Assets Other Current Assets Total Current Assets Net Plant Long-Term Investments Long-Term Loans Receivalbe Other Non-current Assets Intangibles Total Assets Liabilities & Shareholders' Equity Short-Term Debt CP of Long Term Debt Accounts Payable Accrued Expenses Down Payments Taxes Payable Dividends Payable Royalties Payables / Due to Sister Co. Other Current Liabilities Total Current Liabilities Total Long-Term Debt Other Non-Current Liabilities Total Liabilities Deferred Taxes Other Provisions Minority Interest Shareholders' Equity Total Liab. & Equity Income Statement (LE mn) Sales COGS x-dep Gross Profit SG&A EBITDA Depreciation & Amortization EBIT Interest Expense Provisions Interest Income Investment Income Other Non-Operating Income Other Non-Operating Expenses EBT Taxes NPAT Minority Interest Extraordinary Items Attributable Profits 2007A 1,891.8 265.4 2,547.6 125.3 0.6 157.2 4,988 10,601 63.0 189.3 6.3 0.0 15,848 2008F 2,477.8 378.0 3,644.2 184.1 18.8 367.6 7,070 11,338 55.9 5.7 0.4 315.2 18,786 2009F 1,777.8 331.3 3,271.7 165.2 18.8 367.6 5,932 13,543 55.9 0.0 0.4 315.2 19,847 2010F 1,777.8 367.2 3,514.7 177.5 18.8 367.6 6,224 16,947 55.9 0.0 0.4 315.2 23,542 Cash Flow (LE mn) NOPAT Depreciation & Amortization Gross Cash Flow (COPAT) Working Investments Change Other Current Items Cash After Current Operations Financing Payments Cash Before Long Term Use Net Plant Change FCFF Others Cash Before Financing Short-Term Debt Long-Term Debt Networth Grey Area Dividends Change in Cash Note: A = Actual; F = Forecasted Source: ES and CIBC forecasts 2007A 2,715 659 3,374 215 (43) 3,546 (1,529) 2,016.93 (18) 3,528 346 2,345 (203) 891 (1,292) (474) (58) 1,209 2008F 3,712 695 4,407 (700) (264) 3,442 (2,409) 1,033 (1,432) 2,010 (95) (494) (1,271) 1,549 (662) 1,435 29 586 2009F 2,739 726 3,465 215 0 3,680 (2,043) 1,636 (2,930) 749 185 (1,109) 141 325 (1,061) 1,129 (125) (700) 2010F 3,462 818 4,280 (133) 0 4,147 (1,706) 2,441 (4,222) (75) 174 (1,607) 1,346 325 (1,175) 1,267 (155) 0 1,370 1,901.1 701.3 113.9 616.3 615.8 137.2 5.4 148.3 5,609 3,892.1 708.9 10,210 0.0 91.7 1,970.9 3,575 15,848 2007A 16,159 (11,852) 4,308 (371) 3,937 (659) 3,278 (710) (6) 67 (0) 246 0 2,875 (653) 2,222 (1,100) 0 1,122 99 1,616.4 954.0 167.3 877.9 593.0 328.5 1.9 72.2 4,711 3,824.7 754.7 9,290 0.0 91.7 3,405.7 5,998 18,786 2008F 23,016 (17,410) 5,606 (528) 5,078 (695) 4,383 (508) 0 37 0 147 0 4,060 (812) 3,248 (1,435) 0 1,813 240 1,167.3 856.5 150.2 769.3 593.0 328.5 1.9 72.2 4,179 2,982.2 754.7 7,916 0.0 91.7 4,534.9 7,304 19,847 2009F 20,225 (15,673) 4,552 (464) 4,088 (726) 3,362 (427) 0 32 0 147 0 3,114 (623) 2,491 (1,129) 0 1,362 1,586 1,167.3 920.1 161.4 852.8 593.0 328.5 1.9 72.2 5,683 2,139.7 754.7 8,578 0.0 91.7 5,801.8 9,071 23,542 2010F 22,359 (16,792) 5,568 (513) 5,055 (818) 4,236 (539) 0 27 0 147 0 3,871 (774) 3,097 (1,267) 0 1,830 Fact Sheet ROE ROS ROA ROIC 2007A 31.4% 6.9% 7.1% 21.2% 2008F 30.2% 7.9% 9.7% 25.2% 2009F 18.6% 6.7% 6.9% 17.1% 2010F 20.2% 8.2% 7.8% 17.7% Gross Profit Margin EBITDA Margin ATO WI/ Sales ALEV Liabilities/Networth Current Ratio 26.7% 24.4% 1.0 10.5% 4.4 2.9 0.9 24.4% 22.1% 1.2 9.6% 3.1 1.5 1.5 22.5% 20.2% 1.0 9.9% 2.7 1.1 1.4 24.9% 22.6% 0.9 9.5% 2.6 0.9 1.1 Per-Share Ratios Share Price No. Of Shares (000) EPS DPS Revenues/Share Capacity/Share BV/Share Gross Cash Flow/Share FCFF/Share EBITDA/Share EV/Share Multiples P/E Dividend Yield P/ Revenue EV/ Revenues P/ COPAT EV/ COPAT P/ FCFF EV/ FCFF P/ EBITDA EV/ EBITDA P/ BV Source: Company reports and CICR estimates 2007A 10.95 543,261 2.1 0.3 29.7 N/A 6.6 6.2 6.5 7.2 20.7 2007A 5.3x 3% 0.4 0.7 1.8 3.3 1.7 3.2 1.5 2.8 1.7x 2008F 10.95 543,261 3.3 0.3 42.4 N/A 11.0 8.1 3.7 9.3 16.6 2008F 3.3x 3% 0.3 0.4 1.3 2.0 3.0 4.5 1.2 1.8 1.0x 2009F 10.95 543,261 2.5 0.2 37.2 N/A 13.4 6.4 1.4 7.5 15.8 2009F 4.4x 2% 0.3 0.4 1.7 2.5 7.9 11.4 1.5 2.1 0.8x 2010F 10.95 543,261 3.4 0.3 41.2 N/A 16.7 7.9 -0.1 9.3 16.7 2010F 3.3x 3% 0.3 0.4 1.4 2.1 79.3(120.9) 1.2 1.8 0.7x 126
Slide 129: November 11, 2008 EGYPT | OIL & GAS MARIDIVE & OIL SERVICES (MOS) Competitive global player Maridive & Oil Services (MOS) sustained earnings growth with its fleet size growing from 3 vessels and 4 mooring boats in 1979 to 57 marine units in 2008. MOS continues to grow its fleet, having contracted for 16 new marine units, as well as upgrading its existing fleet to meet demand. MOS’s projects are global – with 80% of its revenues generated outside Egypt. Its share price, however, seems to have been suffering from waning oil prices, a risk - therefore - of lower E&P demand. Yet, MOS is well placed due to its relatively low-cost structure, offering competitive rates than its peers. As such it trades at 6.5x 2009e PER, and 99% below our SOTP 12-month fair value of US$5.1/share. We initiate coverage on the stock with a BUY and MODERATE RISK rating. 12M FAIR VALUE | US$5.1 BUY | MODERATE RISK SHARE DATA Reuters; Bloomberg Recent price as of 6-Nov-08 No. of O/S shares Market cap 52-wk high / low Avg. daily volume / turnover MOIL.CA; MOIL EY US$ 2.57 256.0 mn US$ 0,657.9 mn US$ 7.3/ US$ 2.3 0.73 mn / US$ 1.75 mn COMPANY SYNOPSIS Maridive & Oil Services Company (MOS) is a free-zone joint stock company established in 1978. MOS operates under Investment Law No. 8/1997. The company is located in Port Said with offices in Cairo, Alexandria, and Abu Dhabi. Maridive's major objective is to provide Offshore Support Vessels (Marine services) and Offshore Construction Services (Project services) to oil exploration and production companies. The company's operations are executed through the mother company as well as its subsidiaries: Maritide Offshore Oil Services, Valentine Maritime, and Maridve Offshore Projects (MOP). Maridive, with an experience of over 30 years, is currently the largest Egyptian marine and offshore oil services company and one of the largest regional players in terms of fleet size owned. The company owns 57 marine units. The company contracted for 16 marine units (vessels and barges) which will be gradually delivered by 2011. Maridive's operations have widely expanded. The group won a number of contracts in the Gulf region, Persian Gulf, Caspian Sea, Gulf of Mexico as well as North, West, and East Africa in addition to the Far East. Global demand: Global demand for oil as a primary source of energy triggered exploration and production (E&P) activities in untapped offshore oil and gas reserves. Accordingly, MOS contracted for 16 new marine units. Highly-integrated business model: MOS is a horizontallyintegrated company providing offshore construction and support to oil E&P companies. These services cover a wide range of both operational and production levels. Barriers to entry: There are high barriers prevailing against the entrance of potential players into the market owing to the capital-intensive nature of the industry with high initial investment and operational costs as well as strong technical capabilities required. Also, MOS has the edge to offer competitive daily rates than its competitors owing to its ability to source labor with lower packages compared to international markets. Risks - global financial crisis and lower oil prices: The global financial crisis may have an impact on MOS's requirements for financial facilities and foreign currencies to finance its operations and expansion plans. Meanwhile, should oil prices continue in their downtrend, offshore operations could reduce their production. Thus, demand for oil services - provided by MOS - may feel the pinch. Difficult weather conditions: This industry can be affected by difficult weather conditions that could damage vessels and equipment and result in the suspension of operations. The industry is seasonal depending on the storms that hit the regions in different times. The monsoon hits India, where the bulk of the Far East revenues are generated from, starting June till end of September. However, this is mitigated by the company's geographical diversification, such as Australia where the monsoon hits from December till early March. It is worth highlighting that one barge sank in June 2007 south of Pakistan due to the monsoon. Valuation and recommendation: We used sum-of-the-parts (SOTP) valuation to value MOS’s businesses. We reached a 12-month fair value of US$5.1/share, implying a 99% upside potential and 45% above the IPO price. We initiate coverage on the stock with a BUY recommendation and MODERATE RISK. 127 SHAREHOLDER STRUCTURE Offshore Oil Projects Eleish Family Zeid Family Nadim Family CIB Horus PE Fund III Free Float Total 21.4% 13.2% 13.2% 13.2% 7.1% 2.9% 29.0% 100.0% MOHAMED HAMDY MOHAMED.HAMDY@CICH.COM.EG STOCK PERFORMANCE | 52 WEEKS Volume US$ 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 May-08 Aug-08 Sep-08 Nov-08 Jun-08 Jul-08 Oct-08 MOIL CASE 30 - rebased mn shares 25.0 20.0 15.0 10.0 5.0 -
Slide 130: November 11, 2008 EGYPT | OIL & GAS | MARIDIVE Balance Sheet (US$ mn) Assets Cash Time Deposits Net Receivables Total Inventory Advance Payments to Suppliers Other Trading Assets Other Current Assets Total Current Assets Net Plant Long-Term Investments Other Trading Non-Current Assets Other Non-Current Assets Intangibles Total Assets Liabilities & Equity Short-Term Debt Current Portion of LT Debt Accounts Payable Accrued Expenses Down Payments to Customers Taxes Payable Dividends Payable Other Current Liabilities Total Current Liabilities Total Long-Term Debt Other Non-Current Liabilities Total Liabilities Deferred Taxes Other Provisions Minority Interest Paid-in capital Additional paid-in capital Treasury shares Reserves Retained earnings Shareholders' Equity Total Liab. & Equity Income Statement (US$ mn) OCS OSV Revenues OCS OSV Cost of Revenues (including provisions) OCS OCS gross margin OSV OSV gross margin Gross Profit (including provisions) Gross Margin OCS As a % of revenues OSV As a % of revenues SG&A As a % of revenues OCS OCS EBITDA margin OSV OSV EBITDA margin EBITDA (including provisions) EBITDA Margin EBITDA (excluding provisions) EBITDA Margin Depreciation & Amortization EBIT Interest Expense Interest Income Investment Income Other Non-Operating Income Other Non-Operating Exp. EBT Taxes NPAT Minority Interest Extraordinary Items Net Profits Net Margin 2007A 6.3 3.1 98.9 5.8 0.3 0.3 38.8 153.6 192.3 0.0 1.9 0.1 9.8 357.7 2008F 163.9 4.1 81.9 6.0 0.4 0.3 10.8 267.4 326.1 0.0 1.9 0.8 9.8 606.0 2009F 170.4 5.5 113.6 8.3 0.5 0.3 14.6 313.2 404.0 0.0 1.9 0.8 9.8 729.8 2010F 246.7 7.5 158.3 12.0 0.7 0.3 19.9 445.4 451.8 0.0 1.9 0.8 9.8 909.7 24.5 24.1 40.8 6.7 2.1 0.0 0.3 4.2 102.8 64.2 0.0 167.0 0.2 1.7 22.5 85.0 0.0 0.0 11.7 69.6 166.3 357.7 2007A 216.8 47.3 264.1 (117.7) (22.3) (140.0) 99.1 45.7% 25.0 52.9% 124.1 47.0% (11.4) 5.2% (4.6) 9.7% (16.0) 6.0% 87.7 40.5% 20.4 43.2% 108.1 41.0% 110.6 41.9% (11.6) 96.5 (3.3) 0.2 0.0 0.5 (0.1) 93.8 (1.7) 92.2 (12.3) 0.2 80.1 30.3% 0.0 9.7 11.3 11.3 10.0 0.0 32.8 7.4 82.4 133.8 0.0 216.3 0.0 2.1 33.9 102.4 85.5 0.0 11.7 154.1 353.7 606.0 2008F 187.8 74.7 262.5 (102.1) (35.4) (137.5) 85.7 45.6% 39.3 52.7% 125.0 47.6% (11.7) 6.2% (6.5) 8.6% (18.2) 6.9% 74.0 39.4% 32.9 44.0% 106.9 40.7% 109.9 41.9% (16.0) 90.8 (6.1) 1.8 0.0 1.3 (0.5) 87.2 (1.4) 85.9 (11.4) 10.1 84.5 32.2% 0.0 17.6 15.6 15.6 20.3 0.0 0.0 7.4 76.4 154.6 0.0 231.0 0.0 2.1 41.7 102.4 85.5 0.0 11.7 255.3 454.9 729.8 2009F 245.1 108.2 353.3 (140.4) (48.8) (189.2) 104.7 42.7% 59.4 54.9% 164.0 46.4% (14.2) 5.8% (8.7) 8.1% (23.0) 6.5% 90.4 36.9% 50.6 46.8% 141.0 39.9% 145.7 41.2% (21.8) 119.2 (11.4) 3.4 0.0 0.0 (0.5) 110.7 (1.7) 109.0 (7.8) 0.0 101.3 28.7% 0.0 27.2 21.2 21.2 39.6 0.0 63.7 7.4 180.2 141.3 0.0 321.5 0.0 2.1 48.5 102.4 85.5 0.0 11.7 338.0 537.6 909.7 2010F 346.0 135.2 481.3 (198.4) (59.1) (257.5) 147.7 42.7% 76.1 56.3% 223.8 46.5% (18.1) 5.2% (10.7) 7.9% (28.7) 6.0% 129.6 37.4% 65.5 48.4% 195.1 40.5% 201.2 41.8% (28.1) 167.0 (10.7) 4.9 0.0 0.0 (0.5) 160.7 (2.3) 158.3 (12.0) 0.0 146.4 30.4% Cash Flow (US$ mn) NOPAT Depreciation & Amortization Gross Cash Flow (COPAT) WI Change Other Current Items Cash After Current Operations Financing Payments Cash Before Long-Term Use Net Plant Change FCFF Others Cash Before Financing Short-Term Debt Long-Term Debt Net-worth Grey Area Dividends Change in Cash Fact Sheet OCS revenue growth OSV revenue growth Revenue growth OCS gross profit growth OSV gross profit growth Gross profit growth OCS EBITDA growth OSV EBITDA growth EBITDA growth Earnings growth Revenue mix OCS OSV EBITDA mix OCS OSV ROE ROA ROIC ATO WI/ Sales ALEV Liabilities/Networth Current Ratio Per-Share Ratios Share Price No. of Shares ('000) EPS DPS DIV./NPAUI Revenues/Share BV/Share Gross Cash Flow/Share FCFF/Share EBITDA/Share EV/Share Multiples P/E Dividend Yield P/ Revenue EV/ Revenues P/ FCFF EV/ FCFF P/ EBITDA EV/ EBITDA P/ BV Source: Maridive and CICR forecasts 2007A 82.5 11.6 94.1 (28.0) (1.1) 65.0 (13.4) 51.6 (91.4) (25.3) 2.4 (37.5) 17.2 49.6 (33.5) 0.2 0.3 (3.8) 2007A 2.6% 22.2% 5.6% 20.8% 45.9% 25.1% 24.7% 51.9% 29.1% 49.8% 2008F 78.1 16.0 94.1 (0.3) 31.1 124.9 (28.6) 96.3 (139.8) (46.0) (0.8) (44.2) (24.5) 79.3 114.3 0.3 32.4 157.6 2008F -13.4% 58.0% -0.6% -13.5% 57.3% 0.8% -15.6% 60.9% -1.2% 5.5% 2009F 109.8 21.8 131.6 (15.3) (3.7) 112.6 (17.9) 94.6 (99.8) 16.6 (1.7) (6.9) 0.0 38.3 7.8 0.0 (32.8) 6.5 2009F 30.5% 44.8% 34.6% 22.1% 50.9% 31.2% 22.2% 54.0% 32.0% 19.8% 2010F 152.7 28.1 180.8 (18.1) (5.3) 157.4 (23.6) 133.7 (75.8) 86.8 (2.3) 55.6 0.0 13.9 6.8 0.0 0.0 76.3 2010F 41.2% 25.0% 36.2% 41.1% 28.3% 36.4% 43.3% 29.4% 38.3% 44.6% 82.1% 17.9% 71.5% 28.5% 69.4% 30.6% 71.9% 28.1% 81.1% 18.9% 48.2% 22.4% 27.4% 0.7 -10.6% 2.2 1.0 1.5 2007A $2.57 256,000 0.31 0.00 0% 1.03 0.65 0.37 (0.10) 0.43 2.97 2007A 8.2x 0.0% 2.5x 2.9x -26.0x -30.1x 5.9x 6.9x 4.0x 69.2% 30.8% 23.9% 13.9% 14.7% 0.4 -0.1% 1.7 0.6 3.2 2008F $2.57 256,000 0.33 0.00 0% 1.03 1.38 0.37 (0.18) 0.43 2.47 2008F 7.8x 0.0% 2.5x 2.4x -14.3x -13.8x 6.0x 5.8x 1.9x 64.1% 35.9% 22.3% 13.9% 16.4% 0.5 -4.3% 1.6 0.5 4.1 2009F $2.57 256,000 0.40 0.00 0% 1.38 1.78 0.51 0.06 0.57 2.56 2009F 6.5x 0.0% 1.9x 1.9x 39.7x 39.5x 4.5x 4.5x 1.4x 66.4% 33.6% 27.2% 16.1% 20.2% 0.5 -3.8% 1.7 0.6 2.5 2010F $2.57 256,000 0.57 0.25 44% 1.88 2.10 0.71 0.34 0.79 2.24 2010F 4.5x 9.7% 1.4x 1.2x 7.6x 6.6x 3.3x 2.8x 1.2x 128
Slide 131: November 11, 2008 EGYPT | CEMENT MISR BENI SUEF CEMENT (MBSC) Very cheaply rated versus peer group 12M FAIR VALUE | LE 153 BUY | MODERATE RISK SHARE DATA Reuters; Bloomberg Recent price as of 6-Nov-08 No. of O/S shares Market cap 52-wk high / low Avg. daily volume / turnover MBSC.CA; MBSC EY LE 46.79 20.0 mn LE 935.8 mn LE 141.49/ LE 45 0.03 mn / LE 3.63 mn Misr Beni Suef Cement (MBSC), a grey cement producer since 2003, comprises a mono-production line cement factory of 1.5 mtpa capacity. In view of the imposed license fees of LE 251 mn for its new 1.5 mtpa production line, MBSC booked a significant provision of LE 156 mn in 2007. Yet, MBSC did not pay that fee till date awaiting the authorities' reply concerning its appeal stating that Beni Suef Cement (Titan Group) won at the auction held in October 2008 an expansion license in the same governorate for just LE 134.5 mn. The stock is traded at PER of 3.5x 2009 earnings vs. a peer average of 7.5x, which may imply acquisitive interest. Our DCF-based valuation of LE 152.5/ share suggests a 226% upside potential with a BUY at MODERATE RISK rating. COMPANY SYNOPSIS Misr Beni Suef Cement (MBSC) was incorporated under Law no. 8/1997 in November 1997 as a shareholding company, with the objective of producing all kinds of cement and all other associated products. In August 1999, MBSC had its shares listed on the Egyptian Exchange (EGX). The company was established with a paid-in capital of LE 120 mn distributed over 12 mn shares at a par value of LE 10/share. Currently, MBSC has an authorized capital of LE 500 mn with a paid-in capital of LE 200 mn distributed over 20 mn shares with a par value of LE 10/share. In December 2006, MBSC signed a supplying & installation contract with the French company Polysius to expand its daily clinker production to 10k tpd. MBSC reached 2% local market share in 2007, selling 837k tons and 4% in 8M08, selling 961k tons. Meanwhile, 21% export market share in 2007, exporting 869k tons (c. 51% of production) and 23% in 8M08, exporting 169k tons (c. 15% of production). New production line: Said new line is expected to release its initial production by H209, with a required investment cost estimated at LE 1.2 bn. Overcapacity utilization to be hit by 2010: We expect MBSC to maintain the same trend, outpacing the market capacity utilization over 2008-12. Given the new capacities entering the cement market, we expect the 100%+ utilization rate by MBSC which registered 113% (the third highest rate) in 2007 to be hit gradually to 96% in 2012 - yet still higher than 79% for the market then. Competitive post ban export price: MBSC was one of the first two companies permitted to export to Sudan during the 6month export ban that ended in October 2008. MBSC had acquired a 16% export market share during April-August 2008, failing to obtain a better share relative to others permitted by the same time. We believe MBSC will be able to strengthen its export market share as exports resumed after the ban at US$75/ton - a competitive price compared to other local players exporting at a minimum of US$85/ton. Temporary cost advantage: MBSC did not pay the LE 35.1/ cement ton produced clay resource development fees till date, awaiting for the authorities to reply to its appeal stating that (1) clay usage rate used to calculate said fee is incorrect, (2) a contract with the governorate was established to deliver clay at a fixed fee of LE 2.25/ton, and (3) several other industries use clay, such as the ceramics industry and - accordingly should be charged the same fee as well. Valuation and recommendation: Based on a cost of equity of 17.6%, our DCF model resulted in a 12-month fair value of LE 152.5/share, implying a 226% upside potential. Accordingly we rate this stock a BUY at MODERATE RISK. SHAREHOLDER STRUCTURE Top Management National Investment Bank Individuals Others Free Float Total 20.5% 20.1% 6.3% 2.6% 50.5% 100.0% GHADA REFKY GHADA.REFKY@CICH.COM.EG STOCK PERFORMANCE | 52 WEEKS Volume 180 160 140 120 100 80 60 40 20 0 LE MBSC CASE 30 - rebased mn shares 0.5 0.4 0.3 0.2 0.1 Nov-07 Jan-08 Jun-08 Jul-08 Feb-08 Mar-08 May-08 Dec-07 Aug-08 Sep-08 Oct-08 Apr-08 129
Slide 132: November 11, 2008 EGYPT | CEMENT | MBSC Balance Sheet (LE mn) Assets Cash & Cash Equivalent Net Receivables Total Inventory Advance Payments Other Trading Assets Other Current Assets Total Current Assets Net Plant Long-Term Investments Other Trading Non-Current Assets Other Non-current Assets Intangibles Total Assets Liabilities & Shareholders' Equity Short-Tem Debt CP Of Long-Term Debt Accounts Payable Accrued Expenses Down Payments Taxes Payable Dividends Payable Other Spontaneous Finance Other Current Liabilities Total Current Liabilities Total Long Term Debts Other Non-Current Liabilities Long Term Spontaneous Finance Total Liabilities Tax Provision Other Provisions Minority Interest Shareholders' Equity Total Liabilities & Equity Income Statement (LE mn) Capacity '000 Tons Tons Sold '000 Revenues Cost of Goods Sold Gross Profits SG&A EBITDA Depreciation & Amortization EBIT Interest Expense Provisions Interest Income Investment Income Other Non-Operating Income Other Non-Operating Expenses EBT Taxes NPAT Minority Interest Extraordinary Items Attributable Profits Dec-07 548.3 0.2 30.9 1.4 0.0 0.0 580.9 776.3 10.0 0.0 12.5 0.0 1,379.7 Dec-08 7.8 0.2 14.8 0.7 0.0 0.0 23.6 1,477.5 0.0 0.0 0.0 0.0 1,501.1 Dec-09 88.4 0.4 45.2 2.8 0.0 0.0 136.8 1,562.0 0.0 0.0 0.0 0.0 1,698.9 Dec-10 427.2 0.5 119.7 5.4 0.0 0.0 552.7 1,421.8 0.0 0.0 0.0 0.0 1,974.5 Cash Flow (LE mn) NOPAT Depreciation & Amortization Gross Cash Flow (COPAT) Working Investment Change Other Current Items Cash After Current Operations Financing Payments Cash Before Long-Term Use Net Plant Change FCFF Others Cash Before Financing Short-Term Debt Long-Term Debt Net Worth Grey Area Dividends Change in Cash Fact Sheet ROE ROS ROA ROIC Gross Margin EBITDA Margin ATO WI/ Sales ALEV Liabilities/Net worth Current Ratio Per Share Ratios Share Price New No. Of Shares '000 Actual No. Of Shares '000 EPS Diluted EPS DPS Revenues/Share Tons Sold/Share Capacity/Share BV/Share Gross Cash Flow/Share FCFF/Share EBITDA/Share EV/Share Dec-07 321.0 63.3 384.3 14.4 17.3 416.1 (19.6) 396.5 (244.4) 154.4 (190.0) (37.9) 5.6 104.7 (7.7) (3.2) (54.3) 7.2 Dec-07 30.3% 32.8% 14.0% 27.3% 69.3% 67.4% 0.4 -7.1% 2.2 0.6 2.8 Dec-07 46.79 20,000 20,000 9.66 9.66 3.39 29.41 0.09 0.08 31.9 19.22 7.72 19.84 28.72 Dec-08 294.1 64.7 358.8 130.6 (57.5) 432.0 (11.6) 420.4 (765.8) (276.4) 567.1 221.7 86.3 (177.2) (0.0) (20.0) (119.5) (8.7) Dec-08 30.6% 40.5% 17.2% 22.5% 57.6% 55.8% 0.4 -27.0% 1.8 0.3 0.1 Dec-08 46.79 20,000 20,000 12.94 12.94 2.59 31.98 0.08 0.08 42.3 17.94 -13.82 17.85 51.03 Dec-08 3.62 3.62 5.5% 1.46 1.60 2.61 2.84 -3.39 -3.69 680.39 2.62 2.86 1.11 Dec-09 284.2 157.1 441.3 0.8 (3.4) 438.7 (5.9) 432.8 (241.6) 200.4 (39.9) 151.3 (45.4) 0.0 0.0 0.0 (93.3) 12.6 Dec-09 26.2% 27.2% 15.7% 19.2% 47.5% 45.6% 0.6 -17.7% 1.7 0.3 0.5 Dec-09 46.79 20,000 20,000 13.32 13.32 4.66 49.04 0.11 0.11 50.9 22.07 10.02 22.38 44.73 Dec-09 3.51 3.51 10.0% 0.95 0.91 2.12 2.03 4.67 4.46 397.59 2.09 2.00 0.92 Dec-10 371.0 190.8 561.7 (55.6) 0.0 506.1 (5.1) 501.0 (50.5) 455.5 (188.0) 262.5 (6.5) 0.0 0.0 0.0 (147.1) 108.9 Dec-10 29.7% 29.3% 18.6% 21.4% 47.3% 45.4% 0.6 -9.4% 1.6 0.2 1.9 Dec-10 46.79 20,000 20,000 18.39 18.39 7.36 62.75 0.14 0.15 62.0 28.09 22.78 28.51 27.47 Dec-10 2.54 2.54 15.7% 0.75 0.44 1.67 0.98 2.05 1.21 183.11 1.64 0.96 0.76 6.3 0.0 54.1 6.7 13.6 0.0 67.8 0.0 60.9 209.3 180.6 0.0 0.0 389.9 0.0 351.4 0.0 638.4 1,379.7 Dec-07 1,500 1,706 588.3 (180.6) 407.7 (11.0) 396.7 (63.3) 333.4 (3.1) (156.5) 0.0 0.0 23.8 0.0 197.6 (4.5) 193.1 0.0 0.0 193 92.6 0.0 88.8 29.6 69.9 0.0 0.0 0.0 3.4 284.3 0.0 0.0 0.0 284.3 0.0 371.4 0.0 845.3 1,501.1 Dec-08 1,500 1,649 639.6 (270.9) 368.6 (11.7) 356.9 (64.7) 292.2 (11.6) (40.0) 0.2 0.0 23.8 0.0 264.7 (6.0) 258.7 0.0 0.0 259 47.2 0.0 153.9 40.9 26.9 0.0 0.0 0.0 0.0 268.9 0.0 0.0 0.0 268.9 0.0 411.4 0.0 1,018.5 1,698.9 40.7 0.0 197.6 18.1 27.5 0.0 0.0 0.0 0.0 283.9 0.0 0.0 0.0 283.9 0.0 451.4 0.0 1,239.2 1,974.5 Dec-09 Dec-10 2,250 3,000 2,258 2,780 980.8 1,255.0 (515.3) (661.8) 465.5 593.3 (18.0) (23.0) 447.5 570.3 (157.1) (190.8) 290.4 379.5 (5.9) (5.1) (40.0) (40.0) 4.3 18.1 0.0 0.0 23.8 23.8 0.0 0.0 272.6 376.3 (6.2) (8.5) 266.5 367.8 0.0 0.0 0.0 0.0 266 368 Multiples Dec-07 P/E 4.84 Diluted P/E 4.84 Div Yield % 7.2% P/Revenues 1.59 EV/ Revenues 0.98 P/ COPAT 2.43 EV/ COPAT 1.49 P/ FCFF 6.06 EV/ FCFF 3.72 EV/ Ton 382.89 P/ EBITDA 2.36 EV/ EBITDA 1.45 P/ BV 1.47 Source: Misr Beni Suef Cement & CICR forecast 130
Slide 133: November 11, 2008 EGYPT | CEMENT MISR CEMENT (QENA) (MCQE) Strategically placed for acquisitive interest Misr Cement (Qena) (MCQE), a cement producer since 2002, comprises a mono-production line cement factory of 1.5 mtpa capacity, with no revealed intension to expand locally. Owing to its low capacity, no headway to its recently announced projects, forecasted significant low debt profile and cash-rich position, we believe MCQE could be a good acquisition target. ASEC Cement Holding has been increasing its stake in MCQE to 26.18% via direct purchases from the stock market. With an 8% free float, MCQE will be a fruitful target if the public stake is negotiated to be offered for sale. Although MCQE is traded at a PER of 7.8x 2009 earnings, 8% premium to a peer average of 7.3x due to current unfavourable markets' conditions, our DCF-based valuation suggest a 28% upside potential, hence we assign a BUY with a MODERATE RISK rating. Overcapacity utilization to be hit by 2010: We expect MCQE to maintain the same trend, outpacing the market capacity utilization over 2008-12. Given the new capacities entering the cement market with 41% heading to Upper Egypt, we expect the 100%+ utilization rate by MCQE which registered 119% (the second highest rate) in 2007 to be hit gradually to 92% in 2012 - yet still higher than 79% for the market then. Exports heading south: Benefiting from its location in Upper Egypt, MCQE exports mainly to Sudan and other neighboring countries, which we believe is currently a better export market than that of Europe given the recent global financial crisis. Confirming its location advantage (according to figures released by the Ministry of Investment), MCQE managed to obtain the highest export market share of 71% during AprilAugust 2008 period over the other players permitted to export during the 6-month export ban which ended in October 2008. Permanent cost advantage: In May 2008, a resource development fee for clay – an essential raw material for the cement production process – was imposed on cement producers amounting to LE 35.1/cement ton produced, which is expected to constitute around 10% of producers' cement cost bill in 3Q08. Since MCQE's extracted limestone contains the needed clay, MCQE has secured a cost advantage by not having to pay said fee. A new market and a new business: MCQE is eyeing cement expansion in Oman and a new phosphate fertilizer project in Egypt. Yet, we have not incorporated such developments in our DCF valuation till further details are made available. Valuation and recommendation: Based on a cost of equity of 15.7%, our DCF model resulted in a 12-month fair value of LE 98.54/share. This valuation did not incorporate any of the recently-announced projects, which could indicate further upside potential. Although trading at higher multiples than its peers we think it is strategically placed and note the stake building by ASEC. Accordingly we rate this stock a BUY at MODERATE RISK. 131 SHARE DATA 12M FAIR VALUE | LE 99 BUY | MODERATE RISK Reuters; Bloomberg Recent price as of 6-Nov-08 No. of O/S shares Market cap 52-wk high / low Avg. daily volume / turnover MCQE.CA; MCQE EY LE 76.99 30.0 mn LE 2,309.7 mn LE 90/ LE 55 0.02 mn / LE 1.57 mn COMPANY SYNOPSIS Misr Cement (Qena) (MCQE) was incorporated under Law no. 159/1981 in May 1997 as a shareholding company, with the objective of producing and selling all kinds of cement and all other related construction products. In May 2000, MCQE had its shares listed on the Egyptian Exchange (EGX). The company was established with an authorized capital of LE 600 mn, and an issued and paid-in capital of LE 300 mn distributed over 30 mn shares with a par value of LE 10/share, maintaining said position till date. MCQE had provided FLSmidth in June 1999 the mechanical equipment supply, plant management, & equipment installation of its production line that had a total capacity of 1.4 mta. The plant had a total investment cost of LE 750 mn, releasing its production to the market in April 2002. The company had provided the technical management, the maintenance operations & supervising the operation & delivery of the queries' raw materials to Arab Swiss Engineering Company "ASEC" MCQE has reached 3% local market share in 2007, selling 1,199k tons and 4% in 8M08, selling 1,019k tons. Meanwhile, 14% export market share was achieved in 2007, exporting 585k tons (c. 33% of production) and 41% in 8M08, exporting 301k tons (c. 23% of production). SHAREHOLDER STRUCTURE Asec Cement Misr Insurance Egyptian Investment Projects Egyptian Kuwaiti Investment Al-Ahly Capital Holding Co. Banque Misr Others Free Float Total 26.2% 20.1% 10.0% 9.8% 7.5% 7.5% 10.9% 8.0% 100.0% GHADA REFKY GHADA.REFKY@CICH.COM.EG STOCK PERFORMANCE | 52 WEEKS Volume 120 100 80 60 40 20 0 Nov-07 Jan-08 Jun-08 Jul-08 Feb-08 Mar-08 May-08 Dec-07 Aug-08 Sep-08 Oct-08 Apr-08 0.05 0.10 LE MCQE CASE 30 - rebased mn shares 0.15
Slide 134: November 11, 2008 EGYPT | CEMENT | MISR CEMENT (QENA) Balance Sheet (LE mn) Assets Cash & Cash Equivalent Net Receivables Total Inventory Advance Payments Other Trading Assets Other Current Assets Total Current Assets Net Plant Long-Term Investments Other Trading Non-Current Assets Other Non-current Assets Intangibles Total Assets Liabilities & Equity Short-Tem Debt CP Of Long-Term Debt Accounts Payable Accrued Expenses Down Payments Taxes Payable Dividends Payable Other Spontaneous Finance Other Current Liabilities Total Current Liabilities Total Long Term Debts Other Non-Current Liabilities Long Term Spontaneous Finance Total Liabilities Tax Provision Other Provisions Minority Interest Shareholders' Equity Total Liabilities & Equity Income Statement (LE mn) Capacity '000 Tons Tons Sold '000 Revenues Cost of Goods Sold Gross Profits SG&A EBITDA Depreciation & Amortization EBIT Interest Expense Provisions Interest Income Investment Income Other Non-Operating Income (Expense FX Gains (Losses) EBT Taxes NPAT Minority Interest Extraordinary Items Attributable Profits 2007A 293.5 3.5 36.5 0.3 0.0 0.0 333.8 617.5 0.8 0.1 19.4 0.0 971.7 2008F 251.4 3.8 47.7 1.6 0.0 0.0 304.5 603.4 0.8 0.1 23.4 0.0 932.3 2009F 412.0 3.5 46.6 1.6 0.0 0.0 463.6 593.5 0.8 0.1 23.4 0.0 1,081.5 2010F 571.1 2.7 44.9 1.5 0.0 0.0 620.2 583.2 0.8 0.1 23.4 0.0 1,227.8 Fact Sheet ROE ROS ROA ROIC Gross Profit Margin EBITDA Margin ATO WI/ Sales Net Profit Margin ALEV Liabilities/Net worth Current Ratio Cash Flow (LE mn) NOPAT Depreciation & Amortization Gross Cash Flow (COPAT) Working Investment Change Other Current Items Cash After Current Operations Financing Payments Cash Before Long-Term Use Net Plant Change FCFF Others Cash Before Financing Short-Term Debt Long-Term Debt Net Worth Grey Area Dividends Change in Cash Per Share Ratios Share Price New No. Of Shares '000 Actual No. Of Shares '000 EPS Diluted EPS DPS Revenues/Share Units Sold/Share Capacity/Share BV/Share Gross Cash Flow/Share FCFF/Share EBITDA/Share EV/Share 2007A 43.1% 46.3% 28.5% 43.8% 60.0% 57.5% 0.6 0.1% 46% 1.5 48% 1.3 2007A 291.5 39.3 330.9 2.5 11.2 344.6 (3.0) 341.6 (9.7) 323.7 (167.8) 164.1 0.0 (15.0) (46.6) (14.2) (81.5) 6.7 2007A 76.99 30,000 30,000 9.21 9.21 4.96 19.91 0.06 0.05 21.4 11.03 10.79 11.44 67.21 2008F 34.8% 39.1% 29.2% 37.3% 56.9% 53.4% 0.7 0.7% 39% 1.2 10% 4.1 2008F 319.8 41.1 360.9 (4.3) (11.3) 345.3 (2.5) 342.8 (27.0) 329.6 (9.3) 306.5 1.1 0.0 31.3 0.0 (341.2) (2.3) 2008F 76.99 30,000 30,000 9.07 9.07 5.44 23.18 0.06 0.05 26.1 12.03 10.99 12.38 68.65 2008F 8.49 8.49 7.1% 3.32 2.96 6.40 5.71 7.01 6.25 1373 6.22 5.55 2.95 2009F 32.3% 43.9% 27.3% 29.9% 56.6% 53.0% 0.6 0.7% 44% 1.2 8% 6.4 2009F 302.4 43.0 345.4 0.2 0.0 345.6 (2.5) 343.1 (33.1) 312.6 (126.5) 183.6 (0.1) 0.0 14.8 0.0 (177.3) 20.9 2009F 76.99 30,000 30,000 9.85 9.85 5.91 22.43 0.05 0.05 30.5 11.51 10.42 11.89 63.29 2009F 7.82 7.82 7.7% 3.43 2.82 6.69 5.50 7.39 6.07 1266 6.48 5.32 2.52 2010F 25.2% 42.7% 21.5% 23.1% 55.9% 52.2% 0.5 0.9% 43% 1.2 6% 9.3 2010F 267.8 44.9 312.7 (0.9) 0.0 311.8 (2.2) 309.6 (34.6) 277.2 (93.4) 181.6 (0.1) 0.0 13.2 0.0 (145.2) 49.5 2010F 76.99 30,000 30,000 8.80 8.80 4.84 20.60 0.05 0.05 34.9 10.42 9.24 10.76 57.98 2010F 8.75 8.75 6.3% 3.74 2.81 7.39 5.56 8.33 6.27 1160 7.16 5.39 2.21 0.0 0.0 25.3 0.1 14.5 2.4 177.9 0.0 33.6 253.9 0.0 52.1 0.0 305.9 0.0 24.0 0.0 641.7 971.7 2007A 1,500 1,784 597.3 (239.2) 358.1 (15.0) 343.2 (39.3) 303.8 (0.5) (21.8) 9.1 0.3 0.7 (4.7) 287.0 (10.5) 276.4 0.0 0.0 276.4 1.1 0.0 31.1 0.1 17.1 2.4 0.0 0.0 22.4 74.3 0.0 2.1 0.0 76.4 0.0 74.0 0.0 781.9 932.3 2008F 1,500 1,759 695.4 (299.8) 395.6 (24.3) 371.3 (41.1) 330.1 (0.1) (50.0) 8.3 0.0 0.7 (6.5) 282.5 (10.3) 272.2 0.0 0.0 272.2 1.0 0.0 30.4 0.1 16.6 2.4 0.0 0.0 22.1 72.6 0.0 0.0 0.0 72.6 0.0 94.0 0.0 914.9 1,081.5 2009F 1,500 1,575 673.0 (291.9) 381.1 (24.5) 356.6 (43.0) 313.7 (0.1) (20.0) 12.5 0.0 0.7 0.0 306.8 (11.2) 295.5 0.0 0.0 295.5 0.8 0.0 28.3 0.1 15.2 2.4 0.0 0.0 20.0 66.9 0.0 0.0 0.0 66.9 0.0 114.0 0.0 1,046.8 1,227.8 2010F 1,500 1,386 617.9 (272.2) 345.7 (22.9) 322.8 (44.9) 277.9 (0.1) (20.0) 15.4 0.0 0.7 0.0 273.9 (10.0) 263.9 0.0 0.0 263.9 Multiples 2007A P/E 8.35 Diluted P/E 8.35 Div Yield % 6.4% P/Revenues 3.87 EV/ Revenues 3.38 P/ COPAT 6.98 EV/ COPAT 6.09 P/ FCFF 7.14 EV/ FCFF 6.23 EV/ Ton 1344 P/ EBITDA 6.73 EV/ EBITDA 5.88 P/ BV 3.60 Source Misr Cement (Qena) & CICR forecast 132
Slide 135: November 11, 2008 EGYPT | TMT MOBINIL Two in one: high growth...high dividend yield 12M FAIR VALUE | LE 206 BUY | MODERATE RISK SHARE DATA Reuters; Bloomberg Recent price as of 6-Nov-08 No. of O/S shares Market cap 52-wk high / low Avg. daily volume / turnover EMOB.CA; EMOB EY LE 115.37 100.0 mn LE 11,537.0 mn LE 243/ LE 87 0.1 mn / LE 19.18 mn Mobinil's 3Q08 results proved strong despite macro, regulatory, and market challenges. While revenues were in line, the driver for beating the bottom line forecast was lower costs, thanks to on-net traffic and a "cost efficiency program". This helped the company achieve its highest EBITDA margin in 2 years, albeit not sustainable going forward. One of the key investment catalysts for Mobinil is its high dividend yield of around 14% but with a high leverage. Having revised our model, we reached an 8% higher DCF value of LE 206 (+79% upside). With the stock traded at a 37% discount to EMEA peers, we rate it a BUY. COMPANY SYNOPSIS Egyptian Company for Mobile Services “ECMS” (Mobinil) was established in November 1997 under the Investment Law No. 8/1997, granting it a 5-year tax holiday that ended in December 2003. The company started operation on May 21, 1998, when all the mobile-related assets of Telecom Egypt were sold off to Mobinil Telecommunications (Mobinil Telecom), a consortium comprised of one local and two international telecom giants, Orascom Telecom Holding (OTH), France Telecom Mobiles International (FTMI), and Motorola, respectively. Mobinil Telecom controls ECMS through its 51% combined stake. Early 2001, ownership of that consortium changed as Motorola divested its international mobile investments. Accordingly, both FTMI and OT purchased Motorola’s stake on a prorata basis. In July 2002, FTMI was replaced by Orange as a shareholder in the consortium, controlling 71.25% of Mobinil Telecom. On April 18, 1998, ECMS was formally awarded a 15-year license, renewable for a 5-year period to operate and expand the existing GSM 900 network. In 2005, ECMS was granted an access to 7.5 mhz of the 1800 mhz spectrum for a total payment of LE 1.24 bn. In July 2007, Mobinil decided to apply for 3G license for LE 3.4 bn to launch its commercial services in early September 2008. ECMS represents today the largest local GSM mobile operator in the Egyptian market in terms of subscribers (c. 19 mn subs). ECMS’s network currently covers most of the urban areas in Egypt. As of September 2008, Mobinil had 3,691 sites and 34 switches. Positive results: 3Q08 results beat our and consensus estimates by 26% and 32%, respectively. While no surprise came on the top-line performance, substantial bottom-line growth was driven by lower-than-expected cost of revenues and opex, thanks to on-net traffic growth and a "cost efficiency program". This allowed Mobinil to achieve the highest EBITDA margin in the last 2 years. However, such a level may not be sustainable going forward due to the 3G 2.5% revenue sharing. We believe at least the 45% target in 2008 is achievable. Enduring challenges: Blended ARPU stabilized at LE 47 QoQ on 5% higher usage. While this elasticity may be seen as a bear point for those concerned about inflation in Egypt, inflation rates seem to be coming down. In view of the global financial crisis, Mobinil is adequately liquid despite boasting the highest net debt/equity ratio of 4.5x; Mobinil’s interest coverage ratio stands at a comfortable 4.7x. It had secured all its financial requirements for 2008 and also has the flexibility to do so in 2009 due to its low net debt-to-EBITDA of 1.3x vs. an industry average of 2x. Interconnection dispute: TE filed a complaint with the National Telecom Regulatory Authority (NTRA) to change interconnection prices with mobile operators, the result of which came in TE’s favor. Mobinil informed the NTRA of its rejection to the decision citing lack of a legal basis. Mobinil’s management confirmed that they will continue with the existing interconnection agreement with TE "for years". Valuation and recommendation: We revised our model in view of 3Q08 results and now-lower management guidance for capex and reached a 12-month fair value of LE 206/share (+8% vs. our previous valuation), suggesting a 79% upside. Should Mobinil maintain its dividend policy - as we believe, a key investment catalyst for Mobinil would be its high dividend yield of around 14% vs. an EMEA average of 10.8%. The stock is traded at a PER of 6.2x 2008 expected earnings, a 37% discount to an EMEA average of 9.8x. As such, we reiterate our BUY recommendation with the same MODERATE RISK rating. SHAREHOLDER STRUCTURE Mobinil Telecom FT Orange Group OTH OTH Free Float Total 51.0% 71.3% 28.8% 20.0% 29.0% 100.0% MOHAMED HAMDY MOHAMED.HAMDY@CICH.COM.EG STOCK PERFORMANCE | 52 WEEKS Volume 300 250 200 150 100 50 0 Nov-07 Jan-08 Jun-08 Jul-08 Feb-08 Mar-08 May-08 Dec-07 Aug-08 Sep-08 Oct-08 Apr-08 LE EMOB CASE 30 - rebased mn shares 1.4 1.2 1.0 0.8 0.6 0.4 0.2 - 133
Slide 136: November 11, 2008 EGYPT | TMT | MOBINIL Balance Sheet (LE mn) Assets Cash & Cash Equivalent Net Receivables Total Inventory Advance Payment Other Trading Assets Other Current Assets Total Current Assets Net Plant Long-Term Investments Prepaid Exp. Other Non-current Assets Intangibles Total Assets Liabilities & Equity Short-Term Debt CP of Long Term Debt Accounts Payable Accrued Expenses Down Payments Taxes Payable Dividends Payable Current portion of License fees Other Current Liabilities Total Current Liabilities Total Long-Term Debt Other Non-Current Liabilities LT creditors license fees Total Liabilities Deferred Taxes Other Provisions Minority Interest Shareholders' Equity Total Liab. & Equity Income Statement (LE mn) Yearend Subs (k) Revenues Cost of Revenues Gross Profit SG&A EBITDA Depreciation & Amortization EBIT Interest Expense Imputed Interest Provisions Interest Income Investment Income Other Non-Operating Income Other Non-Operating Expenses EBT Taxes NPAT Minority Interest Extraordinary Items Attributable Profits Dividends 2007A 415 264 116 32 0 0 826 7,626 1 126 403 1,072 10,053 2008F 458 319 145 40 0 0 962 9,060 1 126 403 3,130 13,681 2009F 583 368 177 52 0 0 1,179 10,265 1 126 403 2,908 14,882 2010F 651 410 194 59 0 0 1,314 10,924 1 126 403 3,787 16,554 Cash Flow (LE mn) NOPAT Depreciation & Amortization Gross Cash Flow (COPAT) Working Investments Change Other Current Items Cash After Current Operations Financing Payments Cash Before LT Use Net Plant Change FCFF Others Cash Before Financing Short-Term Debt Long-Term Debt* Networth Grey Area Dividends Change in Cash * Including LT creditors license fees Fact Sheet ROE ROS ROA ROIC EBITDA Margin ATO WI/ Sales ALEV Liabilities/Networth Current Ratio Per-Share Ratios Share Price No. of Shares ('000) No. Of Shares (,000) EPS DPS DIV./NPAUI Revenues/Share Subscribers/1,000 Shares BV/Share Gross Cash Flow/Share FCFF/Share EBITDA/Share EV/Share Multiples P/E Dividend Yield P/ Revenue EV/ Revenues P/ COPAT EV/ COPAT P/ FCFF EV/ FCFF EV/Sub (US$) P/ EBITDA EV/ EBITDA P/ BV Note: A = Actual; F = Forecasted Source: Mobinil and CICR forecasts 2007A 1,994 1,286 3,279 411 187 3,878 (548) 3,329 (3,581) 297 (72) (323) 217 1,984 (34) 57 (1,715) 185 2007A 104.1% 22.2% 18.1% 37.2% 45.1% 0.8 -18.4% 5.7 4.4 0.2 2007A 115.37 100,000 18.24 16.70 92% 82.00 151.2 17.52 32.79 2.97 37.00 153 2007A 6.3x 14.5% 1.4 1.9 3.5 4.7 38.9 51.4 $188 3.1 4.1x 6.6x 2008F 2,622 1,585 4,208 387 0 4,595 (985) 3,609 (2,898) 1,697 (2,425) (1,713) 197 3,715 (668) 111 (1,600) 43 2008F 138.1% 18.7% 13.6% 48.4% 45.3% 0.7 -29.3% 10.1 8.6 0.2 2008F 115.37 100,000 18.65 16.00 86% 99.50 202.8 13.50 42.08 16.97 45.07 176 2008F 6.2x 13.9% 1.2 1.8 2.7 4.2 6.8 10.4 $162 2.6 3.9x 8.5x 2009F 2,840 1,760 4,600 524 0 5,124 (1,750) 3,374 (2,743) 2,381 (84) 546 1,173 25 0 68 (1,686) 125 2009F 118.8% 18.4% 14.1% 40.7% 44.0% 0.8 -23.5% 8.4 7.0 0.2 2009F 115.37 100,000 21.06 16.86 80% 114.29 234.9 17.72 46.00 23.81 50.27 183 2009F 5.5x 14.6% 1.0 1.6 2.5 4.0 4.8 7.7 $146 2.3 3.6x 6.5x 2010F 3,010 2,115 5,125 333 0 5,458 (1,725) 3,733 (2,553) 2,905 (1,051) 129 1,942 (301) 0 38 (1,740) 68 2010F 98.5% 17.0% 13.1% 37.9% 43.5% 0.8 -19.2% 7.5 6.2 0.1 2010F 115.37 100,000 21.73 17.40 80% 127.66 256.1 22.07 51.25 29.05 55.51 196 2010F 5.3x 15.1% 0.9 1.5 2.3 3.8 4.0 6.8 $143 2.1 3.5x 5.2x 369 327 1,112 632 0 372 42 158 924 3,937 3,433 236 145 7,751 0 547 4 1,752 10,053 2007A 15,118 8,200 (1,656) 6,545 (2,845) 3,700 (1,286) 2,414 (124) 0 0 30 0 3 (3) 2,319 (496) 1,823 (2) 3 1,824 (1,670.0) 567 327 1,418 806 0 372 42 775 924 5,230 5,645 247 545 11,669 0 657 5 1,350 13,681 2008F 20,283 9,950 (2,118) 7,832 (3,325) 4,507 (1,585) 2,922 (446) (200) 62 43 0 0 (37) 2,345 (478) 1,867 (2) 0 1,865 (1,600.0) 1,739 816 1,811 1,030 0 372 42 25 924 6,758 4,829 247 545 12,380 0 723 7 1,772 14,882 2009F 23,493 11,429 (2,697) 8,732 (3,705) 5,027 (1,760) 3,267 (535) (128) 0 44 0 0 0 2,647 (540) 2,108 (2) 0 2,106 (1,686.0) 3,682 816 2,065 1,175 0 372 42 0 924 9,075 4,258 247 0 13,580 0 759 9 2,207 16,554 2010F 25,606 12,766 (3,077) 9,689 (4,138) 5,551 (2,115) 3,436 (753) 0 0 49 0 0 0 2,732 (557) 2,175 (2) 0 2,173 (1,739.8) 134
Slide 137: November 11, 2008 EGYPT | HOUSING & REAL ESTATE NASR CITY HOUSING & DEVELOPMENT (NCHD) Surviving the storm 12M FAIR VALUE | LE 42.7 BUY | HIGH RISK SHARE DATA Reuters; Bloomberg Recent price as of 6-Nov-08 No. of O/S shares Market cap 52-wk high / low Avg. daily volume / turnover MNHD.CA; NCHR EY LE 31.22 100.0 mn LE 3,122.0 mn LE 82.45/ LE 18.32 0.67 mn / LE 37.01 mn Nasr City Housing & Development (NCHD) is a one of the oldest local real-estate developer, targeting mainly the middle class. However, it is currently diversifying more into the luxurious market and the low-end housing. NCHD is a cash-rich, low-debt company with a well-located land bank, albeit with some disputes. With a WACC of 19%, our DCF model indicates a 37% upside to a 12-month fair value of LE 42.7/share, warranting a BUY recommendation with a HIGH RISK rating given its land disputes. COMPANY SYNOPSIS Nasr City Housing and Development was established in 1959 via presidential decree No. 815/1959 as a public company. With the issuance of Law No. 97/1983, the company became a subsidiary of the “Public Sector Housing Authority.” In 1991, the company followed law No. 203/1991, where the company became a subsidiary of “National Company for Construction and Development.” In 1995, NCHD’s shares were listed on Cairo and Alexandria Stock Exchanges (CASE), and in 1996, 75% of the company’s shares were floated, with NCHD becoming a shareholding company following Law No. 159/1981. Currently, NCHD has authorized capital of LE 150 mn, with issued capital of LE 100 mn distributed over 100 mn shares at a par value of LE 1/share. NCHD’s main activities are real estate and land development. The former contributed on average 72% of total executed work during FY06/07 and FY07/08, while the latter makes up the balance. NCHD has c.10.2 mn sqm in Nasr City, New Cairo and Sixth of October City, 64% or c.6.5 mn sqm, of which, are sellable. Additionally, 92% of the current land bank is facing disputes. Solving its land bank disputes: During 1Q08, the Egyptian Civil Aviation Authority granted NCHD a building heights license ranging between 12 and 18 meters for its land in AlNasr Gardens (ANG) amounting to 3.8 mn sqm. This will help the company pursue its development activities in a welllocated area in New Cairo. Regarding its conflicts with the Ministry of Defense over the Alternative Land which amounts to 5.6 mn sqm, negotiations are underway; however, no partial settlement has been reached yet*. Increasing its land bank and targeting the middle class: NCHD was able to acquire 179,634 sqm in the Sixth of October City, through the national housing project, for a total consideration of LE 37 mn. Said land bank is earmarked for economic housing projects that will embrace apartments of 63-80 sqm. An additional 555,366 sqm will be acquired in the same area over the coming years. Said transaction will help the company diversify its target clientele by approaching the lower end of the middle class that represents a huge market with unsatisfied demand. More diversification: At the onset of 2008, NCHD announced a joint venture contract with New Cairo for Real Estate Investments (Katameya Heights) to construct a resort on ANG land owned by NCHD at a total cost of LE 5 bn. Said move would help NCHD diversify its clientele by targeting the high-end market to capitalize in its well-located land bank in the New Cairo area. Cash-rich, low-leverage company: As of June 30, 2008, NCHD had a cash position of LE 238 mn and receivables of LE 591 mn, representing 20% and 50% of total assets, respectively. On the other hand, total debt amounted to LE 29 mn, only 2% of total assets. As such, NCHD should benefit from the current high interest rate environment. Valuation and recommendation: We valued NCHD using the DCF method, yielding a 12-month fair value of LE 42.7/share, suggesting a 37% upside potential. Hence, we rate the stock a BUY with a HIGH RISK rating. SHAREHOLDER STRUCTURE Nat. Co. for Const. and Dev. Beltone Group Banks, Ins Co., Others ESOP Free Float Total 15.1% 30.9% 17.1% 5.0% 32.0% 100.0% HANY MOHAMED SAMY, CFM HANY.SAMY@CICH.COM.EG STOCK PERFORMANCE | 52 WEEKS Volume 90 80 70 60 50 40 30 20 10 0 Nov-07 LE MNHD CASE 30 - rebased mn shares 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 - Jan-08 Jun-08 Jul-08 Feb-08 Mar-08 May-08 Dec-07 Aug-08 * Please refer to our report “Struggling for rights…struggling for wealth”, dated November 26, 2006, for a full description of NCHD's land problems. 135 Sep-08 Oct-08 Apr-08
Slide 138: November 11, 2008 EGYPT | HOUSING & REAL ESTATE | NASR CITY H&D Balance Sheet (LE mn) Assets Cash & Cash Equivalent Net Receivables Total Inventory Advance Payments to Suppliers Other Trading Assets Other Current Assets Total Current Assets Net Plant Long-Term Investments Other Trading Non-Current Assets Other Non-Current Assets Intangibles Total Assets Liabilities & Shareholders' Equity Short-Term Debt Current Portion of Long-Term Debt Accounts Payable Accrued Expenses Down Payments Taxes Payable Dividends Payable Other Current Liabilities Total Current Liabilities Total Long-Term Debt Other Non-Current Liabilities Long Term Spontaneous Fin. Total Liabilities Deferred Taxes Other Provisions Minority Interest Shareholders' Equity Total Liab. & Shareholders' Equity Jun-08 A 238.1 55.3 212.3 75.8 0.0 22.3 603.9 12.9 13.1 540.2 0.0 3.8 1,173.9 Jun-09 P 143.6 81.6 178.8 63.8 0.0 16.7 484.5 13.3 13.1 592.1 0.0 3.8 1,106.8 Jun-10 P 123.6 109.7 174.3 65.3 0.0 16.7 489.7 13.8 13.1 623.1 0.0 3.8 1,143.5 Jun-11 P 103.6 140.6 174.0 69.5 0.0 16.7 504.4 14.2 13.1 631.8 0.0 3.8 1,167.3 12.8 0.3 199.0 0.0 4.8 53.2 3.7 466.5 740.4 16.0 0.0 0.0 756.3 0.0 122.2 21.6 273.7 1,173.9 85.7 0.3 200.4 0.0 4.4 0.0 0.0 435.4 726.1 15.7 0.0 0.0 741.8 0.0 134.0 27.1 203.9 1,106.8 99.8 0.3 199.8 0.0 4.7 0.0 0.0 404.2 708.8 15.4 0.0 0.0 724.2 0.0 145.8 33.1 240.4 1,143.5 96.0 0.3 200.4 0.0 5.1 0.0 0.0 373.1 674.8 15.1 0.0 0.0 689.9 0.0 157.6 39.5 280.3 1,167.3 Cash Flow (LE mn) NOPAT Depreciation & Amortization Gross Cash Flow (COPAT) WI Change Other Current Items Cash After Current Operations Financing Payments Cash Before Long-Term Use Net Plant Change FCFF Others Cash Before Financing Short-Term Debt Long-Term Debt Net-worth Grey Area Dividends Change in Cash Note: A = Actual; F = Forecasted Source: NCHD and CIBC forecasts Jun-08 A 84.9 0.9 85.8 7.7 (18.4) 75.1 (4.1) 71.0 4.1 97.6 (14.5) 60.6 (0.6) (7.7) 12.9 (47.1) (80.3) (62.3) Jun-09 P 31.4 1.2 32.7 (36.4) (25.6) (29.3) (12.3) (41.6) (1.6) (5.3) 73.1 29.9 72.8 0.0 (103.3) 5.5 (56.0) (51.0) Jun-10 P 92.0 1.4 93.3 (56.5) (31.2) 5.7 (14.1) (8.4) (1.8) 35.1 27.2 17.0 14.1 0.0 0.0 5.9 (57.0) (20.0) Jun-11 P 99.5 1.4 101.0 (42.5) (31.2) 27.3 (13.6) 13.7 (1.9) 56.6 28.1 39.9 (3.8) 0.0 0.0 6.4 (62.5) (20.0) Fact Sheet ROE ROS ROA ROIC EBITDA Margin ATO WI/ Sales ALEV Debt/ Equity Current Ratio Jun-08 A 38.3% 32.8% 8.9% 19.2% 39.9% 0.3 122.3% 4.3 2.8 0.8 Jun-09 P 42.0% 28.7% 7.7% 6.8% 36.3% 0.3 93.9% 5.5 3.7 0.7 Jun-10 P 38.9% 29.3% 8.2% 17.3% 38.4% 0.3 89.6% 4.8 3.1 0.7 Jun-11 P 36.5% 30.0% 8.8% 17.0% 38.9% 0.3 87.9% 4.2 2.5 0.7 Income Statement (LE mn) Sales Cost of Sales Gross Profit SG&A EBITDA Depreciation & Amortization EBIT Interest Expense Provisions Interest Income Investment Income Other Non-Operating Income Other Non-Operating Expenses EBT Taxes NPAT Minority Interest Extraordinary Items NPAUI Jun-08 A 320.3 (165.1) 155.2 (27.3) 127.9 (0.9) 127.0 (3.8) (13.6) 13.3 7.9 13.0 (9.8) 133.9 (22.0) 111.9 (5.8) (1.1) 105.0 Jun-09 P 298.2 (166.3) 132.0 (23.9) 108.1 (1.2) 106.9 (12.0) (11.8) 15.3 9.1 12.1 (6.9) 112.6 (21.4) 91.2 (5.5) 0.0 85.7 Jun-10 P 319.0 (170.8) 148.2 (25.5) 122.6 (1.4) 121.3 (13.8) (11.8) 10.7 10.5 12.9 (6.9) 122.8 (23.4) 99.5 (5.9) 0.0 93.5 Jun-11 P 341.5 (181.2) 160.3 (27.3) 133.0 (1.4) 131.5 (13.3) (11.8) 9.1 12.0 13.8 (6.9) 134.5 (25.6) 108.9 (6.4) 0.0 102.5 Share Ratios Share Price No. Of Shares '000 EPS Div/Share Revenues/Share BV/Share Gross CF/Share FCFF/Share EBITDA/Share EV/Share Jun-08 A 31.22 100,000 1.05 0.80 3.20 2.74 0.86 0.98 1.28 29.13 Jun-09 P 31.22 100,000 0.86 0.52 2.98 2.04 0.33 -0.05 1.08 30.80 Jun-10 P 31.22 100,000 0.94 0.57 3.19 2.40 0.93 0.35 1.23 31.14 Jun-11 P 31.22 100,000 1.02 0.62 3.42 2.80 1.01 0.57 1.33 31.30 Multiples P/E Div Yield % P/ Revenue EV/ Revenues P/ COPAT EV/ COPAT P/ FCFF EV/ FCFF P/ EBITDA EV/ EBITDA P/ BV Source: Company reports and CICR estimates Jun-08 A 29.7 2.6% 9.7 9.1 36.4 33.9 32.0 29.8 24.4 22.8 11.4 Jun-09 P 36.4 1.7% 10.5 10.3 95.6 94.3 -584.0 -576.2 28.9 28.5 15.3 Jun-10 P 33.4 1.8% 9.8 9.8 33.5 33.4 89.0 88.8 25.5 25.4 13.0 Jun-11 P 30.5 2.0% 9.1 9.2 30.9 31.0 55.2 55.3 23.5 23.5 11.1 136
Slide 139: November 11, 2008 EGYPT | BANKS NATIONAL SOCIETE GENERALE BANK (NSGB) Unleashing growth potential 12M FAIR VALUE | LE 35.76 BUY | MODERATE RISK SHARE DATA Reuters; Bloomberg Recent price as of 6-Nov-08 No. of O/S shares Market cap 52-wk high / low Avg. daily volume / turnover NSGB.CA LE 18.05 302.9 mn LE 5,468.1 mn LE 45.45/ LE 17 0.15 mn / LE 5.76 mn National Société Générale Bank (NSGB) is the second largest private bank in Egypt following the successful acquisition of Misr International Bank (MIBank). Against the global financial issues and concerns of global recession, NSGB is able to steadily generate a double-digit ROAE of 24.1% that adjusts to 32% when excluding goodwill amortization vs. a market average of 16%. The stock is traded at 2009 PER and PBV of 4.8x - adjusts to 3.7x upon excluding goodwill expense - and 0.9x, respectively. Our DCF-based 12-month fair value suggests a 98% upside potential to LE 35.76, therefore we rate it a BUY with MODERATE RISK. COMPANY SYNOPSIS National Société Générale Bank (NSGB) was established in April 1978, by the French Société Générale Bank (SGB); one of the largest financial services group in the Eurozone, and National Bank of Egypt (NBE); Egypt’s largest public bank. In September 2005, NSGB acquired 90.7% of Egypt’s second largest private bank at the time; Misr International Bank (MIBank). NSGB is currently one of the largest private banks in Egypt. The bank operates in key businesses including retail banking, corporate and investment banking, alongside other activities offered through its affiliates such as leasing via “Sogelease”, NSGB Life Insurance company and ALD Automotive specialized in car rentals and fleet management. Currently, Société Générale owns 77.2 % of NSGB after acquiring NBE’s 18% stake in addition to another 6% in August 2005. As at September 2008, NSGB runs a network of 121 branches. Strong 1H08; considering a half year dividend: NSGB demonstrated an outstanding 62% growth in bottom-line profits for 1H08, mostly driven by a one-off income worth LE 278.6 mn in reversed provisions and a 48% growth in total banking income. Conversely, the bank is also burdened with the annual amortization charge worth LE 362 mn related to the goodwill of MIBank, ending 3Q10. The bank called for an EGM and AGM on November 12, 2008, to amend articles of incorporation and accordingly approve the proposed half year DPS worth LE 0.25. Core lending capacity and asset quality: NSGB enjoys a CAR ratio of 13.35% and a decent liquidity demonstrated by a net loans/deposits ratio of 61%, following a 13% growth in the loans portfolio in 1H08. NSGB targets diversified loan growth across all LoBs. The NPLs/loans is 8.5% at end of 1H08, down from 16% post MIBank acquisition. Improved cost-to-income ratio in 2008: NSGB benefited from a positive surprise in its 1H08 P&L, namely one-off reversed provisions, which led to an improved cost-to-income ratio of 41% - adjusts to 34.2% when excluding the said oneoff item and ex-goodwill, compared to 56% - 35.1% exgoodwill—in 1H07. We expect the ratio to show an improved trend throughout the projected period. 2008 forecast implies very cheap leading multiples :We forecast an earnings growth rate of 51% in 2008 to LE 1,018.8 mn. NSGB trades at leading 2009 PER and PBV of 4.8x (3.7x ex-goodwill) and 0.9x, respectively, much cheaper than the 2009 MENA average of 10.6x and 2.2x, respectively. Valuation and recommendation: Using a risk-free rate of 11.5% and a market premium of 8% to reflect the contemporary global and local risks, we re-initiate our coverage on the bank with a 12-month fair value of LE 35.76/share, suggesting a 98% upside potential, therefore we rate it a BUY with MODEARATE RISK rating. SHAREHOLDER STRUCTURE Société Générale Bank (SGB) Free Float Total 77.2% 22.8% 100.0% ALIA ABDOUN ALIA.ABDOUN@CICH.COM.EG STOCK PERFORMANCE | 52 WEEKS Volume 60 50 40 30 20 10 0 Nov-07 Jan-08 Jun-08 Jul-08 Feb-08 Mar-08 May-08 Dec-07 Aug-08 Sep-08 Oct-08 Apr-08 LE NSGB CASE 30 - rebased mn shares 1.4 1.2 1.0 0.8 0.6 0.4 0.2 - 137
Slide 140: November 11, 2008 EGYPT | BANKS | NSGB Balance Sheet (In LE mn) Assets Cash & Due from Banks Interbank Assets T-Bills & Government Securities Net Trading Investments Available for Sale Investments Net Loans & Advances Held-to-Maturity Investments Investments in Subsidiaries Accrued Income & Other Assets Net Fixed Assets Good Will Total Assets Liabilities and Shareholders' Equity Interbank Liabilities Customer Deposits Accrued Expenses & Other Liabilities Dividends Payable Provisions Medium-/Long-Term Loans Debt Securities Total Liabilities Paid-in Capital Reserves Retained Earnings Dec-07 Dec-08 Dec-09 Dec-10 Profitability & Efficiency Ratios Net Interest Margin (NIM) RoAA RoAE Cost/Income Earning Assets / Total Assets Dec-07 3.16% 1.56% 17.65% 55.25% 87.91% Dec-07 50.22% 8.6 62.78% 8.31% 9.11% 11.30% 82.7% Dec-07 Dec-08 3.45% 2.09% 21.83% 43.33% 87.46% Dec-08 58.45% 7.6 56.63% 8.91% 10.02% 8.12% 95.4% Dec-08 Dec-09 3.84% 2.12% 20.93% 44.53% 87.54% Dec-09 60.90% 7.6 54.35% 9.27% 10.24% 6.72% 99.2% Dec-09 18.1% 13.4% 3.73 4.8x 0.75 4% 19.08 0.9x Dec-10 4.16% 2.51% 24.06% 39.10% 87.62% Dec-10 62.30% 7.6 53.90% 9.61% 10.63% 5.72% 102.2% Dec-10 15.9% 13.3% 5.00 3.6x 1.00 6% 22.48 0.8x 3,315.7 13,537.5 3,946.0 241.1 3,632.1 19,735.6 413.2 39.2 634.5 676.1 1,085.8 47,256.7 3,920.2 12,498.9 2,958.8 147.4 3,746.7 24,016.8 467.8 41.7 880.9 767.5 723.8 50,170.5 4,820.2 12,365.2 3,827.5 165.9 4,135.6 28,367.3 527.0 41.7 985.2 869.8 361.9 56,467.4 5,826.3 12,952.7 4,906.6 186.7 4,564.9 32,867.8 598.3 41.7 1,110.3 994.1 0.0 64,049.6 Productivity & Asset Quality Ratios Net Loans / Customer Deposits Interbank Ratio Liquid Assets / Total Deposits Assets Utilization Capitalization Ratio NPLs / Total Loans Provision Coverage Ratio 1,580.0 39,299.4 1,143.6 130.4 740.1 58.8 0.0 42,952.3 2,754.0 777.9 0.4 1,644.6 41,092.6 1,153.4 244.4 950.1 57.2 0.0 45,142.3 3,029.4 1,276.9 0.4 1,627.1 46,580.2 1,009.5 330.4 1,087.6 51.3 0.0 50,686.1 3,029.4 2,077.8 0.4 1,704.4 52,757.3 1,051.5 441.1 1,238.8 46.1 0.0 57,239.2 3,029.4 3,151.6 0.4 Growth & Market Ratios Tier I Capital Tier II Capital Total Shareholders' Equity Total Liabilities & Shareholders' Equity 3,532.4 772.0 4,304.4 47,256.7 4,306.8 721.5 5,028.2 50,170.5 5,107.7 673.6 5,781.3 56,467.4 6,181.4 629.0 6,810.4 64,049.6 Net Loans Growth 26.2% 21.7% Customer Deposits Growth 18.0% 4.6% EPS (LE) * 2.45 3.36 P/E 8.1x 5.4x DPS (LE) 0.25 0.50 Dividend Yield 1% 3% Retroactive BV/Share (LE) 14.21 16.60 P/BV 1.3x 1.1x * EPS based on NPAUI ** Cost/Income is based on Total non interest expense/ Total interest & non-interest income Source: NSGB and CICR forecasts Contingent Liabilities Total Footing 15,816.4 63,073.1 17,090.5 67,261.1 19,993.5 76,460.9 23,389.6 87,439.2 Income Statement (In LE mn) Total Interest Income Interest Paid to Clients & Banks Net Interest Income (NII) Provisions Net Interest Income AP Fees and Commissions Income Investment Income Foreign Exchange Income Other Incomes Non-Interest Income Operating Income (BP) Operating Income (AP) G&A Expenses and Depreciation Other Expenses Non-Interest Expense Net Operating Income Taxation NPAT Unusual Items NPAUI Less: Non-Appropriation Items Net Attributable Income (NAI) Dec-07 3,047.3 1,834.4 1,212.9 90.3 1,122.6 447.5 13.6 15.7 80.0 556.7 1,769.7 1,679.3 984.5 -6.8 977.7 701.6 29.3 672.3 1.8 674.2 0.0 674.2 Dec-08 3,317.4 1,818.3 1,499.1 305.0 1,194.1 599.3 16.8 28.2 378.6 1,022.9 2,522.0 2,217.0 1,094.7 -1.9 1,092.8 1,124.2 105.4 1,018.7 0.1 1,018.8 92.9 925.9 Dec-09 4,030.0 2,201.3 1,828.7 202.7 1,626.0 713.9 20.7 63.6 113.2 911.5 2,740.2 2,537.5 1,220.3 0.0 1,220.3 1,317.2 185.9 1,131.3 0.0 1,131.3 103.2 1,028.1 Dec-10 4,745.5 2,496.2 2,249.3 218.7 2,030.6 828.1 23.2 73.2 119.4 1,043.9 3,293.2 3,074.5 1,287.5 0.0 1,287.5 1,787.0 272.1 1,514.9 0.0 1,514.9 138.2 1,376.7 138
Slide 141: November 11, 2008 EGYPT | CONSUMER OLYMPIC GROUP (OG) Away from global headache; yet inflation is a concern Olympic Group (OG) maintained a remarkable market share of 30% in 2007 owing to its well diversified portfolio. Classifying its products as durables associated with a one-time buy rather than replacement, we believe that the global slowdown will not have a serious impact on local demand. Yet, inflationary pressures remain a concern. Growth in the coming few years is expected to be sustained from the delivery of housing units in new compounds, while long-term growth is expected to be driven from the new agreement with Electrolux. OG is traded at 5.5x 2008 earnings vs. peers' average of 7.6x. Our 12 month fair value is LE 55.1/share, with a 128% upside potential. Thus, we reiterate our BUY recommendation with Moderate risk. 12M FAIR VALUE | LE 55.1 BUY | MODERATE RISK SHARE DATA Reuters; Bloomberg Recent price as of 6-Nov-08 No. of O/S shares Market cap 52-wk high / low Avg. daily volume / turnover OLGR.CA / OLGR EY LE 24.13 60.1 mn LE 1,450.2 mn LE 89/ LE 17.75 0.1 mn / LE 6.76 mn COMPANY SYNOPSIS Established in 1995, Olympic Group (OG) dates back to the 1930s. It has factories in Cairo, the Tenth of Ramadan City, and the Sixth of October City. Since its acquisition of 79% of Ideal late 1997, OG has been maintaining a leading position in Egypt's white goods market. OG's portfolio is well segmented with products targeting different income classes. Exports contribute less that 10% of OG's top line. OG procures around 50% of the components used in manufacturing locally either from subsidiaries within the group or through other local suppliers. Meanwhile, OG procures 40% of its steel requirements locally, and the remaining balance is imported. Over the last five years, OG has been consolidating its business. In 2003 and 2004, OG consolidated five companies and increased its paid-in capital from LE 340 mn to LE 547.8 mn through (1) a stock dividend distribution and (2) a capital increase of LE 148 mn at par. In 2005, OG increased its stake in Ideal to 93% through a 1:2 share swap (one OG share to two Ideal shares). Accordingly, OG's paid-in capital increased by LE 52.9 mn to LE 600.7 mn. In early September 2008, OG announced the spin-off of Namaa and B.Tech through the distribution of 0.5 shares of Namaa and 0.4 shares of B.tech to OG shareholders as of September 9, 2008 for every 1 share owned in OG or the equivalent in cash (i.e. LE 5/OG share and LE 0.4/OG share, respectively). Growth profile to be maintained. We believe that future demand will be driven from the delivery of most of the housing units of newly established compounds in 2010 in addition to growing urbanization and new marriages. Yet, inflationary pressures are expected to increase demand on lower priced brands and lower replacement market. Long-term earnings growth, estimated at a 5-year CAGR of 19%, is expected to be achieved on the back of alliance signed with Electrolux. More capacity is required to be added to expand with Electrolux with an estimated capex figure of LE 1.12 bn. The alliance, part of Electrolux's strategy to relocate its factories to low cost nations, is expected to add around LE 513 mn to EBITDA over the next 5 years. OG will export products produced on an OEM basis to Electrolux. Future cost savings ahead. We believe that the current slowdown in steel prices is expected to give the company an edge for future savings in light of its hedging strategy to purchase its steel requirements 3-6 months in advance. Valuation and recommendation. We downgraded our 12month fair value using DCF to LE 55.1/share vs. LE 58.1/ share in our previous update, reflecting i) 50-bps and a 200 bps increase in the discount rate and the market risk premium to 11.5% and 8%, respectively ii) a 100 bps decrease in the perpetuity growth rate to 3% reflecting inflationary pressures. Given that OG is traded at a 56% discount to fair value, thus we still maintain our BUY recommendation. Yet, we need to highlight the downside risk to our valuation which is the slowdown in sales of consumer durables mirroring the global slowdown. It is worth highlighting that our valuation incorporates (1) lower estimates of steel prices and (2) OG's exact stakes in Namaa and B.Tech post spin-off, announced early September, where OG shareholders were given the option to request shares or cash. Since a larger than expected amount of shareholders requested cash, OG now has controlling stakes in Namaa and B.Tech. OG is traded at 5.5x 2008 expected earnings vs. peers traded at 7.6x expected earnings. SHAREHOLDER STRUCTURE Paradise Capital Foreign Institutions Local Institutions Retail 52.0% 37.0% 8.0% 3.0% INGY EL-DIWANY INGY.ELDIWANY@CICH.COM.EG STOCK PERFORMANCE | 52 WEEKS Volume 120 100 80 60 40 20 0 Nov-07 Jan-08 Jun-08 Jul-08 Feb-08 Mar-08 May-08 Dec-07 Aug-08 Sep-08 Oct-08 Apr-08 LE OLGR CASE 30 - rebased mn shares 0.7 0.6 0.5 0.4 0.3 0.2 0.1 - 139
Slide 142: November 11, 2008 EGYPT | CONSUMER | OLYMPIC GROUP Balance Sheet (LE mn)* Assets Cash & Cash Equivalent Net Receivables Total Inventory Advance Payment Other Trading Assets Other Current Assets Total Current Assets Net Plant Long-Term Investments Other Non-Current Assets Other Non-current Assets Intangibles Total Assets Liabilities & Shareholders' Equity Short-Term Debt CP of Long Term Debt Accounts Payable Accrued Expenses Down Payments Taxes Payable Dividends Payable Other Current Liabilities Total Current Liabilities Total Long-Term Debt Other Non-Current Liabilities Total Liabilities Other Provisions Minority Interest Shareholders' Equity Total Liab. & Equity Income Statement (LE mn) Revenues Cost of Revenues Gross Profit SG&A EBITDA Adjusted EBITDA** Depreciation & Amortization EBIT Interest Expense Provisions Interest Income Investment Income Other Non-Operating Income Other Non-Operating Expenses EBT Taxes NPAT Minority Interest Extraordinary Items Attributable Profits 2007P 115 161 434 0 0 0 710 444 515 235 0 1 1,906 2008F 112 228 524 62 0 0 926 589 251 119 111 1 1,998 2009F 83 275 628 74 0 0 1,061 1,130 259 139 111 1 2,702 2010F 154 334 758 90 0 0 1,336 1,487 269 166 111 1 3,370 Cash Flow (LE mn) NOPAT Depreciation & Amortization Gross Cash Flow (COPAT) Working Investments Change Other Current Items Cash After Current Operations Financing Payments Cash Before Long Term Use Net Plant Change FCFF Others Cash Before Financing Short-Term Debt Long-Term Debt Networth Grey Area Dividends Change in Cash Fact Sheet ROE ROS ROA ROIC Gross Margin EBITDA Margin Adjusted EBITDA Margin** ATO WI/ Sales ALEV Liabilities/Networth Current Ratio Per-Share Ratios Share Price No. Of Shares (,000) EPS DPS Revenues/Share BV/Share Gross Cash Flow/Share FCFF/Share EBITDA/Share EV/Share Multiples P/E P/ Revenue EV/ Revenues P/ COPAT EV/ COPAT P/ FCFF EV/ FCFF P/ EBITDA EV/ EBITDA P/ BV Note: P = Pro forma; F = Forecast *Figures exclude Namaa and B.Tech **Adjusted EBITDA excludes lease expense but includes export subsidies. Source: OG and CICR forecasts 2007P 245 31 276 (101) (7) 169 (89) 80 (82) 86 (3) (5) (1) 100 (112) 9 0 (10) 2007P 20.2% 12.0% 11.9% 14.6% 27.5% 15.7% 17.2% 1.0 35.7% 1.7 0.5 1.5 2007P 24.13 60,076 3.8 1.5 31.6 18.8 4.6 1.4 5.0 28.6 2008F 186 38 224 (147) (22) 54 (103) (49) (182) (128) 462 230 104 153 (556) (40) 106 (3) 2008F 27.6% 11.1% 13.3% 11.0% 26.9% 14.8% 15.9% 1.2 29.7% 2.1 0.9 1.4 2008F 24.13 60,076 4.4 1.7 39.7 16.0 3.7 (2.1) 5.9 32.3 2009F 385 41 425 (119) 14 320 (153) 167 (581) (261) 51 (363) 4 459 (284) 25 129 (29) 2009F 29.2% 12.0% 12.7% 16.4% 27.4% 16.0% 16.9% 1.1 29.5% 2.3 1.2 1.3 2009F 24.13 60,076 5.7 2.3 47.8 19.6 7.1 (4.3) 7.6 39.4 2009F 4.2x 0.5x 0.8x 3.4x 5.6x -5.6x -9.1x 3.2x 5.2x 1.2x 2010F 493 42 535 (148) 17 404 (295) 108 (398) 5 67 (223) 446 5 (347) 31 158 71 2010F 29.2% 12.1% 12.5% 16.8% 27.7% 16.5% 17.6% 1.0 29.4% 2.3 1.2 1.0 2010F 24.13 60,076 7.0 2.8 57.9 23.9 8.9 0.1 9.6 43.2 2010F 3.5x 0.4x 0.7x 2.7x 4.9x 267.5x 479.2x 2.5x 4.5x 1.0x 208 42 153 0 0 0 0 73 476 137 0 612 99 68 1,127 1,906 -0.99 2007P 1,899 (1,376) 523 (225) 298 326 (31) 266 (51) 0 2 (2) 47 (1) 261 (20) 241 (13) 228 312 62 190 14 20 7 0 67 672 228 6 905 68 64 962 1,998 -0.04 2008F 2,385 (1,743) 642 (289) 353 378 (38) 316 (61) (4) 4 3 53 (0) 310 (25) 285 (20) 265 316 154 228 17 24 7 0 80 826 533 6 1,365 72 89 1,176 2,702 0.81 2009F 2,870 (2,085) 785 (327) 458 486 (41) 417 (91) (4) 3 7 70 (0) 401 (32) 369 (25) 344 762 155 276 21 29 7 0 97 1,347 384 6 1,736 76 120 1,438 3,370 -0.96 2010F 3,481 (2,517) 964 (390) 574 611 (42) 532 (142) (4) 4 10 90 (0) 490 (39) 451 (31) 420 2007P 2008F 6.4x 5.5x 0.8x 0.6x 0.9x 0.8x 5.2x 6.5x 6.2x 8.7x 16.8x -11.3x 20.0x -15.1x 4.9x 4.1x 5.8x 5.5x 1.3x 1.5x NA= Not Available 140
Slide 143: November 11, 2008 EGYPT | CONSTRUCTION & FERTILIZERS ORASCOM CONSTRUCTION INDUSTRIES (OCI) Black pearl Orascom Construction Industries (OCI) is one of the largest regional construction groups with diversified businesses and a shrewd management team. Besides its "conventional" construction business, it once had a global cement business that was cashed out early 2008 with good timing and valuation only to shift gears towards the high-growth fertilizers sector. OCI's current fertilizers business model focuses on nitrogen fertilizers in Egypt and Algeria with a low-cost advantage of natural gas prices (between US$0.57-2/MMBtu). OCI is also looking into the phosphate fertilizers as a complement. The stock is currently traded at a 40% discount to intrinsic value but a 30% premium vs. peers based on 2008 EV/EBITDA multiple due to asymmetric market conditions and the fact that Algeria’s operation is yet to start by 2010. We re-initiate coverage with a BUY. 12M FAIR VALUE | LE 330.5 BUY | MODERATE RISK SHARE DATA Reuters; Bloomberg Recent price as of 6-Nov-08 No. of O/S shares Market cap 52-wk high / low Avg. daily volume / turnover OCIC.CA; OCIC EY LE 197.00 214.8 mn LE 42,309.9 mn LE 485/ LE 182.09 0.27 mn / LE 88.23 mn COMPANY SYNOPSIS Orascom Construction Industries is incorporated under Law no. 159/1981 in April 1998 as a shareholding company, to undertake contracting activities and other related activities. OCI's operations encompass construction, fertilizers (nitrogen), and previously cement in US, Europe, MENA, and GCC regions. Currently, OCIC has an authorized and paid-in capital of LE 1,073.8 mn distributed over 214.77 mn shares with a par value of LE 5. In 1999, OCI joined in the cement business and had its shares listed on the Egyptian Exchange (EGX). Afterwards, it owned and operated a group including cement, ready-mix concrete and cement bag manufacturing operating in Egypt, Algeria, northern Iraq, Pakistan, UAE, Turkey and Spain, with a combined annual designed production capacity of 35 mn tons. In January 2008, OCI divested the cement LoB to Lafarge S.A., that paid EUR8.8 bn (US$12.9 bn) and assumed US$2 bn in debt, the deal was executed on the EGX. Starting 2008, OCI ventured in the fertilizers business by merging Egyptian Fertilizers Company (EFC), a subsidiary of ABRAAJ Capital (Abraaj) - a UAE company. The deal amounted to US$1.59 bn (cash and shares), also OCI assumed EFC's US$1.1 bn net debt. Through EFC, OCI owns a 20% stake in Notore Fertilizers, a Nigerian company. In addition, OCI established Egyptian Basic Industries Company (EBIC), another fertilizer plant in Egypt's Suez free zone, to be launched in 4Q08. A third fertilizers plant, Sorfert, is underway in Algeria, to be launched in 2H10. Also, OCI acquired 20% stake in Gavilon, a US fertilizer distribution company. Furthermore, OCI schemed a DAP/MAP project – phosphate fertilizers – in Algeria or Morocco. Modeling the fertilizers business: OCI's fertilizers business is evolving and should benefit from expected demand in the different fertilizers sub-segments (nitrogen and phosphate). Management vision: OCI's management believes in growth via establishing new fertilizers plants or acquiring stakes in existing ones (á la EFC type-of-deal). Hence, we should expect further expansion in 2008 and beyond, further boosting both revenues and investment income. Capacities ramp-up: New capacities are on schedule with Egyptian Basic Industries Co. (EBIC) and Nigeria-based Notore Fertilizers (NCIL) coming on stream in 4Q08 with full capacity starting 2009, helping OCI take advantage of the current slack in global nitrogen fertilizers capacities. In addition, EFC's production capacity will increase in 2010, concurrent with the launch of OCI's Algerian fertilizers plant, Sorfert. Nitrogen fertilizers prices rally: Although urea prices reverted back to its normal levels (c. US$300/ton), ammonia prices are rallying up the scale reaching c. US$900/ton beginning 4Q08, just in time for the launch of EBIC - an ammonia producer. Thus, EBIC is expected to ride the ammonia peck. Guaranteed output sales: OCI's fertilizers output is sold through both the retail and wholesale channels, with the latter backed with long-term take-or-pay agreements. Cheap natural gas prices: OCI's fertilizers business is backed by long-term gas agreements with prescribed gas volumes and price formulas in the range of US$1.25-2/MMBtu valid for 20 years in Egypt and US$0.57/MMBtu valid for a similar period in Algeria. Valuation and recommendation: We valued OCI based on a sum-of-the-parts basis and using the DCF model for its two main lines of business: construction and fertilizers. We reached a 12-month fair value of LE 330/share, implying an upside potential of 68%. SHAREHOLDER STRUCTURE Sawiris Family Free Float Total 60.0% 40.0% 100.0% MUHAMMAD EL EBRASHI MUHAMMAD.ELEBRASHI@CICH.COM.EG STOCK PERFORMANCE | 52 WEEKS Volume 500 450 400 350 300 250 200 150 100 50 0 LE OCIC CASE 30 - rebased mn shares 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 Nov-07 Jan-08 Jun-08 Jul-08 Feb-08 Mar-08 May-08 Dec-07 Aug-08 Sep-08 Oct-08 Apr-08 141
Slide 144: November 11, 2008 EGYPT | CONSTRUCTION & FETILIZERS | OCI Balance Sheet (in US$ mn) Assets Cash & Cash Equivalent Net Receivables Total Inventory Advance Payments to Suppliers Other Trading Assets Other Current Assets Total Current Assets Net Plant Long-Term Investments Other Trading Non-Current Assets Other Non-Current Assets Intangibles Total Assets 4,260.7 959.8 130.3 0.0 13,843.3 0.0 1,678.3 1,346.6 201.5 3.8 233.1 5.4 1,222.6 1,548.0 234.0 4.0 292.7 5.4 1,232.2 1,791.0 307.5 9.1 335.4 5.4 Dec-07 Dec-08 Dec-09 Dec-10 Fact Sheet ROE ROS ROA ROIC EBITDA Margin ATO WI/ Sales ALEV Debt/ Equity Current Ratio Dec-07 13.8% 10.3% 1.2% 8.6% 18% 0.1 588.9% 11.6 1164% 1.3 Dec-08 29.6% 21.5% 12.3% 16.3% 27% 0.6 17.4% 2.7 125% 2.4 Dec-09 44.3% 24.7% 14.7% 11.4% 21% 0.6 18.9% 3.4 187% 1.7 Dec-10 47.6% 26.8% 15.8% 14.0% 25% 0.6 19.8% 3.4 182% 1.7 19,194.1 614.0 558.7 129.2 0.0 11.5 3,468.6 2,267.1 602.5 38.6 0.0 278.0 3,306.6 2,868.8 653.8 45.1 0.0 278.0 3,680.7 3,628.1 703.4 50.5 0.0 278.0 20,507.5 1,888.9 46.9 817.6 0.0 0.0 33.8 11,146.6 161.0 239.0 6,654.8 0.0 0.0 976.8 0.0 9.0 33.8 0.0 177.8 259.8 7,152.3 276.5 0.0 1,103.6 0.0 8.3 33.8 0.0 207.5 259.8 8,340.8 315.3 46.9 1,270.9 0.0 17.5 33.8 0.0 231.2 259.8 Liabilities & Shareholders' Equity Short-Term Debt Current Portion of LT Debt Accounts Payable Accrued Expenses Down Payments to Customers Taxes Payable Dividends Payable Other Spontaneous Finance Other Current Liabilities Total Current Liabilities Total Long-Term Debt Other Non-Current Liabilities Sales Tax Total Liabilities Deferred Taxes Other Provisions Minority Interest Shareholders' Equity Total Liab. & Equity Cash Flow (in US$ mn) NOPAT Depreciation & Amortization Gross Cash Flow (COPAT) WI Change Other Current Items Cash After Current Operations Financing Payments Cash Before Long-Term Use Net Plant Change FCFF Others Cash Before Financing Short-Term Debt Long-Term Debt Net-worth Grey Area Dividends Dec-07 693.1 163.9 Dec-08 803.6 98.3 Dec-09 602.4 102.1 Dec-10 876.7 158.6 857.0 (272.5) (13,293.1) 901.9 (566.0) 199.1 704.5 (108.1) (29.8) 1,035.3 (145.1) (19.1) (12,708.5) (107.3) 535.0 (105.3) 566.6 (54.7) 871.0 (74.0) (12,815.8) (777.9) (193.3) 9,981.8 429.7 (2,108.3) (1,772.3) (1,005.1) 511.9 (446.7) 149.8 210.9 797.1 (660.8) 229.4 204.6 14,333.8 6,211.7 0.0 0.0 1,457.3 1,650.0 0.0 0.0 1,889.6 2,025.0 0.0 0.0 2,175.5 2,353.1 0.0 0.0 (3,611.9) 1,888.9 183.6 1,211.0 595.3 0.0 (2,683.7) (580.1) 1,650.0 1,866.3 783.1 (175.5) 276.1 856.6 375.0 (1,224.0) 78.3 (217.9) 340.9 38.7 375.0 (674.1) 181.2 (251.0) 20,545.6 0.0 409.3 0.0 3,107.3 0.0 409.3 373.9 3,914.6 0.0 409.3 452.3 4,528.6 0.0 411.0 633.7 1,776.7 22,731.6 Dec-07 2,391.7 (1,818.1) 2,764.3 6,654.8 Dec-08 3,799.4 (2,547.4) 2,376.2 7,152.3 Dec-09 4,261.4 (3,141.9) 2,767.5 8,340.8 Dec-10 4,913.6 (3,411.4) Income Statement (in US$ mn) Revenues COGS Gross Profits SG&A EBITDA Depreciation & Amortization EBIT Interest Expense Provisions Interest Income Investment Income Other Non-Operating Income Other Non-Operating Expenses EBT Taxes NPAT Share Ratios Share Price New No. Of Shares '000 Actual No. Of Shares '000 EPS Div/Share Revenues/Share Units Sold/Share BV/Share Gross CF/Share FCFF/Share EBITDA/Share EV/Share 573.6 (135.5) 1,252.0 (215.3) 1,119.5 (244.7) 1,502.2 (281.6) 438.1 (163.9) 1,036.7 (98.3) 874.9 (102.1) 1,220.7 (158.6) 274.2 (107.3) (15.2) 57.3 22.9 20.6 8.0 938.4 (105.3) (20.4) 79.9 32.0 20.7 13.0 772.8 (54.7) (24.0) 96.9 112.0 23.9 15.1 1,062.0 (74.0) (28.5) 107.2 106.9 26.6 16.8 Dec-07 35.65 214,771 214,771 1.15 51.90 11.14 95.66 8.27 3.99 -0.90 2.04 42.56 Dec-07 31.1 145.6% 3.2 3.8 8.9 10.7 -39.6 -47.3 17.5 20.9 4.3 Dec-08 35.65 214,771 214,771 3.81 0.82 17.69 14.47 12.87 4.20 -8.25 4.83 35.52 Dec-08 9.4 2.3% 2.0 2.0 8.5 8.5 -4.3 -4.3 7.4 7.4 2.8 Dec-09 35.65 214,771 214,771 3.72 1.01 19.84 18.23 11.06 3.28 0.70 4.07 40.67 Dec-09 9.6 2.8% 1.8 2.0 10.9 12.4 51.1 58.3 8.8 10.0 3.2 Dec-10 35.65 214,771 214,771 4.94 1.17 22.88 21.09 12.89 4.82 1.07 5.68 42.56 Dec-10 7.2 3.3% 1.6 1.9 7.4 8.8 33.4 39.8 6.3 7.5 2.8 260.5 (14.5) 958.2 (139.8) 942.0 (143.4) 1,217.1 (155.8) Multiples* P/E Div Yield % P/ Revenue EV/ Revenues P/ COPAT EV/ COPAT P/ FCFF EV/ FCFF P/ EBITDA EV/ EBITDA P/ BV 246.0 818.4 798.6 1,061.3 142
Slide 145: November 11, 2008 EGYPT | TMT ORASCOM TELECOM (OT) A strategy shift or no EM growth in sight? 12M FAIR VALUE | LE 96.1 BUY | HIGH RISK SHARE DATA Orascom Telecom (OT) managed to maintain leading market positions in its key markets, Djezzy (73% of OT's value) enjoys a high market share of 63%. While Mobinil and Tunisiana continued their strong performance, margins and growth of Asian subsidiaries are affected by political, economic, and competitive factors. Thus, we cut our valuations for all GSM subsidiaries in the wake of the global financial crisis and a higher interest rate environment. Said downgrade was offset by the addition of OT's investments in Canada and North Korea. Longer term, OT will build value through mobile banking and investing in Africa. Our SOTP 12-month fair value is some 167% higher, trading at 11.3x adjusted earnings a 6% discount to other regional operators. Canada - a key catalyst to rescue value: In partnership with Canada-based Globalive, OT has won AWS spectrum in Canada at a price of C$442 mn to provide its services in all provinces except the Quebec. OT intends to invest US$500-700 mn with an IRR of 20%. OTH will enjoy operating in a highincome market with low penetration of 61% and a high ARPU of US$55 vs. OT's global ARPU of US$6.6. We valued OT's share in Globalive at US$1,530 mn, representing 10% of OT's total value. Building value through mobile banking and Africa: OT plans to further create value and develop its business through two key venues: (1) Mobile banking: Western Union (WU) and OT announced an alliance to introduce mobile remittance services in selected markets. Mobile banking is likely to appeal to a wide base of OT's users as it will ease financial and banking transactions. Consequently, we expect a positive impact on OT's ARPU over the medium- to long-term. (2) Targeting small-sized investments: OT's management is targeting small-sized investment opportunities in Africa via Telecel Global. Very few opportunities in emerging markets: We reckon that the scarcity of investment opportunities in emerging markets compelled OT to seek opportunities elsewhere in developed markets and to continue its share buyback program. However, if investment opportunities pop up, OT may find it difficult to shore up funds for acquisitions, especially in such battered global credit markets. Valuation and recommendation: Following 2Q08 results we cut our sum-of-the-parts (SOTP) valuation by 9% to LE 96.1/ share (US$86.8/GDR), which still implies a 167% upside potential over the recent market price. The stock is down 60% YTD and appears oversold over negative news flow from Asian markets. However, it trades at a PER of 11.3x expected 2008 earnings (adjusted for one-time items), 6% below the regional operators, the likes of Etisalat, MTC, Vodafone Group, and MTN. Until there is a positive news catalyst the shares are unlikely to reach its longer-term potential in the current environment. Yet, our DCF-based recommendation matrix places the stock as a BUY, albeit with a HIGH RISK rating. 143 Reuters; Bloomberg Recent price as of 6-Nov-08 No. of O/S shares Market cap 52-wk high / low Avg. daily volume / turnover ORTE.CA/ORTEq.L; ORTE EY LE 35.98 899.4 mn LE 32,360.5 mn LE 94.46/ LE 27 1.11 mn / LE 74.42 mn COMPANY SYNOPSIS Orascom Telecom Holding (OTH) is one of the leading regional mobile operators and among the largest in the Middle East and Africa. OTH’s GSM networks cover 5 main countries with a total population of more than 430 mn. OTH operates GSM operations in Egypt, Pakistan, Algeria, Tunisia, and Bangladesh. In December 2005, OTH had acquired 19.3% of Hutchison Telecom International Limited (HTIL) for US$1.3 bn. After receiving US$793 mn in special dividends from HTIL's sale of Hutch Essar, OTH sold its entire stake in HTIL for a total value of US$1.3 bn. Historically, OTH had restructured its operation with a wave of divestiture, selling its stakes in the Jordanian mobile operator, Fastlink and nine GSM mobile operators in Africa, in addition to Loteny (Ivory Coast), Oasis Telecom (DRC), and Libertis Telecom (Congo Brazzaville). In December 2007, OTH sold its GSM operator in Iraq to MTC-Atheer (Zain) for US$1.2 bn. By end of January 2008, OTH has been granted the first 25-year commercial license to provide mobile services in the Democratic People’s Republic of Korea (DPRK) or North Korea, using 3G technology with an exclusivity period of four years. In partnership with Canada-based Globalive, OTH won an AWS spectrum in Canada to start operations by mid 2009. SHAREHOLDER STRUCTURE Weather Investments Free Float Total 51.9% 48.1% 100.0% MOHAMED HAMDY MOHAMED.HAMDY@CICH.COM.EG STOCK PERFORMANCE | 52 WEEKS Volume 120 100 80 60 40 20 0 Nov-07 Jan-08 Jun-08 Jul-08 Feb-08 Mar-08 May-08 Dec-07 Aug-08 Sep-08 Oct-08 Apr-08 LE ORTE CASE 30 - rebased mn shares 6.0 5.0 4.0 3.0 2.0 1.0 -
Slide 146: November 11, 2008 EGYPT | TMT | ORASCOM TELECOM Balance Sheet (LE mn) Assets Cash & Cash Equivalent Net Receivables Total Inventory Advance Payment Other Trading Assets Other Current Assets Total Current Assets Net Plant Long-Term Investments Intangibles Other Non-current Assets Goodwill Total Assets 2007A 6,893 4,375 617 0 5,144 3,501 20,530 26,689 0 12,187 3,975 0 63,381 2008F 11,409 4,881 773 0 100 3,838 21,001 31,483 2,778 12,267 1,324 0 68,854 2009F 11,563 5,398 855 0 100 3,838 21,753 32,681 2,653 10,511 1,324 0 68,922 2010F 11,798 6,083 963 0 100 3,838 22,782 32,767 2,227 8,767 1,324 0 67,868 Cash Flow (LE mn) NOPAT Depreciation & Amortization Gross Cash Flow (COPAT) Working Investments Change Other Current Items Cash After Current Operations Financing Payments Cash Before LT Use Net Plant Change FCFF Others Cash Before Financing Short-Term Debt Long-Term Debt Networth Grey Area Dividends Change in Cash Fact Sheet ROE ROS ROA ROIC EBITDA Margin ATO WI/ Sales ALEV Liabilities/Networth Current Ratio Per-Share Ratios Share price No. of shares ('000) EPS DPS Revenues/Share BV/Share Gross Cash Flow/Share FCFF/Share EBITDA/Share EV/Share Multiples P/E Dividend Yield P/ Revenue EV/ Revenues P/ COPAT EV/ COPAT P/ FCFF EV/ FCFF P/ EBITDA EV/ EBITDA P/ BV Note: A = Actual; F = Forecasted Source: OTH and CICR forecasts 2007A 7,165 4,257 11,422 (287) (4,624) 6,511 (6,441) 70 (7,811) (1,300) 8,236 495 0 8,501 (4,776) (563) (1,100) 2,557 2007A 66.8% 43.2% 18.2% 15.3% 43.7% 0.4 14.6% 4 3 0.9 2007A 35.98 899,403 12.86 1.22 29.75 19.24 12.70 (1.45) 13.01 60.59 2007A 2.8x 3.4% 1.2 2.0 2.8 4.8 (24.9) (41.9) 2.8 4.7x 1.9x 2008F 4,715 5,206 9,921 (417) (353) 9,151 (12,807) (3,656) (9,195) (44) 4,252 (8,599) 0 10,356 3,653 0 (893) 4,517 2008F 11.8% 9.0% 3.9% 8.9% 43.3% 0.4 17.5% 3 2 1.2 2008F 35.98 899,403 2.98 0.99 33.10 25.29 11.03 (0.05) 14.33 55.70 2008F 12.1x 2.8% 1.1 1.7 3.3 5.0 (735) (1,137) 2.5 3.9x 1.4x 2009F 6,447 5,917 12,365 564 0 12,929 (7,257) 5,672 (6,310) 6,619 1,128 490 0 (29) 854 0 (1,163) 153 2009F 13.5% 10.6% 5.1% 12.5% 42.6% 0.5 8.8% 3 2 1.2 2009F 35.98 899,403 3.88 1.29 36.51 28.83 13.75 7.36 15.56 50.35 2009F 9.3x 3.6% 1.0 1.4 2.6 3.7 4.9 6.8 2.3 3.2x 1.2x 2010F 7,210 6,367 13,577 749 0 14,326 (6,769) 7,557 (5,648) 8,678 1,304 3,212 0 (1,489) (0) 0 (1,488) 235 2010F 15.3% 12.0% 6.5% 14.7% 42.2% 0.5 1.1% 2 1 1.2 2010F 35.98 899,403 4.92 1.65 41.15 32.09 15.10 9.65 17.38 43.34 2010F 7.3x 4.6% 0.9 1.1 2.4 2.9 3.7 4.5 2.1 2.5x 1.1x Liabilities & Equity ST Debt Payables Accrued Expenses Down Payments Put Option Liabilities Other Current Liabilities Total Current Liabilities Total Long-Term Debt Other Non-Current Liabilities LT creditors license fees Total Liabilities Deferred Taxes Other Provisions Minority Interest Shareholders' Equity Total Liab. & Equity Income Statement (LE mn) Yearend Subs (k) Proportionate Yearend Subs (k) Revenues Djezzy Mobilink Mobinil CHEO Tunisiana Banglalink Telecel GSM Non GSM EBITDA Djezzy Mobilink Mobinil CHEO Tunisiana Banglalink Telecel GSM Non GSM Depreciation & Amortization Others EBIT Net Interest Exp./Inc. Share of Income/(Loss) of Associates Net Profit from discont. operations Capital Gain Gain (loss) from sale of Inv. Non-Operating Inc., Net of Exp. EBT Taxes NPAT Minority Interest Extraordinary Items Attributable Profits 10,234 13,277 0 0 0 378 23,890 18,792 2,877 0 45,559 0 0 521 17,301 63,381 2007A 70,089 57,861 26,754 9,955 7,138 3,997 0 1,499 1,091 0 23,679 3,075 11,699 6,346 3,163 1,816 0 776 (241) (28) 11,832 (133) (4,257) 7,441 (2,731) 4,316 5,213 (1) (28) 298 14,507 (2,571) 11,935 (372) 0 11,563 4,634 12,704 0 0 0 362 17,701 24,515 3,078 0 45,293 0 0 817 22,743 68,854 2008F 83,538 67,726 29,773 11,414 6,963 4,757 14 1,875 1,569 0 26,593 3,180 12,886 7,032 2,891 2,128 1 1,042 (118) 0 12,977 (90) (5,206) (193) 7,488 (2,512) 0 0 0 149 (161) 4,964 (1,985) 2,978 (296) 0 2,682 4,581 13,867 0 0 0 362 18,810 19,905 3,078 0 41,794 0 0 1,200 25,928 68,922 2009F 94,732 76,436 32,836 12,407 6,610 5,384 550 2,056 2,051 0 29,059 3,777 13,991 7,444 2,775 2,263 99 1,028 244 0 13,853 137 (5,917) 8,073 (2,446) (125) 0 0 0 0 5,502 (1,626) 3,876 (383) 0 3,493 3,130 15,410 0 0 0 362 18,902 15,286 3,078 0 37,267 0 0 1,735 28,865 67,868 2010F 105,041 84,950 37,008 13,354 7,072 5,911 1,381 2,131 2,582 0 32,430 4,578 15,628 7,879 3,041 2,455 410 1,023 556 0 15,364 264 (6,367) 9,261 (1,825) (425) 0 0 0 0 7,011 (2,051) 4,960 (535) 0 4,425 144
Slide 147: November 11, 2008 EGYPT | CONSUMER ORIENTAL WEAVERS CARPETS (OWC) Diverting to the local haven 12M FAIR VALUE | LE 48.3 BUY | HIGH RISK SHARE DATA Reuters; Bloomberg Recent price as of 6-Nov-08 No. of O/S shares Market cap 52-wk high / low Avg. daily volume / turnover ORWE.CA; ORWE EY LE 22.89 74.6 mn LE 1,707.6 mn LE 52.87/ LE 17.12 0.17 mn / LE 6.95 mn Oriental Weavers Carpets (OWC), a vertically-integrated rug manufacturer, maintains a leading position in the local market and a strong footing in global markets. Faced with the challenges of a slowdown in its major markets, US and Europe, OWC started diverting unutilized capacities to the local market in addition to penetrating new markets. Improvement in the company's margins is foreseen on cooling-down of polypropylene prices. OWC’s earnings are expected to grow at a 5-year CAGR of 7%. The stock is traded at 5.3x 2008 earnings vs. a peer average of 11.5x. Our 12-month fair value is LE 48.3/share, implying a 111% upside potential. Hence, we reiterate our BUY recommendation with High risk. COMPANY SYNOPSIS Oriental Weavers Carpets (OWC) was established in 1981 and is operating under Investment Law #8/1997. OWC is part of the Orientals Holding Co., which is involved in diversified fields including floor coverings, textiles, petrochemicals, real-estate development, and investment. OWC is the leading Egyptian carpet manufacturer with a local market share of 85%. Also, OWC has a very strong position in the global market, retaining a decent market share of 14% in 2006. In the US, OWC had a market share of 6% in the area rugs market in 2007, while MAC had around 19% market share. Exports contributed around 63% of OWC's top line in 1H08 with sales to the US and Europe constituted almost 79% of exports. OWC adopts the vertical and horizontal integration methods in its manufacturing process. OWC processes its own polypropylene fiber, which is converted into yarn, and it manufactures and distributes finished products. OPC, a 12% owned subsidiary, supplies 80-90% of OWC's requirement of polypropylene granules. Total fiber requirements are supplied through its subsidiaries OWF and EFCO. Carpets and rugs production processes are carried out through its main subsidiaries namely: Oriental Weavers Carpets (OWC), Oriental Weavers International (OWI), MAC, OW China, and OW USA. Lately, OWC diversified its portfolio to include new products, such tapestry and Axminster which are free of polypropylene. A series of developments took place in OWC's paid-in capital. Lately, in 2008 OWC distributed a 1:3 stock dividend, whereby the company’s paid-in capital reached LE 373 mn distributed over 74.6 mn shares. Tapping new channels – cooling-down of polypropylene prices. To offset the US and the European slowdown, OWC diverted unutilized capacities to the local market to meet strong demand. Also, OWC started penetrating new markets such as Chile, Brazil and Mexico. Furthermore, OWC opened new sales channels in the Gulf and Asia in addition to continuous diversification of its product mix towards high-end segments. However, the US market remains OWC's center of attention, where steps to increase distribution network are taken to achieve further growth once the market picks up. On a different front, gross margins were suppressed in 2007 on the back of the hike in polypropylene prices. However, polypropylene prices started to cool down, on falling oil prices, which will help improve the company's margins over the coming period. Establishing an LE 1.3-bn complex with a capacity of 42 mn sqm. We believe that the new industrial complex, planned to partially commence operation in 2009, will add further growth to the company. The project, planned to be built over three phases in nine years' time till 2016, will be financed with 55% debt and 45% equity. Owing to the global turmoil, plans to proceed with the phases of the complex will more likely depend on the global market situation. Valuation and recommendation: We downgraded our latest valuation dated September 22, 2008 by 4% to LE 48.3/share. This reflected the following: (1) the 200-bps increase in the market risk premium to 8%, (2) the 100-bps reduction in the perpetuity growth to 3% on the back of the global slowdown, and (3) a slight reduction in the expected utilization rate of the new complex. We incorporated lower estimates of polypropylene prices than the estimates we previously used. Still, the stock offers 111% upside potential vs. current market price, hence we reiterate our BUY recommendation. However, the ongoing US slowdown - expected to pick up in 2010 - coupled with the gradual decline of export rebates are still our main concerns for the company. Thus, we still maintain our HIGH RISK profile for OWC. OWC is currently traded at 5.3x 2008 earnings versus an international peer average of 11.5x. SHAREHOLDER STRUCTURE Moh.Farid Khamis & Family Institutions Fitaihi Holding Group Co. Amwal Al Khaleej Free float 66.0% 23.0% 5.0% 1.7% 4.3% INGY EL-DIWANY INGY.ELDIWANY@CICH.COM.EG STOCK PERFORMANCE | 52 WEEKS Volume 70 60 50 40 30 20 10 0 Nov-07 Jan-08 Jun-08 Jul-08 Feb-08 Mar-08 May-08 Dec-07 Aug-08 Sep-08 Oct-08 Apr-08 LE ORWE CASE 30 - rebased mn shares 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 - 145
Slide 148: November 11, 2008 EGYPT | CONSUMER | OWC Balance Sheet (LE mn) Assets Cash & Cash Equivalent Net Receivables Total Inventory Advance Payment Other Trading Assets Other Current Assets Total Current Assets Net Plant Long-Term Investments Other Non-Current Assets Intangibles Total Assets Liabilities & Shareholders' Equity Short-Term Debt CP of Long-Term Debt Accounts Payable Accrued Expenses Down Payments Taxes Payable Dividends Payable Other Current Liabilities Total Current Liabilities Total Long-Term Debt Other Non-Current Liabilities Total Liabilities Deferred Taxes Other Provisions Minority Interest Shareholders' Equity Total Liab. & Equity Income Statement (LE mn) Revenues Cost of Revenues Gross Profit SG&A EBITDA Depreciation & Amortization EBIT Interest Expense Provisions Interest Income Investment Income Other Non-Operating Income Other Non-Operating Expenses EBT Taxes NPAT Minority Interest Extraordinary Items Attributable Profits 2007A 134 625 1,245 14 41 0 2,059 1,801 88 107 697 4,752 2008F 165 670 1,453 16 41 0 2,344 1,822 105 115 697 5,083 2009F 140 740 1,585 17 41 0 2,522 1,855 105 121 697 5,300 2010F 173 851 1,834 20 41 0 2,919 1,866 105 129 697 5,716 Cash Flow (LE mn) NOPAT Depreciation & Amortization Gross Cash Flow (COPAT) Working Investments Change Other Current Items Cash After Current Operations Financing Payments Cash Before Long Term Use Net Plant Change FCFF Others Cash Before Financing Short-Term Debt Long-Term Debt Networth Grey Area Dividends Change in Cash Fact Sheet ROE ROS ROA ROIC EBITDA Margin ATO WI/ Sales ALEV Liabilities/Networth Current Ratio Per-Share Ratios Recent Share Price New No. Of Shares ('000)* EPS* DPS* Revenues/Share Capacity/Share BV/Share Gross Cash Flow/Share FCFF/Share EBITDA/Share EV/Share Multiples P/E P/ Revenue EV/ Revenues P/ COPAT EV/ COPAT P/ FCFF EV/ FCFF P/ EBITDA EV/ EBITDA P/ BV * Adjusted for 1-to-3 stock dividend. Note: A = Actual; F = Forecasted Source: Company reports and CICR forecasts 2007A 314 163 477 (118) 94 454 (199) 254 (232) 222 102 125 9 51 (169) (3) (131) (119) 2007A 13.7% 10.7% 6.9% 9.4% 16.9% 0.6 45.7% 2.0 0.9 1.5 2007A 22.89 55,249 5.94 1.50 55.5 N/A 43.5 8.6 4.0 9.4 44.8 2007A 3.9x 0.4 0.8 2.7 5.2 5.7 11.1 2.4 4.8 0.5x 2008F 292 200 492 (183) 12 321 (148) 174 (221) 100 126 78 (212) 127 (1) 47 (7) 31 2008F 12.2% 9.8% 6.4% 8.4% 16.5% 0.6 48.4% 1.9 0.8 1.7 2008F 22.89 74,607 4.33 1.55 44.2 N/A 35.4 6.6 1.3 7.3 36.5 2008F 5.3x 0.5 0.8 3.5 5.5 17.1 27.3 3.1 5.0 0.6x 2009F 344 219 563 (143) 3 424 (219) 205 (253) 171 143 95 (173) 182 (55) 56 (130) (25) 2009F 12.9% 10.2% 7.0% 9.6% 17.0% 0.7 48.0% 1.9 0.7 1.8 2009F 22.89 74,607 4.97 1.78 48.7 N/A 38.4 7.5 2.3 8.3 34.9 2009F 4.6x 0.5 0.7 3.0 4.6 10.0 15.2 2.8 4.2 0.6x 2010F 399 237 636 (250) 16 402 (368) 34 (248) 155 146 (68) 243 7 (59) 59 (149) 34 2010F 12.9% 9.6% 7.0% 10.3% 16.6% 0.7 47.9% 1.8 0.7 1.6 2010F 22.89 74,607 5.37 1.92 56.0 N/A 41.6 8.5 2.1 9.3 34.1 2010F 4.3x 0.4 0.6 2.7 4.0 11.0 16.4 2.5 3.7 0.6x 531 78 508 22 59 38 7 92 1,335 734 0 2,068 0 68 213 2,402 4,752 2007A 3,067 (1,859) 1,208 (690) 517 (163) 354 (97) 0 5 3 121 6 392 (13) 379 (51) 0 328 318 153 573 24 63 38 130 105 1,405 708 0 2,112 0 67 261 2,642 5,083 2008F 3,295 (2,102) 1,194 (649) 545 (200) 344 (70) 0 3 4 129 3 414 (43) 371 (48) 0 323 145 275 625 27 70 38 149 109 1,437 614 0 2,051 0 67 317 2,865 5,300 2009F 3,631 (2,286) 1,345 (726) 618 (219) 399 (66) 0 5 5 138 0 482 (55) 426 (56) 0 370 388 288 723 31 80 38 161 125 1,835 333 0 2,168 0 67 376 3,104 5,716 2010F 4,175 (2,646) 1,529 (835) 694 (237) 457 (93) 0 6 5 138 5 518 (58) 460 (59) 0 401 146
Slide 149: November 11, 2008 EGYPT | BUILDING MATERIALS PAINTS & CHEMICAL INDUSTRIES (PACHIN) Wonders of colors PACHIN remains Egypt’s largest paint producer with a diversified product portfolio of architectural and industrial paints, capturing a 42% market share. Furthermore it is the sole local printing ink producer with a market share of 10%. PACHIN is considered a lucrative investment opportunity, offering a 90% upside potential to our 12-month fair value. The stock is traded at 2007/08 P/E of 5.5x , with a 53% discount to an international peer average of 11.8x. 12M FAIR VALUE | LE 57.7 BUY | MODERATE RISK SHARE DATA Reuters; Bloomberg Recent price as of 6-Nov-08 No. of O/S shares Market cap 52-wk high / low Avg. daily volume / turnover PACH.CA; PCLDq.L PACH EY LE 30.45 20.0 mn LE 609.0 mn LE 81/ LE 27.5 0.03 mn / LE 1.74 mn COMPANY SYNOPSIS PACHIN was established in 1958 as an Egyptian joint stock company with a paid-in capital of LE 15 mn distributed over 150k shares at a par value of LE 100/share. PACHIN was nationalized in 1961. In 1962 and 1963 the Ammonia & Chemical Co., the Hinshold Paints & Oil Co. and Bahari Paints Co. were merged within PACHIN. On August 21, 1993, PACHIN executive regulations were amended to be in accordance with Public Sector Law #203/1991 and became affiliated to the Holding Company for Chemical Industries. In January 1994, paid-in capital was increased to LE 80 mn. In May 1994, paid-in capital was further increased to LE 100 mn. In August 1996, a stock split at a ratio of 10-to-1 took place to bring the number of shares to 10 mn. In October 1997, the company's article of incorporation was amended, by virtue of which, it became under the umbrella of Law #159/1981 as PACHIN became a private sector company, with a 27% stake floated on London Stock Exchange (LSE) via a GDR offering. Finally, in February 2000, PACHIN paid-in capital was doubled to LE 200 mn distributed over 20 mn shares at a par value of LE 10/share financed from reserves. The main business of the company is the production of paints, varnishes, printing inks, and animal bone products. PACHIN monopolized the Egyptian paints' market till early 1990s when low barriers-to-entry enticed many players to step in. PACHIN’s product mix also includes Perpetual exclusivity license: PACHIN had acquired a perpetual exclusive license for the Danish DYRUP trademark back in December 2006, covering sale and production in Egypt, Sudan, Libya, and Ethiopia. Its existence in such diversified markets allows PACHIN to reap the fruits of the realestate booms in those markets, further balancing sales. Enjoying a 10-year tax exemption: PACHIN for Ink was established before the new Income Tax Law came into effect, thus it enjoys a 10-year tax exemption starting 2009. Growth in the H&RE sector: The Egyptian real-estate sector is growing at an average annual growth rate of 7-9%. Said growth should positively impact the company's performance over the coming five years, especially in the decorative segment, which is PACHIN'S main sales contributor (by 81%). Decorative paints' growth led by synthetic paints: PACHIN boasts the largest market share (52%) in synthetic paints, thanks to scattered sales outlets all over Egypt. As such, this segment is poised to post the highest profit margin in view of the company's cost-passing ability of any increase in raw materials prices. Solid operational performance: PACHIN showed a strong growth historically with an earnings 4-year CAGR of 15% over FY02/03-FY06/07. Moreover the company was able to sustain its profitability margins with an EBITDA margin ranging between 20-22% over the same periods. 9M FY07/08 revealed a bottom line profit of LE 85.8 mn, which is in line with our estimates of LE 110 mn for FY07/08. Valuation and recommendation: Applying our DCF valuation we reached a 12-month fair value of LE 57.7/share (US$3.4/ GDR), implying a hefty upside potential of 90%. Thus, we upgrade the stock from HOLD to BUY recommendation with a MODERATE RISK rating. It is worth mentioning that company officials had revealed their intent to eventually dispose of AlAmireya idle land post relocation to Al-Obour City. Incorporating this plot of land NAV of LE 80 mn into our valuation enhances our valuation by another LE 4/share. animal charcoal, used in sugar refining. Furthermore, it produces resins and sells the surplus to its competitors. SHAREHOLDER STRUCTURE Holding Co. for Chemical Ind. Insurance companies Funds & Instit. Investors (incl. 1% GDRs) Free Float Total 37.4% 3.4% 40.0% 19.2% 100.0% MARY MILAD MARY.MILAD@CICH.COM.EG STOCK PERFORMANCE | 52 WEEKS Volume 90 80 70 60 50 40 30 20 10 0 Nov-07 LE PACH CASE 30 - rebased mn shares 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 Jan-08 Jun-08 Jul-08 Feb-08 Mar-08 May-08 Dec-07 Aug-08 Sep-08 Oct-08 Apr-08 147
Slide 150: November 11, 2008 EGYPT | BUILDING MATERIALS| PACHIN Balance Sheet (LE mn) Assets Cash & Cash Equivalent Net Receivables Total Inventory Advance Payments to Suppliers Other Trading Assets Other Current Assets Total Current Assets Net Plant Long-Term Investments Other Trading Non-Current Assets Other Non-Current Assets Intangibles Total Assets Liabilities & Shareholders' Equity Short-Term Debt Current Portion Of Long-Term Debt Accounts Payable Accrued Expenses Down Payments to Customers Taxes Payable Dividends Payable Other Spontaneous Finance Other Current Liabilities Total Current Liabilities Total Long-Term Debt Other Non-Current Liabilities Long-Term Spontaneous Finance Total Liabilities Deferred Taxes Other Provisions Minority Interest Shareholders' Equity Total Liabilities & Equity Jun-07 A Jun-08 P Jun-09 P Jun-10 P 114.6 65.6 165.1 0.0 0.0 0.0 345.3 208.1 1.3 33.8 9.5 16.0 613.9 118.8 64.9 171.0 0.0 0.0 0.0 354.7 228.0 2.3 34.8 9.5 14.4 643.4 124.9 62.9 198.9 0.0 0.0 0.0 386.8 225.1 2.3 33.8 9.5 12.8 670.0 136.6 69.4 218.9 0.0 0.0 0.0 424.8 222.3 2.3 33.8 9.5 11.2 703.6 Fact Sheet ROE ROS ROA ROIC EBITDA Margin ATO WI/ Sales ALEV Debt/ Tangible Networth Current Ratio Jun-07 A Jun-08 P Jun-09 P Jun-10 P 20.6% 21.5% 24.1% 25.6% 19.3% 18.9% 19.2% 19.5% 16.4% 17.1% 19.3% 20.6% 18.2% 18.7% 21.1% 22.4% 20.9% 20.4% 20.4% 20.5% 0.9 40.1% 1.30 0.18 4.3 0.9 37.1% 1.29 0.18 3.9 1.0 34.2% 1.28 0.17 4.4 1.1 33.7% 1.27 0.16 4.7 8.0 0.0 35.2 8.4 11.6 7.1 0.0 0.0 9.9 80.3 0.0 3.8 0.0 84.0 39.2 0.6 0.0 490.0 613.9 17.5 0.0 33.1 9.4 12.9 7.1 0.0 0.0 9.9 89.9 0.0 0.0 0.0 89.9 40.8 0.6 0.0 512.0 643.4 7.1 0.0 38.5 10.9 15.0 7.1 0.0 0.0 9.9 88.6 0.0 0.0 0.0 88.6 42.8 0.6 0.0 538.0 670.0 3.0 0.0 42.3 12.0 16.5 7.1 0.0 0.0 9.9 90.9 0.0 0.0 0.0 90.9 45.0 0.6 0.0 566.9 703.6 Cash Flow NOPAT Depreciation & Amortization Gross Cash Flow (COPAT) WI Change Other Current Items Cash After Current Operations Financing Payments Cash Before Long-Term Use Net Plant Change FCFF Others Cash Before Financing Short-Term Debt Long-Term Debt Net-worth Grey Area Dividends Change in Cash Jun-07 A Jun-08 P Jun-09 P Jun-10 P 95.0 103.9 121.7 135.7 11.9 13.0 14.2 15.0 106.8 116.9 135.9 150.6 (39.9) (5.1) (16.9) (19.9) (2.5) (1.0) 1.0 0.0 64.5 110.8 120.0 130.7 (2.9) (1.9) (0.8) (0.3) 61.6 108.8 119.2 130.4 (19.4) (32.8) (11.4) (12.1) 47.6 78.9 107.6 118.6 26.8 1.9 7.1 1.7 69.1 77.9 114.9 120.0 1.9 9.5 (10.4) (4.1) (3.0) 0.0 0.0 0.0 0.2 5.5 6.5 7.2 6.4 1.2 1.5 1.8 (70.2) (93.5) (110.2) (123.2) 4.3 0.6 2.4 1.7 Income Statement (LE mn) Net Sales COGS Gross Profits SG&A EBITDA Depreciation & Amortization EBIT Interest Expense Provisions Interest Income Investment Income Other Non-Operating Income Other Non-Operating Expenses EBT Taxes NPAT Minority Expense Extraordinary Items Attributable Profits Jun-07 A Jun-08 P Jun-09 P Jun-10 P 522.2 580.9 675.6 744.6 (399.5) (447.3) (520.2) (572.5) 122.6 133.6 155.4 172.2 (13.5) (15.0) (17.5) (19.2) 109.1 118.6 137.9 152.9 (11.9) (13.0) (14.2) (15.0) 97.28 105.6 123.7 137.9 (2.9) (1.9) (0.8) (0.3) (0.1) (0.5) (0.5) (0.5) 3.3 4.8 5.0 5.5 3.4 3.7 4.1 4.5 2.1 2.1 2.1 2.1 (0.5) (2.0) (2.0) (2.0) 102.5 111.8 131.6 147.2 (1.6) (1.7) (2.0) (2.2) 100.9 110.1 129.7 145.0 (0.0) (0.1) (0.1) (0.1) 0.0 0.0 0.0 0.0 100.9 110.1 129.6 144.9 Per Share Ratios Share Price Actual No. Of Shares '000 New No. Of Shares '000 EPS Diluted EPS Div/Share Revenues/Share Units Sold/Share BV/Share Gross Cash Flow/Share FCFF/Share EBITDA/Share EV/Share Jun-07 A Jun-08 P Jun-09 P Jun-10 P 30.45 30.45 30.45 30.45 20,000 20,000 20,000 20,000 20,000 20,000 20,000 20,000 5.04 5.50 6.48 7.25 5.04 5.50 6.48 7.25 3.50 4.68 5.51 6.16 26.11 29.05 33.78 37.23 4.20 4.50 4.43 4.55 24.50 25.60 26.90 28.35 5.34 5.84 6.79 7.53 2.38 3.95 5.38 5.93 5.46 5.93 6.90 7.65 26.43 26.43 26.43 26.43 Multiples Jun-07 A Jun-08 P Jun-09 P Jun-10 P P/E 6.0 5.5 4.7 4.2 Diluted P/E 6.0 5.5 4.7 4.2 Div Yield % 11.5% 15.4% 18.1% 20.2% P/ Revenue 1.2 1.0 0.9 0.8 EV/ Revenues [ EV/ Rev] 1.0 0.9 0.8 0.7 P/ COPAT 5.7 5.2 4.5 4.0 EV/ COPAT 4.9 4.5 3.9 3.5 P/ FCFF 12.8 7.7 5.7 5.1 EV/ FCFF 11.1 6.7 4.9 4.5 P/ EBITDA 5.6 5.1 4.4 4.0 EV/ EBITDA 4.8 4.5 3.8 3.5 P/ BV 1.24 1.19 1.13 1.07 Note: A = Actual; P = Projected Source: PACHIN & CICR estimates 148