Documente Academic
Documente Profesional
Documente Cultură
The ongoing political disturbances raised countless questions to investors today, wondering which sectors of
Sector Outlook the Egyptian economy are set for a safe investment. Our sentiment on different sectors has changed, where
some of these sectors have taken an opposite direction to what we saw prior to the incidents of January, 25,
2011.
Oil & Gas Positive
In our perspective, the one sector that we believe still has real foundation is the Oil and Gas sector. The Oil
and Gas sector is expected to boom in the coming period mainly driven by higher crude oil prices
Banking Neutral which have reached a high of US$103/barrel amid fears of shutting down the Suez Canal due to the political
uncertainties. In addition, as a result of hiking oil prices, the stretching of exploration and production pro-
Pharmaceuticals Neutral jects worldwide is expected to increase coupled with oil supply dependent companies benefiting from soaring
oil prices.
Despite our expectation for a significant slow down/shrinking of most sectors, we expect the current po-
Fertilizers Neutral litical and economic disturbances to have a minimal effect on industries such as pharmaceuti-
cals, fertilizers, telecom and food due to their defensive nature (i.e. necessary goods). Moreover,
Telecommunication Neutral most of the government subsides are directed to serve the above mentioned sectors curbing selling price
fluctuation. Accordingly, we haven’t revised our assumptions on demand, supply, prices and margins for
those sectors.
Food Neutral Regarding the Pharmaceutical sector, given the inelasticity to systematic risk, pharmaceuticals consumption
is not expected to be negatively impacted. We anticipate that people will continue to consume, if not at an
increased rate. Hence, given that per capita pharmaceutical expenditure for Egypt is estimated at US$34 in
Real Estate Negative FY10, we maintain our estimates of per capita pharmaceutical expenditures at US$37.40, up by 10% Y-o-Y.
Furthermore, Telecom sector will lose traffic from roaming activities as tourists influx drop, however this drop
will be offset by strong network usage coupled with large population base and promotions offered by opera-
Tourism Negative
tors.
For the food sector, we have maintained our consumption assumptions forecasting that the aggregate con-
Building Materials sumption and per capita consumption are projected to culminate at LE228 billion and LE2,800, respectively,
during 2011.
We have a neutral sentiment on the banking sector as we expect financial performance to be sup-
Cement Negative ported by income from high yield treasuries, in addition to service charges and fees. On the other hand, we
expect revaluation losses from financial investments and increased provisioning to weigh negatively on in-
Steel Negative come.
We believe that the prevailing circumstances will have a significant negative effect on cyclical
industries. Therefore, we suppose that Tourism, Real Estate and Building Materials sectors will be hindered
Contracting Negative
in terms of demand, supply, prices and margins throughout 2011. Moreover, one of our major concerns re-
garding the real estate sector remains in the legal aspect associated with the validity of land purchase con-
Automotive Negative tracts and the fair value of previously obtained land. This will add more pressure on Real Estate and Tourism
sectors as most of those companies are predicted to be charged with additional costs and penalties given the
accused allegations.
Prime Research Team In terms of Tourism, outbound tourism receipts are expected to be slashed to US$7.5 billion compared to
US$11.6 billion in 2010 backed by the tendency of some countries to deport Egyptians back to their mother
Phone +202 3300 5728 countries. Occupancy rates have also slumped severely below the normal levels of 65%-100% to a stagger-
Email Research@egy.primegroup.org ing 0%-15%.
Last but not least, government spending on infrastructure projects is forecasted to plummet by 30% directly
affecting building materials sector dynamics (demand, supply, prices and margins) which are accordingly
predicted to shrink.
Energy Outlook-Positive
E&P companies are Generally speaking, oil leads all commodities and hence when talking about energy, we’re mainly concerned
expected to continue about oil price, supply and demand.
stretching their
projects worldwide Brent crude oil price has hiked to US$103/bbl amid fears of Suez Canal shutting down due to political instability
to benefit from in Egypt. However, after fears have gone, it went down again to the current level of US$100.6/bbl. Similarly,
soaring prices
OPEC basket price has surged up this month to US$96.12/bbl then eased to stand at US$91.12.
Considering this recent progression in price, E&P companies are expected to continue and further stretch their
Oil & Gas companies
projects worldwide to benefit from soaring prices and thus achieving higher margins. According to OPEC, total
are expected to
witness higher sell- supply stands currently at 89.3 million barrels up from 88.1 million barrels in the previous month. On the other
ing prices and mar- hand, total demand is 89.9 million barrels versus 87.9 million barrels a month earlier. Furthermore, local de-
gins mand is seen to grow steadily unaffected by Egypt turmoil backed by sound consumption of a great population.
Consequently, oil supply dependant companies in Egypt are expected to proceed their business activities and
benefit from soaring oil prices by imposing higher selling prices in attempt of attaining higher sales but not
higher margins as cost rises.
We expect financial performance to be supported by income from high yield treasuries, in addition to main-
tained momentum from service charges and fees. Over the coming period, we expect to see growing exporta-
tion activities, hence, boosting service charges and fees. On the other hand, we expect revaluation losses from
financial investments to weigh negatively on non-interest income. Another negative is expected to come from
higher provisioning charges.
Prime Research 2
PHARMACEUTICAL, FERTILIZERS AND FOOD February 21, 2011
SECTORS OUTLOOK
Pharmaceutical sector-Neutral
we maintain our We have a neutral sentiment on Pharmaceutical sector; thus, we haven’t revised our previous assumptions for
estimates of per this sector. During the coming period of 2011, the Egyptian drug making business is poised to see a moderate
capita Pharmaceuti- increase in demand. Given that pharmaceutics are inelastic in demand, people will remain consumers, yet at an
cal expenditures at
US$37.40 up by 10% increased rate of consumption. Moreover, given that the per capita Pharmaceutical expenditure for Egypt is
Y-o-Y estimated at US$34 in FY10, we maintain our estimates of per capita Pharmaceutical expenditures at
US$37.40, up by 10% Y-o-Y.
Government’s restrictions on pricing pharmaceuticals, achieved through a cost plus method, allows the govern-
ment to set the price of the drug after reviewing all the costs incurred by the company. Therefore, due to the
Government price pharmaceutical industry’s structure and government restrictions on pricing, prices are expected to remain un-
restrictions set on
cost plus method changed. We expect the companies to witness an increase in its COGS backed by two factors: 1) 85% of raw
materials used in the manufacturing of drugs are imported 2) Depreciation of the Egyptian pound against US$
to reach approximately LE6.2/US$, which represents a burden on companies in the sector. Consequently, cus-
toms for pharmaceutical raw materials have been dropped by the government from 10% to 2%; reducing pres-
sures of higher costs.
Maintained margins Given that demand is expected to increase, producers are expected to increase production to accommodate
due to government
restrictions on prices customers demands. Thus, it is expected that revenues will increase; resulting from the sale of a larger number
of pharmaceutical drugs.
Although revenues and sales are expected to witness growth, margins for pharmaceuticals are expected to be
sustained at 40% and 30% for EBITDA and NI margins respectively; due to government’s aim at calming and
sustaining the public and not raising prices.
Most of food prices in the local market have followed an upward trend since the beginning of 2010 associated
with the increase in international prices driven by the decline in global production and increase in international
demand. Most of food companies were able to pass the increases to consumers, however the government will
exert more efforts to reduce further increases in some prices.
Prime Research 3
TELECOM, TOURISM AND REAL ESTATE SEC- February 21, 2011
TORS OUTLOOK
Furthermore, the Egyptian real estate companies are forecasted to face a declining margin pattern associated
Developers will face
a declining margins with the decline in selling prices and the expected additional charges driven from acquiring land bank at lower
and sales. than fair value.
Prime Research 4
CONTRACTING, STEEL AND CEMENT SECTORS February 21, 2011
OUTLOOK
The forecasted Local steel prices as of January 2011 had shot up to LE4,500/ton driven by the substantial increase in the inter-
dwindle in local
demand and supply national raw material and steel prices which reached US$800/ton. Given that the global raw material prices
after the current account for 40% of the total COGS, steel producers chose to maintain their margins by rising local prices in
chaos will subse- attempt of passing on the hike to end consumers . At present, we don't believe that January price levels will be
quently lead to a
slump in sales vol-
maintained. The forecasted dwindle in local demand and supply after the current chaos will subsequently lead
umes, local prices to a slump in local prices to an average LE4,000 ton for FY11, down by 11%. Our main concern yet remains in
and profit margins. how steel producers will be able to sustain margins given the hiking international raw material prices but also
cope with the declining market in Egypt.
In our perspective, In our perspective, all steel producers are to witness slowdowns in sales volumes, average selling prices and
all steel producers margins . Focusing more on margin forecasts, in the so called “growth period”, the average market gross profit
are to witness slow-
downs in sales due
margins ranged between 15%-25%. Given that we are now to encounter a declining phase, we anticipate that
to expected decline the margins will decline to range between 10%-14%. Furthermore, we expect the steel companies to record
in their key revenue net losses in 2011.
driver.
Local companies will We believe that companies will focus on the export market to offset the decline in the domestic sales
focus on the export and benefit from the depreciation of EGP against US$. Meanwhile, any further deterioration in EGP/USD should
market encourage the foreign importers to buy Egyptian cement which will be equivalent to approximately US$88/tons
in FY11. Consequently, we increased our assumption of exports from 10% to 20% of total production to capi-
talize on high export margins.
Prime Research 5
CEMENT AND AUTOMOTIVE SECTORS OUT- February 21, 2011
LOOK
Prime Research 6
February 21, 2011
Disclaimer
Information included in this report has no regard to specific investment objectives, financial situation, advices or particular needs of the report users.
The report is published for information purposes only and is not to be construed as a solicitation or an offer to buy or sell any securities or related finan-
cial instruments. Unless specifically stated otherwise, all price information is only considered as indicator.
No express or implied representation or guarantee is provided with respect to completeness, accuracy or reliability of information included in this report.
Past performance is not necessarily an indication of future results. Fluctuation of foreign currency rates of exchange may adversely affect the value,
price or income of any products mentioned in this report.
Information included in this report should not be regarded by report users as a substitute for the exercise of their own due diligence and analysis based
on own assessment and judgment criteria. Any opinions given are subject to change without notice and may significantly differ or be contrary to opin-
ions expressed by other Prime business areas as a result of using different assumptions and criteria. Prime Group is under no obligation responsible to
update or keep current the information contained herein.
Prime Group, its directors, officers, employees or clients may have or have had interests or long or short positions in the securities and/or currencies
referred to herein, and may at any time make purchases and/or sales in them as principal or agent.
Prime Group, its related entities, directors, employees and agents accepts no liability whatsoever for any loss or damage of any kind arising from the
use of all or part of these information included in this report. Certain laws and regulations impose liabilities which cannot be disclaimed. This disclaimer
shall, in no way, constitute a waiver or limitation of any rights a person may have under such laws and/or regulations.
Furthermore, Prime Group or any of the group companies may have or have had a relationship with or may provide or have provided other services,
within its objectives to the relevant companies.
Copyright 2011 Prime Group all rights reserved. You are hereby notified that distribution and copying of this document is strictly prohibited without
the prior approval of Prime Group.
Prime Research 7