CI Capital chief executive officer Mahmoud Atallah stated that 2013 was an outstanding year for CI Capital Investment Banking as it concluded OCI N.V.’s acquisition of OCI SAE, earning itself the third position amongst ME investment banks on Thomson Reuters’s scale. Atallah expects the company to maintain this momentum throughout 2014, adding that CI Capital Investment Banking is currently in talks on several transactions that might be concluded next year.
In the seminar organised by Daily News Egypt hosting CI Capital leading executives, including Atallah, Khaled Abdel Rahman, Group Head of Securities and Managing Director, as well as Sameh Khalil and Amr Abou El-Enein, Managing Directors of CI Asset Management, it was agreed that the country is currently “taking a breather” following the ouster of the former cabinet, which they believed pushed the economy to deteriorating levels that was manifested in the series of cuts in the country’s credit ratings by international agencies. Atallah stated that the interim government’s main role is to target short-term remedies to deal with current economic issues to help set the base for recovery. This includes reducing the budget deficit through boosting revenues on improved tourism inflow, revisiting investment policies to be more investment-friendly, and dealing with current security issues. He added that that security and legislations are key for creating an investment-incentive environment, and warned that heavy reliance on regional support packages should be looked at as a temporary relief to the current budget woes, yet could never serve in rebuilding Egypt’s solid economic base to ensure sustainable development – calling for other long-term solutions to deal with the inflated fiscal deficit.
Overview on Egyptian economic and investment environment
Furthermore, Atallah stressed that subsidies are the main budget headline that needs to be dealt with given their hefty weight in expenditure and given that the 60 million benefiting from subsidised commodities include a massive tranche of the un-needy. Promoting a more targeted social safety net as cash transfers directed to the poor, he said this would save the government more than half the budget allocated for subsidies as cash disbursement will be rationed. Atallah believes that gasoline is the main product that should see higher prices especially since its prices have been fixed for 15 years now, adding that Egypt is ranked the fourth cheapest country world-wide. Regarding the electricity subsidy, Atallah believes that households with limited consumption should enjoy either a free or subsidized electricity bill – bearing in mind that the government should set a fair consumption quota to these households. Atallah believes that the private sector should be engaged in power projects to inject more investments in the sector and ensure efficient operations.
On a different note, Atallah called for a better allocation of medical aid to villages and governorates in addition to support packages to the unemployed. He highly rated the government role to raise supervision on subsidised bread in an effort to improve its quality, noting that a loaf of bread must weigh 135 grams, while it currently weighs only 85 grams. He suggested that bread should be sold by weight rather than pieces of loaves.
The current government should build the base for wider reform measures on the longer term, Attallah highlighted, as citizens are much more likely to accept changes and bear additional burdens like subsidy removal at the time of revolutions and crises, in his view. Accordingly, the government should utilise this phase to redistribute wealth, saying this the only way out for the cabinet to tame budget deficit. He urged the government to impose wealth taxes and revisit the real estate tax.
In terms of international relations, Attallah believes that the current government must make more effort in advocating to the global community that 30 June was a revolution and not a military coup, which he said was key to improve the image of Egypt in the west to ensure investment flows. He also urged the government to develop new procedures to protect investors, so as to build a more conductive investment climate regulated by appropriate laws.
Plans of expansion
As for CI Capital’s developments, the CEO said that the investment bank had utilised the slowdown in economic activities in capacity building as well as infrastructure progress. The research department was restructured, bringing in high caliber personnel with international expertise in an effort to be ranked as the best research centre across Egypt by 2Q14, on the back of wider coverage in Egypt and Gulf markets and deeper coverage to expand the group clients’ base.
The group’s expansions focus mainly on the local market under the slogan “The country is suffering but will never fail”. Making efforts to give a boost to the Egyptian economy through expanding its investments, the company is mulling to establish a unit in the GCC region, which will likely serve the local market indirectly. While no decision has been yet taken on the premises of the new arm, priority will be given to low-cost and easy-licensing countries, Atallah said, confirming that all GCC countries will serve the company’s expansion policy but cost is crucial.
He revealed that CI Capital group managed to achieve profits, supported by highly competent staff, unlike the majority of its peers – thanks to the company’s success in executing c.95% of the transactions that took place recently in the Egyptian market. As for the Investment Banking business, he explained that the company is preparing for three IPOs in the Egyptian Stock Exchange by 1Q 2014, including Arabian Cement Company (ACC). The two other companies work in the food and tourism sectors. Attallah rates food, real estate, construction and building materials, transportation, and technology sectors as the most attractive sectors in times of economic recovery.
Regarding private equity business, Attallah revealed plans to establish a private equity fund, where potential sectors and invested capital in such fund is currently under study. Current low valuations of companies should maximise returns as the economy stabilises and growth picks up. This year, the Egyptian stock exchange witnessed numerous acquisitions of listed companies driven by low share prices that offer strong upside potential as the market booms on the back of a more stable macro scene. This should positively reflect on the group’s profits, in his view, particularly as the holding is backed by a well-established bank (CIB) that should boost confidence in the company and help achieve its ambitious plan.
As for the Asset Management business, CI Asset Management (CIAM) managing director Sameh Khalil confirmed that the volume of assets under management reached EGP 9bn, with the company maintaining its rating of “Best Asset Manager in Egypt” for four years in a row by Global Investor Institution. He added that the company signed new contracts with large-scale institutions for managing their portfolios that exceeds EGP 100m, confirming rising investors’ confidence in the company as it continuously diversify its portfolio. Khalil confirmed the need to introduce other non-conventional mechanisms in order to increase mutual funds potential that is currently suffering from a slowdown. He revealed the company’s will to establish Exchange Traded Funds (ETFs); which is expected to attract investors, in addition to real estate funds. Yet, launching these funds is still subject to the authorities’ approval. Khalil stressed the need to collaborate efforts to set a clear economic plan with well-defined goals and timeline.
That was also confirmed by CIAM managing director Amr Abou-El Enien, who added that the interim government should pave the way through removing budget imbalances, revisiting laws, and removing obstacles to investment. Abou-El Enien, who praised the appointment of Sherif Samy as the new head of the Egyptian Financial Supervisory Authority (EFSA), expected him to launch exchange-traded-funds (ETFs), which have been put on the back burner since 2008. He expects EFSA to see a raft of approvals for implementing new investment mechanisms given expectations that the new head is eager to meet all market needs. This should reflect positively on the market’s performance compared to other emerging markets in the region. The Egyptian capital market is in need of a new legal revolution to create new products and tools that can compete and attract new investors on the local, regional and international fronts, he said. This entails wide diversification, including commodity and hedge funds. Such new products offer lucrative returns to investors and strongly reflect the competence of the investment manager.
Regarding the Brokerage business, Managing Director of CIBC Khaled Abdul-Rahman, expects the brokerage market to see mergers of small companies; highlighting that survival in this market will be attributed to those firms delivering better retail services atcompetitive fees along with e-trading services. He added that CI Capital Brokerage will not resort to slashing commissions as a mean to maintain its leading market share, confirming that quality and diversity of products and services is the key success driver. This stems from the company’s strong conviction that cutting-back commissions will consequently impact the high-quality service CIBC offers to its clients, especially amidst low trading volumes.
Macro views
Karim Khidr, head of Research, agreed that the political bottleneck lies in passing a constitution with a vast majority, and with a high turnout as evidence of consensus building. He quoted a recent poll indicating that the turnout for the referendum could be as high as 84%, which stands much higher than the 33% who voted in the December 2012 referendum and 41% in March 2011.
The government’s ability to efficiently channel GCC aid for job creation purposes and to attract investments are outstanding boxes that need to be checked, Khidr said, adding that the UAE’s recent announcement of an additional $2bn directed to labour-intensive infrastructure projects (creating 53% of Egypt’s annual employment needs) is a case in point. The government’s allocation of $3.2bn (EGP22bn) of GCC aid to an additional stimulus package (recently raised to EGP29.7bn) confirms commitment to spur growth through supporting investments.
CI Capital sees investments growing at 9%YoY in FY14 (below the potential of +23%), lifting up GDP growth to 3.3% up from 2.1% in FY13, given that the government heads in the right direction, Khidr said. He expected improved tax revenues stream to slightly narrow fiscal deficit to 12.6% of GDP in FY14 (vs. 13.8% in FY13), especially that oil grants from GCC ($3bn) help keep the energy subsidies bill at EGP131bn (7% of GDP), despite soft reform measures. Improved FX revenues as well as regional oil grants should support the external sector; however, CI Capital remains conservative on the monthly burn rate of foreign reserves – keeping it at $1bn – on potential eased capital restrictions; which was recently confirmed by the CBE Governor, and payment to oil companies ($6.2bn).
Normalised business operation should reflect positively on inflation, keeping headline CPI at an average of 10.7% in FY14, despite a devalued local currency (averaging EGP6.9/USD, 6% devaluation) and improved private spending (3.8%YoY growth – below a potential of +6%). This would give room for the CBE to continue an accommodative monetary policy – allowing for another 50bps cut in rates – which confirms the government’s commitment to supporting investments.
Khidr voiced CI Capital’s downside risks being prolonged security risks, inability to ensure political consensus, weak government execution of investment projects, in addition to further delays in establishing an efficient social safety net.
Overweight Egypt
Despite the inherent risks to political transition, Khidr said Egypt is attractively valued as it trades on a 2014e price-to-earnings-ratio of 7.2 times while offering 30% in year on year earnings-per-share growth, compared to emerging market averages of 10.5x and 12%, respectively. It is also under-owned, with a market cap-to-GDP of 20%, off from its 2008 peak of 96% and compared to an emerging market average of 46%. Potential eased capital restrictions on the back of a larger pool of foreign currency reserves should boost investment confidence in the market, Khidr said. Though inflation is to remain benign in CI Capital’s view, higher FY14 headline Consumer Price Index reading of 10.7% compared to 6.9% a year earlier should bode well for equities – as a hedge against inflation.
Khidr concluded by saying that CI Capital would be buyers of deeply under-valued industrial stocks, namely Centamin, Ezz Steel and El Sewedy Electric, and has high conviction in Egyptian real estate names, as the combination of weakening EGP and inflationary pressure would direct the flow towards real estate stocks. CI Capital’s top picks are Talaat Mostafa Group Holding, MNHD and SODIC. The company is also positive on Oriental Weavers Carpets (OWC) [ORWE EY | Overweight | TP EGP35.30] as demand recovery in both local and international markets along with improved margins should reflect positively on the stock performance, according to Khidr.
