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24-Mar-2019

Egypt Strategy - Add EKHO on large upside, Drop JUFO after strong run

Add EKHO to MENA Top 20 and FEM Top Picks 

 
We add EKHO to our MENA Top 20 and FEM Top Picks replacing JUFO. JUFO has returned 44% (in USD) since we added it to our MENA Top 20 list in Nov 2017 outperforming Egypt, MENA, and EM by 37%, 16%, and 48%, respectively. We keep JUFO in our Egypt portfolio, but cut its weight given its strong performance YTD.  We also open a Long EKHO trading call. We have been OW on Egypt since Nov 2016.
 
Why EKHO? 

EKHO is a name that could have a strong 12-14 months run, in our view, as it ticks the right boxes: i) trades at c12.8x P/E, with 28% EPS CAGR (2019-23e); ii) offers decent USD dividend (c4% yield in 2019), which can be comfortably increased; iii) enjoys cash + liquid investments that represent 26% of MCap; and iv) still has the optionality to add more value if the deeper gas layers are developed. In addition, if liquidity remains at 1Q19 levels we see EKHO as a potential May 2020 MSCI EM inclusion candidate (using FIF of 0.7, which MSCI has historically used), leading to USD100mn inflows (58x ADVT).
 
Reshuffle our Egypt portfolio

EGX30 has outperformed MSCI EM by 6.7% YTD. We reshuffle our portfolio, ahead of the MPC meeting this Thursday, which could see a pause in rate cuts until 2H19 – this could lead to some ST profit taking, especially on outperformers. Therefore, we increase our allocation to some of the EGX30 laggards in our portfolio such as SWDY, AUTO, ESRS, CIEB, CIRA and DOMT as we believe they should catch up with the rest of the market, and in the event of a pullback they should suffer less considering there isn’t much profit YTD to take off the table. Overall, the market is still discounting the superior growth outlook, and improved macro outlook over the past couple of months. The EGX30 is still trading at 9x forward earnings (compared to a peak of 14x in 1Q18), as such from a valuation perspective downside should be limited.
 
ST upside and downside risks 

We believe that inflation remains the key risk to our bullish view on Egypt as elevated readings could slow monetary easing, which remains the main catalyst for the market going forward given implications on valuations and liquidity. As such, we see higher oil prices and volatility in food prices as the main sources of risk. Upside risks remain faster and sooner-than-expected monetary easing (although we pencil in a 100-200bps cut over 2019, most likely in 2H19). Finally, if the GTHE deal goes through, this could lead to cUSD600mn potentially circulating back into the equity market, providing a strong catalyst for another re-rating for Egyptian equities. 

 
Mohamad Al Hajj
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