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16-Apr-2018

Egypt Strategy - Stars are aligned for multi-year rally

All ingredients in place for a multi-year bull run (+29% p.a.) 

Egypt’s rally is just getting started, in our view, as macro catalysts are aplenty: i) falling interest rates; ii) improved current account balances, on increased gas output and pick-up in tourism; iii) lower fiscal deficit on continued reforms; and iv) better economic growth outlook. Consensus 2018-20e EPS CAGR is 20% for EGX30 (in line with our numbers) vs 15% for MSCI EM. We assume Egypt will continue to trade at a trailing P/E of 15x (MSCI EM LT avg.) by the end of the forecast period, implying a total 17% multiple expansion over the next three years, likely to come in 2018 and 2019 (fig.3) as Egypt cuts rates. A c4% dividend yield takes us to an average c29% total return per annum. Downside risks to our forecasts are: i) weaker-than-expected growth; ii) geopolitical concerns; iii) global equity sell-off; iv) and slower-than-expected progress on economic reforms. We see a stable EGP over 2018-20. We raise our end-2018 EGX30 target to 20,125 (from 18,600) as we add in a 10% multiple expansion for 2018e, as interest rate cuts, in line with our economics team’s expectations, should support some multiple expansion, in our view.
 
Load up on consumers (JUFO, DOMT) and ESRS 

Real estate and consumers are best placed for falling interest rates and recovery in real wages. We particularly like highly leveraged companies in EGP terms – JUFO, ESRS (which we add to our MENA Top 20 list, replacing SWDY) and DOMT – as they will see net margin expansion, in addition to recovery driven top-line growth. In real estate, we like TMGH (next in line for MSCI EM inclusion, in our view, provided certain conditions are met). SWDY delivered 59% total return YTD, but expected EM inclusion and potential backlog additions could keep the momentum going for the stock in Apr/May 2018. We adjust weightings in our Egypt portfolio by cutting SWDY’s weight following its stellar performance and lifting JUFO and TMGH’s weights (fig.1).
 
EGX30 could surpass 2008’s peak in USD terms by end-2021

Egypt scores the highest among EM countries, in terms of nominal growth for 2018-2021 (fig.4). This offers strong potential for EPS growth in Egypt and warrants us to look at Egypt’s potential beyond 2018, or even 2019. Growth will be strong (figs. 5-6) and could surprise positively. In addition, M&As, IPOs and secondary offerings can catalyse sector-specific multiple expansion that can spill across the market. We believe this will lead to new highs for EGX30 in USD terms. EGX30’s previous peak (in USD terms) was on 5 May 2008, when the Index touched 2,228 (USD); the implied level, in EGP terms, today is 39,432 (EGP), which is 124% from current levels (figs.7-9). The 2014 peak, in USD terms, is 38% away from current level, and we believe this should be achievable in 2019 (fig.3). Moreover, EGX30 could surpass 2008’s peak in USD terms by end of 2021, if forecasts materialise.  

Mohamed Al Hajj