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Egypt Strategy - Still bullish on Egypt, raise EGX30 target to 18,600


We reshuffle our Egypt portfolio (launched on 28 Nov 2017) following the 100bps rate cut and falling inflation. We look to consumer stocks and add DOMT (13x 2019e P/E) on resilient volumes (carton pack white cheese) and net margin pick up and DSCW on attractive valuation (6x 2019e P/E). In real estate, we add EMFD (top RE pick) as it scores favorably vs. peers on growth, cash flow visibility, and profitability. We add ETEL, despite ST headwinds from an expected 4Q loss (dispute settlement with Etisalat Misr – but it is largely priced in -8% YTD) as it offers a high yield, low-beta addition to our portfolio, with upside risk from its mobile business. We also add ADIB-Egypt on a strong ROE pick-up (to 36%) this year as its tax rate normalises, and despite its recent strong performance, we see strong momentum – most liquid small-cap Egyptian bank. To make way, we remove SKPC, MFPC, EKHO, and MNHD after returns of 42%, 25%, 15%, and 7%, respectively since inception on 28 Nov, (vs EGX30 +9%). As a result, we cut our exposure to materials from c16% to 5% following the sector’s strong outperformance. 
Portfolio has outperformed since inception and YTD; we cut COMI’s weight, lift SWDY’s

Our Egypt portfolio has returned c17% since inception vs 9% for EGX30 (8% YTD vs 3% for EGX30). We cut the weight of COMI from 27% to 23%. While we remain buyers of COMI, it could continue to lag behind the EGX30 in 1H18 owing to its already high foreign ownership (c75% of mcap). This makes incremental bids in COMI harder to find, and may mean that COMI serves as the funding source for investors looking to diversify their Egypt exposure. Finally, amid rising global volatility, we prefer to have less exposure to proxy names such as COMI. One catalyst for COMI would be a stronger credit growth environment. We increase our exposure to SWDY to 12.5% from 5%, turning more bullish on the name as we see it as one of the key beneficiaries of the transmission grid upgrades, and the next in line to join MSCI Egypt hence MSCI EM should the number of constituents drop below three. We replace ESRS with SWDY in our MENA Top 20 list, but keep ESRS in our Egypt portfolio. We maintain JUFO and EAST in our MENA Top 20 list and Egypt portfolio as we see more upside in both names. We also keep TMGH in our Egypt portfolio. EMFD replaces MNHD in our MENA Top 20 list.
Egypt’s investment case remains strong, raise end-2018 EGX30 target to 18,600 (from 17,000)

We continue to believe that Egypt is amidst a multi-year rally, supported by broad reforms with multiple catalysts ahead: i) interest rates cuts (we see 200-300bps more in 2018e); ii) some EGP appreciation and recovery in real wages; iii) continued recovery in tourism; and iv) increased gas output. The EGX30 Index remains c36% below the 2014 peak in USD terms (Fig.4), and market cap to GDP remains around 20%, which is one of the lowest in EM. We raise our EGX30 target to 18,600 (from 17,000 on 28 Nov 2017), with total returns in 2018e to be driven by 20% EPS growth and 3% dividend yield. Upside to our total returns target could come from multiple expansion – Egypt is trading almost in line with its LT average 12-month forward P/E of c11x (fig.5), with its 10-year peak forward P/E at c14x (average of c10x). However, we make no assumptions on strong multiple expansion despite falling interest rates and yields, as the index composition (COMI 30% of the weight) may mean that any expansion would be limited in 2018, and aggregate index returns are likely to be driven by EPS growth and yield. Having said that, unlike what we saw in 2017, we see limited scope for multiple contraction for Egypt this year.  

Mohamed Al Hajj