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05-Aug-2018

Egypt Strategy - Too hard to ignore EPS growth forever; reiterate OW, 22% upside by year-end

Oil, EM jitters, and rates paused the rally; time to Buy again… 

On 16 April 2018, we reiterated our OW on Egypt, calling for a multi-year rally, EGX30 gained 4.5% to reach a peak of 18,363 on 26 April, before giving up 15%. What went wrong? EM jitters (Turkey, Argentina, USD strength, EM outflows in May/June) and more importantly oil prices rose from around USD70/bbl to USD80 by 23 May. The CBE with an eye on oil prices and subsidy cuts (in 2018/19) kept rates on hold in May, and if oil remains at these levels we could see rates on hold for the next 12-18 months. However, we think the market has bottomed-out and it is time to buy again, as we expect a pick-up in turnover, as July has the lowest monthly turnover historically, and a strong earnings season in 2Q18 (22% Y-o-Y growth expected, with reported numbers so far showing upside potential) to kickstart the market again.
 
…EGX30 at 19,119 by year end; food names best trade in 18/19

Even if rates are not cut over the next 12-18 months, our view is that aggregate earnings growth is unlikely to be impacted in 2018/19e, and if we assume no multiples expansion in Egypt this year, we think the market still offers +22% upside by year-end on 25% EPS growth (EGX30 +4% YTD). We now expect EGX30 at 19,119 by year end (down from 21,250 as we remove our multiples expansion assumption on recent global EM de-rating). We continue to believe that food names are the best theme to play in 2018/19 – JUFO and DOMT are our top picks. It is also worth remembering that EGX30 is 36% below 2014 peak in USD terms.   
 
Add SKPC & EKHO to Egypt portfolio, drop EAST & ETEL

Our Egypt portfolio has outperformed the market by 14% YTD (see chart on the right). We make some changes ahead of our expectation of a market rebound. We add SKPC to our portfolio after its recent correction. We also add EKHO as a defensive play with additional upside stemming from the new gas discovery. We remove ETEL (outperformed the market in 2Q) and EAST (until we see evidence of its ability to raise prices again).  
 
The positive and negative catalysts ahead 

Positive catalysts: Earnings growth is the basis of our continued bullish view on Egypt (numbers from JUFO and DOMT in 2Q18 have significantly beaten expectations). We are not too concerned about the inflation outlook, and continue to see positive macro trends (improved growth, current account and fiscal balances). IPOs, Index inclusion for individual stocks, and improved liquidity could act as other catalysts. Last but not least, interest rates normalisation. Negative catalysts: oil breaking above USD100/bbl (looking increasingly unlikely), rising regional tensions, and continued EM jitters.

Mohamal Al Hajj