Fundamental Thoughts
Yesterday, Abu Dhabi Islamic Bank – Egypt’s [ADIB] management held an Analyst Day to discuss its strategic plans and targets following a magnificent performance in 2022. Below are our main takeaways from the meeting that we attended:
· Growth still a top priority: ADIB’s management intends to maintain its focus on growth without jeopardizing high profitability. In 2022, ADIB recorded the highest ROE in its sector with deposits and gross loans growing 29% and 17%, respectively. ADIB met the 25% minimum percentage of SME loans set by the Central Bank of Egypt, with a loan book of c.EGP10bn.
· Competition intensifying: Expansion is ADIB’s keyword for 2023, driven by a bigger number of branches and an enlarged customer base. The bank targets a new tranche of clients through its consumer finance arm, microfinance arm (to be launched by Q2 2023), or core banking services. Competition in the local market is very tense; the two largest state-owned banks have a combined market share of 55%, while all state-owned banks have a combined market share near 65%. However, ADIB was able to grow its market presence, with a total number of debit cards of 181,000 and a client base of around 276,000 clients (planned to be doubled). The bank will try to safeguard its deposits market share by keeping an eye on funding costs, following the same approach as 2022.
· Capital adequacy in a much safer spot: The management assured that the current satisfactory CAR (following two capital increases last year) allows the bank to carry on with its growth trajectory. Despite being able to secure considerable subordinated debt, management believes that the current CAR structure with earnings growth will be more than enough to avoid slipping back towards the 12.5% threshold. With capitalization pressures alleviated, ADIB now has no apparent obstacle to hinder dividends distribution in the future. We note that the bank’s CAR was briefly below the aforementioned threshold last year for about a month, according to management. The bank overcame its CAR limitation when approaching growth by growing its off balance sheet finance (i.e. trade finance). By now, the bank’s off-balance sheet credit commitments reached c.EGP17bn, one of the highest off-balance sheet lenders in the sector considering its on-balance sheet size.
· The sukuk market, ADIB's favorite playground: ADIB played a vital role in the latest Egyptian sovereign sukuk issuance, starting from preparation of the legislative framework with the Egyptian government and ending with the issuance itself. Sukuk issuance represents one of ADIB’s major competitive edges, given the established track record of its parent bank. Management believes that the possibility of a sovereign sukuk issuance in local currency will unlock major opportunities and could attract foreign and local interest, potentially creating some opportunities for carry trades in the medium and long runs.
· Unlocking value from subsidiaries: ADIB’s plans for its subsidiaries are as follows:
(1) Exiting non-core investments. This includes:
o National Co. for Glass & Crystal which was successfully divested for EGP231mn.
o Assiut National Agricultural Development (ANAD) which owns 1,200 feddans of agricultural land.
o National Co. for Trading & Development (NTAD) (40% stake) which owns a small building.
o El Kahera El Watania Investment (65% stake) to be retained by ADIB for now.
(2) Expanding subsidiaries and other investees with relevant and attractive business models. This includes:
o ADI Capital which led several high-profile syndications, with EGP11mn in 2022 earnings.
o ADI Finance which went through a successful restructuring, with EGP80mn in 2022 earnings after adding the factoring license in addition to its leasing license.
o ADI Consumer Finance (a capital of EGP100mn) will soon launch its first product under the brand name “Takka”.
o ADI Microfinance (a capital of EGP25mn) which is planned to be launched in Q2 2023 with a portfolio of EGP130mn spun off from ADIB.
o Orient Takaful (20% stake) which is an insurance company.
o Taskeek (a sukuk company).
o Custody.
· No particular worries for credit risk so far in 2023: With a solid asset quality, ADIB is expected to maintain its provisioning rates of last year as long as NPLs remain within range. While the bank’s CoR was high during 2022 (i.e. 145bps), management is watching its loan book carefully during 2023. ADIB’s management is sorting out any problems that face its clients in order to make sure that necessary actions are taken in case of any credit quality event. So far into Q1 2023, management indicated no worrying shift in clients’ credit behavior.
We note that ADIB is one of our top picks for 2023 with an Overweight rating for the name with a 12MPT of EGP27.4/share.
—Amany Shaaban | Equity Analyst
Today’s Top News & Analysis
Egypt targets a 5% GDP growth in FY24
Egypt to raise annual income tax exemption limit to EGP36,000
AD Ports interested in Damietta and Port Said Container Handling Companies
Egypt’s car exports fall by 50% in 2022
Two state-owned real estate companies seek investments through capital increases
Egypt to stop wheat tenders by mid-April; raised budget for bread subsidies
Ezz Steel raises rebar prices for the second time in March
Egyptian government to sell a stake in ETEL this week
CLHO 2022: Higher costs pressure earnings
Orascom Development Egypt 2022: A 38% increase in bottom line
FRA approves to publish National Paints higher offer to buy PACH at EGP34/share
Edita to buy back 1% of its outstanding shares
Lecico Egypt approves a share buyback program
SAIB's BoD adjusts proposed dividends for 2022
Egypt Gas’ BoD approves a cash dividend of EGP1.25/share
Kaf Life Insurance is first to convert from takaful to commercial insurance
Emirates Aluminum is interested in a stake in EGAL
Elsewedy Electric to increase exports by at least 20%
Macro
Egypt targets a 5% GDP growth in FY24
In a meeting held yesterday, the Egyptian government reviewed FY24 budget where GDP growth is expected to be around 5%, the primary surplus to record 2.5%, and overall deficit to record 6.4%. (CNBC Arabia)
Egypt to raise annual income tax exemption limit to EGP36,000
President El-Sisi directed the Egyptian government to raise annual income tax exemption limit from EGP24,000 to EGP36,000 (instead of the EGP30,000 that was planned before) as part of the government's efforts to mitigate the effects of the global economic crisis. (Al-Mal)
AD Ports interested in Damietta and Port Said Container Handling Companies
AD Ports, a subsidiary of ADQ Holding, is currently studying to acquire a stake in Damietta Container Handling Co. [DCCC] and Port Said Container Handling Co. [POCO] in the upcoming IPO program. It was reported that Qatar Investment Authority (QIA) is negotiating to buy a majority stake in both DCCC and POCO. (Al-Mal)
Egypt’s car exports fall by 50% in 2022
According to Automotive Marketing Information Council (AMIC), Egypt’s car exports fell to USD47mn in 2022 (-50% y/y). (Al-Mal)
Two state-owned real estate companies seek investments through capital increases
El Nasr Housing & Development and Maadi for Development & Construction, two state-owned real estate companies, are reportedly seeking investments from strategic investors through capital increases rather than selling stakes belonging to existing shareholders. The two companies are subsidiaries of the Holding Co. for Construction & Development (HCCD). (Enterprise)
Egypt to stop wheat tenders by mid-April; raised budget for bread subsidies
The Egyptian Minister of Supply said that all the wheat tenders will be stopped in 15 April 2023. However, there are agreements to import c.120,000 tons of wheat from Ukraine, to be delivered in May. The minister referred that Egypt already delivered 4mn tons of wheat in which 2.6mn are from Russia and Ukraine. Additionally, he said that bread subsidies in FY24’s budget are raised by 78% to EGP91bn due to the high costs of wheat. (Al-Arabiya)
Corporate
Ezz Steel raises rebar prices for the second time in March
Ezz Steel [ESRS] raised its factory rebar prices to EGP32,135 (including 14% tax) effective today. This is a 10% increase since the last price increase 13 days ago on 7 March 2023. (Company disclosure)
Egyptian government to sell a stake in ETEL this week
Reportedly, the Egyptian Finance Ministry has agreed to sell a 10% from its stake in Telecom Egypt [ETEL] to an investor from the GCC, through this week. Referring that the government is trying to secure dollars through the deal. (Economy Plus)
CLHO 2022: Higher costs pressure earnings
Cleopatra Hospitals Group [CLHO] reported 2022 net profits of EGP326mn (-16% y/y) on revenues of EGP2.6bn (+3% y/y). Revenues grew despite the high base effect of COVID-related services in 2021 due to an 8% y/y growth in CLHO’s overall number of cases. However, gross profit margin decreased by 3pp y/y to 33% due to higher costs. Meanwhile, Q4 2022 net profits declined by 32% y/y to EGP79mn despite 10% y/y higher revenues of EGP712mn which were driven by higher volumes (+11% y/y) as gross profit margin decreased by 4pp y/y to 33% due to higher costs. (Company disclosure)
Orascom Development Egypt 2022: A 38% increase in bottom line
Orascom Development Egypt’s [ORHD] 2022 net income came in at EGP1.7bn (+38% y/y) on revenues of EGP10.3bn (+46% y/y), while GPM recorded 36.7% (+2.8% y/y). New sales recorded EGP11.1bn (+21% y/y), the highest in ORHD’s history. (Company disclosure)
FRA approves to publish National Paints higher offer to buy PACH at EGP34/share
The Financial Regulatory Authority (FRA) approved to publish National Paints Holding (NPH) offer to buy up to 100% of Paints & Chemical Industries (PACHIN) [PACH] at EGP34/share (17% higher than its previous offer). This makes NPH the highest bidder on the table, surpassing Compass Capital’s and Eagles Chemicals’ offers. (Company disclosure)
Edita to buy back 1% of its outstanding shares
Edita Food Industries’ [EFID] BoD approved the buyback of 7.23mn shares for EGP14.5/share, starting from 22 March 2023. Once executed, EFID’s treasury shares will amount to 3.19% or 23.04mn shares. The share buyback is made to support EFID's market price. (Company disclosure)
Lecico Egypt approves a share buyback program
Lecico Egypt’s [LCSW] BoD approved to buy back 3.2mn shares (4% of total outstanding shares) at EGP7.9/share (+39% than 19 March closing). (Company disclosure)
SAIB's BoD adjusts proposed dividends for 2022
In a BoD held on 16 March 2023, Societe Arabe Internationale de Banque's [SAIB] BoD decided to change its proposed dividends for 2022 from a cash dividend of USD0.7/share to a 7% stock dividend. (Bank disclosures: 1, 2)
Egypt Gas’ BoD approves a cash dividend of EGP1.25/share
Egypt Gas’ [EGAS] BoD approved a cash dividend of EGP1.25/share, implying a 4.1% yield. (Company disclosure)
Kaf Life Insurance is first to convert from takaful to commercial insurance
The Financial Regulatory Authority (FRA) granted Kaf Life Insurance a commercial life insurance license, making it the first insurance company to convert from takaful to commercial insurance. The conversion would allow for the creation of simplified and high-value insurance solutions that would pave the way for financial inclusion. (Al-Borsa)
Emirates Aluminum is interested in a stake in EGAL
Minister of Public Business Sector has announced that Emirates Aluminum Global, the world's largest premium aluminum producer and the biggest industrial UAE company outside oil and gas, is interested in acquiring a stake in Egypt Aluminum [EGAL] through a capital increase to fund the company's latest developments. (Al-Borsa)
Elsewedy Electric to increase exports by at least 20%
Elsewedy Electric [SWDY] is looking to increase exports by at least 20% this year, to benefit from a stronger USD/EGP. Moreover, SWDY is looking to cooperate with the Egyptian government to build a 5mn sqm industrial complex in 6th of October city. (CNBC Arabia)
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