Another Downgrade

May 07, 2023

Today’s Top News & Analysis

Egypt's balance of payments recorded a surplus of USD599mn in H1 FY23
Fitch downgrades Egypt to B with a negative outlook
Diesel prices increase, gasoline unchanged
Egypt's PMI rose to 47.3 in April
Egypt's net international reserves improved marginally in April 2023
Egypt’s automotive manufacturing components imports fall 31% in January and February 2023
SKPC Q1 2023: Hitting the ground running
Egypt Aluminum's preliminary 9M 2022/23: 132% higher net profits
Orascom Development Egypt suspends 2022 dividends, settles EGP390mn of debt
BTFH 2022: Wider losses on higher expenses
Two AIH subsidiaries receive binding offers from JAF Investment

MACRO

Egypt's balance of payments recorded a surplus of USD599mn in H1 FY23

The Central Bank of Egypt (CBE) published Egypt's balance of payments (BoP) for H1 FY23 ending 31 December 2022, registering an overall surplus of USD599mn compared to a deficit of USD14mn in H1 FY22. The current account deficit (CAD) improved by 77% y/y to USD1.8bn in H1 FY23 compared to USD7.8bn in H1 FY22, while the capital & financial account surplus fell 76% y/y to USD2.8bn compared to USD11.4bn in the comparable period. However, the y/y improvement was driven by lower net errors and omissions of a negative USD404mn from a negative USD3.6bn. Below are our key takeaways:

· Trade deficit improved by 28% to USD15.5bn, as:

o Non-oil trade deficit improved by 27% y/y to USD17.3bn, driven by an increase in non-oil exports by less than 1% to USD12.9bn and a decline in non-oil imports by 17% to USD30.2bn.

o Oil trade surplus fell 14% y/y to USD1.8bn, mainly due to:

§ A surge of USD691mn in oil exports on the back of a USD2bn increase in natural gas exports, despite a decline in exports of USD691mn and USD652mn in crude oil and oil products, respectively.

§ An increase of USD980mn in oil imports.

· Tourism revenues increased by 26% y/y to USD7.3bn.

· Egyptians' remittances declined by 23% y/y to USD12bn.

· Investment income deficit rose 26% to USD8.9bn due to higher income payments for earnings on FDIs in Egypt and interest payments on external debt.

· Net foreign direct investments (FDIs) rose 75% y/y to USD5.7bn, driven mainly by:

o Net inflows of non-oil sectors on sale proceeds of companies to non-residents and net greenfield investments and capital increases of existing companies.

o Net outflows of the oil sector declining as a net result of a rise in new investments of foreign oil companies and an increase in outflows from the cost recovery for exploration, development, and operations previously incurred by foreign partners.

· Foreign portfolio investments (FPIs) registered a net outflow of USD3bn vs. USD2.5bn a year before, on withdrawal of investments against the backdrop of a more hawkish U.S. Fed. (CBE)

Fitch downgrades Egypt to B with a negative outlook

Fitch Ratings downgraded Egypt's outlook on Long-Term Foreign Currency (LTFC) Issuer Default Rating (IDR) from B+ to B with a negative outlook. This comes on the back of a higher external financing needs and risk, constrained external financing conditions, and the sensitivity of Egypt's broader financing plan to investors sentiment, according to Fitch. (Fitch)

Diesel prices increase, gasoline unchanged

The Fuel Automatic Pricing Committee raised diesel prices but maintained the other fuel prices, effective last Thursday, 4 May 2023. Diesel prices increased by 14% or EGP1/liter to EGP8.25/liter, while Octane and industrial-use mazut remained unchanged as follows:

• Octane-80 gasoline at EGP8.75/liter.

• Octane-92 gasoline at EGP10.25/liter.

• Octane-95 gasoline at EGP11.50/liter.

• Natural gas car fuel at EGP4.50/cubic meter.

• Industrial-use mazut at EGP6,000/ton.

This should have an effect on food prices, especially bakeries, and should reflect in higher electricity prices, which will all fuel inflation further in May and June. (Al-Masry Al-Youm)

Egypt's PMI rose to 47.3 in April

Egypt's PMI rose 1.3% m/m to 47.3 in April 2023 compared to 46.7 in March 2023, but still below the 50 neutral mark for the 29^th consecutive month. This ease in PMI’ April reading is driven by a slower fall in demand levels and easing inflationary pressures. (PMI)

Egypt's net international reserves improved marginally in April 2023

Egypt's net international reserves (NIR) increased slightly in April 2023 to USD34.55bn, up USD104mn from USD34.45bn in March 2023. (CBE)

Egypt’s automotive manufacturing components imports fall 31% in January and February 2023

According to Automotive Marketing Information Council (AMIC), Egypt’s automotive manufacturing components imports fell to USD93.1mn in January and February 2023 (-31% y/y). (Al-Mal)

Corporate

SKPC Q1 2023: Hitting the ground running

Sidi Kerir Petrochemicals Co. (Sidpec) [SKPC] reported its preliminary Q1 2023 results, recording net profits of EGP520mn (+107% y/y) on higher revenues of EGP3.6bn (+71% y/y). The company’s GPM also increased to 29% (+11pp y/y). Furthermore, Sidpec achieved adequate sequential growth with net profits increasing 5% q/q while revenues expanded 27% q/q. SKPC is currently trading at an TTM PE ratio of 11.0x. (Company disclosure)

Egypt Aluminum's preliminary 9M 2022/23: 132% higher net profits

Egypt Aluminum’s [EGAL] preliminary results for 9M 2022/23 showed the bottom line rising by 132% y/y to EGP3.9bn vs. EGP1.7bn a year before. The increase came on the back of 37% higher revenues of EGP14.8bn and a 9pp y/y higher GPM of 31%. (Company disclosure)

Orascom Development Egypt suspends 2022 dividends, settles EGP390mn of debt

In an OGM held on 2 May 2023, Orascom Development Egypt’s [ORHD] shareholders agreed to suspend dividend payments on 2022 financials, only approving EGP48.3mn in employees’ profit share. Meanwhile, shareholders approved the sale of three land plots owned by ORHD in a non-cash, debt-for-land swap, where ORHD will settle the liabilities it owes its 90%-owned subsidiary El-Gouna Educational Buildings. This debt settlement detailed as follows:

(1) Berlin Technical University land for EGP150.1mn.

(2) A land plot related to a school for EGP196.3mn.

(3) A cinema land plot in El-Gouna for EGP43.5mn.

In our opinion, while these transactions do imply some valuation for the land parcels mentioned, they are made with a subsidiary that is consolidated within ORHD's financials, so we do not think these transactions will impact ORHD's consolidated financials. (Company disclosure)

BTFH 2022: Wider losses on higher expenses

Beltone Financial Holding’s [BTFH] net losses widened to EGP269mn in 2022 against losses of EGP170mn a year before. This came despite a 16% increase in total revenues to EGP256mn. The deeper losses can be attributed to:

(1) 28% y/y higher wages and salaries of EGP226mn.

(2) 47% y/y higher other operating expenses of EGP114mn.

(3) 252% higher provisions of EGP37mn.

(4) 55% y/y higher interest expense of EGP144mn. (Company disclosure)

Two AIH subsidiaries receive binding offers from JAF Investment

Arabia Investments Holding [AIH] received an official binding offer from JAF Investment to acquire a stake in two of AIH's subsidiaries:

· A 30% stake in UE Finance, AIH's leasing arm, for EGP147mn.

· A 30% stake in Rawaj Consumer Finance for EGP30mn.

We note that the combined implied valuation for both subsidiaries is EGP590mn, 22% higher than AIH’s current market cap of EGP485mn. We note that the two aforementioned companies are the main bread winners for AIH given the weak performance of the other subsidiaries. (Company disclosure)