The market fell across the board yesterday, with EGX 30 and EGX 70 EWI giving up 1.8% and 2.4%, respectively. The former has fallen by 3.2% in the past couple of days alone since the start of the holy month of Ramadan. The reason? Earlier, it was the margin debt narrative. Later, it was the geopolitical tensions in relation to the Great Ethiopian Renaissance Dam (GERD). This week, the market seems to have added yet another reason related to the upcoming MSCI Emerging Markets index rebalancing. Market talk is suggesting that Elsewedy Electric [SWDY] could be replaced by Fawry [FWRY] in MSCI EM index, hence the former was down 16% in just three days, while the former is up 9% over the same period. Such market moves around index rebalancing windows are often a good opportunity for picking up cheap stocks. SWDY is now trading at 4.4x 2021 earnings with an EGP0.40 DPS to be paid out soon, implying a 5% yield. All EGX 30 constituents were down on the day, except for FWRY which will see its EGP400mn capital increase rights trade next week. Large caps were hammered, which coincided with foreign investors showing as net sellers.
However, it was not all bleak. Yesterday, EFG Hermes Holding's [HRHO] BoD approved the long-anticipated acquisition of aiBank which was valued within a range of EGP0.9-1.2bn with an estimated fair value of EGP1.1bn. Post-acquisition, HRHO will own a 51% stake, while The Sovereign Fund of Egypt (TSFE) will own another 25% stake. The acquisition will be in the form of a capital increase (i.e. growth capital), raising aiBank's capital by EGP3.9bn to meet the CBE's minimum required capital of EGP5bn, after writing off some EGP800mn of assets. This means HRHO will need to dole out EGP2.55bn of its EGP5bn available cash balance to fund the deal which valued aiBank at 0.56x its book equity at end of June 2020 (before any asset write-off) versus our estimated 1.0x, indicating that aiBank’s valuation came below our expectation due to lower-than-thought profitability.