Today’s Trading Playbook
KEY THEMES
MSCI has been in the center of the rumor mill for at least a month now. Word on the street is that MSCI may replace SWDY with HRHO in its upcoming Quarterly Index Review (QIR). A divergence between the two stocks’ performance is vivid since 12 May—interestingly the same day the last QIR was announced with SWDY kept as one of Egypt’s three stocks in MSCI EM index (the other two being COMI and EAST). Since 12 May, SWDY is down 22%, whereas HRHO is up 23% (an almost one-for-one move, albeit in the opposite direction). However, we note that SWDY’s underperformance was triggered in the first place by its weak Q1 2020 results. Now, let’s play the devil’s advocate. Assuming SWDY’s EGP400mn in net income reported in Q1 2020 will be the norm throughout 2020, the company would be generating EGP1.6bn in net income this year (a level not seen since 2015). At current market price with a market cap of EGP14.8bn, SWDY would be trading at just above 9x (not too demanding when compared to the potential recovery in the business in the medium term).
On the other hand, FWRY—the high-flying electronic payment platform—is now worth EGP12.1bn, implying a forward P/E of 95x based on Bloomberg consensus and 98x based on Q1 2020 annualized net earnings, and yes, we are not missing any decimals here. Such valuation is almost double that 53x that the global e-payment platform PayPal Holdings (NASDAQ: PYPL) is trading at on a forward earnings basis. That said, we are not debating here whether FWRY is worth that much; this depends on the type of growth you are conceiving when you envisage each company’s future. What we are doing here is comparing SWDY with a market cap of EGP14.8bn vs. FWRY with a market cap of EGP12.1bn. While it could be argued that we are comparing “old” vs. “new” economies in action, we believe SWDY is worth picking at current levels even after taking into consideration its weak Q1 2020 results and swallowing a potential removal off MSCI EM index – or at least that’s what some market participants tout to play the “sell SWDY, buy HRHO” trade. MSCI will not make its decision public until late 12 August. Meanwhile, SWDY’s board decision to open the window for its share buyback for three more months might boost the stock somewhat (please see news below).
NEGATIVE
SVCE: Reporting its 2019 results over six months after the end of its financial year, SVCE is echoing the negative performance almost all cement producers have shown in 2019, with the exception of MBSC and MCQE—the only two cement names we would ever consider to buy if we had to buy into the sector. At least both are eking out profits! That said, we are still negative on the cement sector.
Now, on to the top news and analysis for the day.