Today’s Trading Playbook
KEY THEMES
The stimulus package passed overnight by the Cabinet to stimulate trading on the Egyptian Exchange (EGX) was welcome by almost all market participants. However, some still see more issues are yet to be tackled. Bottom line, the stamp duties will be removed, and the capital gains tax is here to stay and will be implemented as scheduled starting next year, albeit with some sweeteners, such as a lower tax rate for investors in mutual funds. Also, the cost basis for calculating capital gains tax will also include the full cost of trading (i.e. margin loan cost), which makes sense. Furthermore, any new IPOs will have a two-year 50% discount on their related capital gains to further stimulate new listings in the market. The question remains, however, whether this addresses all the issues remains to be see, especially from the eyes of foreign investors who have been neglecting the Egyptian stock market despite its being one of the cheapest in the region, while other regional markets (e.g. Saudi Arabia and Abu Dhabi) have benefited from an overall positive sentiment post-COVID-19. That said, we should expect the market to greet the stimulus package in today’s trading with a positive the market open.
Elsewhere, we have more Q3 results coming our way. Telecom Egypt [ETEL] has reported its 9M 2021 figures, registering a whopping 73% y/y growth in bottom line to EGP6.1bn. Meanwhile, quarterly speaking, ETEL’s earnings grew by 51% y/y to EGP2.2bn on the back of 22% growth in revenues to EGP9.0bn coupled with 633bps expansion in EBITDA margin of 39.8%. Revenue growth was mainly dominated by the Home & Consumer segments, as well as the Domestic Wholesale segment. On the other hand, EBITDA margin expansion comes as a result of a better, healthier revenue mix. ETEL’s current market cap is EGP23.6bn, which if we annualized 9M 2021 earnings, we’ll get to a 2022e P/E that’s only 3x! Also, at such a market cap, ETEL is trading below its book value. For a very long period, ETEL’s ROE levels were not as satisfying; however, based on annualized 9M 2021, ETEL will score an annualized ROE of c.19%. We reiterate our call for ETEL, anchored by (1) impressive earnings run, (2) very steep valuation discount, (3) ETEL is Egypt’s only and dominant telecom infrastructure player, and (4) any related deal talks regarding Vodafone Egypt [VODE] should help re-rate the undervalued ETEL. We valued ETEL at EGP22.5/share (+62% y/y) in our TAKEStock dated 8 June 2021.
Meanwhile, Al Ezz for Ceramics & Porcelain [ECAP] managed to swing to a net profit of EGP31mn in Q3 2021 from a net loss of EGP8.3mn in Q3 2020. Revenues during Q3 surged to EGP358mn (+31% y/y) aided by local sales and a better product mix. Meanwhile, ECAP’s gross profit shot up to EGP106mn (+79% y/y) and its margins improved. We note the contribution of local sales increased by 6%, at the expense of exports, to 86% of total. Bolstering local sales was a strong recovery in the local market as construction revived in Egypt post-COVID-19. This increase in local sales points to improved profitability; the company sells its products locally at a premium to exports where it has to sell at a lower price to compete globally. Also, the local market rebound offsets the effect of pricier energy on the company. The increase in natural gas prices itself, which is 6% to USD4.75/MMBTu, already only translates to a paltry 0.5% more cost on the company.
Now, on to the top news and analysis for the day.