Finance & Markets An Early Year in Review The CASE usually goes on vacation in August, but instead roared out of a correction with a 22.6% gain by press time. Are the bulls back to stay?

By Fatima El Saadani

If it weren’t for outside events, the Cairo and Alexandria Stock Exchange (CASE) might be boasting about a gain of more than 10% for July, triggered by the announcement that Etisalat had paid a record LE 16.7 billion for the right to operate the nation’s third mobile network.

As it was, growing anxiety about amendments being made to libel provisions in the criminal code and the Israeli military campaign in Lebanon sparked investor flight that saw the benchmark CASE30 Index close down 1.34% during our reporting period. The index ended at 4,943.20 as bargain-hunters gave every sign that they were off on summer vacation, leaving no one to take advantage of value-priced shares on the bourse.

Meanwhile, Central Bank of Egypt (CBE) reports continue to assure everyone from small retail investors to major foreign institutions that the nation’s economic fundamentals are improving. Egypt’s balance of payments hit a surplus of $3.3 billion in 3QFY05-06, foreign direct investment increased 48% to $4.6 billion year-on-year, the budget deficit fell to 8.3% of GDP in FY05-06 from 9.1% the previous fiscal year, and inflation has plummeted from 17% a little over a year ago to 4% today.

Banking sector liquidity for the nine months ending March 2006 climbed 8.3% to LE 40.8 billion. Credit is also on the rise as banks increased lending to the private sector, bringing the total to LE 23.6 billion, while total deposits hit LE 555.4 billion in the year ending February 2006.

Furthermore, with the sale of 52 companies, privatization proceeds in the nine months ending March 2006 came to LE 14.3 billion.

The market was hit with several days of turbulence in the second week of July as the People’s Assembly went into session to vote on government-proposed amendments to the criminal code pertaining to media-related offenses. With journalists protesting at Parliament’s doors, President Hosni Mubarak joined the fray, saying lawmakers should scrap prison terms for most forms of libel.

As that piece of support rallied the ailing bourse — investors love promises of political reform — war broke out in Lebanon when Israel began bombing its northern neighbor in response to a Hezbollah offensive.

Retail trading dominated the market last month, with local investors accounting for 80-85% of all buying, while institutional investors offloaded their holdings on July 16, the fifth day of fighting in Lebanon. As they surpassed their stop-loss points and adjusted their positions, institutional buyers returned to the market as net buyers, though Arab investors continued to pull out when air strikes against Beirut intensified.

The banking sector has been among the most dynamic of late, with several M&A deals having been finalized. The joint Egyptian American Bank (EAB, bt100 number 37) and Calyon Bank-Egypt general meetings held on June 27 approved the merger of the two banks, valuing EAB shares at LE 51.70 and Calyon shares at LE 14.15. The outcome pushed the stock price higher, but EAB shares dipped below LE 50 a week after conflict broke out in Lebanon.

Foreign interest in Egypt’s banking system continues unabated as Nile Strategic Company, a consortium established by Bahrain’s Ahli United Bank, filed papers with the CBE asking to acquire 100% of Delta International Bank (DIBK). The bank’s shareholders agreed to sell 80% of DIBK at LE 37 per share, with the balance of its equity to be bought on the CASE, bringing the deal’s total value to LE 1.85 billion.

Also up for sale is Alexandria Commercial and Maritime Bank (ACMB, bt100 number 80), for which Emirates-based Union National Bank has completed its due diligence. Banque du Caire has been assigned to sell a 58.28% controlling stake at LE 23 per share.

On June 29, the CBE ordered the merger of the Islamic International Investment Bank, United Bank of Egypt and Nile Bank to create United Bank. Shortly after the merger was announced, Commercial International Bank (CIB, bt100 number 13) Managing Director Mohamed Ashmawy resigned to become chairman of the nation’s newest financial institution. The CBE is extending United Bank a LE 3-billion interest-free 10-year loan to help it set its house in order.

Ashmawy’s resignation hardly affected CIB shares as investors were still holding their breaths for the results of the bid for the third mobile license. When the Etisalat consortium – of which CIB is a partner – won the bid with an overwhelming offer worth LE 16.7 billion, CIB shares shot up, but only for a few days. Profit-taking and selling pressures set in as regional political turbulence heightened.

Etisalat’s success set its competitors Telecom Egypt (TE, bt100 number 3) and RAYA Holding’s (RAYA, bt100 number 17) stock prices tumbling 2.75% and 4.46%, respectively, on the day the announcement was made. As TE gracefully accepted defeat, it assured shareholders that its diverse lines of business leave room for growth of its high-bandwidth data products as well as fixed-line network ventures in Algeria and Jordan.

The incumbent mobile operators’ shareholders were relieved to have the third operator finally identified. At more than 10 times what the previous two licenses had gone for, the Etisalat offer boosted investor confidence in Egypt’s telecom sector. Its high price tag has created expectations that the new provider will most likely offer high prices to consumers, possibly boosting demand for MobiNil (bt100 number 6) and Vodafone’s (bt100 number 5) services.

Furthermore, because the National Telecom Regulatory Authority (NTRA) offered the third license in the market before 2007 — in violation of its agreement with both MobiNil and Vodafone — the two operators will be entitled to a rebate of LE 300 million each. With Etisalat required under its license conditions to introduce 3G technology to the market, Vodafone Egypt announced it would invest $578 million to upgrade its 2G license to 3G. The amount is equivalent to 20% of Etisalat’s bid for the third license, as per NTRA regulations.

The telecom sector might have sparked a run on the market that would have restored old glories if it hadn’t been for war in the region. MobiNil’s share price jumped 20% to LE 156, Orascom Telecom’s (OT, bt100 number 1) closed 2.81% higher at LE 248.79 and Vodafone Egypt climbed 9.57% to LE 91.16 on July 4, the day Etisalat won its bid. For the first time since mid-June, the CASE 30 Index climbed over the 5,000-point level to 5021.62 points, a single-day change of 2.59%.

On July 18, Vodafone announced key performance indicators for the quarter ending 30 June 2006, showing a 57% y-o-y increase in the total number of customers to 7.1 million; a 37% rise in total revenues to LE 1,738 million; a 39% jump in EBITDA to LE 948 million; and a 57% increase in profits after legal provisions and deferred taxes to LE 525 million.

Meanwhile, OT announced it plans to up its stake in MobiNil by 3.5%. The regional telecom operator already owns 16.6% in MobiNil and 28.75% of MobiNil Holding, which has a 51% stake in MobiNil.

In Iraq, OT’s 100%-owned GSM operation, Iraqna, has been granted only a three-month extension to its current interim license. Iraqna has invested over $257 million in its GSM mobile network since its inception in December 2003 and the company served more than 2.2 million active subscribers as of March 31, 2006. The license extension until September 30, 2006 means Iraqna will continue to pay a revenue-sharing fee of 13% of gross revenues less amounts paid to the Iraqi Telephone and Post Company and other licensed mobile operators for interconnection and access services.

Retail favorite EFG-Hermes (EFG, bt100 number 26), which was in partnership with Kuwait’s MTC in the race for the third operator, dropped 3.47% to LE 27.01 after it lost the bid. The regional investment bank’s share price has tumbled with events unfolding in Lebanon.

Orascom Hotels and Development (OHD, bt100 number 32) submitted a bid to the Egyptian General Company for Tourism and Hotels for a 6.25-million-square-meter prime plot of land on the North Coast’s Sidi Abdel Rahman–Alamein. As it did with El-Gouna, OHD plans to introduce an international marina, a world-class golf course, international standard hospital, schools, health spa and all else needed to create another ‘Orascom Town’ on the North Coast, going head-to-head with Dubai-based Emaar on this one.

Like the rest of the market, OHD peaked in early July, reaching LE 32.98 and bottom-lining at LE 22 by the end of our reporting period. Orascom Construction Industries (OCI, bt100 number 2) followed a similar trend, closing the period only 2% higher even after it announced the rehabilitation of the 2.3-million-ton-per-year Tasluja cement factory in northern Iraq.

OCI is also handing over a LE 245-million factory to Eastern Tobacco (EAST, bt100 number 8) with a production capacity of 96 billion cigarettes per year, which will commence operations in October 2007.

EAST’s share price fell at the beginning of our reporting period and continued on a stable path for the rest of the month, even though it had announced the renewal of its contract with British American Tobacco (BAT) for the next seven years. The new contract dictates a $0.10 increase in fees paid by EAST per 1,000 cigarettes, a move that will not affect consumer prices. Company sources claimed that the renewed contract should have a positive effect on the company’s annual earnings in the neighborhood of LE 500,000, assuming sales, volumes and exchange rates against the dollar are stable.

In the cement sector, a number of stocks bucked the market trend. Suez Cement (SCEM, bt100 number 11) was 5% higher at the end of the period and Misr Beni Suef Cement (MBSC, bt100 number 48) was flat by the end of our reporting period, despite announcing a 5% increase in clinker production and a 37% increase in cement production.

Misr Cement (Qena, bt100 number 46) announced a 29.5% increase in production to 446,600 tons. At least 302,800 tons were sold locally, while 152,200 tons were exported during 1Q06. Moreover, Qena was able to repay LE 47.84 million from its current loan, bringing its loan balance to LE 160.7 million. It also announced its intention to build a second clinker production line of 1.5 million tons per annum.

Newly listed El-Sewedy Cables signed a memorandum of understanding on June 28 with Mada Company for Industrial and Commercial Investment (a subsidiary of Al-Raghy Group) for the establishment of a 25,000-ton-per-year manufacturing facility for power cables up to 400 KV in Saudi Arabia. Investments in the plant will top $800 million, 60% of which will be owned by El-Sewedy Cables and 40% by Mada, with production expected to start mid-2007.

The market holds great potential that requires several changes in order to be tapped, and that needs an educated investor. The upcoming introduction of short selling and margin trading promise to expand market liquidity and overcome problems of investors being strapped for cash, and intra-day trading has given the speculating trader room to make a quick buck, but the real problem lies outside the market.

If only there were a way to protect the market from queasy investors who panic at the first sight of trouble. bt