A climate of anticipation for the results of the Egyptian pound’s flotation has occupied the market since Thursday as the impact of this on foreigners’ views of investment opportunities in Egyptian companies through acquisitions and IPOs has yet to be seen–though the market seems predominantly optimistic at the moment.
According to managers of investment, promotion, and coverage of IPOs, this anticipation is based on many factors: the most important of which is changing the assessment of companies that depend on importing production inputs, or generating revenues through the sales of the local market. In case these fail to increase prices in a way that suits the dropping value of the pound, the assessments of these companies will decline.
The second factor is whether the flotation decision is able to make US dollars available in the banking sector and adhere to the commitments to provide dollars to foreigners through the transfer of funds abroad in a way that increases the chance that they will take part in IPOs.
The third factor is the future impact of the interest rate—which was increased by 3%—on the cost of companies’ financing and how this will reflect on the value of debts in US dollars being increased, as well as on the ability of companies to implement expansion plans or begin plans in the first place.
Ayman Abou Hend, head of the Direct Investments sector in the Cartel Capital in the Middle East and North Africa, said that the pound’s flotation, as accompanied by tax and investment incentives for the Supreme Council of Investment, will have a positive impact on acquisitions, especially foreign ones.
He explained that companies’ assessments will change greatly, depending on the nature of the activity. Companies that bring in revenues from the local market or largely depend on investment will be challenged by the increase in prices coming at a rate that is close to the increase in costs following the pound’s devaluation.
Abou Hend went on to explain that in the case of slow demand, which is a possibility, companies will decline this kind of assessment, especially as the risk free rate will jump from 25% to a range of 30%-32% for five-year term investments.
He noted that the value of companies which bring in revenues through exports, that are higher than the cost of importing production inputs, will increase greatly. This is owing to the conversion of revenues into pounds, or the company’s ability to enjoy a low risk-free rate, in addition to its ability to maintain operational rates even amid the US dollar crisis.
He ruled out that Egyptian companies, which depend on importing or generating revenues from the local market, would be rejected due to their low value in the case of receiving offers for acquisitions or mergers—as [their low value] is due to the change in the internal economic climate.
To explain further, Abou Hend compared the situation nowadays with the 2008 scenario which “will not be repeated”. At that time, Egyptian companies adhered to their assessments, refusing to lower them when they received foreign acquisition offers. Their choice was correct at the time because the crisis occurred due to the global economy rather than the local market.
On the other hand, Mahmoud Selim, deputy head of investment banks in HC Securities and Investment, said that the attractiveness of investment opportunities in the Egyptian market is still vague because the results of recently made decisions are hard to predict at the current time.
“Of course, the pound’s flotation and declining land prices, as well as tax incentives and the postponement of working with the capital gains tax in the stock exchange are all good decisions; but on the other hand, there will be an increase in the cost of companies’ financing after increasing the interest rate by 3%. This may have a huge impact on companies’ abilities to expand,” Selim added.
Selim stressed that whether the flotation decision achieves positive results depends on the banks’ ability to provide dollars to clients–failure would mean achieving numbers in the exchange rate that exhaust the business community.
Hussein Abdel Haleem, managing director of Paradigm Investment, said that foreign assessments of Egyptian companies were based on the US dollar exchange price in the unofficial market, which reduces the possibility of a decline in the assessments of Egyptian companies.
Abdel Haleem ruled out the possibility of companies being affected by the increase in funding owing to the decline in companies’ dependence on loans. This is evident by the fact that the rate of loans utilisation in the banking sector does not exceed 40%.
He noted that the improvement in the activity of propositions and acquisitions depends on the honesty of the government and the Central Bank of Egypt (CBE) in terms of solving the US dollar crisis and guaranteeing the transfer of foreigners’ revenues abroad—as this issue is the main reason why many deals fail, causing many foreign institutions to refrain from taking part in propositions.
Based on this, Abdel Haleem believes that foreigners are eagerly anticipating the results of the pound flotation.