Beltone financial investment bank said in its latest Mena Macro Strategy, that the key sector for Egyptian industrial players has been Egypt’s giant natural gas discoveries in the Zohr Gas field, which triggered a turnaround in the industrial sector.
The first key milestone was the Ministry of Petroleum’s announcement that Egypt has achieved natural gas self-sufficiency in October 2019, reflected in the halt in natural gas imports starting January 2019.
The government targets an industrial annual growth rate of 10.7% by 2022 from current rate of 6.3% to be achieved through a series of encouraging sector reforms. Additionally, the 2018 and 2019 interest rate cuts should encourage capex spending amid lower debt cost opportunities, which should help facilitate higher growth for industrial players according to Beltone analysts.
Industrial sector reforms have already been initiated by the government with its decision to slash natural gas prices for key industrial players in October 2019. This saw steel and ceramic manufacturers given natural gas at $ 5.5/MMBtu down from $ 7.0/ MMBtu, notably reducing production costs Ezz Steel, Al Ezz Dekheila, and Al Ezz for Ceramics & Porcelain (GEMMA) according to Beltone.
Another key favourable aspect was the government’s decision to increase concession prices from $ 3.0/MMBtu to the current range of $ 5.18-5.8/MMBtu, which has encouraged EKH to resume the development of its Offshore North Sinai (ONS) gas field. There are further talks regarding additional industry reforms to further boost the industrials and materials sectors.
It is worth highlighting that a downward revision of electricity prices for industrial players would be a game changer for companies including Egyptian Aluminium (EGAL) and Misr Chemical Industries (MICH), where electricity represents the single largest cost component. Both companies are charged EGP 1.11/kWh, which is considerably high, compared to regional and global peers, resulting in recorded losses, according to Beltone analysts.
The trade tension between the US and China has been a threat to global economic growth and supply/demand policies, dragging down prices for a wide range of commodities such as steel, urea, aluminium, coal, petrochemicals, and others. Contracting commodity prices has negatively affected domestic industrial players, including Ezz Steel and Al Ezz Dekheila, which were forced to cut their prices several times on fears of heavy cheap import flows as global prices contracted 11%.
Beltone analysts choose EK Holding (EKHO) and El Sewedy Electric (SWDY) as their top picks. EKHO’S shift in strategy has been key in the company’s turnaround, as it has followed trending investment themes in Egypt. EKHO focused its investments on Egypt after macro development. Beltone analysts expect EKHO’s bottom line to grow by 16%. While they set fair value at $2.5/share with current market price at $1.4/share.
El Sewedy Electric has passed the normalisation test with flying colours following a couple of years of exceptional cable margins given low cost inventory, and highly profitable fast track mega projects. Belton analysts set fair value at EGP 18.8/share, while market price at EGP 13.32/share.
On the other hand, EFG Hermes added in its yearbook energy deregulation is still a valid theme to play in Egypt with continuing cut backs on its energy subsidy bill. EFG analyst expect players in utilities may stand to benefit. Not only will the deregulation of Egypt’s energy space help improve pricing, but it may also lead to improve private company participation in the utilities space.
Following Egypt’s significant capex cycle in power generation, they believe investment in distribution is necessary and will likely involve private sector participation. The two privately owned players in this space are EKHO’s Nat energy and Qalaa Holdings’ Taqa Arabia.
They added that the ongoing trade war is expected to have a sizable impact on global trade routes, as well as the size of trade. Every 10% applied on $ 250bn of goods will lead to a 50bps impact on global trade growth according to discussions between EFG analysts and DPW’s management. DPW’s portfolio is more skewed to frontier and emerging markets, which should be in a relatively more defensive position, should trade disputes continue for no longer than expected.
EFG analysts think the market has penalised DPW’s valuation because of global trade issues, and the stock could potentially see re-rating, once an agreement is made between the US and China. They are in favor with EK Holding and Aramex.
Moreover, Pharos holding investment bank added that the recent reduction in gas prices to $1.5/MMBtu would result in savings by $72m for ESRS. In addition, price reduction in local rebar steel by EGP 1300/tonne since September 2019 may close the gap between local and global prices by 0.4% premium to global prices, and stronger EGP will weigh down on both steel and Aluminium margins.
In this context, Pharos analysts hope that the imposition of a flexible tariff north of 50% on current global steel price on both rebar and flat steel could alleviate the pressure from the global trade war, and improving overall commodity outlook if the US-China global trade war softens ahead of the 2020 US presidential election.
On the other hand, Pharos analysts are fearful of the weakness in global steel prices to persist on the back of the ongoing global trade war, the gradual decline in steel tariff that could lead to lower steel prices and magnify losses going forward, and higher tariffs in key export markets. They also believe that the strengthening of the EGP could result in further margin pressure, and a higher electricity tariff in July 2020 irrespective of producer complaints, which will pressure EGAL margins further.