Making a comeback: A more stable political environment produces an unexpected rally

The decline in value of the Egyptian Exchange (EGX) during 2011, which saw the EGX 30 index drop from 5628 on the June 15, 2011 to reach a low of 3622 on December 29 of that year, led to subdued expectations regarding its potential performance in 2012. The new year, however, started with an unanticipated rally, which peaked in early March 2012 with the EGX standing at 5428. The perception of a stabilising political environment played a significant part in the recovery. The anniversary of the January 2011 uprising passed without the widespread unrest that many feared, and the Port Said football riots the following month did not worry the market as much as it might have at an earlier time of greater political uncertainty.

SAVED BY THE BELL: It was developments related to the stock market that provided the decisive stimulus to Egypt’s bourse. The resumed trading of Orascom Telecom Holding (ORTE) in late January 2012 was a useful fillip to the exchange at a moment when it was most needed. ORTE trading had halted two months earlier as a result of the company’s decision to split into two units, locking up a significant amount of the exchange’s liquidity. Shareholders approved the restructuring of the firm to facilitate a $6.5bn merger between Italian parent holding company Wind Telecom and Russia’s VimpelCom, and the result of the process is two new companies: Orascom Telecom Holding, which maintains 58% of the original company’s assets (including those in Bangladesh, Pakistan and Algeria); and Orascom Telecom Media & Technology Holding (OTMT), which took the Egyptian and North Korean assets.

The announcement in March 2012 by OTMT that it had reached a preliminary accord to sell the majority of its stake in local telecoms operator Mobinil to fellow shareholder France Telecom was another boost to the bourse. At the announcement, the company revealed that it would transfer much of the $1bn it expects to gain from the deal to shareholders, and that France Telecom would offer to buy all other Mobinil shares on the exchange. Following a short delay, the Egyptian Financial Supervisory Authority granted approval to France Telecom’s tender offer in April 2012.

SPREADING THE WEALTH: The Orascom and Mobinil developments established the telecoms sector as the driving force of the EGX’s rally during the first quarter of 2012, but the recovery turned into a more widespread and substantial phenomenon. The upbeat mood continued into February, which saw encouraging financial results for Commercial International Bank and Telecom Egypt, two high-cap companies that have not historically posted large profits, displaying results that were more favourable than those foreseen by analysts mindful of the political and economic turbulence in 2011.

Another positive market development came in March 2012 when the Ministry of Industry reinstated two direct reduced iron licences to Ezz Steel. Shares in Egypt’s largest steel maker had fallen by as much as 10% in a single day in September 2011, after a Cairo court withdrew the licences for two major expansion projects. The dispute was one of several to receive attention in the aftermath of regime leader Hosni Mubarak’s toppling due to potential impropriety in the industrial sector. The development forced Ezz Steel to review a number of multimillion-dollar projects, and the threat to its future growth plans prompted analysts to review their valuations of the company. The return of the licences changed the valuations once again, which saw the company move from “hold” to “buy” status in the books of Cairo’s leading investment firms, such as CI Capital Holding, which raised its price target on the stock by 7% and its long-term fair value by 16%.

Finally, the resolution of a number of legal disputes regarding real estate projects has restored confidence in a market sector that had suffered from the political machinations of 2011. In the period from February 15 to March 15, 2012, Sixth of October for Investment and Development rose by 30% month-on-month, Madinet Nasr for Housing and Development, 26%; Heliopolis Housing, 17.6%; and Palm Hills for Development, 16%; according to data provided by Egypt’s Prime Holding.

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The Report: Egypt 2012

Capital Markets chapter from The Report: Egypt 2012

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