Surprisingly upbeat
Despite the aftermath of the pound devaluation and the American-led war on Iraq, the market has recorded historical highs during the first half of year 2003. Sherine Abdel-Razek reports
Thinking about the events of the first half of the year brings memories of economic woes following the government's decision to float the currency, amid a three year-long economic slowdown, compounded political instability due to regional tensions. In the business world this combination usually is disastrous for companies, with losses mirrored in struggling stock markets. However, most of the indices measuring Egyptian market performance recorded significant gains during the six-month period ending in June 2003.
Optimism in the market after the end of the war together with a handful of encouraging microeconomic developments and several acquisition deals fed the better than expected performance.
According to a report issued by the Ministry of Foreign Trade, the Capital Market Authority index surged to new heights, breaking the 700 points barrier twice in May and then in June reaching an unprecedented 714 points. Also, the limited index listing only the 14 most active stocks rose by an impressive 30.3 per cent in the period.
International indices covering active companies also showed gains, with Morgan Stanley Composite Index (MSCI-Egypt) gaining 9.6 per cent while the two indices for the International Finance Corporation (IFC) rose, IFCI by 18.6 per cent and IFCG by 23.5 per cent.
A new market index was added to the collection, the CASE30, launched in February. The CASE30 index includes 30 of the most actively-traded companies arranged according to the ratio of the free-floating shares in its capital. These companies all have at least 10 per cent of their paid capital freely floated in the market. The new index was applauded by market observers who have repeatedly lamented the fact that the main official index, the Capital Market Index, was misleading as it includes all listed companies even those that are closed and non-traded.
As a result of the Capital Market Index's organisation, the index gave all 1123 listed companies equal weight, whereas only 94 actually had transactions during the six month period. Despite positive growth, the total value of transactions came out 20 per cent lower than the corresponding period of 2002. This drop in activity is attributed to the regional political tensions, especially the war on Iraq and concern about future American-led wars, leading to investors' caution in putting their money in the regional markets.
Overall market capitalisation increased by 22 per cent to reach LE150.26 billion, around 38.6 per cent of GDP, compared to LE123.2 at the end of 2002.
Taking a closer look at the events of the period makes the picture clearer. The first half of 2003 witnessed the devaluation of the pound in late January, a step that put a burden on the listed companies with foreign currency liabilities, including some of the main market movers like MobiNil.
However, a positive sentiment swept through the market after this long anticipated measure. With the exchange rate working in their favor, there was a swift increase in foreign purchases of Egyptian stocks. Unfortunately, the presence of the black market limited much of this gain, and the exchange soon found itself again in a downturn.
February and March were characterised by conservative trading as investors waited for the outcome of the Iraqi crisis. As military activities drew to a favourable close for the coalition forces, April witnessed the reentry of investors into the region. This coincided with a number of companies announcing first quarter results which were better than expected. MobiNil, for example, posted an 84 per cent increase in its profits compared to the first quarter of 2002.
The good mood continued through May and June as the CMA recorded new heights, breaking the 700 barrier and reaching 702 and then 714 points. Beside reaping the fruits of the termination of military operations, the revival came on the back of the gains realised by the market's main player Orascom Telecom Holding (OTH) due to news that the planned third mobile network in Egypt was not to emerge in the near future. Also, a deal reached between cement producers ending a price war and leading to a gradual increase in the price per ton from LE130 to LE210 has supported the upward trend followed by indices.
The performance of individual shares, especially those of the blue chips, partially explains the good performance. The most active 20 companies alone cornered 37 per cent of the overall transactions with Orascom Telecom Holding acquiring the lion's share with a 12 per cent stake, followed by MobiNil with 6.3 per cent and OCI and CIB with 3.5 and 3.1 respectively.
The market leader OTH, despite occasional downturns, maintained an upward trend through most of the period. Investors in the GSM operator were thrilled by the better than expected financial year 2002 results backed by a strong showing from its Jordanian subsidiary Fastlink. OTH's net revenue added up to LE1.047 billion. On top of the positive impact of this news, investors reacted warmly to the divestiture of seven of its unprofitable Sub-Saharan Africa Telecel units.
OTH also revealed its ambitions for regional expansion, stating that it has started the due diligence process to bid for a share of the state-run Pakistan Telecom, in addition to bidding for the first mobile network in Iraq. Coalition authorities announced 12 June that they would be starting a mobile network in Iraq before the formation of an Iraqi government.
MobiNil, the minority subsidiary of OTH, performed erratically but eventually was given a boost by the news of the postponement of the entry of a third mobile operator into Egypt. This came after the company was about to join its only rival, Vodafone Egypt, and pay LE1 billion each to convince Telecom Egypt (TE) not to launch the third network. However, a presidential decree was issued emphasising that the third company would soon be launched. This was later modified, with the minister of telecommunications announcing that TE would be allowed to sell its frequencies to the current two mobile operators for LE2 billion and then use this sum in buying stakes in either of the existing two companies.
Shares of MobiNil and OTH recorded 52- week highs in May with OTH reaching LE29.7 and MobiNil at LE52.26.
Also the period saw the conclusion of a number of important major deals, together accounting for 37 per cent of the overall turnover. Topping the list was the transfer of ownership of LE2.573 billion worth of shares of the Middle East Oil Refinery (MIDOR) from the National Bank of Egypt to a Libyan company. The report highlighted the most important deals in the market through the period -- the food industries sector was the star in acquisition deals, with Kraft Foods buying out 100 per cent of Family Nutrition.
In another major acquisition, the Greek company Edita purchased the distributor of Hostess products in Egypt, International Food Company, for LE25 million after a long duel with the local Rational International.
The cement sector was turbulent during the period, starting off with a price war ended by a gentlemen's agreement between cement producers that helped to protect the sector from the free fall in share prices. Foreign interest in the sector is still strong with the Irish CRH renewing its offer to buy a 34 per cent stake in Misr Beni Suef Cement, a bid challenged by the National Saudi Investment Company's public announcement of its interest in buying 100 per cent of the company at $4 per share.
Also the French cement manufacturer Groupe Vicat joined the shareholders of Sinai Cement when it acquired a capital increase stake. For Sinai Cement, the French cement manufacturer Group Vicat became a shareholder and a consortium led by Egyptian Cement, a subsidiary of Orascom Construction Industries, made an offer to buy a majority stake in the company.
In general, foreign individuals and companies were net buyers with their purchases coming at LE2.852 billion compared to LE2.176 billion worth of selling orders.
The report observed that in general stocks, whether of the new or old economy, were on the rise during the six month period. Meanwhile, bonds lost ground for the first time during the last period as they only cornered 18 per cent of the overall market turnover.
The Global Depository Receipts (GDRs) trading in international markets fared well . Out of the eight Egyptian companies with GDRs only two, EFG and CIB, registered average negative gains with Ezz Steel increasing 65 per cent and Suez Cement 28 per cent.
