Market up in September
Despite an overall economic gloom, a positive sentiment marked stock market transactions in September with both the blue chips and small caps gaining grounds Sherine Abdel-Razek reports
On the macro-economic level, the month of September brought no relief. The future of the pound remains uncertain, while there were further hikes in the prices of most food commodities. Meanwhile, a bread shortage was caused by a drop in the supply of increasingly expensive imported wheat.
Also the month saw the collapse of the meetings of the WTO in Cancun and the conclusion of the Dubai World Bank and IMF ministerial meetings, which foresaw little short-term relief for the economies of the Middle East and North Africa (MENA) region.
However, September marked a good month for the local market. The transactions became buoyant and the market indices recorded a three-year high with both the main market movers as well as the small caps witnessing price hikes.
And while the main market movers' energetic performance was backed by good news or strong financial results, the small caps gains were mainly based on speculation, suggesting that a corrective wave will soon be seen in the market.
The Commercial International Bank (CIB) was the market's star during the month with its decision to double its capital to LE1.3 billion through a 100 per cent stock dividend.
CIB, Egypt's biggest private sector bank in terms of asset value, said that the capital increase will be financed from general and special reserves which amounted to LE742.4 million as of 30 June 2003.
The move comes in accordance with the decision of the extraordinary general meeting of the bank in April 1998 to increase the bank's paid in capital. CIB's authorised capital will remain at LE1.5 billion.
A research report issued by Commercial International Brokerage Company (CIBC), the brokerage firm affiliated to the CIB noted that doubling the capital will increase CIB shares' liquidity as more shares will be available for trading at a lower price per share, hence attracting more investor segments.
The move will also double the tax benefit CIB was claiming off its taxable income. "Being a listed company, CIB enjoys the benefit of deducting a sum equal to 10 per cent of its capital from its taxable income. Before the increase this 10 per cent was LE65 million but will increase now to LE130 million," explained Amr El- Alfy, assistant manager of CIBC's research department and author of the report.
However, according to Egyptian banking regulations the bank will return to deduct a five per cent of its profits each year to build up its legal reserves until they reach 50 per cent of its paid in capital. CIB's legal reserves amounted to LE325 million as of 31 December 2002, or 50 per cent of its then LE650 million capital.
"While adding to legal reserves will support the bank's capital base and enable it to comply with Basle II capital requirements, cornering reserves out of the profits will affect the bank's dividends," said El-Alfy.
Another active stock was Orascom Telecom which is still capitalising on the strong possibilities that it will acquire one of Iraq's mobile network licence in addition to encouraging subscription figures from its Algerian subsidiary. OT said that the number of its customers in Algeria reached one million by the end of September. It was reported by the end of the month that the company is considering bidding for a mobile network in Yemen.
OT's sister company, Orascom Construction Industry (OCI) witnessed a 68 per cent increase in its second quarter net profits. The company whose activities cover both the production of building materials and construction said that regional activities fed the gain. According to a company press release, OCI's cement- producing subsidiary, Egyptian Cement Company, alone realised 29 per cent of the profit.
While the bond transactions were subdued compared to their heyday earlier this year, when investors jumped on bonds as a more stable investment than the then- plummeting stocks, several developments might help to revive this fixed income investment soon. The government announced that the new primary dealers system will be enforced early December. According to the new system, aimed at activating the bond market, 12 banks will be licensed to exclusively underwrite for the government bond and bills and then sell it to the public. The profits these banks realise from selling the securities are tax exempted, in addition to their getting underwriting commission.
The new system grants covering the government securities issues, though it is believed to be risk free, other than in a situation such as Russia's default five years ago or Argentina's failure last week to repay $80 billion in bonds, still is not very popular due to its low return and short maturities. Senior government officials point out that the new system would encourage the Ministry of Finance to issue bonds of 15-year maturity.
One might wonder if issuing new bonds is what Medhat Hassanein, the minister of finance meant when talking about the restructuring of local debt in one of the Euromoney conference sessions. Hassanein said that there were plans to restructure the local debt in order to lower the budget deficit from 6.3 per cent of GDP in 2002- 2003 to only three per cent. Egypt's local debt service is a burden that alone corners LE30 billion of the 2003-2004 budget.
In another bond market related development, Telecom Egypt announced that it is looking for financial consultants to manage its LE1.5-2 billion bond offering. The company said that the bonds issue is a reasonable alternative to floating a part of the company in the stock exchange due to the current economic conditions. The exact value, timing and maturity of the issue is still to be determined. Telecom Egypt was supposed to issue 20 per cent of its equity in the local market during year 2000, but the government postponed the plan due to the economic slowdown.
It is not only the bond market that will be injected with a much needed supply of securities. Vodafone Egypt, submitted a listing request to the Cairo and Alexandria Stock Exchange as a prior step to float five per cent of its shares in the stock exchange by early November.
The month also witnessed the delisting of a number of traded companies due to their failure to comply with the new listing rules. The new rules, covering regulations related to company's minimum capital requirements, number of traded shares, standards and timing of financial results disclosure and transparency, were enforced on August 2002. The stock exchange authority gave the listed companies a one year ending on August 2003 to comply with the new regulations.
