AM — The EGX tax + fee incentives plan: The market reacts

Good morning, wonderful people, and happy Monday. We have an absolutely stacked issue this morning, starting with a deep dive into how the market is reacting to a basket of fee and tax incentives the government announced last week to make a new capital gains tax on EGX trades a bit more palatable. The tax — payable only by investors who are tax resident in Egypt — comes into effect in January 2020, and analysts have welcomed the incentives, even as they suggest they may not go far enough.

And while we’re on the subject, a confirmation: The 10% capital gains tax on EGX trades coming into effect in January will be calculated on annual net portfolio earnings, not on a per transaction basis, Finance Ministry spokesperson Ragab Mahrous confirmed to us. The basis of calculation was vague in the announcement last week.

THE BIG STORIES ABROAD- There’s no single story driving the agenda in the foreign press this morning:

• COP criticism: Some business groups have joined the chorus of criticism directed at the world’s politicians for their inaction at this month’s COP26 conference. (FT)
• Yield hunger: Inflation fears are pushing investors into riskier assets as real yields on treasuries turn negative. (WSJ)
• Red Tesla: Elon Musk and Bernie Sanders are going at it on Twitter over the leftist senator’s call for a wealth tax. (Reuters)

Central bank orders board shake-up: Egyptian banks will be prohibited from appointing the same person to act as chairman and CEO under amendments to board formation rules (pdf) designed to promote “appropriate diversity” in boardrooms published by the Central bank of Egypt yesterday.

Under the changes, banks must:

• Appoint a maximum of two executive directors; the rest of the board must be non-executives, including at least two independent non-execs;
• Appoint at least two women;
• Ensure board representation for minority shareholders (if they hold more than 5% of the bank’s shares).

Non-executive members are barred from staying on for more than two terms (or a maximum of six years), though a third term may be possible in exceptional circumstances if the central bank gives its blessing.

There won’t be any immediate reshuffles: Banks don’t need to start complying with the changes until their current board terms end.

PSA- The next time you buy a major home appliance, don’t pay any fees the retailer tacks on to install and “activate” the warranty. These costs should already be included in the sticker price for white goods, so the services should be provided to consumers without charge, the Consumer Protection Agency said in a notice blasted out by text message yesterday.

WHAT’S HAPPENING TODAY-

All unvaccinated public sector workers will be prohibited from going to the office today unless they submit to a weekly PCR test at their own expense. University students will also be unable to access campuses without proof of vaccination.

As of today, auto dealerships have to comply with new consumer protection rules requiring price stickers to be displayed on vehicles. Companies that could be fined up to EGP 2 mn if they don’t comply with the rules.

FOR TOMORROW-

The two-day Africa Fintech summit kicks off tomorrow: The summit looks at innovation in the fintech ecosystem, venture capital and other forms of investing, and will also discuss the rise of healthtech.

CIRCLE YOUR CALENDAR-

The International Finance Corporation is hosting an invite-only forum in Cairo on Wednesday with a focus on sustainable finance in Africa. Egyptian speakers include Central Bank of Egypt First Sub-Governor May Abulnaga, the Financial Regulatory Authority’s Sina Hbous and CIB’s Dalia Abdel Kader.

Prince Charles and the Duchess of Cornwall will be in Cairo on Thursday and Friday (18-19 November). Charles will meet with President Abdel Fattah El Sisi and Al Azhar’s Grand Imam, Ahmed El Tayyeb, among other government officials. Expect climate change to be high on the prince’s agenda given his personal interest in the topic and Egypt’s selection as host of COP27 next year.

Comesa summit next week in Sharm: Egypt will host the 2021 Common Market for Eastern and Southern Africa (Comesa) summit on 23 November in Sharm El Sheikh.

KfW is launching a call for green projects: Companies and public bodies working on projects related to the green economy transformation will be able to submit proposals to the KfW Development Bank’s Investing for Employment facility, which will see co-financing grants ranging from 1 mn to 10 mn EUR awarded to to each project, the German development bank said in a press release (pdf). The facility will award grants to projects that contribute towards job creation. You can find out more about the facility and the application process here.

Check out our full calendar on the web for a comprehensive listing of upcoming news events, national holidays and news triggers.

*** It’s Blackboard day: We have our weekly look at the business of education in Egypt, from pre-K through the highest reaches of higher ed. Blackboard appears every Monday in Enterprise in the place of our traditional industry news roundups.

In today’s issue: Scholarships are rarely offered by Egypt’s K-12 private schools, as we reported last week. While most offer some financial aid to existing students under a charitable model, very few provide academic or non-academic scholarships designed to increase access overall. Today, sources comment on why this might be — with one suggestion being that scholarships offer few direct cost benefits to the private school for-profit business model. But beyond that, expanding access to top private schools isn’t seen as a priority for the broader market, several sources note.

Market watchers have welcomed a basket of EGX-centric tax incentives and fee cuts unveiled last week, but they want specifics — and they’re still not entirely sold on the idea that the incentives will allow domestic investors to swallow the 10% capital gains tax on EGX trades due to come into effect in January 2022.

Okay, before we move on, you need to remember one thing: This story is all about the psychology of domestic investors (retail and institutional) — folks who are resident in Egypt for tax purposes. Local investors (retail in particular) have been driving trading on the EGX since foreign institutional investors left the market in the early days of the pandemic. As non-residents, foreign investors are exempt from the capital gains tax here.

We’ve been picking up plenty of chatter that foreign investors are rediscovering their appetite for Egyptian equities, with folks on the buy side lining up conference calls with local issuers — and doing in-person visits and small roadshows to Egypt for the first time since February 2020.

Market reaction to the basket of tax and fee cuts has been muted (the EGX is up just 1.6% in the two sessions since the announcement) for two reasons:

• Many traders were clamoring for the capital gains tax (CGT) to be scrapped entirely, Arqaam Capital’s Noaman Khalid reminded us. Brokerage houses are worried the tax will discourage trading volumes and were buoyed by parliamentarians in both the upper and lower houses of parliament who were pushing for the CGT to be scrapped (or postponed yet again). Those bids appeared to fizzle a little over a week ago.
• Traders are still waiting for details on many of the tax and fee cuts (more on that below).

Okay, so what are the incentives? The package, announced by cabinet last week, combines fee reductions on EGX trading on the one side, and tax cuts on the other. Fees that could be slashed include tithes payable to MCDR and the state’s investor protection fund, while a stamp duty on trades by resident investors will be scrapped. Taxes on gains on mutual funds by retail investors would be taxed at a lower 5% rate. A recalibration of how the CGT is calculated (designed to protect long-time shareholders of a given equity) will also soften the tax’s impact — and trading, clearance and regulatory fees will be made tax-deductible. Intriguingly, policymakers have also promised a 50% break within a two-year window on realized capital gains from the sale of shares bought as part of an IPO.

(That last bit also opens the question of whether newly listed companies will face a selling wave ahead of the expiration of the two-year window as investors look to book gains at lower tax rates, but that’s a question for another morning — and one best answered when the final regulations are handed down.)

At the end of the day, fee cuts — while most welcome — will probably have a marginal impact on trading volumes, the analysts we spoke with suggested. The planned cuts to trading and clearing fees won’t have a huge impact on the cost of EGX participation, most of the analysts we spoke with said, with much of the cost coming in the form of (a) brokerage fees and (b) the proposed CGT. The incoming capital gains tax and the new caps on margin trading will both impact the market more significantly, they said.

Still: Fee cuts and tax write-offs are better than nothing, and retail investors have a habit of absorbing things like the CGT after a period of foot-dragging and loud complaining and then … moving on. After all, if you want to trade shares in an Egyptian company, the EGX is basically the only game in town.

It’s still unclear how much the cuts to EGX trading fees are worth. Local press reports yesterday claimed to have the exact percentages of the tax and fee cuts investors would be getting. A Financial Regulatory Authority (FRA) official we spoke with under condition of anonymity tells us that these were figures suggested by stakeholders and were not necessarily the numbers the FRA plans to make official. The extent of the fee cuts will be decided at the FRA’s next board meeting, the official said, which has yet to be scheduled.

At the end of the day, the EGX has one primary problem, the analysts suggest: We’re not adding large-cap, blue chip stocks fast enough, leading to low trading volumes and a lack of liquidity, Arqaam’s Khalid told us. Most analysts echoed similar sentiments. New listings by large state-owned firms have proven to reinvigorate other regional exchanges, Khalid said.

The 50% break on gains made by domestic investors on new IPOs within a two-year window will help spur IPO activity, Prime Holding’s Amr Elalfy told us. The move makes both primary and secondary offerings attractive, Sara Saada, senior economist at CI Capital, wrote in an email. The two-year break is good news for the recently rebooted state privatization program: “We see the two-year tax rate cut on offerings as beneficial to the government’s plan to offer four to six companies in FY21/22, along with the private sector pipeline,” she wrote. Changes brought in to ease listing requirements will also help, Elalfy added.

Which IPOs could we be seeing soon? Despite much buzz about both state-owned and private IPOs coming down the pipeline following e-Finance’s EGP 5.8 bn IPO, it’s been all quiet on the listing front so far since then. Ghazl El Mahalla sports club could make a small splash with its EGP 135 mn sale planned for November, and e-Finance has suggested it could separately list two of its subsidies. On the private-sector side, Abu Auf announced this fall that it would go to market in the first half of next year, but Macro Pharma, and non-bank financial services player Ebtikar have been silent as of late about their plans.

SPEAKING OF IPO NEWS-

Al Gioshy Steel is considering an IPO on the EGX and wants to list on the bourse as soon as market indicators improve, company CEO Tarek Al Gioshy told CNBC Arabia (watch, runtime: 4:21), without disclosing further information.

It’s been a while since we’ve heard “Al Gioshy” and “IPO” in the same sentence: The steel manufacturer said back in June 2019 that it was looking to offer up to 25% of its shares in 2020.

Our Egyptian-made covid jab is officially in clinical trials: Our locally made Covi Vax has made it through the laboratory testing and is currently in clinical trials, interim health minister Khaled Abdel Ghaffar announced in a presser yesterday (watch, runtime: 9:36). Abdel Ghaffar, who is also the country’s higher education minister, said that the trials will begins with tens of participants before they’re expanded to include hundreds and thousands of people.

What’s Covi Vax? The two-dose jab will use an inactive virus — the same technology used in standard vaccines for measles, mumps and rubella, as well as the Sinopharm covid-19 vaccine. Peer reviews of the vaccine indicate that it produces antibodies three weeks after administration, which remain active for 13 weeks, and was effective in preventing severe illness in the animals that were tested, and is 100% effective in preventing death.

The Health Ministry reported 935 new covid-19 infections yesterday, up from 929 the day before. Egypt has now disclosed a total of 343,961 confirmed cases of covid-19. The ministry also reported 64 new deaths, bringing the country’s total death toll to 19,499.

A syndicate of 10 regional and international banks are providing the USD 2 bn loan the Madbouly government is raising to finance green projects and plug budget shortfalls, Al Shorouk reports, citing unnamed sources. The facility will be divided into a USD 1 bn Islamic financing tranche and a USD 1 bn ESG tranche set to target green projects under the Finance Ministry’s green financing framework.

Banks reportedly participating: Emirates NBD, First Abu Dhabi Bank, Abu Dhabi Commercial Bank, Abu Dhabi Islamic Bank, Mashreq Bank, Bank ABC, National Bank of Kuwait, Ahli United Bank of Kuwait, Al Ahli Bank of Kuwait and Italy’s Intesa Sanpaolo Bank.

This facility is the second loan with an Islamic financing component the government has secured this year, after closing a USD 500 mn Islamic loan in September as part of a USD 2 bn package with regional and international banks to plug budget shortfalls during the COVID-19 crisis.

Cairo-based road safety startup BlinkApp has closed a six-figure pre-seed round led by undisclosed Saudi and Emirati investors, the startup announced in a statement. The company did not reveal the currency of the investment. BlinkApp had previously raised two zero-equity grants with around USD 210k, from ITIDA.

BlinkApp uses AI to minimize the driving behavior risk impact on vehicles and accidents. The company’s technology captures and analyzes thousands of miles of data, using smartphone sensors and AI technology and through them it monitors drivers’ behavior, detects collisions and generates insightful reports to guide and assist customers. The app works on its own or it can be integrated into other apps.

Looking ahead: The company is hoping to have 6 mn users and raise revenues to almost USD 20 mn by 2025, it said in the statement. The startup has linked up with ins. company gig-Egypt in a partnership that will be announced in the coming weeks, CEO Wael Noufal said.

Apparently we’re still not over the whole Ever Given thing: The National Navigational Company has filed a lawsuit in a local economic court against the owners of the Ever Given, claiming to have suffered heavy losses when the giant container ship blocked the Suez Canal in March, according to Sada El Balad.

In case you forgot: Egypt became the center of global attention for six days in March after the Panama-flagged ship became lodged, disrupting some 10-15% of global trade. Cue several months of haggling between the Egyptian government and the ship’s ins. companies, which was settled in July with a reported payout of USD 540 mn to the Suez Canal Authority.

The National Navigational Company is just one strand of a litigation nightmare being faced by ship owner Shoei Kisen and its ins. companies, which could be in for years of lawsuits as those affected by the incident file claims and seek damages. Fitch Ratings has estimated that claims can easily surpass hundreds of mns of EUR, and that it would affect marine reinsurers in particular.

The ruling on this particular case has been postponed until the end of the month, Sada El Balad reported yesterday evening.

Despite the disturbance, the Suez Canal is doing just fine, reporting record revenues during the first six months of the year.

FACT CHECK- Is Mowasalat Misr fielding an acquisition offer? A report in Al Borsa yesterday claimed that public transport company Mowasalat Misr has received an offer from an unnamed European transport player to acquire a stake in the company. This is not true and the company is not currently considering offering a stake to any new investors, Vice Chairman Mohsen Sabra confirmed to Enterprise. Sabra and CEO Hisham Taha also denied there being any updates on the company’s IPO plans. Sabra had told us in August that Mowasalat is simply “studying the move” but hasn’t made any decisions on the matter.

OTHER M&A NEWS-

The Egyptian Company for Housing Development & Reconstruction (EHDR) is planning to submit an offer to acquire another 51% of Emerald Real Estate, which would bring its total stake to 90%, according to an EGX disclosure (pdf). The offer would see EHDR acquire the stake via a share swap.

e-Finance saw its net income dip 20% y-o-y in 3Q2021 to EGP 99.3 mn, according to the company’s first quarterly financials (pdf) as a publicly traded company. Revenues rose around 25% y-o-y during the quarter to EGP 395.2 mn. On a nine-month basis, net income rose 35% y-o-y to EGP 374.8 mn during 9M2021 while revenues rose 59% y-o-y to reach EGP 1.3 bn. The state-owned fintech platform listed on the EGX last month, raising some EGP 5.8 bn in the IPO. That might not be all for e-Finance, with the firm currently deliberating selling shares in two of its subsidiaries, Khales and e-Cards.

Shares in the state-owned tech firm closed down 7.4% at EGP 19.17 as of the close of trading yesterday, a sell-off that, according to one analyst who asked to remain anonymous, was triggered by the disappointing results. Still, the company’s shares are handily above water, having made their market debut at EGP 13.98.

More is riding on end-of-year financials: Investors will get a fuller picture come the new year about whether the high expectations generated during the IPO process are justified. Over the next couple of quarters, the market will look to see progress from the company on its advertised plans (projects on e-everything from e-invoicing to e-gates), according to our source.

EDITOR’S NOTE- This story was updated on 15 November to correct net income figures for 3Q2021 and 9M2021. 

Egypt Kuwait Holding’s net income rose 60% y-o-y in 3Q2021 to USD 46.8 mn, according to the company’s quarterly earnings release (pdf). Revenues during the quarter came in at USD 211.6 mn, up 45% from 3Q2020. Top-line growth was fuelled by a 60% surge in revenues from the company’s fertilizers and petrochemicals business, which benefited from the boom in commodities and urea prices. EKH’s energy segment saw revenues grow 12% during the three-month period.

Share conversion “well received”: “EKH’s recent optional conversion of its listed shares on the EGX was well received by the market, with institutional investors opting to convert 83% of their holdings in EKH’s shares from USD to EGP,” CEO Sherif El Zayat said. In total, 68% of the company’s EGX shares were converted to EGP.

Ibnsina Pharma reported EGP 5.6 mn in quarterly net income for 3Q2021, up 20% y-o-y increase from the same period last year, according to the company’s earnings release (pdf). Its net revenues for the same period increased by 16.4% y-o-y to EGP 5.6 bn. Separately, the company is planning to increase its capital to EGP 280 mn from EGP 240 mn through new shares, which will be put up for a vote at an extraordinary general assembly meeting (pdf) later this month.

Odin Investments’ net losses widened in 3Q2021 to EGP 374k, falling 6.4% y-o-y, according to the company’s financials (pdf). The company’s revenues also dipped 9.7% y-o-y to EGP 4.5 mn during the quarter.

The Health Ministry has a new spokesperson: Interim health minister Khaled Abdel Ghaffar has brought his spokesperson with him from the Higher Education Ministry, appointing Hossam Abdel Ghaffar in a decision yesterday carried by Ahram Gate. Abdel Ghaffar replaces Khaled Megahed, who has served as the ministry’s spokesperson for six years.

This is the second high-profile change at the ministry in recent weeks after Hala Zayed was replaced by Abdel Ghaffar as health minister for unknown reasons. The ministerial change came amid unconfirmed reports of a corruption investigation at the ministry and media reports that Zayed had been hospitalized.

Marc Charabati (LinkedIn) has been tapped as Schneider Electric’s new vice president of services for North East Africa and the Levant, according to a statement (pdf). Charabati was previously Schneider’s general manager for Levant countries.

The state-owned Cotton and Textiles Holding Company has appointed Hany Mahmoud as non-executive chairman and Ahmed Mostafa as managing director, Hapi Journal reports.

It was a mixed bag of nuts on the airwaves last night: EGX tax cuts, the scorpion attacks in Aswan and controversy over fourth-grade curriculum all had the nation’s talking heads, well, talking.

The thinking behind the EGX tax cuts: The package of measures announced last week to make it more affordable to trade on the EGX are not incentives designed to draw new investors into the market but are reforms done an anticipation of potentially negative effects stemming from the introduction of the capital gains tax in January, EGX board member Ahmed Abou El Saad told Kelma Akhira (watch, runtime: 10:49).

How are the people of Aswan coping? El Hekaya (watch, runtime: 5:08) took us to Aswan to follow up on the scorpion attacks and heavy rains that destroyed a number of houses. We got to see the damage done and hear the testimonies of those who lost their houses due to the rains. On the bright side, Amer Group and an unnamed Saudi donor have donated a combined EGP 1.5 mn for the humanitarian aid going to those who fell victims to Aswan’s heavy rains, Amr Adib said (watch, runtime: 5:05).

A fourth-grade revolt: The past week has seen complaints surface on social media from parents and children about how difficult the fourth grade curriculum is, including a video of a little boy crying for help with his school work. In an interview on Ala Mas’ouleety last night, Education Minister Tarek Shawki dismissed the criticism, telling show host Ahmed Moussa that the complaints have no basis and that claims that fourth graders are being taught 13 subjects instead of five are not true (watch, runtime: 34:00).

Last week’s mass scorpion attack in Aswan is still getting play in the foreign press this morning: Associated Press | Insider | Independent | Times of Israel | Ynet.

The new capital’s legacy: President Abdel Fattah El Sisi has “staked his legacy” on the new administrative capital and massive infrastructure projects around the country. (AFP)

Egypt natgas exports rebound: Egypt exported 1 mn tonnes of liquefied natural gas (LNG) in 3Q2021, up from just 100k tonnes in the same period last year, according to the Organization of Arab Petroleum Exporting Countries’ (OAPEC) latest report (pdf). Gas exports have been given a boost by the return of the Damietta liquefaction plant, which shipped 600k tonnes of LNG during the quarter and 1.6 mn tonnes since it was brought back online in February.

Edita plans to expand to two new markets in the next five years, with one expansion slated for next year, CEO Hani Berzi told Al Mal. Edita has not yet allocated a specific budget or timeline for the expansion, IR director Menna Shams El Din told Enterprise. The move comes as part of a larger plan for regional expansion, including Edita’s new facility in Morocco, where its first production line is set to become operational this month.

Vodafone Egypt submitted ownership restructuring papers to the NTRA last Wednesday as part of Vodafone Group’s plans to transfer its 55% stake in the company to its sub-Saharan African subsidiary Vodacom in a EUR 2.72 bn transaction.

Other things we’re keeping an eye on this morning:

• The Trade and Industry Ministry is scrapping import duties on iron billets, steel rebar and aluminum products earlier than expected, citing the global energy crisis and soaring raw material prices, according to a ministry statement. The ministry had first introduced a 16% tariff on steel billets and 25% on steel rebar provisionally in 2019, with an eye to taper them off over a three-year period. They were reduced in May to USD 46 per tonne, and USD 85 / tonne on steel rebars, and were scheduled for another reduction in April 2022.
• Danish industrial conglomerate AVK Group is looking to establish two water desalination and sewage treatment projects in the new capital and Damietta. The company is currently in the negotiations process with the Egyptian government.

Saif al-Islam Qaddafi registered yesterday to run in the country’s upcoming presidential elections, despite being wanted by the International Criminal Court, Reuters reports. The son of Libya’s late ruler appeared on camera for the first time since 2011 yesterday in an electoral commission video showing him submitting documents at an election center in the southern city of Sabha.