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Monday, 8 February 2021

Auto is hot right now + could rising yields put a cap on EGX performance

The EGX30 closed today down 0.69% on turnover of EGP 2.14 bn (34.1% above the 90-day average). Foreign investors were net sellers. The index is up 6.25% YTD.

In the green: CI Capital Holding (+9.4%), Orascom Investment Holding (+7.6%) and Fawry (+2.2%). CI rose on word Banque Misr was making an offer for an additional stake, OIH is rallying ahead of the spinout of Orascom Financial Holding (which will include stakes in Beltone and Sarwa Capital), while Fawry climbed on word that it’s in the market to acquire stakes in other fintech players.

In the red: Orascom Development (-2.7%), Abu Qir Fertilizers (-2.4%) and Pioneers Holding (-2.3%).

IN THE HOT SEAT TODAY- HC Research’s head of macro and financials Monette Doss, HC Research’s head of consumers Noha Baraka, Sigma Research’s senior equity analyst Dareen El Arousy

STILL ON THE UPSWING: GB Auto (up +0.8% today and +4.1% yesterday) has surged more than 140% from its low of EGP 1.32 at the bottom of the March 2020 rout of emerging markets. What’s driving the recovery of a share that billed itself as “everything on wheels” during its IPO more than a decade ago?

The automotive industry as a whole is recovering from covid, says Baraka, and still has plenty of room to advance. A lighter hand on regulation since 2016, has helped, but the market supported by significant pent-up demand for passenger cars. That demand is fueled by population growth and wealth formation — and accrued when prices skyrocketed in the run-up to the float of the EGP (does anybody else remember receipts to take possession of new cards effectively becoming a form of currency?). Hyperinflation in the period after the float made even more would-be buyers wait another day. Today, demand is supported by reasonable inflation and stability in the EGP’s rate of exchange against key currencies.

All of this is driving growth in earnings per share, Baraka says, and while this is part of a wider trend of the large caps seeing recovery, there’s still a lot of runway, she adds.

Non-bank financial services arm GB Capital, is “a very strong driver for the company with impressive net interest margins,” says Baraka, and has “cushioned” the group for the last five years. GB Auto has been a pioneer on the NBFS sector, starting with ventures financing three-wheelers and offering fleet leasing and growing exponentially from there.

“The boom in car sales in 2020 was a pleasant surprise,” says Sigma’s El Arousy. The auto arm of the company kicked-off the year with “a slight but promising expansion in margins” and were able to liquidate their loss making models, she adds. The interest rate cuts last year were a win-win, as the company relies on banks to finance its working capital, she says, while consumers who purchase cars using bank loans also benefit from the 400 bps interest rate cut across 2020.

MEANWHILE, ON THE MACRO FRONT: Could rising treasury yields cap stock market performance? HC’s Doss is watching daily treasury auctions, and a downward trajectory for yields from January’s highs could give the stock market a boost. Doss expected treasury yields to start cooling off in 2021, responding to last year’s CBE interest rate cuts by 400 bps, “but this didn’t come around as expected due to monetary tightening in Turkey, as a result of inflationary hikes, which took the rates on its 15M treasuries to 15.97% in January up from an implied rate of 10.66%.” This higher competition from Turkish treasuries is expected to continue over the coming months. HC is calling for a total of 100 bps worth of cuts this year.

MORE ON THAT FRONT- The Finance Ministry made a USD-denominated local bond sale today, Reuters reports. The three-tranche issuance saw yields of 4.38% for the 5-year tranche, 6.25% of the 10-year tranche, and 7.87% for a 40-year tranche.

Strategic and public market investors alike are closely following M&A trends in the healthcare and banking sectors, with both industries having plenty of room to grow, says Doss. The Sisi administration’s financial inclusion drive will boost the deposit base in the banking sector and expand the formal economy, attracting more interest to healthcare and financial services as opposed to oil and gas, a previous stalwart of foreign direct investment now suffering amid the global slump in demand.

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