Egypt in focus: Screening the EGX100 for value

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We scan the Egyptian market by looking at liquidity changes YtD, EPS forecast revisions, earnings outlooks and multiple valuations, all based on Bloomberg consensus. We identify a mismatch between liquidity patterns and consensus expectations, unearth a significant outperformer, track investor interest, and look for improving earnings outlooks coupled with undemanding valuations to identify where we might expect potential short-term re-ratings (or, conversely, de-ratings).

Liquidity tightening while EPS outlook has improved

We discover that there is a mismatch between investor sentiment (liquidity patterns) and analysts’ expectations. On the one hand, liquidity (3M ADTV in Egyptian pounds) in medium- to large-cap stocks fell from EGP1.3bn as of 1 January 2017 to EGP758mn as of 3 September; only five names have seen their liquidity increase YtD (see Figure 3). On the other hand, consensus has revised 2017E EPS forecasts upwards by 22% on average, with two-thirds of medium- to large-cap stocks in the index seeing an improvement in EPS forecasts. We also try to justify the mismatch by cross-checking liquidity changes and dividend yields, but our conclusion is the same: that the drop in liquidity remains macro-driven and investors are in wait-and-see mode.

One outperformer and overall market valuations

When we scan market cap and liquidity trends in the EGX100, one name stands out: Misr Fertilizers Production Company (not covered). Its market cap of $1.1bn as of 3 September – the fifth-biggest in Egypt – has grown 8x YoY (from 3 September 2016) and its liquidity (although still low) has grown 6x YtD to $336k. It trades on consensus 2017E P/E of 13x, with a 2017E dividend yield of 4% and a 2017-2019E EPS CAGR of 39%. Overall, for the medium- to large-cap stocks, 2017E P/E valuations look lower than eight months ago, falling from 16x on average to 14x.

Potential re(de)-ratings in the short-to-medium term

We analyse consensus EPS forecast revisions (up or down) YtD by cross-checking these stocks’ price changes to identify potential short- to medium-term re(de)-ratings. For example, for companies with upward EPS forecast revisions YtD, we try to identify whether this has translated into higher share prices, suggesting that a re-rating has already happened (as we find for Eastern Tobacco, for example). As shown in Figure 12, we find that the potential for re-ratings remains high. We identify 10 companies for which an upward EPS revision has not yet been reflected in higher prices. We also find companies that have seen downward EPS forecast revisions that we believe are not fully reflected in their relatively high valuations. For companies in our coverage universe, any potential short- to medium-term re(de)-ratings we identify on this analysis are unrelated to our published ratings and TPs (shown in Figure 1), which are based on a 12-month view.