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follow up
privatization bosses pledge to
support their stock
[“strategic moves could drive market,” may 1998]
the chairmen of egypt’s majority-privatized companies agreed
in early august to implement government-suggested means of supporting
their companies’ falling share prices, minister of public enterprises
atef ebeid said in remarks quoted in the semi-official daily al
ahram.
ebeid said that the measures include using retained earnings to
repurchase shares whose prices have fallen below fair value or have
been driven down by speculators, al ahram reported.
ebeid said the measures also include replacing annual dividend payments
with quarterly or semi-annual disbursements and establishing investor-relations
departments in each company, al ahram reported.
the scheme – which al ahram said involves the 59 formerly state-owned
companies that have sold more than 50 percent of their shares on
the stock exchange – was the latest initiative announced by
the government or state-sector institutions to stem the egyptian
share market’s virtually unbroken slide in 1998 and adds credence
to the theory advanced by some analysts in our may article that
strategic actions like mergers and buybacks could move egyptian
stocks this year.
brokers, however, were skeptical that the moves would actually be
implemented and raised the concern that supporting share prices
might not be the best use of the companies’ capital.
“we’ve heard lots of stories like that in the past,”
said bassim arida, a broker in institutional sales at efg-hermes.
some analysts in our may article criticized share buybacks as a
poor use of capital by companies facing the need to finance expensive
upgrades or expand their operations. and any foray into government-suggested
buybacks could get an especially negative reception now, when the
state-sector managers of many privatized companies are already under
fire for paying more attention to their former government owners
than their new shareholders.
investors certainly didn’t ring in the news. efg-hermes’
public sector offerings index of privatization issues closed down
0.2 percent the day of the announcement. the index has lost 21 percent
of its value since the start of the year.
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more mobile shares seen
[“egypt completes gsm selloff,” april 1998]
egyptian co. for mobile services (mobinil), owner and operator
of egypt’s cellular telephone network, plans to raise £e
400 million in a public share offering expected to take place around
the time egypt’s vacation season ends in mid-september.
mobinil president and ceo osman sultan said the company’s board
of directors had approved what would be the second public offering
of shares in the company, but would not discuss key details like
pricing.
ecms shares closed at £e 28.27 the week of sultan’s an-nouncement,
and in the process accounted for huge chunks of the trading volume
on the exchange. shares in ecms rocketed in late july and early
august after exchange officials lifted the requirement that they
trade only at their par value of £e 10.
mobinil needs to raise capital to finance the expansion of its network
and increase its subscriber base so that it can generate revenues
to cover the heavy cost of buying the network, most notably a £e
1.76 billion license fee.
khaled saba, an equities analyst at efg-hermes, said that mobinil’s
existing commitments to banks – the company already has a $490
million syndicated loan arranged by chase manhattan bank –
ruled out new loans as a source of capital.
“they’re 2.8 times, three times leveraged,” he said
of the £e 600 million company, hence the return to the capital
market. ecms raised £e 180 million via the sale of 30 percent
of its shares in a wildly popular initial public offering that closed
in february.
the week before the announcement of the capital in-crease, the company
announced it had awarded contracts worth £e 400 million to
alcatel and motorola to boost the capacity of its network to 160,000
lines by the end of aug-ust and to more than 300,000 lines by the
end of 1998.
sultan told al alam al youm that mobinil has added 25,000 subscribers
since the july 1, earning £e 42.5 million in subscription
fees. the company aims to add another 190,000 subscribers by the
end of the year, worth an additional £e 323 million in fees,
he said.
mobinil projects the egyptian market for cellular telephones will
reach 1 million subscribers in three years. the company currently
has 110,000 subscribers and soon – probably by the end of the
year – will face competition from misrfone, the consortium
that has been awarded a license to build a second cellular network
in the country.
lack of network capacity has not only capped the company’s
growth, it has frustrated subscribers, particularly in the alexandria
area, where summer vacationers have inundated a system designed
only to cope with residents. local newspapers reported in august
that the company had re-ceived an ultimatum from the government
to sort out the difficulties or face unrevealed consequences.
sultan said the company had received no such message. regardless,
another industry official said sorting out the difficulties in alexandria
would be a priority under the an-nounced expansion. mobinil has
also fought back with a series of corporate-image ads touting the
power of the company’s founders – france telecom mobiles
international, motorola network management group of the u.s. and
orascom of egypt.
public relations might also explain the bizarre giveaway at the
press conference mobinil called to announce the new expansion contracts:
each journalist in the room walked away with a new motorola or alcatel
cellular phone.
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cotton prices to be tied to alcotexa
export price
[“cotton insiders eye liberalization,” june 1998]
a new decree governing the sale of cotton from this year’s
.harvest and comments by officials over the past month support speculation
by analysts quoted here in august that this year the government
has done away with the floor price, only to effectively replace
it with the export price set by the alcotexa board (minus a fixed
discount).
an august report in al ahram newspaper said that under the new decree,
domestic farmers would sell their cotton at prices based on those
set for exports by the government-supported cartel alcotexa, whose
prices are much closer to international market rates.
previously, the government has guaranteed farmers a floor price
for their raw cotton far above world prices. the old system, by
pushing the cost of raw cotton so high, ef-fectively forced private
sector traders out of the domestic market. instead, a handful of
government-owned and subsidized trading companies bought virtually
the entire dom-estic crop last year, costing the government vast
amounts of money and resulting in a mountain of around 125,000 tons
of unsold cotton from the 1997-98 season alone.
“the new rule will make a big difference. this year the system
should be based mainly on free trade,” said a consultant to
the egyptian government on the cotton industry.
more private traders would mean less cotton that the government
could feel compelled to buy and therefore less state debt. the government
also announced in august discount prices for cotton in storage and
slightly more flexible export policies, both of which should help
reduce the weight of the government’s cotton burden.“it
seems they are making it much easier for the buyer,” the industry
consultant said.
at press time, the industry was watching to see how alcotexa would
set its prices for the selling season that began on sept 1. last
year, alcotexa set its benchmark giza 75 grade cotton at around
$1.00 a pound, which, although much closer to world market rates
than the government price to farmers, was still high enough to leave
much of egyptian cotton unsold. cotton traders said that the private
sector, which tends to favor lower export prices, has been gaining
influence in alcotexa and now controls more than half the seats
on the board. but the board’s decisionmaking has tended to
be dominated by the government; and its prices, ostensibly just
a guideline, have in practice proved binding, analysts of the sector
said.
in addition, remarks by minister of trade ahmed gow-eilly reported
by al ahram later in august indicated that the government is prepared,
at least in some circumstances, to act as the buyer of last resort.
if that happens, and if the alcotexa price remains binding, then
the government will in essence have kept the floor price, albeit
a lower and more flexible one.
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t-bond welcomed
[“bond,” april 1998]
egypt’s offering of £e 500 million in treasury bonds
– only the third such issue in recent years – drew total
subscriptions of £e 2.3 billion, closing aug. 15 oversubscribed
by four and a half times. the bonds mature in 2005 and bear a coupon
of 10 percent, paid semi-annually.
analysts cheered the offering, saying regular issues of treasury
bonds, particularly in larger volumes, would go a long way toward
breathing life into egypt’s sluggish secondary market for bonds.
“if the central bank goes on issuing more bonds, i think we
will find an active market,” said moustafa assal, head of fixed
income at efg-hermes. assal said bonds saw just £e 500 million
in total trading at face value in the six months ended june 30,
compared with £e 9.5 billion in trading in stocks for the
same period.
as we reported in april, a steady supply of long-term government
bonds is seen as the key to mopping up de-mand and setting a benchmark
that could spur more corp-orate borrowers to issue bonds of their
own. the bonds also have the advantage of helping the government
diversify its predominantly short-term domestic debt.
egyptian officials said the government is indeed likely to float
more offerings. finance minister mohieddin el ghar-eeb was quoted
in the semi-official daily al ahram as saying the government would
soon issue £e 500 million in treasury bonds to meet demand
unsatisfied by the august offering. a person in the securities department
at the cen-tral bank of egypt said the offering could come as early
as this month. “i think there will be 500 million in septem-ber,”
the person said.
whenever the new issue comes, analysts said the government’s
system of allocating the august offering demonstrated its interest
in activating the bond market. individuals and mutual funds received
their full requests – £e 367 million in bonds, or 73
percent of the offering. on the other hand, banks – whose tendency
to buy and hold bonds has long been lamented – walked away
with just £e 105 million in bonds, 7 percent of their requests.
“by giving priority to individuals, mutual funds and corporations,
you ensure there will be liquidity in secondary-market trading,”
said hossam raouf, senior director of the american express bank
in the middle east.
not that the issue was perfect. assal panned the government’s
decision to make the bonds callable at any point, saying it would
reduce investors’ confidence, and said fut-ure offerings would
need to be much larger in volume, perhaps on the order of £e
2 billion. he also said the interest paid on the bonds, while a
bargain for the government, might not prove that attractive to foreign
investors.
still, there’s plenty of room for growth. egypt’s parliament
in may 1995 gave the minister of finance permission to issue up
to £e 15 billion in treasury bonds, the central bank source
said.
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bank earnings mixed
[banks get back to business, may 1998]
the government’s late-june announcement of the executive regulations
that would shape the implementation of january’s law 5 came
just in time to allow banks to prepare their first-half reports
without the haze of uncertainty that had garbled the first-quarter
reporting period.
at press time, three of egypt’s four leading joint-venture
banks had reported, and each showed growth in their core businesses.
banking stocks, however, continued to fall, and remaining doubts
about the performance of commercial international bank (egypt) added
to the sector’s weakness this year.
national société générale bank was the
first to report, showing growth of 11 percent in its first-half
net profits to £e 46 million from the year-before period despite
substantially increased provisions.
first-half income from loans and balances due from banks jumped
to £e 158 million in 1998 from £e 110 million in 1997,
fueling an increase in net interest income for the period to £e
56 million in 1998 from £e 47 million in 1997. first-half
income from commissions and fees also showed strong growth, to £e
26 million in 1998 from £e 20 million in 1997, as did income
from foreign-exchange operations, which grew to £e 5 million
in 1998 from £e 2 million in 1997.
“it looks like they are doing quite well in their core business,
which is what counts,” said amr el-kadi, director of research
at efg-hermes.
misr international bank, the second to report, also showed growth
in its core. mibank reported 1998 first-half growth in net profits
of 20 percent to £e 105 million from the year-before period.
first-half income from loans and balances due from banks increased
to £e 308 million in 1998 from £e 278 million in 1997,
leading to an increase in net interest in-come for the period to
£e 88 million in 1998 from £e 78 million in 1997. first-half
income from commissions and fees also grew, to £e 67 million
in 1998 from £e 58 million in 1997.
mibank’s net profits also got a boost from a £e 10 million
cut in provisions taken for the period, part of the bank’s
longstanding policy of correcting what has been seen as overprovisioning,
but observers focused on the core growth.
“it’s quite positive,” said haythem soliman, account
ex-ecutive at intercapital securities. “you see most of the
growth coming from the operations income.”
cib was the last to report, and its tardiness led many to speculate
that the bank’s earnings weren’t up to expect-ations.
cib did finally report in mid-august, showing a drop in first-half
net profits of 5 percent to £e 127 million from the year-before
period. the report did meet analysts’ expectations, but not
without a little massaging.
the key was £e 12.8 million in dividend income from the bank’s
26 percent stake in commercial international in-vestment co. that
figure is up from £e 7 million for the same period in 1997,
but the catch is that in 1997 the bank didn’t claim that income
until the third quarter.
“it’s not a straight comparison to the six months before,”
el-kadi said of the report.
excluding that income would leave cib with £e 114 million
in first-half income for 1998, a 15 percent drop from the same period
in 1997.
observers also expressed concerns that the bank’s loan-portfolio
growth had come at the cost of profitability. cib reported first-half
income from lending of £e 406 million in 1998, up from £e
367 million in 1997. but the bank’s loan portfolio grew faster,
to £e 8.7 billion as of june 30, 1998, from £e 7.6 billion
as of june 30, 1997.
“it means that they are lending more at probably lower rates,”
el-kadi said.
regardless, the bank’s core operations did grow. aside from
the growth in lending – no mean feat in egypt’s ultra-competitive
market for corporate loans – cib reported that its first-half
income from commissions and fees rose to £e 86 million in
1998 from £e 78 million in 1997, its first-half income from
foreign-exchange operations rose to £e 21 million in 1998
from £e 16 million in 1997 and its first-half income from
securities trading rose to £e 7 million in the first half
of 1998 from zero in 1997.
in addition, cib reported that its first-half cost of lending fell
to £e 343 million in 1998 from £e 352 million in 1997.
“in light of the number of things that went against them in
the first two quarters, i think it’s good they got as close
as they did to last year’s figures,” said tarek lotfy,
account executive at intercapital securities.
what went against them was what went against everybody else –
the tax liabilities and uncertainty created by law 5, which removed
a key loophole involving investments in tax-free instruments like
treasuries.
cib responded in the first quarter by dramatically in-creasing its
provisions against taxes, which resulted in a 30 percent drop in
net profits from the year-before period. cib also increased its
provisions in the second quarter, to £e 29 million in 1998
from £e 19 million in 1997, again dimming the bank’s
earnings picture.
nsgb also increased its provisions, to £e 22 million from
£e 13 million, but unlike cib and mibank continued to hold
large volumes of treasury bills, a concern considering the tax liabilities
threatened by law 5.
nsgb reported treasuries holdings of £e 555 million as of
june 30, 1998, against holdings of £e 840 million as of dec.
31, 1997, the last period before the passage of law 5. mibank, in
comparison, reported treasuries holdings of £e 185 million
as of june 30, 1998, against holdings of £e 374 million as
of dec. 31, 1997.
and cib slashed its treasuries holdings to £e 250 million
as of june 30, 1998, from £e 2.5 billion as of dec. 31, 1997.
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