Cairo bourse shows signs of life

31 July 2009
While the Egyptian stock market fell further and faster than many of its Western counterparts after the global downturn hit last year, it is recovering more quickly.

Shareholders in one of Egypt's largest quoted companies have missed out on a big payday for the third time in a matter of months.

Investors in Egyptian Company for Mobile Services, which trades as Mobinil, could make a healthy profit if an attempted takeover by France Telecom ever goes through. However, on 16 July, the Egyptian Financial Services Authority (EFSA) turned down France Telecom's third offer for the mobile phone company before shareholders even had a chance to respond.

Neither France Telecom nor the EFSA will say how much shareholders were offered. However, during a previous attempt to buy the Egyptian operator in May, France Telecom offered£E230 ($41.30) a share, which is still a 15 per cent premium to Mobinil's closing price of£E200 on 23 July. The first bid was made in April.

Healthy position

Any future attempt to buy the company may require an even higher bid, if the recovery in the Egyptian Exchange continues through the second half of this year.

The benchmark EGX30, the index of the 30 largest companies on the Egyptian Exchange, which includes Mobinil, was at 5,948 on 23 July. While that is still 50 per cent below its peak of 11,922 in May last year, it is at least now going in the right direction, having risen 71 per cent since its low of 3,474 in mid-February.

Just as Egypt fell further and faster than developed markets when the global financial crisis struck last year, so it has recovered more quickly than Europe and the US.

The downturn in the market hit some Egyptian companies much harder than others, with local banks among the worst affected.

At the end of last year, Egypt's listed banks were trading at 4.5-8.5 times their earnings for the previous 12 months - a share price of 10 times earnings is often considered cheap.

However, the country's banks hold none of the toxic assets that undermined their peers on Wall Street and in the City of London, and although their price-earnings ratios remain low, they are in a relatively healthy position.

"The conservative nature of Egyptian banks was a plus during the run-up to the financial crisis," says Henri Guillemin, managing director of Credit Agricole Egypt, which is majority owned by French bank Credit Agricole.

Two of Egypt's largest listed companies, Orascom Construction Industries and Orascom Telecom, have also suffered.

The two companies are both controlled by the Sawiris family and are also part of the EGX30 index. Orascom Telecom, which is a major shareholder in Mobinil, has been hit by plunging revenues at its Pakistani subsidiary Mobilink. On 10 March, the International Court of Arbitration in Paris also ruled against the company in a long-running dispute with France Telecom over control of Mobinil. If the Egyptian regulator had not stepped in to reject France Telecom's offer for Mobinil shares in July, Orascom Telecom would now lack a presence in its domestic market.

Its sister company, Orascom Construction, had the lowest price-earnings ratio of any sizeable Egyptian company at the bottom of the market in February, when it was valued at just 0.46 times its earnings over the previous 12 months. The figure has since recovered to 8.13 times earnings.

The Egyptian market has begun to recover for several reasons, not least that its economy has continued to grow.

According to the Finance Ministry, the economy grew by about 4.6 per cent over the 12 months to 30 June this year. This is significantly lower than the growth rate of more than 7 per cent in the previous two years, but compares well with many other economies around the world.

Investors are also more comfortable with Egypt because its capital market is more transparent than its peers. The EFSA, which was launched on 1 July, has inherited a strong set of stock market rules from its predecessor, the Capital Market Authority.

Better still, Egypt's Investment Ministry enforces the rules, applying them to both listed companies and state-owned enterprises. "Egypt is more expensive [than other Arab markets] because you have better transparency," says Angus Blair, head of research at Egyptian investment bank Beltone Financial.

Tight regulation in the past also ensured that Egypt never had the boom in bank debt that led to the global downturn. Although it has suffered from the withdrawal of foreign capital from emerging markets over the past 12 months, it is among the best placed economies to recover when international investors begin to deploy their assets once again.

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