cibc egypt year book 2009

November 11, 2008

Sector/Co. Page No.

STRATEGY 3

ECONOMY 11

INDUSTRYBANKING 22CEMENT 30FERTILIZERS 41POULTRY 50REAL ESTATE 58STEEL 67SUGAR 80TELECOM 91WHITE CONSUMER GOODS 101

EQUITYAL-EZZ CERAMICS & PORCELAIN (GEMMA) 107ARAB COTTON GINNING CO. (ACGC) 109COMMERCIAL INTERNATIONAL BANK (CIB) 111CREDIT AGRICOLE EGYPT (CAE) 113DELTA SUGAR 115EASTERN COMPANY (EC) 117EGYPTIAN FINANCIAL & INDUSTRIAL CO. (EFIC) 119EIPICO 121EZZ AL-DEKHEILA STEEL 123EZZ STEEL (ES) 125MARIDIVE & OIL SERVICES 127MISR BENI SUEF CEMENT (MBSC) 129MISR CEMENT (QENA) 131MOBINIL 133NASR CITY HOUSING & DEVELOPMENT (NCHD) 135NATIONAL SOCIETE GENERALE BANK (NSGB) 137OLYMPIC GROUP 139ORASCOM CONSTRUCTION INDUSTRIES (OCI) 141ORASCOM TELECOM (OT) 143ORIENTAL WEAVERS CARPETS (OWC) 145PAINTS & CHEMICAL INDUSTRIES (PACHIN) 147PALM HILLS DEVELOPMENTS 149RAYA HOLDING 151SINAI CEMENT 153TELECOM EGYPT (TE) 155TMG HOLDING 157

EGYPT | TABLE OF CONTENTS

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EGYPT | STRATEGY

Welcome to CI Capital Research (CICR)'s first Egypt Book, where we look from the top to drill down through 9 sectors and into 26 companies, which we think demonstrates a wide and deep knowledge of the market.

WHY HERE? WHY NOW? The Egyptian market has been hit hard by factors not of its own making. Ever since its reformist government has been in place it has managed c.7% p.a. growth, and now, despite global events, is widely recognized as a market of least risk characteristics for its ability to continue delivering growth. Yet, as high com-modity prices brought inflation to emerging markets and as the dawning realization that the global financial crisis would have a global economic impact, then the Egyptian market was hit by an outflow of (largely foreign) portfolio investments. This saw the market plummet some 50% year-to-date.

This is despite the potential to grow, despite the robustness of its banking system, despite the lack of toxic financial products, and despite economic growth being driven nearly 3/4's by local demand. In short, this has left investors with a market with the potential to grow through these turbulent times, the potential for strong long-term growth, a market of low-cost production, and at valuations often lower than their developed and emerging market peers. We conclude, therefore, that whilst the Warren Buffet approach of buying value for the long-term at times like these is correct, it is entirely possible that the returns may be seen rather sooner.

Compelling macro backdrop Egypt’s reformist government is determined to keep growth going, to minimize risk, and to complete a program to bring rising living standards to the masses. It is a consumer-led environment, stimulated by investments, and gradually lowering interest rates. Long-term growth is assured by demographics and geographic loca-tion.

FIVE TOP PICKS We suggest below five interesting investments spread between a wealth of oppor-tunities and investment requirements. We have chosen these from among the lar-ger stocks, although within the body of the report there are exciting stories for those interested in smaller stocks.

Top recommendations

Summary macro snapshot

LE m LE LE 2008 2009 2008 2009 2008 2009 2008 2009

Name M.Cap Price12M

FV

Up-side

% PER PER PBV PBVEV/

EBITDAEV/

EBITDA Yield YieldNSGB 5,468 18.1 35.8 98% 5.4 4.8 1.27 1.07 N/A N/A 2.8% 4.1%EFIC 2,064 29.8 50.1 68% 9.7 4.5 2.91 2.33 6.5 3.3 2.9% 3.7%Mobinil 11,537 115.4 206.0 79% 6.2 5.5 8.54 6.51 3.9 3.6 13.9% 14.6%Ezz Steel 5,949 11.0 34.2 212% 3.3 4.4 0.99 0.81 1.8 2.1 2.7% 2.1%EIPICO 1,763 24.5 43.7 79% 6.6 5.9 1.50 1.36 3.2 2.6 7.8% 9.2%

Source: CICR forecast

2005/6 2006/7 2007/8 2008/9 2009/10 2010/11 2011/12Real GDP Growth (%) 6.8% 7.1% 7.2% 5.0% 4.4% 5.7% 6.3%Population (000) 71,347 72,798 74,357 75,844 77,361 78,908 80,486 Avg. Population (>15<45 yrs old) 35,531 36,253 37,030 37,770 38,526 39,296 40,082 GDP/Capita, Current (US$) 1,527 1,792 2,191 2,305 2,455 2,698 3,026 Private Sector Credit Growth 5.3% 9.1% 13.4% 10.5% 9.0% 12.3% 14.0%Fiscal Deficit % GDP 8.0% 7.3% 6.6% 6.5% 6.0% 5.7% 5.3%

Actual Forecasts

Source: CBE and CICR forecast

AN OASIS OF GROWTH AND VALUE THAT SURPASSES RISK

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VALUATION AND STOCK SELECTION Our analysts use one main method of valuation, namely a discounted cash flow (DCF) model. This discounts the explicitly forecast free cash flow for our 5 year forecast period, then a terminal value at an assumed long-term growth rate. For the real estate companies, the analyst discounts only the expected performance of the known projects. Our basic cost of equity (COE) is taking a risk-free rate of 11.5% (derived from a 10-year bond) and 8% equity risk premium, which is con-siderably higher than the traditional 5-5.5% seen in global equity research for emerging markets. Individual company models have different COE, adjusting for specific risk and leveraged beta. Basically we think you want to see at least 20% upside potential from a share price performance in the current environment.

After the steep market fall, it is unsurprising that every stock has a significant up-side potential to the thus-calculated methodology. Clearly in times like these, the sensitivities of DCF go awry, not least as the market perception is perhaps saying that the required rates of return have gone stratospheric. Whilst we are indeed debating changing the valuation methods (in addition to DCF) and how we choose a target price and recommendation, it is convenient to leave this in place, if noth-ing else to emphasize the fact that EGYPT is way below its long-term potential and indeed the whole market may be a “BUY”.

For the purposes of this report, rather than a simple relative ranking between the stocks versus DCF upside potential, we have developed an “S” Score (or Subjec-tive) rating in order to rank the stocks in some order of preference. We do this by looking at a number of “screens” for Profitability, Momentum and Valuation, and by looking at some charts to highlight this relative positioning.

We bring this together by including a number of factors, with weights to then pro-vide a ranking order of the stocks, and from this derive a focus list of five compa-nies drawn from different sectors. The factors and weightings we use include our relative assessment of: management, size and tradability of the shares, valuation from PER, PBV and EV/EBITDA, profitability from ROE or ROIC, balance sheet risk from gearing, industry risk from our top-down view, and relative DCF upside.

We weight the factors subjectively, having higher weights for management and industry risk than DCF upside potential. We also add a factor if we think the com-pany may be an acquisition target. We only produce the result here in the form of a ranked chart and is only one factor in considering our assessment of our top rec-ommendations.

FROM THE TOP - SECTORS From our view on the sustainability of growth in the economy, and with reducing but high inflation, we try to think about which sectors are most and least at risk. Given that the economy is 70% driven by local consumption, and given the gov-ernment’s desire to sustain economic growth, we generally think the least risky sectors should be the ones that would benefit from any investment program and are linked to domestic consumption.

More risky In this global environment, it is perhaps easier to think about where nerves should settle, or where risks are increasing. The sectors below - we think - are relatively high risk: Housing & construction, particularly at the high-end of the market. De-

mand has been falling away here and the market looks somewhat satu-rated. If economic growth continues and inflation abates, then there should be reducing pressure on the middle classes, and this is reflected in the housing companies’ shift towards the middle classes away from the top-end. It is worth noting that there has not been the property boom to the ex-tent there has been in parts of the Middle East, and property is still consid-

EGYPT | STRATEGY

November 11, 2008

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ered more affordable in Egypt than in the Gulf. PALM HILLS DEVELOPMENTS, SODIC, and TMG HOLDING are companies in this segment

Tourism: Falling global demand should place tourist receipts at risk. In re-cent years, tourists have been coming not only from Europe and the Middle East but increasingly from CIS. Egypt is a relatively low-cost location, with good-all-year weather. Nonetheless, in our macro estimates, we pare the growth of tourist receipts and think this sector potentially at risk.

Export oriented: With the slowdown in global trade expected, so too ex-ports, particularly of consumer goods, are at risk. Egypt has some advan-tage in that it is generally considered to be a low-cost producer. In addition, we expect some currency weakness and export incentives to mitigate this slowdown. Companies such as ORIENTAL WEAVERS CARPETS and OLYMPIC GROUP (the latter to a lesser extent; only 10% of sales come from exports to Arab and African countries) spring to mind as exporters in categories that may suffer from falling global consumption, and yet these companies will also spend efforts in focusing on domestic consumption as the export mar-kets weaken.

Less Risky Agriculture: We think food and food services is an interesting sector from

the top-down. Firstly, food is needed whatever the economy. Secondly, after the rapid rise in basic food staples last year, Egypt realizes it has to make more of its fertile crescent, and we think this is a sector which will receive investment. Fertilizer, sugar, poultry ,and flour mills all make inter-esting sectors. Included in this report are EFIC (fertilizers), DELTA SUGAR, and EASTERN COMPANY (tobacco). (Our industry team would be happy to help with bespoke requests on sectors, such as the milling sector, and companies not included in this report.)

Non-housing construction: Since we think that there will be investment in

infrastructure and help for strategic sectors, then construction per se should still be an activity going on in Egypt. Included in this should also be building services and materials companies. OCI is the principal company in this sector, but the larger proportion of its construction activity is outside of Egypt (mainly GCC). However, its main profit growth driver comes from the fertilizer segment. Other construction-related companies include EZZ STEEL (virtual monopoly in Egypt). In addition, we include cement companies, which is a sector wrongly out of favor – in our view. Within this, there are speculative investments (MISR CEMENT – QENA) and totally mispriced (MISR BENI SUEF CEMENT) and which foreigners can buy.

Oil & oil services: We think the energy sector is also a strategic sector for further development. Mostly, we think this will benefit construction compa-nies in the quoted sector. MARIDIVE & OIL SERVICES is an oil services com-pany and has most of its earnings generated globally. Mostly, we think we shall see continuing foreign direct investments (FDIs) in this sector as in-deed recent press articles have continued to highlight the foreign interest in the sector.

EGYPT | STRATEGY

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DRILLING DOWN In this section we drill down from the top, running several screens and charts for consideration. We only show the top and bottom companies in each screen, so our top picks, including our "S" Score chart, may have companies that have not featured in these tables, but nonetheless in our opinion do well.

The downward sloping trend line perhaps indicates that growth is not the main factor on investors’ minds at the moment, or even that the very high growth rates are disbelieved. In any case, as the cycle goes round, growth should undoubtedly come back into fashion and now is the time to look at companies and markets with the potential for long-range growth – Egypt!

Noteworthy above is Palm Hills Developments (PHDC), but this growth is coming off a very low base. We circled the "Sweet Spot" i.e. companies growing at a credible pace at under 6x earnings.

ROE vs. PBV and ROIC vs. WACC

The ROE versus PBV is in effect a diagram of the PER, and the slope of the line greatly affected by the outliers. The correlation is low, r-squared is just 0.25, but pictorially it does give a snapshot and prompt one to think about whether stocks in the bottom right hand corner really are cheap. The PBV, or Market Value to In-vested Capital, compared to the ROIC/WACC, or in a banks case ROE/COE, al-lows some comparison across sectors, adjusted for risk. The ROE/COE implies the level at which the equity or book value or invested capital should trade, and then (ignoring growth) can be compared to the PBV.

EGYPT | STRATEGY

PE versus growth

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PHARPACHORWE OLGR

OCIC

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MCQE

MBSC

IRAX

ETEL

ESRS

EMOB

EASTACGC

NSGBCOMICIEB

0.0

2.0

4.0

6.0

8.0

10.0

12.0

-10% -5% 0% 5% 10% 15% 20% 25% 30% 35% 40%3-year EPS CAGR

09E

PER

ROE vs. PBV ROIC (ROE) vs. WACC (COE)

ACGC

COMICIEB

NSGB

EAST

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EFIC

EMOB

ESRS

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IRAX

MBSC

MCQE

MNHD

MOIL OCIC OLGR ORTE

ORWE

PACH PHAR PHDC

RAYA

SCEM SUGR

TMGH

0%

5%10%

15%

20%25%

30%

35%40%

45%

7% 9% 11% 13% 15% 17% 19% 21% 23%

WACC (COE for banks)

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COMICIEB

NSGB

EAST

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EFIC

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PACH PHAR

PHDC

RAYA SCEM

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TMGH -

0.5

1.0

1.5

2.0

2.5

3.0

3.5

0% 10% 20% 30% 40% 50% 60%09E ROE

09E

PBV


Source: CICR forecast Source: CICR forecast

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The cheapest rated stocks, (PER) tend to come from the sectors out of favor, such as cement, real estate, and IT services, with steel not far behind. Similarly the highest yields are found there. Dividend yields are approaching money market rates, which should enhance any total return for an investment. Whilst a sector like cement is out of favor with investors, there really appears a good longer-term op-portunity. Consider that the government is trying to sustain growth through invest-ment, and there continues to be much need for infrastructure investment in Egypt to such an extent that the companies are finding it necessary to increase their capac-ity (see the industry section), and there is some sector consolidation to consider.

EGYPT | STRATEGY

VALUATION

MOMENTUM

Company 2008E 2009E Company 2008E 2009ECheapest PER PER Cheapest PBV PBVSinai Cement 4.0 2.5 TMG Holding 0.35 0.32Palm Hills Developments 4.4 2.9 Arab Cotton Ginning 0.48 0.46TMG Holding 4.1 3.4 Raya Holding 0.55 0.50Misr Beni Suef Cement 3.6 3.5 Oriental Weavers 0.65 0.60Raya Holding 4.1 3.6 Sinai Cement 0.83 0.65Dearest PER PER Dearest PBV PBVDelta Sugar 9.0 8.9 EFIC 2.91 2.33OCI 9.5 9.4 Misr Cement (Qena) 2.95 2.52Orascom Telecom Holding 12.3 9.5 OCI 2.82 3.16Al-Ezz Ceramics 13.4 22.4 Mobinil 8.54 6.51Nasr City Housing & Dev. 36.4 33.4 Nasr City Housing & Dev. 15.31 12.99

Company 2008E 2009E Company 2008E 2009EHighest Yield Yield Cheapest EV/EBITDA EV/EBITDAMobinil 14% 15% Sinai Cement 3.3 1.5Credit Agricole Bank-Egypt 10% 12% Palm Hills Developments 2.2 1.6Ezz Al-Dekheila 14% 11% Arab Cotton Ginning 2.5 1.9Misr Beni Suef Cement 6% 10% Misr Beni Suef Cement 2.9 2.0Olympic Group 7% 9% Ezz Steel 1.8 2.1Lowest Yield Yield Dearest EV/EBITDA EV/EBITDAAl-Ezz Ceramics 0% 0% Olympic Group 5.5 5.2Maridive & Oil Services 0% 0% Delta Sugar 4.9 5.3PACHIN 0% 0% Misr Cement (Qena) 5.5 5.3Palm Hills Developments 0% 0% OCI 8.9 11.7TMG Holding 0% 0% Nasr City Housing & Dev. 28.5 25.4

Company 2009E 3yr CAGR Company 2009E 3yr CAGRFastest EPS EPS Fastest EBITDA EBITDAPalm Hills Developments 52% 100% Palm Hills Developments 42% 105%EFIC 116% 69% TMG Holding -1% 95%TMG Holding 21% 47% EFIC 86% 62%Al-Ezz Ceramics -40% 42% OCI -12% 41%OCI 1% 40% Olympic Group 30% 25%Slowest EPS EPS Slowest EBITDA EBITDANasr City Housing & Dev. 9% -3% Eastern Company 2% 5%Delta Sugar 1% -5% Ezz Al-Dekheila -20% 5%Arab Cotton Ginning 10% -6% Nasr City Housing & Dev. 13% 1%Raya Holding 14% -6% Misr Cement (Qena) -4% -2%Orascom Telecom Holding 30% -27% Delta Sugar -7% -6%

Company 2009E 3yr CAGR Company 2009E 3yr CAGRFastest CASH CASH Fastest BVPS BVPSSinai Cement 1389% 244% Maridive & Oil Services 29% 48%Maridive & Oil Services 5% 200% Ezz Steel 22% 36%Palm Hills Developments -4% 78% CIB 28% 29%EFIC 70% 53% Ezz Al-Dekheila 19% 26%TMG Holding 37% 45% Misr Beni Suef Cement 20% 25%Slowest CASH CASH Slowest BVPS BVPSEzz Steel -28% -2% Delta Sugar 7% 7%Misr Beni Suef Cement 1033% -8% Arab Cotton Ginning 5% 5%Ezz Al-Dekheila -12% -11% PACHIN 5% 5%Raya Holding 5% -19% Telecom Egypt 4% 4%Nasr City Housing & Dev. -14% -24% Nasr City Housing & Dev. 18% 1%


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EGYPT | STRATEGY

Mobile telephony may start to benefit from sector rotation as recent results from MOBINIL suggest the concerns of a downturn in subscriber activity may have been overdone. Clearly, the market also fears the housing and real estate com-panies which seem already to be discounting a major downturn in real estate prices. This also is a sector where consolidation may occur, especially amongst smaller players, as in this environment the larger companies seek to acquire land banks.

If our analysts are right there is considerable momentum still to be seen in Egypt. Even those ranking in the “worst section” have reasonable growth expectations.

EZZ STEEL, almost a steel monopolist in Egypt, stands out as lowly rated and growing quickly. The catalyst again should be construction volumes as it can control its margin. MISR BENI SUEF CEMENT also falls into this category and looks potentially mispriced.

EFIC has fast growing earnings and is cash generative, and a look at the com-pany pages shows that it too is not highly rated. This is in a strategically-important sector as the government wants to increase the agriculture capacity and is still benefiting from better pricing even if fertilizer prices are well off their peak.

The lowly-rated housing and cement sector rank well on EBITDA margin, and MOBINIL in terms of returns on shareholders’ equity, but this latter is also one of the most highly leveraged, just escaping our list of bottom 5. Reducing interest rates, now that the cycle is turning may be of some help, but this is increased financial risk for the returns. Even the worst appear to have reasonable returns measured as EBITDA margin.

PROFITABILTY & RISK ROE 2008 2009 EBITDA Margin 2008 2009Best BestMobinil 120% 135% Palm Hills Developments 66% 59%EFIC 32% 58% Misr Cement (Qena) 53% 53%Ezz Al-Dekheila 74% 45% Telecom Egypt 50% 52%Palm Hills Developments 43% 43% TMG Holding 39% 51%Nasr City Housing & Dev. 36% 42% Misr Beni Suef Cement 56% 46%Worst 2008 2009 Worst 2008 2009Oriental Weavers 13% 13% PACHIN 20% 20%Telecom Egypt 10% 12% Ezz Steel 22% 20%TMG Holding 9% 10% Oriental Weavers 17% 17%Arab Cotton Ginning 6% 6% Olympic Group 15% 16%Al-Ezz Ceramics 7% 4% Raya Holding 6% 6%

NET DEBT/EQUITY 2008 2009 Net Interest/Revenue 2008 2009Best BestAl-Ezz Ceramics 54% 37% Arab Cotton Ginning 33% 35%Orascom Telecom Holding 78% 50% OCI 8% 11%Olympic Group 51% 78% TMG Holding 8% 11%OCI 52% 113% EIPICO 5% 5%

Misr Cement (Qena) 2% 4%Worst 2008 2009 Worst 2008 2009PACHIN -20% -22% Oriental Weavers -12% -10%Palm Hills Developments -36% -33% Mobinil -9% -10%EIPICO -41% -45% Orascom Telecom Holding -21% -18%Misr Cement (Qena) -32% -45% Raya Holding -25% -19%Delta Sugar -48% -46% Olympic Group -16% -19%


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EGYPT | STRATEGY

"S" SCORE Given the weightings and factors we include, the highest ranked stocks do not necessarily have the most compelling valuations. In this way, OCI has come out highly paced, and is indeed one of Egypt’s premier blue chips, with a well-regarded management. The banks as cheap and tradable come out well in this scoring too.

CI Capital Research Universe

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LE m LE LE 2008 2009 2008 2009 2008 2009 2008 2009

Name M.CapPrice

(11/6/08)12M

FV

Up-side

% PER PER PBV PBVEV/

EBITDAEV/

EBITDADiv.

Yield Div.

Yield Al-Ezz Ceramics 254 5.0 7.2 45% 13.4 22.4 0.80 0.78 5.6 4.2 0.0% 0.0%Arab Cotton Ginning 1,020 4.1 10.1 148% 8.0 7.3 0.48 0.46 2.5 1.9 3.8% 4.1%CIB 8,989 30.7 N/A N/A 5.1 4.3 1.69 1.32 N/A N/A 3.3% 4.1%Credit Agricole Bank-Egypt 2,959 10.3 15.3 49% 5.6 4.9 1.68 1.52 N/A N/A 9.7% 12.1%Delta Sugar 2,170 22.0 32.3 47% 9.0 8.9 2.42 2.27 4.9 5.3 8.3% 8.4%Eastern Company 5,450 218.0 305.6 40% 7.1 7.1 1.75 1.54 4.7 4.4 6.7% 7.0%EFIC 2,064 29.8 50.1 68% 9.7 4.5 2.91 2.33 6.5 3.3 2.9% 3.7%EIPICO 1,763 24.5 43.7 79% 6.6 5.9 1.50 1.36 3.2 2.6 7.8% 9.2%Ezz Al-Dekheila 12,249 896.2 1,501.9 68% 4.2 5.4 2.62 2.21 3.4 4.1 14.4% 11.2%Ezz Steel 5,949 11.0 34.2 212% 3.3 4.4 0.99 0.81 1.8 2.1 2.7% 2.1%Maridive & Oil Services 3,781 2.6 5.1 99% 7.8 6.5 1.85 1.44 5.9 4.6 0.0% 0.0%Misr Beni Suef Cement 936 46.8 152.5 226% 3.6 3.5 1.11 0.92 2.9 2.0 5.5% 10.0%Misr Cement (Qena) 2,310 77.0 98.5 28% 8.5 7.8 2.95 2.52 5.5 5.3 7.1% 7.7%Mobinil 11,537 115.4 206.0 79% 6.2 5.5 8.54 6.51 3.9 3.6 13.9% 14.6%Nasr City Housing & Dev. 3,122 31.2 42.8 37% 36.4 33.4 15.31 12.99 28.5 25.4 1.7% 1.8%NSGB 5,468 18.1 35.8 98% 5.4 4.8 1.27 1.07 N/A N/A 2.8% 4.1%OCI 42,192 196.5 330.5 68% 9.5 9.4 2.82 3.16 8.9 11.7 2.3% 2.9%Olympic Group 1,450 24.1 55.1 128% 5.5 4.2 1.51 1.23 5.5 5.2 7.2% 9.4%Orascom Telecom Holding 33,116 36.8 96.1 161% 12.3 9.5 1.46 1.28 3.9 3.3 2.7% 3.5%Oriental Weavers 1,708 22.9 48.3 111% 5.3 4.6 0.65 0.60 5.0 4.2 6.8% 7.8%PACHIN 585 29.2 83.4 185% 5.3 4.5 1.14 1.09 4.1 3.4 0.0% 0.0%Palm Hills Developments 3,774 8.1 24.3 199% 4.4 2.9 1.25 1.20 2.2 1.6 0.0% 0.0%Raya Holding 259 4.6 11.5 152% 4.1 3.6 0.55 0.50 3.6 3.0 8.0% 9.1%Sinai Cement 1,150 32.9 93.0 183% 4.0 2.5 0.83 0.65 3.3 1.5 5.0% 8.0%Telecom Egypt 26,801 15.7 24.3 55% 9.9 7.9 1.00 0.96 5.6 4.8 6.6% 8.2%TMG Holding 7,857 3.9 12.8 231% 4.1 3.4 0.35 0.32 3.0 2.4 0.0% 0.0%

Source: CICR forecast *Maridive & Oil Services share price is in US dollar

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EGYPT | STRATEGY

CONCLUSIONS Summarizing the charts, tables and data above, these are the main conclusions we draw:

A. Mispriced in our opinion:

SINAI CEMENT - Heavily sold off and half the value of its peers.

RAYA HOLDING - Consumer electronics, slow growth, and its net debt rank-ing belies a liquid balance sheet and investments into a growing service sector.

EIPICO – Low PER, high yield, decent (defensive - pharmaceutical) growth, good margins and profitability.

The banks (see industry section) do not make most of the screens but are rela-tively well placed as well capitalized and liquid, profitable, growing, and cheaply rated. Now that the interest rate cycle has stabilized, interest may return to this segment, not least as it is one banking sector in the world capable of lending to a market with the potential to grow.

B. Speculative interest: RAYA HOLDING - Cheap liquid balance sheet could be made to sweat

more.

MISR CEMENT (QENA) - Cement in the right place at the right time, and ASEC is building a stake.

Our top five picks From the above and from our “S” Score, we highlight the following investment opportunities from different sectors and in no particular order:

NSGB: profitable, good returns, sound balance sheet, and still gaining restructuring benefits, trading at 4.8x 2009E earnings, 1.1x 2009E BV, ROE 24%, while earnings growing at 31% over next three years.

EFIC: Sound high returning growth in a strategically-important agricul-tural sector, valued at 4.5x 2009E earnings.

EIPICO: Defensive play in the healthcare sector. Stable earnings with long-range potential as health becomes an increasingly important issue in Egypt.

MOBINIL: Mobile operator which has just beat consensus 3Q08 earnings. It pays a generous dividend and sweats the equity. Interest rate and lev-erage risk should be declining and has ongoing cost efficiency program. We think there is some rotation back to Telcos, which should benefit from stimulated consumer.

EZZ STEEL: Virtual monopoly position in Egypt, with controlled margins, cheaper than foreign competition. Benefit from any rally in commodity prices, and more fundamentally from the continued (non-housing) con-struction investment we think will continue in Egypt.

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EGYPT | ECONOMY

From the beginning of 2008 emerging economies watched the global tornado from afar. Now with a vanishing confi-dence, foreign capital has fled compelling the waning of many emerging economies stock markets. Yet, we deem Egypt's economy will reveal distinguished resilience amidst the headwinds from the developed economies. Re-inforced by its diversified GDP, liquid banking system, and an under-leveraged economy; Egypt is expected to maintain a modest GDP growth rate of 5% in FY08/09 – based on the GoE's ability to promote local investments, with a focus on SMEs. Consumer-led recovery “the guardian” for growth: Reap-ing the fruits of bold reforms implemented to date and a grow-ing investors’ confidence, Egypt's economy has leapfrogged both on its economic and fiscal management platforms. Thanks to the export-led strategy adopted, which led to the witnessed domestic demand boom, GDP jumped to a growth rate of 7.2% in FY07/08.

FDI, a perfect exhale: Given Egypt’s fertile business soil and the increasing investors’ confidence in a reformist government, FDI soared reaching US$13.2 bn in FY07/08 up from US$3.9 bn in FY04/05. Yet, it is expected to be hardly hit by the global downturn and exacerbated by investors’ panic all over the globe.

Sustained high inflation jeopardy fading away: Like other open economies, Egypt was hit hard by the surge in interna-tional oil and food prices with inflation recording a double-digit growth of 11.7% in FY07/08. However, complying with the ex-pected decline in international markets, we believe inflation to simmer down driving the wheel for strengthened domestic de-mand.

BOP surplus maintained while current account deterio-rates: Expenses of the robust domestic demand has been re-flected in a deteriorating current account reaching US$0.9 bn in FY07/08 and turning into a deficit of US$ 3.3 bn in FY08/09 given the widening trade deficit and the relatively static ser-vices growth. Yet, still BOP reflects low vulnerability given the performance of the capital and financial account outweighing such pitfalls.

Fiscal deficit restructuring, right on track: Despite the huge hike in expenditures due to increased subsidies, driven by the spiraling rise of oil prices; fiscal deficit to GDP narrowed to 6.6% in FY07/08 down from 7.3% in FY06/07. This is mainly attributable to the revenues growth, powered by tax revenues' increase as well as other revenues including proceeds from cement licenses worth of around LE 1.14 bn in FY07/08.

DEMAND & INVESTMENT: A DARING CHALLENGE

Populous economy with inherent sizable demand. Domestic investments represent the bulk –

around 60% - of implemented investments. Well capitalized, under leveraged Banking

sector flushed with liquidity. Solid BOP position even with the weaken-

ing at the margins. Favorable factors of production and benign

business environment that allows Egypt to act as an investment hub within the region. Underlying potential in a number of sectors

including fertilizers, infrastructure, agribusi-ness and pharmaceutical.

The current global challenges that is ex-pected to negatively impact exports growth. Highly affected FX earning sectors, namely

tourism, Suez Canal and FDI. Inability to rely on fiscal pumping to pro-

mote growth with the prevailing fiscal defi-cit.

EGYPT’S ECONOMIC PERFORMANCE

ALIA MAMDOUH [email protected]

POTENTIALS

RISKS

SELECTED MACRO INDICATORS

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

2003/4 2004/5 2005/6 2006/7 2007/8 2008/9 2009/10 2010/11 2011/120.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Real GDP GR Investment GR

2006/7 2007/8 2008/9FGDP (Current, LE bn) 744.8 896.5 1,002.8 Real GDP GR (%) 7.1% 7.2% 5.0%GDP/Capita (Current, US$) 1,792 2,191 2,305 Inflation (CPI %) 10.9% 11.7% 17.0%FDI (US$ mn) 11,053 13,237 6,364 Investments (LE bn) 155.3 179.3 190.8

November 11, 2008

12

2006E

Medium, 50%

Small, 14%Large, 38%

EGYPT | ECONOMY

REAL SECTOR Economic growth in recent years has been aggravated by a diversified output strategy that was reflected in the strong growth in tourism, construction, real es-tate, communications, oil and gas and trade sectors. The inflow of foreign invest-ments as DAMAC and Emaar helped flourishing the construction and real estate sectors that in turn fed the building materials industry. In addition, the entrance of the third mobile operator, Etisalat Misr, lifted up the communications sector. Export volumes, despite the strengthening of the Egyptian pound against the US$ helped the manufacturing sectors to record a growth of 8% in FY07/08 up from 5.9% in FY05/06.

Fueled by an ex-panded output strat-egy, economic growth has been maintained over the past years

Real GDP growth breakdown GDP growth by sector

Source: CBE Source: CBE

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2004/5 2005/6 2006/7 2007/8

Private consumption Government consumptionGross Capital Formation Net Exports

An economy with an increasing say for SME’s and the infor-mal sector

SMEs have been one of the pillars of the Egyptian private sector, compromising the bulk - above 90% - of the operating private non-agricultural establishments. Micro, small and medium enterprises contribute with around 80% of total value added and attract 47% of total investments. Moreover, their input to the country’s exports reached around 20%; of which chemical products represent the lion’s share of 38%.

SME’s contribution to Industrial GDP

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Oil

& G

as

Indu

strie

s

Con

stru

ctio

n

Com

mun

icat

ions

Who

lesa

le &

Trad

e

Fina

ncia

lse

rvic

es

Tour

ism

Rea

l Est

ate

Oth

ers

2006/7 2007/8

2000

Large, 48%

Small, 12%

Medium, 40%

Source: CICR database

November 11, 2008

13

EGYPT | ECONOMY

Vibrant investment appetite

Based on weighted growth, the services sectors accounted for the bulk of new investments. In FY07/08, investment in transportation and communication wit-nessed the highest flow of 7.8%; followed by hydrocarbon investments, namely in the upstream activities which recorded a weighted growth of 7.1%. Infrastructure investments come next with a rate of 5% - especially in water and electricity sta-tions.

Services sectors led investment growth

High level of infor-mality is the main im-pediment facing SMEs. Yet, they enjoy increasing GoE sup-port

As SMEs provide affordable goods and services that suits the lower and lower-middle income groups - which represents 57% of the population - they are highly interrelated to the informal economy. Such high level of informality limits SMEs access to a wide range of formal services, most importantly credit facilities. Rec-ognizing their vital role, GoE launched an Exchange market for growing medium and small companies, Nilex, to facilitate access to capital as well as exposure to foreign investors. We highly believe that increasing SMEs support is crucial to sus-tain high growth levels by promoting entrepreneurship, job creation and attracting domestic investments.

Investments weighted growth by sector

Source: CBE

Mounting FDI inflows were reflected in a strengthened cur-rency and an ex-panded output

Rising confidence in the country's economic performance loosened the wheel for FDI flows which maintained their high growth levels reaching US$13.2 bn in FY07/08 up from US$3.9 bn in FY04/05. FDI constitutes around 8.2% of the coun-try's GDP in FY07/08. The petroleum sector held the major chunk of 38% of such inflows, while the contribution of the real-estate still maintains a low level of 0.8% in FY07/08, despite its strong growth reaching US$90.6 mn up from US$39 mn in FY06/07. Within the non-petroleum investments, the financial sector accounted for the lion’s share of 40% followed by industrial activities (32%) and the services sec-tors (15%).

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

Agric

ultu

re

Cru

de O

il &

NG

Man

uf.&

Oil

Prod

ucts

Elec

trici

ty &

Wat

er

Con

stru

ctio

n

Tran

sp. &

Com

.

Suez

Can

al

Who

lesa

le T

rade

Fina

ncia

l Sec

tor

Tour

ism

Rea

l Est

ate

Educ

atio

n

Hea

lth

Oth

ers

Investment breakdown FY07/08

Source: CBE

Financial Intermediaries, 1%

Wholesale & Retail Trade,

3%

Manufacturing & Oil Products,

22%

Electricity & Water, 8%Construction & Building, 2%

Transp. & Com.,20%

Tourism, 3%

Real Estate, 7%

Education, 3%

Health, 2%

Others,8%

Crude Oil & NG,17%

Agriculture, 4%

INVESTMENTS

The package of bold reforms implemented on all fronts, namely (1) reducing the minimum capital requirement of incorporation to LE 1,000, (2) corporate tax cut by half reaching 20%, (3) reducing weighted average custom tariffs from 14% to 6.9%, (4) tariff bands streamlined and reduced from 27 to 6, and (5) customs on capital assets capped at 5% have created an attractive environment for invest-ment. Moreover, with the country's favorable factors of production and competitive energy prices, both investment and FDI recorded buoyant growth.

November 11, 2008

14

EGYPT | ECONOMY

However, sustaining such strong FDI in-flows is of a concern

Source: CBE Source: Ministry of Investment

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2004/5 2005/6 2006/7 2007/8

US$ mn

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

FDI Implemented InvestmentsFDI % of GDP Investment % of GDP

Agriculture, 1.4%

Construction, 7.3%

CIT, 0.3%Real Estate, 1.8%

Services, 15.3%

Financial Sector, 40.1%

Industry, 31.6%

Tourism, 2.2%

A positive aspect is that announcements of new foreign invest-ments are still in the headlines

Despite the global gloom, announcements of new projects are still in the head-lines: Al Kharafi Group confirmed plans to pump US$2 bn in new investments in the steel industry; Schneider Electric will establish a new electricity plant with an investment cost of around US$ 45.5 mn; GlaxoSmithkline plans to buy the Egyp-tian mature products business of Bristol-Myers Squibb Co. for US$210 mn, and Solvay SA, the world's largest soda- ash maker, bought Alexandria Sodium Car-bonate Co. in a deal worth US$137.5 mn. Moreover, the fertilizers sector is to wit-ness further investments including EBIC, Agrium and Egyphos.

However, sustaining such strong FDI levels is doubtful, especially after the re-moval of tax exemptions from the free zones for energy-intensive industries cou-pled with the increase in energy prices that were announced in May 2008. More-over, the current global financial turmoil is expected to have a negative impact on the inflow of FDI, as 70% of such inflows comes from the US and EU countries. Yet, with GCC surplus such decline is expected to be mitigated. We expect net FDI inflows to reach US$6.4 bn in FY08/09, followed by US$5.9 bn in FY09/10. On a different note, GoE expects FDI to reach around US$10 bn in FY08/09.

Investment & FDI & Shares in GDP Non-Petroleum FDI Breakdown FY07/08

Key pipeline projects over 2008-12

Source: CICR

Sector Project Investments Completion DateEl-Swedy Cement US$350 mn 2010North Sinai Cement LE 1,500 mn 2010Al-Nahda Industries LE 1,600 mn 2011Al-Wady Cement LE 1,000 mn 2012

SteelFour new steel raw materials factories; Ezz Steel (ES), SuezSteel Company, Tiba for Iron & Steel and the EgyptianCompany for Sponge Iron.

US$15 bn NA

Almaza City Center by Al-Futtaim US$0.5 bn 2008Hyde Park by Damac US$5.5 bn 2011Cairo Nile Corniche Towers project by Qatari Diar LE 5.75 bn 2011West Town Cairo, in Sheikh Zayed by SODIC US$2.4 bn 2011East Town Cairo, in Katameya US$1.6 bn 2011

Port Ghalib by El-kharafi Group US$1.2 bn 2009Serrenia resort by Shaheen Bus.& Inv, Group US$2.5 bn 2010

Porto Sokhna by Amer Group LE 1.5 bn 2010Marassi by Emaar US$1.74 bn 2012Almaza Bay Resort by Travco LE 2.56 bn 2012

Egyptian Basic Industries Co. (EBIC) US$432 mn 2008

Egyptian Fertilzers Co. (EFC) US$250 - 300 mn 2010Agrium US$1400 mn 2010Egyphos US$680 mn 2011

Cement

Real Estate

Tourism

Fertilizers

November 11, 2008

15

EGYPT | ECONOMY

As domestic investments represent the bulk of total implemented investments in Egypt, of which SMEs bears a considerable contribution, the GoE's commitment to support SMEs investments as well as providing them with export facilities – through tapping new potential markets – is expected to mitigate a reduced FDI inflows. Moreover, the GoE's decision of freezing any increase in energy prices till the end of 2009 is another measure that can drive further investments. In addition to the continued infrastructural development with US$8.9 bn worth of transport investments expected to pour into the country over the coming three years. We expect total implemented investments to reach LE 190.8 bn in FY08/09. Against this backdrop and given the purchasing power resilience of the upper and upper middle classes of the society and their influence on the informal sector domestic demand growth will likely maintain its levels. Thus, we believe Egypt to maintain a modest growth amidst such turbulence and negative sentiments with expected GDP growth rates of 5% and 4.4% in FY08/09 and FY09/10, respectively. Said moderate setback in growth is to be also supported by the country’s diversified GDP, liquid banking system with loans to deposits ratio of 53% and an under-leveraged economy. We highly believe a 5% GDP growth is still significantly higher than that witnessed during the slowdown early in the decade, reflecting a better-off economic structure with stronger spine and foundations. Overall, we believe economic slowdown will worsen in FY09/10 given the steep decline in oil prices and the maintained global slowdown affecting large emerging markets, including Russia and China. Our estimates are considered conservative, yet there might be upside surprises if the GoE succeeded to attract higher than expected FDI levels and support export-oriented industries.

Another positive as-pect is the GoE's commitment to focus on SMEs and con-tinuing infrastructural development

FDI & Investment Outlook


0.0

50.0

100.0

150.0

200.0

250.0

300.0

2005/06 2006/07 2007/8 2008/9 2009/10 2010/11

LE bn

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000US$ mnInvestment FDI

Public-private part-nership, another mechanism for sup-porting investments

Public-private partnerships (PPP) are integral to investments, as well as sustained economic growth as it aims at lifting-off some of the burden on the government budget, particularly in terms of infrastructural investments. PPP is considered an important supporting tool for the private sector as well benefiting from the govern-ment endorsement in fast-tracking the projects permits. One of the main sectors that witnessed PPP projects is the transport sector with Cairo-Alexandria highway project that will be awarded to a private firm under the PPP model in January 2009 with an estimated investment cost of LE 1.9 bn. In addition to the Mediterranean Coastal highway with an investment cost of LE 1.5 bn. There are still a number of PPP opportunities in infrastructure development, including water facilities and sani-tation as well as electricity plants with Egyptian Contracting Co. (Mokhtar Ibrahim) winning a project for expanding a water utility in Obour City with an investment cost of LE 280 mn. We highly believe that endorsing PPP will enhance sustaining mod-erate economic growth levels without imperiling the existing fiscal deficit.

November 11, 2008

16

EGYPT | ECONOMY

Yet, inflation started cooling-off

CPI, food & oil prices

Source: CAPMAS & Bloomberg

Monetary tightening was the first re-sponse

The decline in global oil prices witnessed since July 2008 was filtered down to food commodities' prices which started to cool-off since September 2008, bringing down the CPI reading to 20.2% in October 2008. We believe inflation will not re-cord its 2008 skyrocketing readings, not only due to the cool-off in international prices but also due to the absence of the low base of the consumer price index effect. We expect inflation to start exhibiting lower levels in FY09/10, enhancing the purchasing power and driving up domestic demand.

As a measure to counteract inflation, the Central Bank of Egypt (CBE) raised inter-est rates for six consecutive times starting February 2008. The overnight deposits and lending rates rose from 8.75% and 10.75% in December 2007 reaching 11.5% and 13.5%, respectively in September 2008. Consequently, broad money supply and liquidity (M2) witnessed slower growth of 15.7% in FY07/08 down from 18.2% in FY06/07. We do not believe that the monetary tightening have been to-tally effective in curbing inflation mainly due to the slow pass of changes in corri-dor interest rates to general interest rates in the banking system. In addition to, the relatively low loan-to-deposits ratio of 53% that flushed the banks with excess li-quidity, along with the nature of the Egyptian economy – which bears a significant contribution from the informal sector.

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

Jul-0

6A

ug-0

6S

ep-0

6O

ct-0

6N

ov-0

6D

ec-0

6Ja

n-07

Feb-

07M

ar-0

7A

pr-0

7M

ay-0

7Ju

n-07

Jul-0

7A

ug-0

7S

ep-0

7O

ct-0

7N

ov-0

7D

ec-0

7Ja

n-08

Feb-

08M

ar-0

8A

pr-0

8M

ay-0

8Ju

n-08

Jul-0

8A

ug-0

8S

ep-0

8O

ct-0

8

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0US$/barrelCPI Food prices Oil prices

INFLATION Rising global oil prices as well as international commodities prices, namely food – as Egypt is a net importer - lifted up local products' prices, leading CPI reading of 11.7% in FY07/08. Yet, the full impact should be reflected in FY08/09 by which CPI reading is expected to reach 17%. In an effort to curb inflationary pressure, the GoE raised up interest rates; reduced imports tariff to 6.9% from 9%; and im-posed tariffs on certain export commodities (steel, cement, rice), yet, inflation maintained its increase – with CPI reading reaching the peak of 23.6% in August 2008. Bearing the highest weight in CPI (44%), food & non-alcoholic beverages drove up the hike being highly influenced by changes in oil prices. In an attempt to alleviate inflationary pressures on the public, as Egyptians spend around 45% of their income on food items expanding to 60% for the lowest income groups, GoE increased wages by 30% in May 2008. Yet, sustained high levels of inflation out-weighed such efforts and eroded the Egyptian's purchasing power and real in-comes.

High levels of infla-tion imposed a threat to growth

MONETARY SECTOR

November 11, 2008

17

EGYPT | ECONOMY

Policy rates is a tool to support growth

With easing inflation readings coupled with expected risk of a downturn, the tight-ening monetary cycle seems to come to an end. The pressing need to support the economy in facing the impact of the global economic downturn should be through driving up local investments. Therefore, monetary policy is expected to be loos-ened with lending rates to decline to 12% in FY09/10.

CPI & interest rate Money supply growth & lending rates

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

Jul-0

6A

ug-0

6S

ep-0

6O

ct-0

6N

ov-0

6D

ec-0

6Ja

n-07

Feb-

07M

ar-0

7A

pr-0

7M

ay-0

7Ju

n-07

Jul-0

7A

ug-0

7S

ep-0

7O

ct-0

7N

ov-0

7D

ec-0

7Ja

n-08

Feb-

08M

ar-0

8A

pr-0

8M

ay-0

8Ju

n-08

Jul-0

8A

ug-0

8S

ep-0

8O

ct-0

8

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%Deposits Lending CPI

Source: CAPMAS & CBE Source: CBE

EXTERNAL SECTOR The extensive growth in capital flows, exports revenues as well as FDI inflows, contributed to the rebound in the Egyptian pound’s confidence leading to the pound’s appreciation to an average of 5.503 LE/US$ in FY07/08 up from 5.710 LE/US$ in FY06/07. We believe such appreciation will not likely to continue with the strength gained by the US$ against the EUR and the declining oil prices. In addition to the decline in FDI flows and the expected current account deficit that will exert more pressure on the Egyptian pound. We expect the LE to depreciate reaching an average of 5.735 LE/US$ in FY08/09, followed by further depreciation in FY09/10 reaching an average of 5.819 LE/US.

Strong Egyptian pound, yet, not for long

Exchange rates

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

2003

/4

2004

/5

2005

/6

2006

/7

2007

/8

2008

/9

2009

/10

2010

/11

2011

/12

US$

5.00

5.20

5.40

5.60

5.80

6.00

6.20

6.40LEEUR/USD LE/USD

Source: Bloomberg & CICR forecasts

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

900.0

Jul-0

6A

ug-0

6S

ep-0

6O

ct-0

6N

ov-0

6D

ec-0

7Ja

n-07

Feb-

07M

ar-0

7A

pr-0

7M

ay-0

7Ju

n-07

Jul-0

7A

ug-0

7S

ep-0

7O

ct-0

7N

ov-0

7D

ec-0

7Ja

n-08

Feb-

08M

ar-0

8A

pr-0

8M

ay-0

8Ju

n-08

LE bn

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%Domestic Liquidity (M2) Lending Rates

November 11, 2008

18

EGYPT | ECONOMY

Egypt's Balance of Payment (BoP) ran an overall surplus of US$5.4 bn in FY07/08 supported by the combined effect of a net inflow of US$7.1 bn on the capital and financial account, and a current account surplus of US$0.9 bn. On the other hand, Egypt’s trade balance reflected an increasing trade deficit despite exports’ growth recording 19% in FY06/07 and 33% in FY07/08 - mainly led by the 43% increase in oil exports. But, the hike in domestic consumption pushed imports growth higher recording 26% and 38% in FY06/07 and FY07/08, respectively. Imports growth was mainly attributed to petroleum payments registering the highest growth of 131% in FY07/08 due to the rising international oil prices. Yet, the services bal-ance surmounted such deficit led by the strong growth of tourism revenues, which resulted in a current account surplus of US$888 mn in FY07/08. It is worth high-lighting that the current account is experiencing a shrinking surplus with a declin-ing share in GDP of 0.5% in FY07/08 down from 1.7% in FY06/07 exacerbated by the growing trade deficit.

Source: CBE Source: CBE

Consumption boom led to a higher trade deficit

Even before we consider the impact of the global slowdown, trade balance has been on the edge with expectations of a growing deficit, given the extensive growth in imports driven, as previously mentioned, by the buoyant domestic de-mand. Looking ahead, the global shrinking demand, particularly hitting developed economies, especially the US and EU, our main trade partners, are expected to force exports to witness a notable setback in its previous strong growth levels. We believe exports to exhibit a growth of 14% in FY08/09 supported by the weaker pound, and the already signed contracts; while imports are expected to grow with 18% in the same year. As imports' growth is expected to continue exceeding that of exports, a growing trade deficit will remain a major drawback for the current ac-count as it is not expected to be outweighed in the medium-term given the static services growth.

Trade balance, the pitfall of the current account

Current account & trade balance Current account inflows

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2004/5 2005/6 2006/7 2007/8

US$ mn Oil Exports Suez canal Tourism Remittances

(30,000.0)

(20,000.0)

(10,000.0)

0.0

10,000.0

20,000.0

30,000.0

2004/5 2005/6 2006/7 2007/8

US$ mn

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

LE bnTrade Balacne Current account balanceConsumption

Trade Deficit & Current account

(3.3)

(8.5)

(11.0)

(13.7)

0.9

2.3

1.8

2.9

-140.0

-120.0

-100.0

-80.0

-60.0

-40.0

-20.0

0.0

20.0

40.0

60.0

80.0

2004/5 2005/6 2006/7 2007/8 2008/9 2009/10 2010/11 2011/12

US$ bn

-16.0

-14.0

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0US$ bnImports Exports Current Account

Source: CBE & CICR forecasts

November 11, 2008

19

EGYPT | ECONOMY

Tourism, one of the main FX earnings pillars, witnessed dramatic growth over the past two years. Both, international tourist arrivals (ITA) and international tourism receipts (ITR) recorded significant respective growth of 18.3% and 32.3% in FY07/08. Such buoyancy has been mainly supported by the weakness of the Egyptian pound against the euro and GCC currencies, where Europe accounts for the bulk of ITA representing 69%, followed by the Middle East 18.8%. Yet, such exceptional tourism performance is expected to be at risk, being faced by the an-ticipated slowdown in the global economy with ITR expected to reach US$11.1 mn and US$11.8 mn in FY08/09 and FY09/10, respectively.

Tourism receipts is the first to be hit

Boosted by the rising global trade and high oil prices; Suez Canal receipts re-corded magnificent growth of 17.2% and 23.6% in FY06/07 and FY07/08, reaching US$5.2 bn. Yet, the anticipated slowdown in global trade is expected to impact Suez Canal receipts leading to a lower growth levels reaching US$5.6 bn.

With expectation of a declining global trade, Suez canal re-ceipts will be nega-tively impacted

Source: CBE Source: IDSC & CBE

Suez Canal Receipts & Traffic International tourists arrivals & receipts

Remittances of Egyptian workers have been one of the main drivers to the current account surplus, through an extensive growth of 25.6% and 35.4% in FY06/07 and FY07/08, respectively. Growth in remittances has been mainly driven by inflows from GCC – the major contributor to remittances with 51% - which recorded a 42% growth in FY07/08 up from 19% in FY06/07. Given that GCC countries will main-tain current account surplus, yet at lower levels due to lower oil prices, we expect that it will mitigate the risk of the anticipated decline of remittances from the US.

Remittances remains an important source for Egypt’s BOP

Remittances

Source: CBE

0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

1,400.0

1,600.0

1,800.0

2,000.0

Jun-

05Ju

l-05

Aug-

05Se

p-05

Oct

-05

Nov

-05

Dec

-05

Jan-

06Fe

b-06

Mar

-06

Apr

-06

May

-Ju

n-06

Jul-0

6Au

g-06

Sep-

06O

ct-0

6N

ov-0

6D

ec-0

6Ja

n-07

Feb-

07M

ar-0

7A

pr-0

7M

ay-

Jun-

07Ju

l-07

Aug-

07Se

p-07

Oct

-07

Nov

-07

Dec

-07

Jan-

08Fe

b-08

Mar

-08

Apr

-08

May

-Ju

n-08

Number

0.0

100.0

200.0

300.0

400.0

500.0

600.0US$ mnNo. of Vessels Oil Tankers Suez Canal Receipts

0.0

2,000.0

4,000.0

6,000.0

8,000.0

10,000.0

12,000.0

2004/5 2005/6 2006/7 2007/8

US$ mn

0.0

2,000.0

4,000.0

6,000.0

8,000.0

10,000.0

12,000.0

14,000.0

VisitorTourism Reciepts Tourists Arrivals

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

2004/5 2005/6 2006/7 2007/8

US$ mn GCC US Europe

November 11, 2008

20

EGYPT | ECONOMY

Provoked by the widening trade deficit and the declining growth in net services, the current account is expected to leave its surplus era, which has been prevail-ing since FY01/02, heading towards a growing deficit reaching US$3.3 bn in FY08/09 deteriorating further to US$8.5 bn in FY09/10. We believe current ac-count deficit will reach 1.9% of GDP in FY08/09 shifting from a surplus of 0.5% of GDP in FY07/08. .

Current account ex-hibiting high vulner-ability to growing trade deficit

FISCAL SECTOR

With a committed government embarking on a restructuring scheme for revenues and expenditures targeting a fiscal deficit of 3% of GDP by FY10/11, it managed to ease fiscal deficit from a GDP share of 9.6% in FY04/05 to 6.6% in FY07/08. Backed by maintained economic growth and enhanced tax payers’ compliance, tax revenues witnessed strong growth of 16.9% and 20% in FY06/07 and FY07/08, respectively, pushing revenues to LE 218.5 bn in FY07/08. However, the surge in oil and food commodities prices exerted more pressure on subsides, besides the 30% increase in wages, putting more pressures on the expenditures side which grew by 25% in FY07/08. Even with the subsidies restructuring scheme (an average energy price increase of 27% July 2006 and 40% in May 2008) that was outlined to alleviate the increasing burden; expenditures reflected signs of rigidity with the oil subsidies accounting for around 48% of the total subsidies.

Revenues & Expenditure

Declining interna-tional oil prices trim-ming fiscal deficit share in GDP

Despite fiscal restruc-turing, subsidies is still a heavy burden

Expenditure Breakdown FY07/08

Tax buoyancy has been improving and is expected to progress further with planned reforms in sales tax and the introduction of value-added tax, the newly introduced real estate tax law, and the new traffic law. We believe revenues will continue to grow reaching LE 269.9 bn in FY08/09. Bearing in mind, the decline in international oil prices that will simmer down subsidies’ growth and the new indus-trial energy policy that reduces fuel subsidies for energy-intensive industries as well as the reduction in imports payments, we believe expenditure will grow at a slower pace. We believe the GoE’s economy rescue package of increasing sup-port for exports; offering financing and export-related facilities for SMEs; and ex-panding infrastructure investments could be implemented from expenditures' sav-ings. We believe this will help reduce the fiscal deficit to 6.5% of GDP in FY08/09 and 5.3% in FY11/12. It is unlikely to hit the target of 3% of GDP unless more re-structuring on the expenditures side takes place, which is unlikely to be attainable in the mean time.

0

50,000

100,000

150,000

200,000

250,000

300,000

2004/5 2005/6 2006/7 2007/8

LE mn

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Revenues Expenditures Fiscal Deficit/ GDP

Others8%

Purchase of Non-Financial Assets

12%

Purchase of Goods & Services

6%

Interest Payments18% Subsidies

34%

Wages & Salaries22%

Source: MOF Source: MOF

November 11, 2008

21

EGYPT | ECONOMY

Reforms also improved Egypt’s debt position with net domestic debt to GDP fal-ling to 43.2% in FY07/08 down from 52.3% in FY04/05. Moreover, net budget sector debt declined reaching 53.4% in FY07/08 from 67.4% in FY04/05. Interest payment as well recorded significant improvement recording a growth of 5.6% in FY07/08 well down from its high levels of 29.6% in FY06/07.

A downsized public debt

Debt Growth & Debt-to-GDP

Source: MOF

0

100,000

200,000

300,000

400,000

500,000

600,000

2004/5 2005/6 2006/7 2007/8

LE mn

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

Gross Domestic Public Debt Net Domestic Public DebtNet Domestic Debt % GDP

Egypt’s economic outlook

Source: CBE, MOF & CICR forecasts

2005/6 2006/7 2007/8 2008/9 2009/10 2010/11 2011/12Real SectorGDP, Current (LE bn) 632.8 744.8 896.5 1,002.8 1,105.1 1,243.2 1,412.1 GDP, Current (US$ bn) 108.9 130.4 162.9 174.8 189.9 212.9 243.6 Real GDP Growth (%) 6.8% 7.1% 7.2% 5.0% 4.4% 5.7% 6.3%Population (000) 71,347 72,798 74,357 75,844 77,361 78,908 80,486 GDP/Capita, Current (US$) 1,527 1,792 2,191 2,305 2,455 2,698 3,026 Investments (LE bn) 85.0 155.3 179.3 190.8 205.3 223.9 251.6 External SectorBalance of Goods & Services (US$ bn) (3.80) (4.79) (8.45) (13.27) (18.77) (22.24) (26.13) Tourism Revenues (US$ bn) 7.23 8.18 10.83 11.12 11.84 13.34 14.81 Suez Canal Revenues (US$ bn) 3.56 4.17 5.16 5.61 6.00 6.93 8.02 Transfers (US$ bn) 5.55 7.06 9.34 10.02 10.25 11.20 12.40 Current Account (US$ bn) 1.8 2.3 0.9 (3.3) (8.5) (11.0) (13.7) Current Account % GDP 1.6% 1.7% 0.5% -1.8% -4.3% -4.9% -5.3%Exports % GDP 31.8% 33.0% 32.6% 34.7% 34.4% 34.6% 36.8%FDI (US$ mn) 6,111 11,053 13,237 6,364 5,865 7,496 10,118 FDI % GDP 5.6% 8.5% 8.1% 3.6% 3.1% 3.5% 4.2%LE/USD Exchange Rate (Period Avg) 5.810 5.710 5.503 5.735 5.819 5.840 5.798 Monetary SectorInflation (CPI %) 4.2% 10.9% 11.7% 17.0% 11.7% 12.9% 14.19%Lending Rate (%) 12.71% 12.64% 12.22% 12.75% 12.00% 11.75% 11.50%Credit Growth 5.3% 9.1% 13.4% 10.5% 9.0% 12.3% 14.00%Fiscal SectorExpenditure % GDP 32.8% 29.8% 30.9% 33.4% 32.7% 32.7% 32.6%Revenues % GDP 23.9% 24.2% 24.4% 26.9% 26.8% 27.2% 27.5%Fiscal Deficit (LE mn) 50,385 54,697 59,234 65,215 66,455 70,563 74,299 Fiscal Deficit % GDP 8.0% 7.3% 6.6% 6.5% 6.0% 5.7% 5.3%

ForecastsActual

November 11, 2008

22

EGYPT | BANKING

Given the global financial crises and amid concerns of a global recession, the Egyptian banking sector is well-positioned with its balanced loans/deposits ratio of 53% implying both high liquidity and funding surplus, vs. fund-ing gaps in some credit crunch economies. Next to the mounting banking losses related to bad assets in the global market, Egypt has no significant exposure to sub-prime assets. Sitting in an under-penetrated emerging mar-ket like Egypt with inherent growth potential and achiev-able high profitability levels with a ROAE of 16% for the sector, and leveraging on the readily available liquidity suggested by the said level of loans/deposits, success is not far.

Banking sector outperformed the economy since 2001: Banking assets outperformed the nominal GDP growth since 2001, with a total banking assets/GDP ratio reaching a multiple of 1.2x as at June 2008.

A real & non-inflated balance sheet: Lending and other as-sets in the banking system are funded by existing core depos-its, with minimal dependence on foreign inter-bank.

Not highly exposed in an under-penetrated market: At a loans/deposits ratio of just 53%, the banking sector is not highly exposed and able to withstand expansions leveraging on only the readily available liquidity, in a market that is eager for growth and under-penetrated (15% penetration) .

Faster deposits’ growth, yet high NIMs and ROAEs: De-spite that deposits had been growing faster than loans for long, still, banks particularly major ones record high NIMs and ROAEs, as evidenced by an average NIM and ROAE of 3.2% and 33.4% for the 3 covered banks, respectively.

Improving credit quality & a much stronger sector: With the termination of the CBE’s first phase of reforms that had started in 2003, including enhancing capitalization, provisional accumulation and consolidations, the banking sector now is much stronger.

Opportunities include potential capital that used to mi-grate to distressed economies: If the banking sector working with the local investors rise up to the challenge, potential capi-tal that previously targeted the currently distressed economies could be diverted to Egypt thereby generating further growth.

RISING UP TO THE CHALLENGE

A highly profitable sector. Under-penetrated market with huge growth po-

tential. A balanced total loans/deposits ratio at 53%

implies a funding surplus and readily available liquidity. A real and non-inflated balance sheet. Improved asset quality through reforms and

consolidations. No significant exposure to sub-prime crises

places the sector at an advantage vs. others.

A large global recession and the risk of other exogenous factors that might impact the sector. A wider than expected GDP slowdown due to

wider exports and FDI deceleration can trigger lower deposits’ growth and eventually weak loans’ growth. Lower GDP and GDP per capita could heighten

corporate and retail default rates, negatively affecting asset quality. Increased liquidity pressures on foreign currency

could create an FX squeeze. Currency depreciation could trigger some FX

losses. Interest rate risks related to increased pricing

pressures of funds.

SECTOR PERFORMANCE | 2002/3 - 2007/8

DRIVERS

RISKS

KEY PERFORMANCE INDICATORS 13.4 Banking assets CAGR (02/3-07/8,%)

13.3 Deposits CAGR (02/3-07/8, %)

7.1 Loans CAGR (02/3-07/8, %)

52.9 Loans/deposits ratio (2007/8, %)

5.3 Equity/assets (2007/8,%)

16 ROAE (2007/8, %)

1.2x

1.3x

1.4x

1.3x

1.3x1.2x

1.3x1.2x

-

200

400

600

800

1,000

1,200

2000/1 2001/2 2002/3 2003/4 2004/5 2005/6 2006/7 2007/81.1x

1.1x

1.2x

1.2x

1.3x

1.3x

1.4x

1.4x

In LE bn Assets/GDP multipleNominal GDP Banking Assets Banking Assets/GDP

ALIA ABDOUN [email protected]

111 CIB

113 CAE

137 NSGB

PAGE # BANKS COVERED

November 11, 2008

23

EGYPT | BANKING

BANKING SECTOR STRUCTURE ASSETS Looking back since 2001, Egypt’s banking assets had been growing at an aver-age of 14.3%, outperforming the nominal GDP growth by an average of 27% over the same period, with a total banking assets/GDP ratio standing at a multiple of 1.2x as at June 2008.

Figures of June 2008 confirm the rich liquidity of the Egyptian banking system, with a loans/assets ratio of only 37.1%, followed by domestic inter-bank assets at 25.7%. It is noteworthy that trading securities & T- Bills represent 18.6% of total assets, of which 73% representing 13% of total assets are in T-Bills, while foreign inter-bank represented only 11.3% of the total.

1.2x

1.3x

1.4x

1.3x

1.3x1.2x

1.3x1.2x

-

200

400

600

800

1,000

1,200

2000/1 2001/2 2002/3 2003/4 2004/5 2005/6 2006/7 2007/81.1x

1.1x

1.2x

1.2x

1.3x

1.3x

1.4x

1.4x

In LE bn Assets/GDP multipleNominal GDP Banking Assets Banking Assets/GDP

1.2x

1.3x

1.4x

1.3x

1.3x

1.2x

1.3x

1.2x

1.1x

1.1x

1.2x

1.2x

1.3x

1.3x

1.4x

1.4x

2000/1 2001/2 2002/3 2003/4 2004/5 2005/6 2006/7 2007/8

Assets/GDP

Banking assets to GDP Trend of Assets/GDP ratio

Source: CICR & CBE Source: CICR & CBE

Banking assets by type, June 2008 Funding by type, June 2008

0.9%

18.6%

25.7%

11.3%

37.1%

6.3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Assets

Cash Securities & TBs Domestic InterbankBalances banks abroad Loans & discounts Other assets

Source: CICR & CBE

Loans represent the main investment; at only 37% of assets…

5.8%

7.9%

9.1%

69.0%

1.5%3.4%

1.2%2.1%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Liabilities

Reserves Capital ProvisionsOther liabilities Obligations to banks in Egypt Total depositsObligations to banks abroad Long term loans&Bonds

Source: CICR & CBE

The Egyptian banking sector outperformed the economy since 2001

November 11, 2008

24

EGYPT | BANKING

Not only does the banking system benefit from liquidity, but also its liquidity stems from internal core deposits which capture 69% of total funding, whereas domestic and foreign inter-bank liabilities barely represent 9.1% and 1.2% of financing, re-spectively. Core internal deposit financing represents a safety haven against ex-ternal shocks. DEPOSITS Total banking sector deposits having been growing at an average of 13% for the past 5 years, an average multiple of 0.9x of GDP. From the deposit breakdown by type, it is apparent that the household sector has long been the major depositor, the second place has shifted from the government deposits to private business sector starting 2006/7, indicating the wider role the private sector has been taking up, thanks to all the reform efforts taking place in Egypt during the last three decades including deregulation and privatization of the economy and the sector.

Deposits dollarization had been easing in the aftermath of the complete currency floatation that took place in 2003, standing at only 25.8% of total deposits as at June 2008. Although the constitution of deposits is mainly captured by time and saving de-posits, still, demand deposits and blocked deposits hold a significant 16%, offer-ing an advantage for the banks to benefit from either interest free or low interest bearing deposits, partially cushioning against funding pricing pressures.

….while core deposits generate the main funding at 69%

Steady deposits growth, composing an average of 90% of GDP

Household sector as major depositor, fol-lowed by a strength-ened private business sector

Total deposits growth relative to GDP Deposits breakdown by depositors

405

464522

571

658

756

418

485

551

633

745

8971.0x

1.0x0.9x

0.8x

0.9x0.9x

-

100

200

300

400

500

600

700

800

900

1,000

2002/3 2003/4 2004/5 2005/6 2006/7 2007/80.8x

0.8x

0.9x

0.9x

1.0x

1.0x

In LE bnTotal Deposits Nominal GDP Deposits/GDP

13.6%

4.1%

65.3%

0.1%

16.7% 17.9% 16.8% 14.4% 11.7% 11.6%

14.0% 13.6% 14.1% 19.2% 23.4%

4.1% 4.0% 4.6%4.6%

5.1%

63.9% 65.1% 66.5% 63.8%59.3%

0.1% 0.5% 0.4% 0.7% 0.6%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2002/3 2003/4 2004/5 2005/6 2006/7 2007/8

Government deposits Private sector business deposits Public sector business depositsHousehold sector Non-resident (external sector)


Local currency domi-nates the deposits base

Household sector as major depositor, fol-lowed by a strength-ened private business sector

November 11, 2008

25

EGYPT | BANKING

LOANS Total loans hovered around 50% of GDP during the last 5 years, with the indus-trial sector capturing the lion’s share, followed by the services sector. Loans dol-larization rate reached 33.3% as at June 2008. Further, FCY loans/deposits ratio has started to exceed LCY loans/deposits ratio since 2006/7, indicating an in-creased activity on the foreign currency side.

Deposits breakdown by currency Breakdown by types of deposits

71.2% 70.6% 71.6% 74.2%

30.8% 32.5% 28.8% 29.4% 28.4% 25.8%

69.2% 67.5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2002/3 2003/4 2004/5 2005/6 2006/7 2007/8

LCY FCY

12%

84%

4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Total Deposits

Demand deposits Time & Saving deposits Blocked or retained deposits


Lending remained at an average of 50% of GDP, with the industry sector as main lender

Loans breakdown by lender Loans growth relative to GDP

283 295 307 323352

399418

485

551

633

745

897

0.7x

0.6x

0.6x0.5x

0.5x

0.4x

0

100

200

300

400

500

600

700

800

900

1000

2002/3 2003/4 2004/5 2005/6 2006/7 2007/80.0x

0.1x

0.2x

0.3x

0.4x

0.5x

0.6x

0.7x

0.8x

In LE bnLoans Nominal GDP Loans/GDP

4.7% 5.5% 7.2% 6.5% 7.6% 7.8%1.7% 1.9% 2.1% 1.8% 2.2% 1.5%

34.4% 34.0% 33.3% 31.4% 31.4% 29.4%

20.7% 20.3% 18.7%17.7% 13.9%

14.4%

25.6% 25.2% 24.7%25.5% 26.9%

25.5%

12.8% 13.1% 14.1% 17.2% 18.0% 21.4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2002/3 2003/4 2004/5 2005/6 2006/7 2007/8

Government Agriculture Industry Trade Services Household & external sector


November 11, 2008

26

EGYPT | BANKING

With the commencement of the reform program around 2003, total loans/deposits ratio has declined from 70% to 52.9% in 2007/2008. Even at the current deposits level and without expanding the deposits base, the readily available liquidity level suggested by the system’s total loans/deposits ratio of just 52.9% as at June 2008, indicating that the sector can withstand further loan growth without jeopard-izing a reasonable liquidity position.

With the system’s LCY loans/deposits ratio of 47.5% and FCY loans/deposits ra-tio of 68.2% as at June 2008, it can be argued that in both cases funding is gener-ated from actual core deposits; meaning, demand is still below supply, implying a funding surplus vs. a funding gap in some countries; according to the Bank of England, the UK for example had a funding gap worth around GBP740 bn as at June 2008, the same case as some other credit crunch economies. Egypt also is in a healthier position with no significant exposure to sub-prime mar-kets and without a high exposure to real-estate; where real-estate represented 6.5% of total implemented investments in 2007/8, vs. many gulf countries that are relatively more exposed to global markets and some highly exposed to real-

Loans breakdown by currency Loans/deposits ratio by currency

23.1%

66.7%70.3%73.8%75.7%77.1%76.9%

33.3%29.7%26.2%24.3%22.9%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2002/3 2003/4 2004/5 2005/6 2006/7 2007/8

LCY FCY

77.8%

72.7%

62.5%59.0%

52.6%

47.5%52.4%

44.9%49.6% 50.5%

56.0%

68.2%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

2002/3 2003/4 2004/5 2005/6 2006/7 2007/8

LCY FCY


Loans to deposits ratio at a favorably reason-able 53%, implies both liquidity and room for growth…

Total loans/deposits of the system Egypt’s loans/deposits vs. others

70.0%

63.6%

58.8%

56.5%

53.5%52.9%

45.0%

50.0%

55.0%

60.0%

65.0%

70.0%

75.0%

2002/3 2003/4 2004/5 2005/6 2006/7 2007/8

32.8%

52.9%

85%91% 94%

99.9%

121.3%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

Lebanon Egypt Turkey SaudiArabia

UAE U.S.A U.K

Source: CICR & CBE Source: CICR, Central Banks& Bloomberg

Better position; no funding gap in Egypt and insignificant expo-sure to distressed economies

November 11, 2008

27

EGYPT | BANKING

estate, additional to having much higher loans/deposits ratios indicating lower liquidity - not a favorable situation concurrent with the easing of oil prices. Following the reforms through banking law no. 88/2003 and its amendments, the CBE had implemented strict supervision over banks including enhancing their provisioning base to hedge against low asset quality, to the extent of forcing some banks to book their entire returns in provisions and record nil profits. Reforms also included increasing capitalization, cleaning bad loan portfolios and consolidations, the banking sector now is considered much stronger. Unlike the private sector banks, non-performing loans are particularly concentrated in the public banks - less the privatized Bank of Alexandria (BoA) which had gone through a strong clean up and restructure before its sale. The government is still considering the sale of Banque du Caire, but waiting for the right time. PROFITABILITY Being in an emerging market, Egyptian banks enjoy decent interest spreads, es-pecially the leading banks with superior asset liability management which enables them to efficiently manage their spreads in both rising and declining interest rates environments.

In June 2008 our analysis, using the maximum 3M USD deposit rate and the 1M LIBOR reveals an increased spread vs. June 2007. Since then there has been some reversal due to the international scene, and the increased demand on USD. However, this may not truly reflect the experience of the private banks, as our discussions with them indicate that especially in the case of fixed lending rates (unlike floating) related to long-term loans that were booked previously but not re-valued, benefiting from larger spreads. Domestically, banks are still considered liquid in both currencies, so there are no liquidity pressures on the FCY yet. Meanwhile, the LCY side benefits from high spreads, despite funding pricing pres-sures resulting from the consecutive CBE hikes the in the corridor rates totaling 2.75% since early 2008. Said rise in rates did not seem to filter with a large mag-nitude in the price of funds as evidenced from the 1H08 of the covered banks, particularly CIB and NSGB. Fortunately, Egyptian banks rely more on core de-

Over the last 5 years, improving credit qual-ity in Egypt & a much stronger sector

Deposits had been growing faster than loans, yet, Egyptian banks generate high NIMs & high ROAEs

Profitability of leading banks Leading 2009 multiples

4.3x

3.7x

4.9x

1.3x

0.9x

1.5x

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

CIB NSGB CAE

P/E 2009P P/BV 2009P

Source: CICR & Banks’ financials as at June 2008 *NSGB’s ROAE is ex-goodwill

Source: CICR projections *NSGB’s P/E is ex-goodwll

NIM, 3.7% NIM, 3.3% NIM, 2.7%

ROAE, 42.6%

ROAE, 32.0%

ROAE, 25.6%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

CIB NSGB CAE

NIM ROAE

Widening FCY spread until June 2008, par-tially narrowing in Sep-tember 2008...

…Significant LCY spread

November 11, 2008

28

EGYPT | BANKING

posit financing rather than inter-bank, therefore enjoy a cost advantage interval; as deposit rates’ rates’ adjustment to rises in interest rates lag behind inter-bank rates. Meanwhile, banks benefit from rate increases with regards to lending port-folios that are benchmarked to the discount rate. We expect the CBE to start re-ducing rates to boost economic activity starting 2009.

BALANCE SHEET OUTLOOK In line with our internal forecast entailing the softening of nominal GDP growth rates in the coming two years, followed by a slight pick up over the subsequent years, we project slower deposits’ and banking assets’ growth in said years, fol-lowed by a smooth pick up. Starting 2010/11 as the consequences of the global crises on the local market become quantifiable, we project lending to slightly pick up leveraging on the already available liquidity, in view of the fact that it had origi-nally fallen from the 70%-level in 2002/3.

We expect the 3 covered private banks to outperform the sector thereby win mar-ket share starting 2009, then to continue steady growth in the following years.

LCY interest spread FCY indicator of spread

5.1%

2.7%3.06%

5.33%

4.06%

2.93%

7.33%

6.06%

4.93%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

2006/7 2007/8 Sep-08

USD 3M average deposit rate USD 1M libor rate Lending rate

Source: CICR & CBE (July is the latest available) Source: CICR, CBE, British Banking Association *Assumed lending rate as USD 1M libor plus 2%

Total loans/deposits to remain stable for the next two years followed by a slight rise…

Balance Sheet outlook for the sector

Source: CBE & CICR projections

Comparative forecasts for the 3 covered banks

6.9% 7.1% 7.2%

12%12.0%12.6%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2006/7 2007/8 Jul-08

LCY less 1-year deposit rate LCY less 1-year lending rate

In LE bn 2006/7 2007/8 2008/9P 2009/10P 2010/11P 2011/12PAssets 938 1,083 1,197 1,305 1,455 1,651

23.2% 15.5% 10.5% 9.0% 11.5% 13.5%Deposits 658 756 835 910 1,015 1,152

15.2% 14.8% 10.5% 9.0% 11.5% 13.5%Loans 352 399 441 481 540 616

9.1% 13.4% 10.5% 9.0% 12.3% 14.0%Loans/Deposits 53.5% 52.9% 52.9% 52.9% 53.3% 53.5%

-298 bps -67 bps 0 bps 0 bps 38 bps 25 bps

November 11, 2008

29

EGYPT | BANKING

Deposits growth of the 3 banks

Loans growth of the 3 banks

Deposits Forecast 2008P 2009P 2010P 2011P 2012PCIB 27% 13% 13% 12% 12%NSGB* 5% 13% 13% 12% 11%CAE 14% 16% 16% 16% 14%Average 15% 14% 14% 13% 12%

Source: CICR projections *NSGB 2008 deposits’ growth is low due to the decline in 2Q08 partially related to the withdrawal of Asset Manager deposits.

Loans Forecast 2008P 2009P 2010P 2011P 2012PCIB 26.6% 17.0% 15.9% 13.6% 12.6%NSGB 21.7% 18.1% 15.9% 12.6% 12.6%CAE* 60.2% 26.2% 22.7% 20.6% 18.1%Average 36% 20% 18% 16% 14%

Source: CICR projections *CAE 2008 loans’ growth is 2008 is high due to strong growth in 1H08

November 11, 2008

30

EGYPT | CEMENT

Given the current fears from the negative impact of the expected global recession, maybe the picture for the Egyptian cement industry is not that gloomy—supported by the massive backlog of real-estate projects which will secure cement consumption despite of some expected delays in these projects. Against the backdrop of an im-proved mortgage scheme, the middle-income group may exert some demand pressures for real-estate—especially that the mortgage loans almost doubled reaching LE 3 bn in October 2008 up from LE 1.4 bn in June 2007. In addi-tion to the GoE’s commitment to push further local invest-ments through building commercial and industrial zones in many governorates which will increase the demand for the retail segment. On the exports front, the GoE’s re-moval of the export ban and duties will give the local ce-ment producers more competitive edge—namely that the Egyptian cement exports prices is considered one of the cheapest in the region. Most notably, the expanded for-eign ownership reaching 79% in 2008, highlights the mar-ket’s growth potential. We believe that the industry with its current concentration level—3 cement groups control-ling 62.1% of the local market—is capable of weathering the coming challenges, yet the market still sustains fur-ther consolidations. Availability & proximity to high-grade limestone: The abundant raw materials in Egypt, gives the industry a cost advantage compared to some of its regional peers that relies on imported clinker. The expanding potential of utilizing natural gas gives an edge to further reduce cost: The growing natural gas re-serves expands the industry’s potential to utilize a relatively cheaper energy source and hence, enhance the margins of the companies utilizing natural gas. Moreover, it is an environ-mental friendly energy source compared to mazot. The industry enjoys higher margins: The local cement play-ers enjoy higher margins averaging a gross profit margin of 54.6% in 1H08 versus a regional average of 36.3%. Cement demand is to be secured by the backlog: In light of the expected slowdown in real-estate demand cement con-sumption is to be secured by the backlog of the developers projects. Yet, with the anticipated pick-up in the economy which will trigger the inflow of projects the demand for cement will regain its strength.

SURVIVAL ON THE BACKLOG

Removal of export duties & export ban. Abundance of raw materials. High margins compared to regional peers. New capacities on stream. Outstanding real-estate projects secure de-mand for cement. The expanding existence of foreign compa-nies in the local market allows for efficient operation and signals market potential.

Anticipated slowdown in construction activi-ties. Rising cost on inputs. Sudden governmental decisions as imposing exports bans and duties. Massive regional capacity additions which intensifies rivalry.

SECTOR PERFORMANCE | 2004-2008

BASMA SHEBETA [email protected]

DRIVERS

RISKS

KEY PERFORMANCE INDICATORS

0

5

10

15

20

25

30

35

40

45

2004 2005 2006 2007 8M08

mn tons

-10%

-5%

0%

5%

10%

15%

20%

25%

Production DemandSupply Growth Demand Growth

10.2 Cement production CAGR (04-07,%)

13.5 Cement consumption CAGR (04-07,%)

20.9 Cement exports CAGR (04-06,%) 5.1 Average surplus (04-07,mn tons)

86.1 Average utilization rate (04-07,%)

129 Misr Beni Suef Cement

131 Misr Cement (Qena)

153 Sinai Cement

PAGE # COMPANIES COVERED

November 11, 2008

31

EGYPT | CEMENT

Consumption outpaced production growth

Designed capacity reached 46 mn tons with foreign companies bearing the bulk

CEMENT MARKET IN EGYPT Over the first eight months in 2008, Egypt's cement market reached 26 mn tons, up by 12.7% from the same period a year earlier. Yet, production growth lagged behind with a 3.5% increase reaching 26.8 mn tons. MARKET STRUCTURE Currently, the designed grinding capacity is 46.1 mn tons, with foreign compa-nies holding the bulk of 74%. The total companies operating in the cement sec-tor is 13; 8 of which are foreign companies, 4 are private; and one is a public company. Moreover, total grinding capacity reached 46.1 mn tons split between gray cement (97.1%) and white cement (2.9%). It is worth highlighting that Ara-bian Cement company which started operations in 2008 is currently producing clinker only till its own grinding mills are up and running. Cement capacity by product in 2008 Cement capacity by ownership in 2008

Source: CICR Database Source: CICR Database

KEY MARKET FACTS The wave of acquisitions activity by foreign companies to local cement compa-nies started since 1999 with Lafarge & Cemex acquiring 76% & 96%, respec-tively of Beni Suef Cement and Assiut Cement companies and ending with La-farge acquiring 100% of OCI Cement Group namely, Egypt Cement Company (ECC). The deal became effective by the end of January 2008, moving up for-eign ownership share – in terms of local sales- from 20.8% in 1999 to 78.9% in 2008 - hence, emphasizing the market's potential.

An expanding foreign ownership confirms the market's potential

Local cement market shares in 1999 & 8M08

Source: Ministry of Investment

Gray 97.1%

White2.9%

Foreign74.0%

Private18.4%

Public7.6%

20.8%

66.3%

12.9%

78.9%

13.3%

7.8%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Foreign

Private

Public

1999 2008E

November 11, 2008

32

EGYPT | CEMENT

The consolidation wave within Egypt's cement market increased the concentration level of the largest three players from 47.3% in 1999 to 62.1% in 2008.*

Increasing market concentration

1999 Local cement market shares 8M08 Local cement market shares


Boosted by the construction & real-estate boom within Egypt, cement market re-versed its growth pattern with demand growth exceeding that of supply (14% vs. 6.2%, respectively) in 2007 and (12.7% vs. 3.5%) during the first eight months of 2008, hence depressing market surplus to 0.74 mn tons.

Cement market development pattern (2004-8M08) Cement market surplus pattern (2004-8M08)



5.21 5.05

5.99

4.01

0.74

0

1

2

3

4

5

6

7

2004 2005 2006 2007 8M08

mn tons


Italicementi (Torah, Helwan &

Suez)29.4%

Misr Beni Suef3.8%

Sinai5.5%

Misr Cement Qena4.0%

National7.8%

Lafarge (ECC)19.6%

Titan (Beni-Suef & Alexandria)

8.1%

Cimpor (Ameriyah)

8.6%

Cemex (Assiut)13.1%

Amereyah11.0%

Beni Suef5.7%

Suez16.5%

ECC7.4%

Torah15.6%

Helwan11.4%

Alexandria4.3%

National 12.9%

Cemex15.2%

0

5

10

15

20

25

30

35

40

45

2004 2005 2006 2007 8M08

mn tons

-10%

-5%

0%

5%

10%

15%

20%

25%

Production DemandProduction Growth Demand Growth

* In terms of local sales

As demand has been following a higher growth pattern than that of supply, hence tighter utilization rates were achieved, reaching its peak of 92.2% in 2007.

… and tighter utilization rates

A shrinking surplus

November 11, 2008

33

EGYPT | CEMENT


Added capacity, demand & utilization rate (8M06-08)

92.2%

78.3%

87.0%

86.8%

-3

-2

-1

0

1

2

3

4

5

6

2004 2005 2006 2007

mn tons

70%

75%

80%

85%

90%

95%Added Capacity Added Demand Utilization Rate

Added capacity, demand & utilization rate (2004-2007)


* Ex-factory including transportation cost


Energy accounted for the highest share in cement production costs, yet, varying based on the type of feedstock used. Energy contribution during 3Q08 registered a lower share of 51.2% in the cost structure of the companies using natural gas against 53.9% for those using mazot such as Misr Cement (Qena).

As demand has been boosted, triggered by the real-estate boom, cement prices have been following a rising trend. Cement ex-factory prices reached an average of LE 435/ton over the first eight months of 2008 up from an average price of LE 362/ton in 2007. Cement prices by month* (Jan 2006-Aug 08)

Prices are following higher levels

Energy is the major contributor to cost

300310320330340350360370380390400410420430440450460470

Jan-0

6

Feb-06

Mar-06

Apr-06

May-06

Jun-0

6Ju

l-06

Aug-06

Sep-06

Oct-06

Nov-06

Dec-06

Jan-0

7

Feb-07

Mar-07

Apr-07

May-07

Jun-0

7Ju

l-07

Aug-07

Sep-07

Oct-07

Nov-07

Dec-07

Jan-0

8

Feb-08

Mar-08

Apr-08

May-08

Jun-0

8Ju

l-08

Aug-08

LE/ton

LE 65/ton levied duties on cement exports

Increasing the levied duties on

cement exports to LE 85/ton

First increase in energy prices

Imposing a ban of 6-month period on

cement exports

Second increase in energy prices

imposing fees on clay amounting to

LE 35.1 per 1 ton of cement produced

62.6%

62.2%

59.5%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

8M06 8M07 8M08

mn tons

57.5%

58.0%

58.5%

59.0%

59.5%

60.0%

60.5%

61.0%

61.5%

62.0%

62.5%

63.0%Added Capacity Added Demand Utilization Rate

November 11, 2008

34

EGYPT | CEMENT

3Q08E Cost structure for companies using natural gas as feedstock

3Q08E Cost structure for the company using ma-zot

Source: CICR estimates

MARKET DYNAMICS


GOVERNMENTAL MEASURES Ever since the beginning of 2007, the government has taken several actions and decisions to regulate the cement industry's trading activity as well as new capaci-ties. Recent governmental measures

Domestic Market

- Removal of export duties & export ban

- Modifying anti-monopoly law

- Raising energy prices

- Raising raw materials prices

- New licenses

- Construction boom

Governmental Measures

Demand Driver

Supply-Related Factors

- Raw materials availability

- Rising cost of inputs

- Higher margins

- Observed tight supply

- Impact from export ban & duties

- Impact of strict conditions on new capacities

- Electricity availability

Measure Date Description Impact

Revoking the export ban & exportduties

19-Oct-08 Calling-off the 6-month export ban previously imposed by theMinistry of Trade & Industry on cement exports starting from March29, 2008. Soon after, the GoE decided to remove the LE 85/tonduties imposed on cement exports.

POSITIVE

Modifying Anti Monopoly Law Jul-08 By raising the minimum level of fines charged per violator from LE30k to LE 100k and the maximum level from LE 10 mn/violator to LE300 mn.

NEGATIVE

Raising energy prices Sep-07 Raising natural gas & electricity prices by 37.3% & 20.1%respectively.

NEGATIVE

Jan-08 Increasing mazot prices in early January 2008 by 100% to record LE1000/ton.

NEGATIVE

Source: CICR Database

Energy51.2%

Others1.1%

Asec13.6%

Packaging13.7% Resource Dev.

Fees10.2%

Raw materials8.7%

Transportation1.5%

Raw Materials8.2%

Packaging19.1%

Energy53.9%

Maintenance18.8%

November 11, 2008

35

EGYPT | CEMENT

Raw materials availability

Rising cost of in-puts

Source: CICR Database and IDA


According to the GoE plan, planned capacity additions will be complete by 2012; raising local gray cement capacity to 62.5 mn tons up from its current level of 42.9 mn tons. The following table illustrates the details of the gray cement capacity additions over 2009-2011: Gray cement capacity additions over 2009-2011

SUPPLY-RELATED FACTORS Despite the minimal share of raw materials in the production cost of cement – an average of 8.45% in 3Q08E, their availability, proximity and quality are crucial to expanding cement production. The fact that Egypt has abundance of limestone, gypsum, and slag in moderate and high quality pushed the cement industry to expand and grow, and will even drive its potential further in the future.

Since cement is an energy-intensive industry – with energy estimated to consti-tute an average of 52.5% of total production cost in 3Q08– raising natural gas & electricity prices by 37.3% & 20.1% effective September 2007, followed by a 100% increase in mazot prices effective January 2008 have negatively impacted the industry's margin. Consequently, the average EBITDA margin for gray cement producers declined from 50.8% in 2006 to 46% in 2007; and from 50% in 1H07 to 47% in 1H08. It is worth noting that the impact of the LE 35.1/ton of resource de-velopment fees for clay imposed on May 6, 2008 was not yet significantly re-flected on the 1H08 margins, however, it should be mirrored in 3Q08 margins.


Increasing clay prices 6-May-08 Imposing on cement companies a resource development fees onthe clay amounting to LE 35.1/ton of cement produced.

NEGATIVE

New licenses Oct-07 Offering 7 licenses through a public auction: 5 licenses forGreenfield operations, and 2 licenses for expansion purposes ofexisting companies. In addtion, a license was offered for free to aGreenfield company namely, New Valley as it was the only bidderfor New Valley license

POSITIVE

Raising duties on cement exports Aug-07 Raising the duties previousely levied on cement exports by 31% toreach LE 85/ton

NEGATIVE

Imposing duties on cement exports Mar-07 Imposing an export duty of LE 65/ton on cement exports NEGATIVE

Greenfield Licenses Governorate License Cost (LE mn)

Capacity in 000 tons

Wadi Al Nile Cement Co. (WNCC) Beni Suef 251 1500Al-Swedy Cement Suez 201 1500Arab National Cement Co. (ANCC) El Meniah 200 1500Al-Nahda Industries Qena 83 1500North Sinai Cement North Sinai 44 1500Building Materials Industries Assuit 22 1500Al-Wadi Cement New Valley Free 1500

Expansion Fees Governorate License Cost (LE mn)


Assiut Cement Company Assuit 202 1500Beni Suef Cement Company Beni Suef 135 1500

Reconciliation Fees Governorate Fees Charged(LE mn)


Arabian Cement Suez NA 1500Sinai Cement Sinai 44 1500Medcom Aswan Aswan NA 1000Misr Beni Suef Cement Beni Suef 251 1500South Valley Cement Beni Suef 251 1500

November 11, 2008

36

EGYPT | CEMENT

Average EBITDA margins for the cement industry (2006-2008)

50.8%

46.0%

50.0%

47.0%

43%

44%

45%

46%

47%

48%

49%

50%

51%

52%

2006 2007 1H07 1H08

Annual Semi-Annual

Source: Company’s Reports The high gross profit margins for the Egyptian cement industry compared with their regional peers played a key role in boosting the industry's expansions, in ad-dition to encouraging a wave of acquisitions by foreign companies. Regional gross profit margins in 1H08

Yet, local produc-ers enjoy higher margins compared

49.0%

63.1%

32.7%

22.8%

14.0%

67.3% 66.1%

57.9%

50.2%45.8%

40.1%

0%

10%

20%

30%

40%

50%

60%

70%

80%

ArabianCement

YamamaCement

GulfCement

FujairahCement

Ras Al-KhaimahCement

SinaiCement

Misr BeniSuef

Cement

MisrCement(Qena)

HelwanCement

SuezCement

Torahcement

KSA UAE Egypt

Source: Company’s Reports

Despite witnessed capacity additions over 2004-2007 averaging 1.7 mn tons per annum, expanding cement consumption maintained the industry’s utilization rate at high levels - with an average of 86%. Over the aforementioned period, cement capacity increased by a CAGR of 4% to reach 42 mn tons in 2007 vs. a CAGR of 13.5% for demand recording 34.5 mn tons. It is worth highlighting that such tight market status led to further capacity additions in order to satisfy the market needs.

Despite capacity additions, still supply is tight

November 11, 2008

37

EGYPT | CEMENT

Cement supply status (2004-2007) Cement utilization rates (2004-2007)

0

5

10

15

20

25

30

35

40

45

2004 2005 2006 2007

mn tons Capacity Production Demand

Source: Ministry of Investment Source: Ministry of Investment

Imposing tariffs on cement in 2007, followed by a 6-month export ban which started by the end March 2008, led to a 28% drop in 2007, followed by a further decline of 73.2% in 8M08 versus 8M07. Yet, to mitigate the negative impact of the anticipated global economic slowdown the GoE decided to call off the export ban and the export duties on cement exports. Cement exports pattern (2004-8M08)


The GoE set strict standards for investors in order to participate in the Greenfield & expansions auctions. In addition, new licenses include strict terms in order to grant that new capacities start on schedule such as, the founder can not sell the Greenfield license until the production starts, yet the GoE allowed the investor to sell a stake, which may open the door for another wave of consolidation in the local market. One of the major constraints facing any capacity additions is the electricity avail-ability. It is worth mentioning that in order to implement the declared new capaci-ties, companies will be required either to establish their own power stations to secure their needs from electricity or to pay the investment cost of the power sta-tion to the GoE which will handle its establishment. It is worth mentioning that the investment cost for establishing a power station may reach LE 125 mn.

Strict conditions in new licenses to pre-vent any delay in the new capacities entrance

Electricity availabil-ity

4.75.2

5.9

4.2

3.2

0.7

0

1

2

3

4

5

6

7

2004 2005 2006 2007 8M07 8M08

mn tons

Imposing the export ban and duties led to a huge drop in exports

92.2%

86.8%

78.3%

87.0%

70%

75%

80%

85%

90%

95%

2004 2005 2006 2007

November 11, 2008

38

EGYPT | CEMENT

CONSTRUCTION DRIVER The massive construction activity witnessed in Egypt has triggered demand for cement. Over 2004-2007, the construction sector grew with a CAGR of 7.4%, pushing further cement consumption from 23.6 mn tons in 2004 to 34.5 mn tons in 2007 – reflecting the strong ties between both variables which is emphasized by the high coefficient correlation of 0.910. Construction activity vs. cement consumption (2004-2008)

Outstanding real-estate projects will secure cement consumption over 2009 and 2010, with an anticipated pick-up afterwards

Source: CBE, Ministry of Investment & CICR estimates

0

5

10

15

20

25

30

35

40

2004 2005 2006 2007 2008E

LE bn

0

5

10

15

20

25

30

35

40mn tonsConstruction Cement Consumption

FUTURE OUTLOOK Against the backdrop of the global economic turmoil and the expected slow down in construction and real-estate activities worldwide and in Egypt, the demand for cement is expected to grow at a slower pace, an AAGR of 1.36% over 2009 and 2010. Nevertheless, cement consumption is expected to gain back its momentum by 2011 with the anticipated pick-up in the economy and the expected inflow of new projects, concurrently cement consumption will grow by a AAGR of 9.4% over 2011-2012 reaching 47.9 mn tons by 2012. It is worth mentioning that de-mand for cement over 2009 & 2010 will be mainly secured by the outstanding real-estate contracts, as the existing contractors are expected to continue their construction works, yet at a slower pace. Future cement outlook

0

5

10

15

20

25

30

35

40

45

50

2006 2007 2008E 2009F 2010F 2011F 2012F

mn tons

Source: CICR Database and estimates

November 11, 2008

39

EGYPT | CEMENT

Planned grinding capacity additions is expected to expand gray cement capaci-ties to 62.53 mn tons by 2012 up from its current level of 42.86 mn; of which year 2011 will witness the highest capacity additions of 9 mn tons. Most notably, Greenfield is to contribute with almost 51% of total additions, highlighting the market’s potential. Planned gray cement grinding capacities

Huge capacity addi-tions of 20 mn tons till 2012

Source: CICR Database and estimates Expected slowdown in construction activity over 2009-2010, coupled with around 10 mn tons of capacity additions will ease utilization rates to 76% by 2010. De-spite the expected pick-up in cement consumption starting 2011, utilization rate will further decline to 74% due to the huge capacity additions of 9 mn tons in that year. Yet, by 2012, utilization rate will rebound reaching 79%.

Utilization rate to strengthen by 2012

0

5

10

15

20

25

30

35

40

45

50

55

60

65

70

2006 2007 2008E 2009F 2010F 2011F 2012F

mn tons Cement Capacity Production Demand

Cement supply status (2006-2012)

78.7%

74.2%

76.1%

84.8%91.1%

92.2%86.8%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2006 2007 2008E 2009F 2010F 2011F 2012F

Market utilization rate (2006-2012)

Source: CICR Database and estimates Source: CICR Database and estimates

Company Name 2006 2007 2008E 2009F 2010F 2011F 2012FTorah Cement 3,330 3,330 3,330 3,330 3,330 3,330 3,330 Helwan Cement 4,500 4,500 4,500 4,500 4,500 4,500 4,500 National Cement 3,500 3,500 3,500 3,500 3,500 3,500 3,500 Cemex 5,000 5,000 5,000 5,000 5,375 6,500 6,500 Al-Amreyah+Cimpor 3,700 3,700 3,700 3,700 3,700 3,700 3,700 Titan 3,000 3,000 3,000 3,375 4,500 4,500 4,500 Suez Cement 4,200 4,200 4,200 4,200 4,200 4,200 4,200 Lafarge 10,000 10,000 10,000 10,300 10,300 10,300 10,300 Sinai Cement 1,500 1,500 1,750 3,000 3,000 3,000 3,000 Misr Cement Qena 1,500 1,500 1,500 1,500 1,500 1,500 1,500 Misr Beni Suef Cement 1,500 1,500 1,500 2,250 3,000 3,000 3,000 Arabian Cement - - - - 1,500 1,500 1,500 Madcom-Aswan - - - 750 1,000 1,000 1,000 Arab National Cement Co. (ANCC) - - - - - 1,125 1,500 Wadi Al Nile Cement Co. (WNCC) - - - - 1,375 1,500 1,500 El-Sweedy Cement - - - - 375 1,500 1,500 North Sinai Cement - - - - 125 1,500 1,500 South Valley Cement - - 875 1,500 1,500 1,500 1,500 Al-Nahda Industries - - - - - 1,500 1,500 Building Materials Industries - - - - - 1,125 1,500 Al-Wadi Cement - - - - - 1,500 1,500 Total Effective Capacities 41,730 41,730 42,855 46,905 52,780 61,780 62,530

November 11, 2008

40

EGYPT | CEMENT

0

100

200

300

400

500

600

700

2006 2007 2008E 2009F 2010F 2011F 2012F

LE/ton

0

20

40

60

80

100

120US$/tonLocal Prices Exports Prices

Local & export cement prices will continue increasing yet, at a decelerating rate over 2009-2010 due to the weakened demand for cement in the local and export markets over the aforementioned years. However, with the expected recovery in local & international economies, local & export cement prices will start increasing at an accelerating rate over 2011-2012, yet, still below historical growth rates due to the rising competition from regional peers. Local & export cement prices* (2006-2012)

Increased cement prices


* Local prices include transportation cost, while exports prices are ex-factory prices

November 11, 2008

41

The abundance of cheap natural gas prices in the range of US$1.72 - 3/MMBtu com-pared with an international price of US$6.3/MMBtu – based on Henry Hub – as well as phosphate rocks support magnified local companies' margins. Phosphate fertilizers enjoy no government interventions, whether in terms of export ban or price caps; which allows for cost passing ability. Egypt enjoys a strategic location for export-ing to different regions and strong local dis-tribution network.

Phosphate mines are state owned, which reflects the monopolistic stance of the gov-ernment. The GoE intervenes in the nitrogen fertilizers sector (mainly companies located outside the free zones) in the form of export ban and price caps. Sulfur - a basic raw material for sulfuric acid production - is imported which subjects the industry to FX risk.

Rising global food demand to support the increasing population, and the international move towards expand-ing sources of clean energy renders the need for fertiliz-ers as a key supportive industry. With the developed re-gion, namely Europe, restricting further set-up of environ-mental-polluting production units as fertilizers, invest-ments are to shift to the developing regions. With Egypt being in central geographical location, and China's slash-ing of 30% of global fertilizers trade with its levied export tariff, Egypt's fertilizers exports are highly valued. On the local front, strong fertilizers demand is to be maintained as the GoE plans to expand the agricultural land and re-claim an additional 150k feddans/annum. Moreover, given the country's cheap cost of production coupled with the abundance of natural gas and phosphate rocks gives Egypt an edge in nitrogen and phosphate segments. Most notably the higher margins that the fertilizers industry enjoys compared to its global peers adds to the country's investment potential. Good prospects in the local and export markets: Against the backdrop of the growing global food needs, and increas-ing bio-fuels demand the global fertilizers consumption is ex-pected to maintain its strength. In the local scene, a sustained strong demand growth is anticipated driven by the expanding agricultural land. Cheap factors of production and availability of raw mate-rials are key strengths: With significant price differential that Egypt offers to investors, as natural gas prices being main-tained at US$1.25 – 3/MMBtu against the international prices of US$6-7/MMBtu, and the cheap abundant phosphate rocks at LE250/ton (less than US$46/ton) in 1Q08 versus c.US$200/ton – based on Casablanca benchmark –total fertil-izers production reached 15.8 mn tons in FY07/08 (of which 7.5 mn tons targeted the export markets) up from 11.2 in FY05/06 (of which 2.8 mn tons targeted the export markets). Such growth was namely due to the Greenfield capacity of 3.9 mn tons/year from both, Helwan and Alexandria fertilizers companies. Still more investment to come on stream: Egyptian Basic fertilizers Industries (EBIC) will launch its operations in 4Q08, with its full potential in 2009 with an annual ammonia produc-tion capacity of 750k. In addition the Canadian fertilizers com-pany, Agrium is expected to start production by 2010 with a total annual capacity of 2.2 mn tons for urea and ammonia combined. Moreover, Egypt's fertilizers portfolio will include DAP/MAP production as the result of the growing global need and the availability of the required feed stock. To capitalize on higher margins: With EBITDA margins reg-istering higher levels than its global peers in both, nitrogen and phosphate fertilizers, Egypt has an edge in supporting future investments. As for nitrogen, free zone companies' EBITDA margin average 80% versus an average of 30% for the global margin; while phosphate fertilizers bear a local in-dustry average EBITDA margin of 30% compared with 20% for the global margin in 2007.

POUNCE AND ROAR

EGYPT | FERTILIZERS

SECTOR PERFORMANCE | FY04/05-07/08

MUHAMMAD EL EBRASHI [email protected]

DRIVERS

RISKS

KEY PERFORMANCE INDICATORS 10 Fertilizers production CAGR (05-08,%)

11 N production CAGR (05-08,%)

26 Fertilizers exports CAGR (05-08,%)

2.5 Added annual capacities (2010,mn tons)

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

2004/05 2007/08

k tons Production Exports Imports Consumption Sales

PAGE # COMPANY COVERED 119 EFIC

November 11, 2008

42

EGYPT | FERTILIZERS

MARKET STRUCTURE Egypt represented 7.5% of the global fertilizers market and 4% of the phosphate fertilizers segment. Total fertilizers market in Egypt reached 12.4 mn tons in FY06/07, up 13% over FY05/06, of which phosphate fertilizers consumption con-tributed 1.6 mn tons. It is worth noting that the recommended NPK ratio is 1:1/3:1/6 ton for nitrogen (N)*, phosphate (P)**, and potassium (K), respectively. Egypt's fertilizers market structure

A dominating nitrogen market

* All nitrogen fertilizers weights are based on a (15.5%) basis. To translate urea to 15.5%, its weights had to be multiplied by a factor of (3). As for ammonium nitrate and ammonium sulphate, their factors are (2.16) and (1.33), respectively. ** All phosphate fertilizers weights are based on SSP (15%) basis. To translate TSP to SSP, its weights have to be multiplied by a fac-tor of 2.46.

Source: Higher Council for Fertilizers

There are currently 10 fertilizers-producing companies; of which 8 are nitrogen-based, while 2 are phosphate-based entities. Concerning the former, 3 compa-nies are located in the free-zone – by which their production is mostly targeting the international market – while the remaining 5 companies are directing their sales to the local market. It is worth noting that the nitrogen-based market is con-centrated with the production of the top five companies (Abu Qir, Delta, EFC, Alexandria, Helwan) dominate 97% of total production in FY07/08. As for phos-phate fertilizers, EFIC Group leads the market with 64% market share of total local sales of phosphate fertilizers in FY07/08, including its subsidiary SCFP. It is worth noting that EFIC's stand-alone market share amounted to 47%. Egyptian phosphate fertilizers producers

A concentrated mar-ket structure in both, nitrogen and phos-phate fertilizers

Company Ownership Production Establishment YearHelwan Fertilizers Private Ammonia and urea 2004Alexfert Private Ammonia and urea 2003El Delta Fertilizers Company Public Ammonium nitrates and urea fertilizers 1999Egyptian Fertilizers Company Private (100% owned by OCI in 2008) Ammonia and granular urea fertilizers 1998Abu Qir Fertilizers & Chemical Industries Public Ammonia, urea, ammonium nitrate fertilizers 1976

El Nasr Coke and Chemicals Company PublicAmmoniom nitrate, coal tar, and metallurgical coke 1964

Egyptian Chemical Industries (Kima) Public Ammonium nitrate and urea fertilizers 1956El Nasr Fertilizer and Chemicals (SEMADCO) Public Ammonium nitrates and urea 1946

Suez Company for Fertilizers Production Public - (99.8% owned by EFIC) Soft and granulated SSP and TSP 2007

Polyserve for Fertilizers and Chemicals Private Soft and granulated SSP and TSP fertilizers 1990

Abu Zaabal Fertilizers and ChemicalsPrivate- (99.03% owned by Polyserve for fertilizers and

Chemicals)

Soft and granulated SSP and TSP fertilizers, phosphate rock, phosphoric acid and sulfuric acid

1947

Egyptian Financial & Industrial (EFIC) Public Soft and granulated SSP fertilizers 1929

Phosphate

Nitrogen


November 11, 2008

43

EGYPT | FERTILIZERS

MARKET KEY DEVELOPMENTS

SUPPLY & DEMAND PATTERN Over FY04/05–07/08, local market production outpaced local consumption. Over the same period, nitrogen fertilizers production increased by an AAGR of 11.9% recording 14.3 mn tons in FY07/08 versus 11.7 mn tons of consumption which increased by an AAGR of 5.8%. Yet, due to the price cap set by the GoE (excluding companies in free zones), local fertilizers manufacturers endeavored to increase their exports at the expense of their local sales. In FY07/08, exports amounted to 49% of nitrogen fertilizers production. As a result of the excessive fertilizers export activities, manufacturers persistently did not meet local demand. Thus, the nitrogen fertilizers market was characterized with deficits, which grew by a CAGR of 37% during FY04/05–07/08, reaching a total deficit of c. 4.3 mn tons in FY07/08. Egypt's nitrogen fertilizers market

Nitrogen fertilizers' production covers consumption, yet due to price capping a considerable volume is directed to the in-ternational market

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2004/05 2007/08

k tonsProduction Exports Imports Consumption Sales


Over FY04/05-07/08 phosphate fertilizers consumption outpaced production in terms of growth, with 4-year AAGRs of 11.9% and 7.9%, respectively. Yet, local production covered 1.2x of consumption with local sales contributing 72% to the local phosphate fertilizers market in FY07/08. Such tendency towards satisfying local market needs is confirmed through the declining imports by a CAGR of 4% and increased exports levels by 5% over FY04/05-07/08. Egypt's phosphate fertilizers market

Phosphate fertilizers enjoy higher contribu-tion in local sales ver-sus total production, since no price cap-ping is applied

-

200

400

600

800

1,000

1,200

1,400

1,600

2004/05 2007/08

k tons Production Exports Imports Consumption Sales


November 11, 2008

44

EGYPT | FERTILIZERS

MARKET DYNAMICS

DEMAND DRIVERS Rising fertilizers consumption is fueled by population growth - which followed an annual rate of 2% over FY03/04-07/08 - creating a growing need for food. The strong link between fertilizers consumption and population growth is illustrated in the high correlation coefficient of 0.731 over the same time span.

Population growth

To cope with the increasing need for food, agricultural land has been witnessing a rising pattern reaching 8.37 mn feddans in FY06/07. Consequently, demand for fertilizers expanded by a 3-year CAGR of 4.1%, with phosphate fertilizers grow-ing by 6.4% over the same time span (FY03/04-06/07), surpassing the industry's growth rate. It is worth mentioning that phosphate fertilizers are highly associ-ated with preparing the soil in reclaimed areas, especially those plots located in the desert areas. (The GoE's plan is to reclaim 150k feddans p.a.) In addition, phosphate fertilizers are utilized during the plant development phases and in plant cells division. Also, agricultural land and fertilizers demand exhibited a strong correlation coefficient of 0.717 over FY03/04-06/07.

Expanding agricul-tural land

Demand for all fertilizers is seasonal. Crops are cultivated in three agriculture seasons: (1) Winter crops extend from November to May; (2) Summer crops extend from March to September; and Nile crops extend from May to October. Although Summer and Winter cropping zones are almost equal in terms of area (6.4 mn feddans for Summer and 6.6 mn feddans for Winter), the former are characterized by their heavy consumption of nitrogen fertilizers. Yet, the case is different for phosphate fertilizers, with consumption being heavier during Septem-ber-December. Moreover, phosphate fertilizers are required during the early stages of treating and preparing alkaline soils in Upper Egypt (East Owaynat) and North Sinai.

Demand seasonality

November 11, 2008

45

EGYPT | FERTILIZERS

SUPPLY DRIVERS

Natural gas: The potential for growth in the nitrogen fertilizers industry is heavily dependent on the availability of feedstock, namely natural gas. Egypt enjoys an increasing level of proven natural gas reserves which reached 2,060 bn cu.m in 2007.

Phosphate rock: Phosphate rock and sulfuric acid are the basic raw materials for phosphate fertilizers production. In terms of volume, the former contributes 62-66% and the latter 34-38% of total inputs in SSP production – the main phos-phate fertilizer produced in Egypt. Phosphate rock is extracted from the Red Sea coast with the government-owned El-Nasr Mining Co. controlling 80% of the mar-ket and Red Sea Co. and National Phosphate Co. (both private sector) producing 20%* collectively. It is worth noting that Egypt's phosphate rocks production ca-pacity was close to 2.4 mn tons in FY06/07, of which 1.6 mn tons were P1. It was reported that around 80% of P1 phosphate rock grade is exported, while the remaining is used by the local fertilizers industry**.

Sulfuric acid: Sulfuric acid is a key input for phosphate fertilizers production, of which sulfur (the main raw material for its production) is imported. Starting 2004, sulfuric acid demand by other industries (such as water desalination projects, petrochemicals, glass, and pharmaceuticals) began to pick up. Hence, to achieve greater diversification, integration, and to meet the rising local needs, EFIC ex-panded its sulfuric acid production line in SCFP with an added annual capacity of 425k tons, which commenced its operations in the second half of December 2007***.

Feedstock availability: an increasing pool of natural gas reserves and a broad base of phosphate rocks, yet sulfur is imported

In order to meet up with mounting demand, both, expansions and green-field de-velopments took place in the fertilizers industry. Helwan fertilizers and Alexandria Fertilizers companies were established in 2006/07 adding 2.4 mn/year of produc-tion increasing to 3.9 mn tons/year after the Helwan's plant came to its full poten-tial. EFIC increased its PSSP production capacity by 33% in 2005 to reach 1,200k tons/year. Moreover, the new SCFP ammonium sulphate production line started operation in 2007 with an annual capacity of 150k tons.

Added capacities boosts supply further

* An interview with Eng. Yehia Kotb, Chairman, EFIC. ** An interview with Eng. Samir Abdul Naby, Production Manager, Abu Zaabal Fertilizers. *** Al-Alam Al-Youm newspaper, December 25, 2007.

COST-RELATED DRIVERS Although the GoE scaled feed stock prices up to US$3/MMBtu, Egyptian compa-nies are paying US$1.25 – 3/MMBtu, which is still less than there international peers paying US$6 – 7/MMBtu. Accordingly, natural gas cost Egyptian fertilizers plants 40 – 60% of total production costs compared with the international range of 75 – 90%. It is worth mentioning that an increase of US$1 MMBtu should re-sult in a US$32.5 increase in ammonia per ton cost; thus emphasizing the cost advantage the Egyptian market offers to global investors. Although the GoE's decision to increase the natural gas prices starting September 2007 was applica-ble on local companies, excluding some companies in the free zones, affected their margins. This is because some of them have price caps by the GoE and/or prevented from exporting as highlighted later. However, some companies negoti-ated some export contracts to catch the hike in fertilizers prices.

Price capping for ni-trogen fertilizers pre-vents cost passing

November 11, 2008

46

EGYPT | FERTILIZERS

Nitrogen fertilizers financial highlights

On a different note by Minister Rachid Mohamed on October 16, 2008, the GoE will temporarily freeze prices some industries pay for energy to help Egypt's economy withstand a global financial crisis.

…Energy prices are put on "hold"

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

2006 2007

US$

0%

10%

20%

30%

40%

50%

60%

70%

Sales - L Gross Profit - L EBIDTA - L NI - LGross Margin - R EBIDTA Margin - R Net Margin - R

Source: Abu Qir Fertilizers Company financials

Phosphate rocks and sulfuric acid, combined, represent the bulk of total cost of phosphate fertilizers production. Despite the c. 50% increase in local phosphate rock prices in 2007 vs. 2006, it is still lower than international prices (based on North Africa FOB export price). In 1H08, phosphate rocks were in the vicinity of LE 300/ton. As for sulfuric acid, it depends on the cost of imported sulfur, which increased by around 75% in 2007 vs. 2006. In 1H08, sulfur prices were in the range of US$700/ton. Such price hikes were driven by the rapid growth of the military industry, which created heavy international demand for sulfuric acid. In contrary to nitrogen fertilizers, phosphate fertilizers enjoy no price caps levied by the GoE, which allows producers to pass the cost to end customers. Indeed, EFIC's margins have expanded in 2007 versus 2006. Phosphate fertilizers financial highlights

On the other hand, phosphate fertilizers enjoys cost passing ability, since no price capping is imposed

0

100,000

200,000

300,000

400,000

500,000

600,000

2006 20070%

5%

10%

15%

20%

25%

30%

35%

40%

Sales Gross Profit EBITDA NI Gross Margin EBITDA MArgin Net Margin

Source: Egyptian Financial and Industrial Company financials (consolidated)

November 11, 2008

47

EGYPT | FERTILIZERS

REGULATORY DRIVERS The government’s spree to unify domestic and international prices has come to impact the fertilizers industry. Prime Minister, Dr. Ahmed Nazif, approved a 100% increase in nitrogen fertilizers prices effective March 1, 2008. Accordingly, the GoE will save LE 800 – 850/ton from the new price scheme, which will be used to subsidize imported nitrogen fertilizers, which we reckon will be partially sourced from companies located in Egypt's free zones.

An increased nitrogen fertilizers prices

The GoE is moving with steadfast steps towards the deregulation of the nitrogen fertilizers market. The Principal Bank for Development & Agriculture Credit (PBDAC) will increase its capital from LE 1.8 bn to LE 3 bn following the new Parliamentary cycle approval for changing the bank's name to the Egyptian Agri-culture Bank, as a public specialized bank. Following the bank's regulatory law, the bank can establish agricultural projects including fertilizers. It is worth men-tioning that the bank has finalized a study to establish a new nitrogen fertilizers project with expected investment cost of US$500 mn in Upper Egypt and with annual production capacity of 2.2 mn tons. It is believed that changing the bank's bylaws is one step towards diminishing its monopolistic distribution role in the local fertilizers market. Moreover, involving the bank in fertilizers manufacturing projects will increase the available capacities for the local market. Consequently, the export ban might be unleashed soon. This will give chance for local compa-nies banned from exporting.

PBDAC restructuring

Nitrogen fertilizer price mechanism (LE/ton) Nitrogen local market prices post 100% price

Factory

Pre-GovernmentDecision

Post-Government Decision

Consumer

PBDAC

LE 700-800 LE 550-650

LE 1,500 - 1,650 LE 700 - 800

Post-Government Decision

Pre-GovernmentDecision

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Prilled Urea GranulatedUrea

Urea Zinc UreaMagnesium

AmmoniumNitrate

AmmoniumSulphate

LE/ton

ex factory price Pre GoE decision Additions to ex factory price Post GoE decisionCustomer price - Post GoE decision

Source: High Council of Fertilizers, CICR Source: CICR database

November 11, 2008

48

EGYPT | FERTILIZERS

FUTURE OUTLOOK GROWING DEMAND Against the backdrop of the growing need for food coupled with the GoE's plan to reclaim an additional 150k feddans p.a. – which requires the utilization of fertiliz-ers, namely phosphate – the demand for fertilizers is expected to follow a strong growth pattern of 5-year CAGR of 4.1% and that of phosphate to follow an even higher growth of 12.7% over FY06/07-11/12. Future local fertilizers demand

10.8013.63

1.56

2.1712.36

15.80

0

2

4

6

8

10

12

14

16

18

20

2006/07 2011/12

mn tons

-

2

4

6

8

10

12

14

16

18

20Nitrogen fertilizers demand Phosphate fertilizers demand

5.0%

7.0%

5.2%

5-year CAGR


CAPACITIES Within the framework of the GoE's strategy to expand the phosphate fertilizers industry, fresh investments are expected to come on stream confirmed by the approval granted by the Minister of Trade & Industry to establish a phosphate fertilizers industrial zone in Aswan, including phosphate rock mines and 12 new phosphate fertilizers plants. The first phase includes 5 plants with an annual ca-pacity of 3 mn tons and an investment cost of LE 1 bn.* It is worth highlighting that vertical integration with ensure a cost-efficient operation. For example, Indo-Egyptian Fertilizers Company is building a phosphoric acid solution plant and sulfuric acid facility in Edfu with respective capacities of 1.5k/day and 4.5k/day to commence operations by 2010.** Future local fertilizers

4,145k 5,257k

4,610k

6,040k

1,440k

1,440k 1,800k

1,800k 1,055k

1,055k

-

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

18,000,000

2008 2010

tonsAmmonia Urea Other N Fertilizers PSSP Other P Fertilizers

Nitrogen fertilizers

Phosphate fertilizers


New capacities on stream for the final products as well as raw materials to en-sure vertical integra-tion

November 11, 2008

49

It is worth mentioning that a DAP/MAP project is expected to be launched on two phases, the first is due in 2010, while the second is due in 2013. Thus increasing the production capacity for phosphate fertilizers starting the respective years. PRICES Starting 2008, sustained high demand for phosphate fertilizers (driven by the strong demand for bio-fuels due to the flaring-up of oil prices) coupled with up-beat sulfur consumption (triggered by the tension in the Middle East) pushed prices to enormously high levels. According to EFIC, GSSP export prices reached a current level of c. US$400/ton, while PSSP local prices recorded LE 1,800/ton, hence driving up prices to much higher levels of US$299/ton and LE 1,101/ton on average for 2008 vs. US$91/ton and LE 512/ton in 2007, respec-tively. Prices are expected to reach their peak by 2010 and cool off starting 2011 when new capacities come on stream. Against the backdrop of an anticipated slowdown in oil prices growth pattern; a reduced pace of growth for bio-fuels de-mand; and the expected expansions in phosphate fertilizers capacities, phos-phate fertilizers prices are to maintain their high level, yet growth is to follow a slower pace over 2009-2012.

*. Al-Ahram newspaper, January 1, 2008. ** IFC website and Higher Council for Fertilizers.

On the nitrogen fertilizers side, the local ex-factory prices will be locked for a 2-year period to align with GoE's directions to maintain energy prices; however, once the situation is clearer, we expect ex-factory fertilizers prices to follow the implementation of the previously announced energy plan, with a possible in-crease in energy prices by 2010.

Urea price forecast PSSP and GSSP price forecast – based on EFIC prices

0

100

200

300

400

500

600

2007 2008 2009 2010 2011 2012

US$/tonUrea Middle East FoB price Local Urea Caped price Local Urea selling price

-

200

400

600

800

1,000

1,200

2007 2008 2009 2010 2011 2012

LE/ton

0

20

40

60

80

100

120

140

160

180

200US$/tonPSSP local prices GSSP export prices

Source: Bloomberg and CI Capital Research estimates Source: Egyptian Financial and industrial Company, IFA and CICR estimates

EGYPT | FERTILIZERS

November 11, 2008

50

EGYPT | POULTRY

Poultry is considered a real support to the Egyptian Econ-omy, through providing a healthy, cheap and self-sufficient kind of protein. As Europe and Asia restrict the establish-ment of poultry farms, future expansions will be shifted to South America and Africa. Egypt’s poultry industry has witnessed a remarkable increase in production reaching 700k tons in 2007 up from 195k tons in 1990. Yet, still po-tential exists as the country’s 2007 per capita consumption of poultry reached 10.2 kg/annum versus a global average of 12.5 kg/annum. With the country’s population growth, rising GDP/capita, and the diversification of diets the de-mand for poultry is expected to reach a per capita level of 13.4 kg/annum by 2012. As for poultry producers, the shift is towards vertical integration as to ensure a hygienic cy-cle and a cost-efficient operation. Rising Consumption/capita in developing countries: While per capita consumption in high income countries increases only marginally, rising incomes and the subsequent diversification of diets led to a shift towards significantly higher white meat con-sumption in developing countries. Poultry is still threatened by AI outbreak, yet is becoming more immune: The advent of the Avian Influenza (AI) at the end of 2006 heavily impacted poultry consumption and resulted in huge losses for poultry producers and the farms’ owners. Industry experts expect that it will not be before 2010 when the occurrence of such disease will end, yet the industry’s devel-oped immune system should alleviate the impact of the AI dis-ease. As fodder is a key contributor to cost, the witnessed de-cline in its prices is an advantage to poultry suppliers: As prices of yellow corn (the main component in poultry fodder) is strongly linked to the global oil prices—as factories shift to yel-low corn for bio-fuel products as a cheap substitute for oil as oil prices kept rising—the current decline in oil prices decreased fodder prices reaching around LE 1,200/ton. The anticipated low levels of oil prices is expected to maintain fodder prices at reasonable levels, thus, enhancing the companies margins. Moreover, the GoE’s plan to locally cultivate yellow corn will minimize the effect of international price fluctuations. The industry’s shift towards vertical integration: To ensure the implementation of a more hygienic poultry cycle in order to avoid the outbreak of the AI disease, poultry companies are targeting vertical integration. Moreover, such integrated busi-ness model ensures a more cost-efficient operation. Thus, in-vestment in slaughterhouses started to kick-off with “Al Wa-taneya Poultry” planning to establish 5 slaughterhouses with a capacity of 500K chicken/day.

CHEK-INS TO THE POULTRY INDUSTRY

The rising consumer health awareness, ris-ing per capita income and growing popula-tion will further expand poultry consumption levels. GoE’s plan to locally cultivate yellow corn to minimize the effect of international price fluctuations. New International law preventing the estab-lishment of poultry farms in Europe and Asia, will direct poultry production to South America and African countries.

The dependence on imported fodder ex-poses producer to international price fluctua-tions. Entrance of small-scale producers during peak prices disrupts the market balance, and leads to price decline. Disease breakout, as Avian Influenza (AI), impacts supply and demand for poultry. Tariffs reduction on Imported frozen chicken intensifies competition.


MARY MILAD [email protected]

DRIVERS

RISKS

KEY PERFORMANCE INDICATORS 700 Poultry production (2007, k tons)

10.2 Local consumption/capita (2007,kg p.a.)

12.5 Global consumption/capita (2007,kg p.a.)

1,200 Current fodder prices (LE/ton)

8.5 9.0 9.8 10.2

5.9%

8.9%

4.1%2.4%

02468

101214

2004 2005 2006 2007

Kg/annum

0%

2%

4%

6%

8%

10%

Consumption/capita Growth rate

November 11, 2008

51

EGYPT | POULTRY

MARKET HIGHLIGHTS

Since 1990, the poultry industry has witnessed a remarkable increase in pro-duction on the local level, as poultry companies increased their production by almost 301%, reaching 700K tons up from 195K tons over 1990-2007, following a CAGR of 7%. Yet, still Egypt’s production represents a minor share of 1% of global poultry production.

Local consumption followed the same increasing trend as that of Global Mar-ket. Consumption per capita reached around 10.2 Kg/annum in 2007 up from 7.9 Kg in 2000; reflecting the fact that the increase in poultry meat consumption mainly depends on the increase in income and not only related to population. Yet, still the country's per capita consumption is below the global average of 12.5 kg/annum.

RECENT DEVELOPMENTS

Though local production is currently sufficient to cover local consumption, how-ever, around 25-30K tons of frozen chickens are imported from Europe and Brazil. Following the protection of the GoE to the industry, over 1986-2007, through the ban it imposed on imports, in July 1997 the ban was lifted up and imports were allowed with an 80% tariff (plus an additional charge of 4%) on imported frozen poultry and poultry products. Moreover, in September 2004 tariffs slashed to 32%, and then further reduced to 30%. Said act, is a govern-ment tool to control monopoly imposed by local producers on poultry prices. Hence, profit margins attract traders, who were unable to neither invest in poul-try business nor bear the losses encountered in case of any disease outbreak; consequently trade is the optimum option to enter the poultry business. Such practice created an over supply, leading to a drop in selling prices.

Ex-farm prices

Source: Poultry Industry Experts

Expanding produc-tion levels

Growing consump-tion, yet, still untapped potential

Slashing import tariffs as a tool to reduce monopolistic power of suppliers

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1999 2000 2001 2002 2003 2004 2005 2006 2007

LE/KG

Slashing import tariff from 80% to

32% in

November 11, 2008

52

EGYPT | POULTRY

Poultry is considered a strategic industry – as the income of many families in Egypt depends on this industry – in addition to its importance as a source of protein to the Egyptian families. However, the advent of the Avian Influenza (AI) heavily impacted consumption and resulted in huge losses for poultry pro-ducers and the farms’ owners. It is worth noting that losses encountered by AI disease during the end of 2006 and the beginning of 2007 due to the AI dis-ease reached around LE 3-4 bn (hitting 50% of parent chickens flocks and around 70% in layers flocks). Moreover, consumers started to shift to substi-tutes as fish and meat, as a safe meal to ensure their required protein intake. The impact of AI, which occurred during end 2006, was remarkable later in 2007, as consumption per capita growth dropped drastically from 9% to 4%.

Local consumption/capita


MARKET STRUCTURE

The poultry industry in Egypt is subdivided into 3 main segments: (1) commercial Chickens; (2) Balady Chickens; and (3) other poultry. Both commercial & balady chickens are, in turn, subdivided into broilers & Layers leading to the following four sub-segments:

Commercial Broilers: This segment concerns chickens (specifically interna-tional breeds) which are reared for the production of white meat.

Commercial Chicken Layers: This segment concerns chickens (specifically in-ternational breeds) which are reared for the production of eggs for consumption. It partially contributes to the production of white meat.

Balady Chicken Broilers & Layers: This segment concerns local breeds reared by individuals in their backyards.

Other Poultry: This segment concerns birds, other than chickens, raised for meat production and it includes; ducks, geese, turkeys and pigeons. It is further subdivided into commercial and backyard operations

The advent of the AI disease heavily hit the industry

8.5

9.0

9.8

10.2

2.4%

4.1%

8.9%

5.9%

7.5

8.0

8.5

9.0

9.5

10.0

10.5

2004 2005 2006 2007

Kg/annum

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Consumption/capita Growth rate

Commercial and Balady Chickens are the main segments

November 11, 2008

53

EGYPT | POULTRY

There are many players in the market; varying from small-scale producers and farmers to well established companies. Moreover, poultry business consists of several production phases; companies’ contribution to the market vary from one stage to another; accordingly, the contribution of market players, on aver-age, can be summarized in the below pie chart.

Poultry market players


MARKET DYNAMICS

A fragmented market, yet, five key players control the field

Other Players

38%

Wataneya Poultry

4%

Dakahleya Poultry

5%

Wadi Holdings

4%

Misr Arab Poultry

19%

Cairo Poultry

30%

MARKET

DYNAMICS

Socio-economic Drivers

Fodder-relatedFactors

Seasonality

Diseases

Fodder Availability

Fodder Prices

Income/Capita

Population

Market-related Factors

Substitutes

November 11, 2008

54

EGYPT | POULTRY

SOCIO-ECONOMIC DRIVERS

As the level of income increases, new social levels enter into the poultry con-suming population, hence expand consumption.

Income/capita vs. consumption/capita


It has been witnessed that consumption of poultry increased over years with the growing population, as demand for poultry and population illustrate high correlation co-efficient of 0.94.

Population vs. consumption

Source: CICR Estimates

Income/capita

0

1,000

2,000

3,000

4,000

5,000

6,000

2003 2004 2005 2006 2007

LE

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Kg/annumIncome per Capita Consumption per Capita

Population

-

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

20002001

20022003

20042005

20062007

ton

56

58

60

62

64

66

68

70

72

74

76mnConsumption Population

November 11, 2008

55

EGYPT | POULTRY

MARKET-RELATED DRIVERS

Poultry consumption is seasonal, as increased consumption levels are wit-nessed during religious occasions and summer vacations. On the supply level, the global production of fodder, which is the main input in poultry industry, vary according to climate conditions under which seeds (yellow corn and soybean) are cultivated.

The emergence of diseases, such as Avian Influenza, impacts both supply and demand for poultry, evidenced by the decline in global production and consump-tion which occurred during 2003 and 2006 as a natural result of the discovery of AI cases. It is worth highlighting that the outbreak of the disease was witnessed late in 2006, thus, impacting 2007 levels.

Global demand vs. supply

Source: FAO STAT Database

The rising consumer health awareness and the discovery of FMD (Foot and Mouth Disease) and BSE (Bovine Spongiform Encephalopathy, commonly known as Mad Cow Disease (MCD)) cases negatively affect red meat consump-tion, yet, boost the demand for poultry and fish – as they represent perfect sub-stitutes for meat in terms of protein intake. Nevertheless, the occurrence of AI disease impacts the demand for poultry and expands consumption of substitutes – as meat and fish. FODDER-RELATED DRIVERS

Fodder constitutes the bulk of poultry production cost; the production of fodder relies, in turn, on yellow corn and soybean, the importation of which depends on the availability of seeds in the Global commodities market. Moreover, fodder prices are determined by commodities’ global prices. It is worth noting that yel-low corn prices is strongly linked to oil global prices as factories shift to yellow corn for bio-fuel products as a cheap substitute for oil, which justifies the tremen-dous increase in fodder prices in the first half of 2008. However, with the de-crease witnessed in oil prices, fodder prices declined reaching a current level of LE 1,200/ton; with an expectation of further decrease.

Seasonality of demand and Sup-ply

Diseases impact both demand and supply

-20,00040,00060,00080,000

100,000

2000 2001 2002 2003 2004 2005 2006 2007

000' Tons

0.00%1.00%2.00%3.00%4.00%5.00%

Demand Supply Demand Growth Supply Growth

Substitutes

November 11, 2008

56

EGYPT | POULTRY

Oil vs. fodder prices

Source: CICR Estimates & Poultry Industry Experts

Most notably, as fodder constitutes around 65% of poultry total production cost, volatility of fodder prices is consequently reflected in poultry selling prices as illustrated in the graph below.

Fodder vs. poultry selling prices


020406080

100120140160

Jan-0

7

Feb-0

7

Mar-07

Apr-07

May-07

Jun-0

7

Jul-0

7

Aug-0

7

Sep-0

7

Oct-07

Nov-0

7

Dec-0

7

Jan-0

8

Feb-0

8

Mar-08

Apr-08

May-08

Jun-0

80500100015002000250030003500

Oil prices Fodder prices

0

500

1000

1500

2000

2500

3000

3500

Jan-

07

Feb-

07

Mar-07

Apr-0

7

May-0

7

Jun-

07Ju

l-07

Aug-0

7

Sep-0

7

Oct-07

Nov-07

Dec-07

Jan-

08

Feb-

08

Mar-08

Apr-0

8

May-0

8

Jun-

08

LE/ton

-

2.00

4.00

6.00

8.00

10.00

12.00LE/KgFodder prices Selling prices

November 11, 2008

57

EGYPT | POULTRY

Anticipated decline in yellow corn prices is a plus

Still fears from the outbreak of AI as a threat, yet it is an-ticipated to end by 2010

More integration is anticipated

0

200

400

600

800

1,000

1,200

2006 2007 2008 2009 2010 2011 2012

000 ton

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Consumption Growth rate

FUTURE OUTLOOK

Poultry is considered a real support to the Egyptian Economy, through providing a healthy, cheap and self-sufficient kind of protein. The anticipated decline in oil prices will be reflected on a reduced demand for yellow corn as a bio-fuel substi-tute, hence a downward slope for its prices which will be mirrored on the fodder prices. Moreover, the GoE plan to cultivate yellow corn will alleviate the exposure of poultry suppliers to the volatility of international prices, enhance their margins, and attract new market players.

Still the outbreak of AI represents a threat to the industry's supply and demand sides. As per industry specialists, the occurrence of the disease is still a risk until 2010. Therefore, we anticipated demand to be depressed during 2009 and 2010, yet, it will resume higher growth levels throughout the remaining period of our fore-cast. Given the growing population rate and increasing income per capita, poultry consumption is expected to grow over 2008-2012 by an average of 7.8% annually to reach a per capita consumption of 13.4 Kg/annum by 2012

Future Consumption

Source: CICR Estimates

To ensure the implementation of a more hygienic poultry cycle in order to avoid the outbreak of the AI disease, poultry companies are targeting vertical integration. Moreover, such integrated business model ensures a more cost-efficient operation. Hence, investment in slaughterhouses started to kick-off with “Al Wataneya Poul-try” planning to establish 5 slaughterhouses with a capacity of 500K chicken/day.

November 11, 2008

58

Given the strong ties linking the real estate market with the economy, the anticipated economic slowdown will be reflected on real estate prospects, which owes much of its boom to the boost in high-end segment demand. Yet, the cool-off in raw materials prices along with an ex-pected decline in mortgage lending rates will shape up an affordable product to the middle-income group; thus, help materialize its unmet demand, and alleviate the ex-pected simmering down of the high-end demand which is on the brink of saturation. Retail, is another key segment driven by the GoE's commitment to support local invest-ments – namely SMEs – and building commercial and industrial zones in many governorates, thus, highlighting the positive prospects of office and commercial seg-ments – which are still undersized. Moreover, the highly competitive property prices in Egypt versus its regional peers may foster foreign investments. Developers are to weather the storm with a solid ground: Developers are expected to withstand the anticipated slow-down in the real estate market with a much solid ground than earlier in the decade, capitalizing on their sell-off plan model. Other drivers may expand the added supply units beyond the completion of outstanding projects: The completion of outstanding projects is expected to ensure growth in supply. Yet, the negative sentiments for the financial market, may act as a potential for liquidity transfer from equity markets to the perceived safe real-estate market. Moreover, the expected growth in real GDP/capita leads to wealth accumulation and expands demand for real estate. Mortgage scheme development enhances affordability: The anticipated improvements in the mortgage scheme and the expected decline in mortgage lending rates along with the cooling off in raw materials prices are expected to create af-fordable residential units for the middle-income group. Hence, alleviate the expected cool off in high-end demand. A bright side for retail: The GoE's commitment to support local investments – namely SMEs – and building commercial and industrial zones in many governorates highlights the po-tential for office and commercial segments, which are still undersized. Highly competitive prices: The recent reforms that helped streamlining the process of property purchase in Egypt, facili-tating the purchases for overseas buyers, may render the country's highly competitive real estate prices, compared to its regional peers, as a base to foster foreign investments.

SHELTERS ARE A MUST

EGYPT | REAL ESTATE & MORTGAGE FINANCE

SECTOR PERFORMANCE | RESIDENTIAL SUPPLY

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

2004/05 2005/06 2006/07 2007/08

Additional Units

Luxury Medium Lower Cost

Growing population, namely urban, coupled with growth in marriages are key engines to the expanding residential demand. Rising real GDP/Capita enriches wealth ac-cumulation activities, which acts as a poten-tial for real estate demand. The availability of land for projects develop-ment. The unmet demand, namely in the medium to lower income classes represents an op-portunity for developers in these categories. Foreign ownership is allowed. Declining raw materials prices will increase affordability of real estate units for middle and lower income classes, hence will ex-pand their demand potential.

The underdeveloped infrastructure and trans-portation facilities act as a limitation for po-tential real estate investments. The undeveloped mortgage finance scheme limits its full application. Lower oil prices might affect the liquidity flow-ing into the real estate from the GCC.

RISKS

KEY PERFORMANCE INDICATORS 508 Av. annual added residential urban demand

(04-07,k units)

134 Av. annual added residential urban supply (04-07,k units)

442 Added urban supply units (2010,k units)

1,006 Cairo average residential selling prices (US$/sqm)

3,068 MENA average residential selling prices (US$/sqm)


DRIVERS

135 Nasr City H&D

149 Palm Hills Developments

157 TMG Holding

PAGE # COMPANIES COVERED

November 11, 2008

59


KEY MARKET FACTS The strong ties between real estate and economic performance drove up real estate investments by 77% over FY03/04-07/08 – the period when the economy was booming. Egypt's strengthening economy prompted investors to undertake residential, office, and retail developments, with total real estate investments reaching LE 13 bn in FY07/08, with Gulf investors being at the forefront of a con-siderable number of developments. Real estate investments versus economic growth

Real estate bears strong ties with the economy

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2002/03 2003/04 2004/05 2005/06 2006/07 2007/080%

5%

10%

15%

20%

25%

30%

35%

40%

Real Estate Investment Real Estate Growth GDP Growth

Source: Central Bank of Egypt bulletin

Despite the dramatic increase in real estate prices, they are still much lower com-pared to regional peers, hence adding to the sector's potential. Average selling prices US$/sqm during 2008

2,960

1,006

5,175

3,068

-

1,000

2,000

3,000

4,000

5,000

6,000

Average office sales price Average residential sales price

US$ per s.qmCairo MENA average

Source: Bank Audi

Highly competitive prices

November 11, 2008

60


MARKET DEVELOPMENTS Sliding Phase Recovery Phase An Uptrend

2000 - 2003 2004 - 2005 2006 - Current

* The real estate market entered a downward phase.

* Real Estate started its recovery. * Launch of the Real Estate tax law

* High-end supply outweighed demand. * Intense development of new urban communities.

* Growing real estate market.

* Depreciated real estate prices. * Appreciated real estate prices. * Influx of international developers.

* Weak real estate demand. * Strong real estate demand. * Appreciating land and property prices.

* The initiation of the mortgage scheme concept.

* Mortgage law was put into effect. * Increasing rental yields.

* Strict foreign ownership regulations. * The first two mortgage companies started operation.

* Demand maintained its strength.

* Banks started to offer household credit to finance residential ownership.

* Banks started to offer seven to ten years loans.

* Laxed foreign ownership regulations. * The establishment of the Egyptian Company for Mortgage Refinancing.

* Reduction in property tax from 46% to 10%.

* Reduction of property registration fees from 12%of property value to a max of LE 2000 per property.

* Increasing number of financing institutions.

* Structural gap.

Source: CI Capital Research

Positive sentiments coupled with a strengthened econ-omy encouraged for-eign investments in-flow

The buoyant sentiment surrounding Egypt’s real-estate market growth coupled with a strengthened economy laid solid grounds for further expanded real-estate investments. With the announcement of billion of dollars worth of emergent pro-jects including residential, offices, commercial and touristic projects that were introduced to the market through local and foreign investors, Egypt is introduced to a new era of intense activity designed to propel it to the global spot light.

Led by GCC invest-ment inflows which were further fostered by the boosted sur-plus from high oil prices

High oil prices have resulted in a dramatic increase in the wealth of the major oil producers. The GCC in particular are generating huge current account surplus reaching US$210 bn in 2007; which finds their way through local and overseas investments. With the downturn in the US and some European housing markets, which has already dented their economic performance through declines in resi-dential investment and construction activities, along with Egypt undertaking an extensive development program, several Gulf investors have directed much of their appetite towards Egypt, developing several mega projects.

Key foreign real estate developers Developer Project Investment (bn) Delivery YearEmaar New Cairo City - Cairo Gate -

Marassi - Up town CairoEGP 42.67 Master planned - 2013

Kharafi Group Port Ghalib EGP 9.20 2013

Barwa Qatamiyya EGP 7.50 2013

Qatari Diar Cairo Nile Corniche Towers project - Tourist Development

EGP 7.65 2012

Al Futtaim Group Cairo festival city EGP 20.10 2011

Damac Gamsha bay - Park Avenue - Hyde Park

EGP 107.00 2011 - 2018

EGP 194.12 Master planned - 2018Total

Source: CICR

November 11, 2008

61


New Cairo communities galloped ahead on their competitive tracks and experi-enced a dramatic increase in residential property supply especially in the con-struction of high-end properties. Commercial activity also picked up lately; how-ever, the office market remains untapped. Moreover, the rising flow of tourist arri-vals attracted investments not only in hotels but also in integrated touristic devel-opments. Egypt's buoyant economic performance stimulated investors to set up retail developments illustrated by the inflow of hypermarkets as well as super-markets, by both international and local chains. It is worth noting that there are about c. 26 shopping malls in Greater Cairo; by which the advent of professional retailing and mall construction started in 2005 through the development of the US$1-bn City Stars investment, including a shopping mall, two hotels, cinemas, as well as residential and commercial units according to internationally accepted standards.

The advent of the inte-grated project con-cept and new housing convention…

Such witnessed investment inflow increased the number of added units; by which the yearly additional residential units averaged 195k units over 2004-08 com-pared to an average of 159k units over 2000-03. Commercial activity witnessed growth as well, however, the office market remains untapped.

Estimated Urban additions for Residential Units

Residential and com-mercial additions were lifted up

-

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

1995-99 2000-03 2004-08

additional Units

Source: CAPMAS & CICR estimates

The bulk of inflows were concentrated in the high-end property segment whose spiraling development dominates headlines in the sector, while the added hous-ing units to medium and low-income inhabitants who constitute the vast majority of Egyptians are limited. As supply failed to keep apace with the rising demand of the medium and low- income housing units, the real-estate market is faced by a structural gap between the high-end property market and that of the medium to low-end segment. Estimated Urban Supply/Demand additions for Residential Units (by sector)

Yet, a structural gap exists

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

2004/05 2005/06 2006/07 2007/08

Additional Units

Luxury Medium Lower Cost

Source: CAPMAS & CICR estimates

November 11, 2008

62


MARKET DYNAMICS

Source: CICR

Population growth coupled with rural urban migration is key engine for residential demand. Egypt's population reached 74 mn inhabitants by 2007; growing with 1.9% on average. Rural-urban migration coupled with the normal growth of urban inhabitants pushed urban population to contribute with a share of 42.9% of total inhabitants.

Population Growth with significant urban share

With the current age distribution, 50% of the population is below the age of 20, while c. 30% of the country's population lies within the age bracket of 20-39 years – this represents the marriage group that stimulates demand for new residential units. As for the 45-year and older age bracket, which represents around 16% of the population, it creates demand for new properties through relocating, or by buying a secondary property. Moreover, huge demand potential still lies ahead, fostered by the fact that 50% of the population is below 20 years, signaling future real-estate demand.

Population structure adds further to de-mand potential

Marriages have reached an estimated level of 669k contracts in 2007/08, and grew at an average annual rate of 5.6% over 2002/03-2007/08. Moreover, cases of divorce have recorded 73.1k cases in 2007/08. Both, marriages and divorces create demand for residential units.

Marriages & Divorces

Demand for property is closely tied to growth in per capita income. The rise in real GDP/capita averaging 5% annually throughout FY05/06-07/08, allowed for the accumulation of wealth, hence drove up the real-estate market by an annual average of 10%.

Per Capita Income

SOCIO-ECONOMIC FACTORS

November 11, 2008

63


REGAULATORY FRAMEWORK Currently, the property tax law is being amended, by which all unfinished units within the cities or in new urban areas will be subject to the property tax law. This will encourage the developers to accelerate the delivery of units to buyers. Pass-ing this law will force owners to sell their properties to avoid paying property tax. It is believed that such law will increase the property sale turnover in Egypt; thus, residential property liquidity will surge, bringing prices to more competitive levels, and accordingly expands affordability. Moreover, a tax of 2.5% is charged on money earned from a property sale. In addition to taxes of 20% on rental income with a basis threshold for taxation of LE 10,800 per annum.

Property tax law

Recent reforms helped streamlining the process of property purchase in Egypt, facilitating the purchases for overseas buyers, and focusing investors' attention on Egypt as a prime location for real-estate buyers as well as developers.

Enhancing registra-tion scheme

In an effort to boost the real-estate market and expand its base, in April 2005, Egypt revamped the property ownership law to extend identical ownership rights and privileges to foreigners as those enjoyed by native Egyptians. Ownership follows a freehold model with the only exception being in Sinai, where the owner-ship is based on a 99-year long lease system, usufruct system.*

Allowing foreign own-ership

Although the mortgage finance scheme was initiated in 2000, it was not put in effect until 2004. Compared to the deferred installment system, a developed mortgage finance system makes purchasing a house more affordable for more people through longer amortization terms and lower prices, which ultimately stimulates and develops the property market. It is worth mentioning that total mortgage loans exceeded LE 2 bn in December 2007 compared with LE 1 bn in December 2006, fueling further the purchase of properties. The launch in the mortgage law was to catch the segment of population with annual salary ranging from LE 1.5 k to LE 6.2 k (22% of the population) and thus can afford to pay the 40% monthly installments of LE 0.6k to LE 2.5k. further improvements in the law could allow the mortgage finance companies and banks to address a further 20% of the population with wages in the range of LE 1 – 1.2 k month.

Mortgage law

*Usufruct system: It is the right to use and exploit property belonging to another person.

MORTGAGE FINANCE Despite the introduction of the mortgage finance system to the market, it is still faced with some obstacles. Red tape; the limited number of mortgage finance providers; and the low amount of finance offered – a ceiling of LE 5 mn - hinder the efficient application of the mortgage finance scheme. Although mortgage loans experienced a two fold increase reaching LE 2.8 bn in 3Q08 vs. LE 1.9 bn in 3Q07, still it represents less than 1% of the country's GDP versus 8.1% in the UAE in December 2007. Mortgage Finance Market

Limited application of mortgage finance scheme

193 208

502714

871 1,0001,067

1,369

1,9062,054 2,130

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08

LE mn

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

MFC Banks Mortgage loans as percentage of GDP (current)

Source: Ministry of Finance and Euromoney Conferences

November 11, 2008

64


Currently there are 10 key major players (banks and companies) in the mortgage finance market up from 9 in 2007. In addition, several investors, both local and regional, showed their interest to enter Egypt's mortgage market by setting their mortgage companies. For instance, Naeem Holding is preparing to submit a re-quest to acquire a license to establish a mortgage finance company with an au-thorized and paid-in capital of LE 1 bn and LE 100 mn, respectively - pending finalization of license procedures with the Mortgage Finance Authority (MFA). In addition, Tamweel PJSC, the largest provider of real estate finance in the UAE, has announced that it has received a mortgage finance license from Egypt’s Mortgage Finance Authority (MFA) during March 2008 to launch operations in the Arab world’s most populous nation, with an authorized capital of LE 500 mn and a paid-in capital of LE 100 mn. Figure 15 Key operating Mortgage Finance Institutions

Rising number of players

Provider Available to Type of Unit Mortgage Tenor Interest Rate Max. Loan Amount Min Salary (LE) Charges Buy-To-Let

Egyptians, Expatriates,

and non-Egyptians

Residential A maximum monthly installment of 20

years/maximum age of 65 years.

13.5%-decreasing 90% of property value (up to LE 5 mn) - monthly

installment can not exceed 40% of

Min monthly salary LE1,000

LE 150 for application form, LE 1000 for the appraiser, and

2% administrative fee are paid once.

Requires Financer Approval


and non-Egyptians

Commercial A maximum monthly installment of 20


14%-decreasing 80% of property value (up to LE 5 mn) - monthly

installment can not exceed 40% of


LE 150 for application form, LE 1000 for the appraiser, and

2% administrative fee are paid once.


EHFC Egyptians, Expatriates,

and non-Egyptians



9.3% Fixed 80% of property value (up to LE 2.5

mn)


LE150 for application form and LE1000 for the appraiser.


Taamir Mortgage company


and non-Egyptians



10% Fixed 85% of property value

Single person: min LE18,000 annually; Total

family income: LE24,000

2% administrative fee from whole loan balance are paid

once.


Bank of Alexandria


and non-Egyptians



12.4% declining for 2 years 13%

declining for 13 years

90% of property value (up to LE 5

mn)

Min monthly salary LE2,000 & max loan

installement is 40% of monthly salary.

1.5% administrative fee from whole loan balance are paid

once.


Bloom Bank Egyptians, Expatriates,

and non-Egyptians

Residential Monthly installment ranging from 5-15


12.5% declining for 3 and 5 years and 13% declining for 10 and 15 years

70% of property value in Cairo and other governorate, 75% of property

value in new Cairo, 80% construction

activities, and 45% finishing activites.

Min monthly salary LE1,000 & max loan installement 40% of

monthly salary.

1% administrative fee from whole loan balance are paid

once (min LE 500 and max of LE 25K).

yes

CIB Egyptians, Expatriates,

and non-Egyptians

Residential Monthly installment ranging from 5-15


11.5% fixed for five years. 12%

declining for the next 10 years

75% of property value (min LE 120k

up to LE 5 mn)

Min monthly salary LE4,000.

LE1,000 is paid for apartments and LE2,000 for villas. In addition to 0.25% is paid annually on the remaining

balance of the loan & 1.5% of loan amount is paid once (max LE 30,000) at the begining of the loan and deducted from

the loan balance.

yes

Egyptian Saudi Finance

Bank

Egyptians Residential A maximum monthly installment of 10


8.2% 90% of property value

Min monthly salary LE1000 & max loan installement 40% of

monthly salary.

LE 500 and insurance 2.5% of loan


Egyptian Arab Land Bank

Egyptians Residential A maximum monthly installment of 15 years for cairo and 20 years for new cities/maximum age of 65

9% fixed for Cairo - 9.6% fixed for new

cities

85% of property value

Min monthly salary LE1000 & max loan installement 40% of

monthly salary.

NA Requires Financer Approval

Housing & Development

Bank


and non-Egyptians

A maximum monthly installment of 10


13 - 14% 75% of property value

Max loan installement 40% of monthly salary.

0.1% Administrative fees. yes

NSGB Egyptians Residential Monthly installment ranging from 5-15


12.5% declining for 5 years - 13% declining for 10 years - 13.5% declining for 15

years

80% of property value (min 50k - up

to LE 5 mn) - monthly installment

can not exceed 40% of gross salary


one time administrative fee which is 1% of total loan.


Amlak


November 11, 2008

65


Cost is now by far the most important selection criteria for the bulk of the resident workforce in Egypt. The witnessed inflationary pressures within 2008 had placed increasing emphasis on affordability, as rising interest rates limits an expanded application of the mortgage finance scheme. Given the decline in CPI readings starting September 2008 along with the anticipated lower inflationary levels going forward, interest rates are expected to adjust to the downside, thus, would bring down with it mortgage lending rates. A fact that is expected to enhance the af-fordability of such scheme and ensures an expanded utilization.

The anticipated lower inflationary levels is to have its positive impact on the mort-gage finance scheme

OIL PRICES The witnessed strengthening of oil prices reflected growing surpluses in oil ex-porting countries, namely those of the GCC region, which registered a current account surplus of US$210 bn in 2007. Oil windfall pushed upward the private wealth which further boosted the recycling of the petrodollars in value added op-portunities as the real-estate market of prospective destinations, including Egypt, thus, stretching further the demand potential as well as expanding the develop-ers' capacities to invest in the real-estate sector. Moreover, the attractive real-estate prices compared to those in traditional markets created demand for a sec-ond-home within Egypt. However, with the anticipated decline in oil prices, GCC surplus will be depressed, and will impact their investments inflow to Egypt. Yet, FDIs in real-estate remains untapped with a minimal share of less than 1% of total FDIs inflows to the country, and a contribution of around 4% to total real-estate investments in FY07/08. Hence, we believe the impact will be limited.

Peaking oil prices en-forced an upbeat for the real-estate market, yet their anticipated drop is expected to depress such growth

RAW MATERIALS The strong real-estate demand witnessed despite the hiking raw materials prices – reaching a peak of LE 6,600/ton in 2008 for steel and a high of LE 462/ton in 2008 for cement – proved the strong belief of the positive prospects of such sec-tor by investors – local and international – and the outweighing of the demand drivers over those of supply, resembled in the dramatic increase in real estate prices caused by the rising steel and cement prices. Yet, the anticipated global economic slowdown which will be reflected on the Egyptian economy is expected to outweigh the anticipated decline in raw materials prices - leaving the real es-tate market cushioned by the outstanding projects.

Strong demand de-spite the hiking raw materials prices, yet, with the cooling off in steel and cement prices still demand is expected to be de-pressed

DEVELOPERS' SELF-FINANCING MODEL Capitalizing on their self financing model (sell-off plan), developers are to weather the slowdown in demand on a more solid ground than during the down-turn that occurred earlier in the decade. Hence, reversing the previous high work-ing capital needs with developers’ financial leverage averaging 0.9x in 2007.

With the de-leveraged standing of develop-ers, they are to weather the storm with a solid ground

FUTURE OUTLOOK

The coming two years are expected to witness a depressed demand with the pace of growth being based upon the completion of outstanding projects. Yet, a more developed mortgage scheme with expected lower interest rates – following the expected decline in lending rates as a measure to expand investments – cou-pled with the cool-off in raw materials prices could allow for the entry of the mid-dle-income class, as residential units can become more affordable. We have ac-counted for a more conservative picture for demand on real estate to incorporate the impact of such economic slowdown. Real estate residential demand is ex-pected to grow at a decelerated rate over 2009 and 2010, and a pick-up is to fol-low afterwards.

Depressed demand for residential units, yet, with expected lower mortgage lend-ing rates units to the middle-income class could be affordable

November 11, 2008

66


As supply mainly targets the high-end, its growth is expected to be based upon completing the outstanding projects. However, the unsatisfied demand that is expected to stem from the middle-income class is likely to alleviate the expected cool-off in the high-end demand. Future additional demand and supply

Middle-income group; “every cloud has a silver lining”

0

100,000

200,000

300,000

400,000

500,000

600,000

2006 2007 2008 2009 2010 2011 2012

Additional Urban Supply Additional Urban Demand

The GoE's commitment to support local investments – namely SMEs - and build-ing commercial and industrial zones in many governorates highlights the poten-tial for office and commercial segments, which are still undersized.

A bright side for the retail segment

November 11, 2008

67

EGYPT | STEEL

Against the backdrop of anticipated downturn in the global economy and a slowdown in trade activities, flat steel is expected to be more affected than rebars, as the former is highly involved in the export markets with 56% of its sales is directed internationally in 2007. On the other hand, the demand for rebars will be secured by the massive backlog of real-estate projects. In addition to the GoE’s commitment to push further local investments through building commercial and industrial zones in many governorates which will increase the demand for the retail segment. In an effort to give local steel products a competitive edge against competition in the global mar-ket, the GoE removed the LE 160/ton export tariffs on steel exports. Another forward move is the vertical inte-gration enforcement through the GoE issuance of license for the production of billets, sponge iron and direct re-duced iron (DRI), key raw materials in steel production. Such move should alleviate the impact of the volatile steel raw materials prices on the local product, as Egypt’s steel industry heavily relies on imported raw materials. Flat steel is expected to be highly affected: As 56% of flat steel sales is directed to the export markets, the anticipated global downturn is expected to highly affect the flat steel com-panies’ sales. Removal of export tariffs will give steel products a com-petitive edge: In mid-October 2008, the levied LE 160/ton export tariff on steel exports was removed, in an effort to make steel prices more competitive in the international mar-kets – against the backdrop of an anticipated global recession spurred by the financial turmoil. Local industry is moving towards more integration: Egypt's heavy reliance on imported raw materials drove the GoE to issue in 2007 four licenses for the production of billets and sponge iron with a combined annual production capacity of 8 mn tons, and an investment cost of US$15 bn. The four winners are Ezz Steel (ES), Suez Steel Company, Tiba for Iron & Steel and the Egyptian Company for Sponge Iron. Most notably, two licenses were offered to two foreign inves-tors for the first time. With investments flowing to steel feeding industry, margins are expected to improve. Rebars demand is to be secured by the backlog: In light of the expected slowdown in real-estate demand rebars con-sumption is to be secured by the backlog of the developers projects. Yet, with the anticipated pick-up in the economy which will trigger the inflow of projects the demand for rebars will regain its strength.

REBARS IS MORE LIKELY TO WITHSTAND THE STORM THAN FLAT STEEL

Outstanding real estate projects secure demand. Strengthened margins. Declining raw materials prices, coupled with declining freight costs. Removal of export ban. Foreign companies' entry is expected to improve the industry's efficiency.

Heavy reliance on imported raw materials. Sudden governmental decisions as impos-ing duties on steel exports. Anticipated slowdown in the global and lo-cal economies.


DRIVERS

RISKS

KEY PERFORMANCE INDICATORS 10.8 Rebars production CAGR (04-07,%)

11.6 Rebars consumption CAGR (04-07,%)

6.2 Flat production CAGR (04-07,%) 10.7 Flat consumption CAGR (04-07,%)

PAGE # COMPANIES COVERED 123 Ezz Al-Dekheila Steel-Alex.

125 Ezz Steel

0.0

0.2

0.4

0.6

0.8

1.0

1.2

2003 2004 2005 2006 2007 2008E

mn tons

0.00

0.05

0.10

0.15

0.20

0.25mn tonsLocal Sales consumption Imports

SECTOR PERFORMANCE|REBARS2003-2008

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2003 2004 2005 2006 2007 2008E

mn tons

0%

3%

6%

9%

12%

15%

18%

21%

Local Sales Exports Share of exports/ total sales

SECTOR PERFORMANCE|FLAT 2003-2008

November 11, 2008

68

EGYPT | STEEL

Strong growth on both, demand and supply sides

STEEL GLOBAL DYNAMICS CRUDE STEEL Both sides of crude steel market – supply and demand – witnessed strong growth; with the former increasing by a CAGR of 7.6% and the latter growing by a CAGR of 7.4% over 2001-2008, reaching the respective levels of 1,420 mn tons and 1,279 mn tons in 2008.

Global crude steel demand & production (2001-2008)

Global added capacity, demand & operating rates (2002-2008)

0

200

400

600

800

1,000

1,200

1,400

1,600

2001 2002 2003 2004 2005 2006 2007 2008E

mn tons Production Demand

0

20

40

60

80

100

120

140

2002 2003 2004 2005 2006 2007 2008E

mn tons

82.0%

82.5%

83.0%

83.5%

84.0%

84.5%

85.0%

85.5%

86.0%

86.5%

87.0%

Added capacity Added demandUtilization Rate

Source: www.worldsteel.org & CICR Database Source: www.worldsteel.org, Tata & CICR Database

Over 2001-2007, Asia and the Middle East recorded the highest production growth rates with respective CAGRs of 13.4% & 5.8%. Moreover, in terms of consumption, both regions recorded the highest CAGRs of 11.2% and 10.3%, respectively, during the same time span. Asia was ranked as the largest steel producing & consuming region with respective shares of 56.1% & 56.7% of global steel production & consumption in 2007.

Developing regions are the industry's growth engine

0%

2%

4%

6%

8%

10%

12%

14%

16%

Asia MiddleEast

SouthAmerica

Africa Europe Oceania NorthAmerica

World

CAGR of Production CAGR of Consumption

CAGRs of regional crude steel production & con-sumption (2001-2007)

Source: www.worldsteel.org

0% 10% 20% 30% 40% 50% 60%

Asia

Europe

North America

South America

Middle East

Africa

Oceania

Share in Global Steel Production Share in Global Steel Consumption

Regional share in global steel production & con-sumption in 2007

Source: www.worldsteel.org

Asia's prominence in the world's steel industry was mainly attributable to the presence of China; which witnessed an outstanding growth in its steel produc-tion & consumption levels over 2001-2007 with the former growing by a CAGR of 21.6% and the latter enjoying a CAGR of 17.1%, thus, contributing with 36.4% & 33.8% respectively in global steel production & consumption in 2007. It is worth noting that steel is a considered a concentrated market, with the top 4 countries representing 54% of the global steel consumption.

With China leading such growth

November 11, 2008

69

EGYPT | STEEL

World's largest steel producing countries in 2007

World's largest steel consuming countries in 2007

Italy2.4%

Brazil2.5%

Ukraine3.2%

Germany3.6%

India3.8% South Korea

3.8% Russia5.4%

United States7.3%

Japan8.9%

China36.3%

Others 22.8%

Others28.4%

Japan6.6%

United States9.0%

China33.8%

Turkey2.0%

Spain2.0%

Italy3.1%

Germany3.2%

Russia3.3% India

4.2%South Korea

4.5%

Source: www.worldsteel.org Source: www.worldsteel.org

Towards the end of 2008, steel prices shifted their hiking trend that was witnessed throughout the first eight months of 2008, mimicking the pattern of the raw materi-als prices. It is worth noting that such declining pattern is namely due to the slow-down in global demand. International steel prices vs. raw materials prices (Feb 2006-Oct 2008)

A shift in steel prices hiking trend

Source: Bloomberg

STEEL MARKET IN EGYPT MARKET STRUCTURE At present, there are 20 steel producers in the local market with a total capacity of 9.60 mn tons split between rebars and flat steel products, with the former holding a share of 72.9% of local steel capacity in 2008 and the latter had a share of 27.1%.

Rebars segment bears the lion's share in local steel capacity

0

100

200

300

400

500

600

700

800

900

1,000

1,100

1,200

Feb-06

Mar-06

Apr-06

May-0

6

Jun-06

Jul-0

6

Aug-06

Sep-06

Oct-06

Nov-06

Dec-06

Jan-

07

Feb-07

Mar-07

Apr-0

7

May-0

7

Jun-

07

Jul-0

7

Aug-07

Sep-07

Oct-07

Nov-07

Dec-07

Jan-08

Feb-08

Mar-08

Apr-08

May-08

Jun-08

Jul-0

8

Aug-08

Sep-08

Oct-08

US$/ton US Hot Rolled Coils US Import Rebar PriceScrap Pig Iron

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70

EGYPT | STEEL

Local steel capacity by product type in 2008

Rebars72.9%

Flat27.1%

Source: ES

After acquiring a stake in Al Ezz Dekheila Steel Company-Alexandria (EDZK) and establishing a new steel company in Al-Sokhna free zone area namely Al Ezz Flat Steel (EFS), Al Ezz Steel (ES) -previously known as Al Ezz Steel Rebars (ESR) – became the largest player in the domestic market with respective shares of 65% & 60% of rebars & flat steel local sales during 9M08. Currently, ES owns 90.73% of Al Ezz Steel Mills (ESM); 75.15% of EFS and 53.24% of EDZK. It is worth men-tioning that the Egyptian Iron & Steel Company (EISCO) is the only public sector player in the flat steel market, while Delta Steel Mills is the only state-owned com-pany in the rebars steel market.

Ezz Steel has the up-per hand in local steel market

Al Attal 5.0%

El Bourieni2.1%

El EZZ Steel65.0%

Kouta 1.9%

Others14.0%

Beshay 12.0%

9M08 Local rebars market shares*

EISCO22%

Imports18%

El EZZ Steel60%

9M08 Local flat steel market shares*

Source: ES Source: ES

* market shares are in terms of local sales.

Raw materials account for the highest contribution to the total production cost, yet their shares vary depending upon the producer's level of integration. Raw materi-als accounted for the respective shares of 68% & 75% in EZDK & in ES of the total production cost in 1H08. The variance in feedstock's share in the cost struc-ture between EZDK & ES is due to the variances between feedstock mixes used by EZDK and ESR & EFS, as the former uses a DRI/scrap mix of 80/20 while ESR & EFS use a DRI/scrap mix of 15/85 and 25/75, respectively. Worthy to mention is that local manufacturers fully import their raw materials either in the form of iron ore, scrap or billets exemplifying Egypt's heavy reliance on imported raw materials.

Raw materials, a key contributor to pro-duction cost

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EGYPT | STEEL

Overhead11%

Raw Materials68%

Depreciation8%

Salaries 3%

Energy10%

Raw Materiald75%

Energy7%

Depreciation6%

Salaries 2%

Overhead10%

EZDK cost structure in 1H08 ES* –consolidated - cost structure in 1H08

Source: ES Source: ES

REBARS SEGMENT Rebars demand grew at a higher pace than that of capacity over 2003-2008 re-cording respective CAGRs of 7.6% and 1.6%. Hence, reaching 4.40 mn tons for the former & 7 mn tons in 2008 for the latter. Capacity expansion was due to the entrance of new players, such as Al Attal, Sarhan Steel, Al Megharbel, Fair Trade and Al Marakbi; in addition to the upgrading of one of the existing facilities namely, Beshay Steel raising its capacity from 400k tons in 2000 to 1.4 mn tons in 2002. In 2005, utilization rates started witnessing an up-trend triggered by an un-matched added demand.

Demand growth exceeded that of capacity

Rebars capacity & demand (2003-2008) Rebars added capacity, demand & utilization rate (2003-2008)

72.0%

62.8%

53.8% 50.7%

67.1% 70.3%

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

2003 2004 2005 2006 2007 2008E

mn tons

0%

10%

20%

30%

40%

50%

60%

70%

80%Added Capacity Added Demand Utilization Rate %

0

1

2

3

4

5

6

7

8

2003 2004 2005 2006 2007 2008E

mn tons Capacity Demand

Source: ES & CICR estimates Source: ES & CICR estimates

About 85% on average approximately of steel rebars sales were directed to the local market over the period 2003-2006. Yet in 2007 & 2008, local sales share increased reaching 87% & 91% due to the flourishing of the real-estate activity over these two years. As for rebars exports, they reached their peak in 2006 with 950k tons, representing 20.7% of total market sales. However, exports' share de-creased to 12.9% in 2007 and is estimated to reach 9% only in 2008, due the ro-bust local demand on steel, and to the imposition of duties on steel exports in 2007 –which lasted from February 2007 until October 19, 2008.

The majority of re-bars production is sold in the local market

*Al Ezz Steel is the consolidation of Al Ezz Dekheila, Al Ezz Steel Rebars & Al Ezz Flat Steel

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72

EGYPT | STEEL

Rebars local sales & exports (2003-2008)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2003 2004 2005 2006 2007 2008E

mn tons

0%

3%

6%

9%

12%

15%

18%

21%Local Sales Exports Share of exports/ total sales

Source: ES & CICR estimates

FLAT STEEL SEGMENT Exports represented a considerable share – an average of 59%- in total Flat steel sales over 2003-2007. Such high exports contribution is mainly attributed to the fact that flat steel is used in the advanced industries, besides EFS- the largest flat steel producer in the local market- is located in Al-Sokhna free zone directed around 82% of its sales to the international markets in 1H08. Yet since 2004, flat steel consumption have showed growth potentials growing by a CAGR of 10.7% over 2004-2007 compared with a CAGR of 5.2% over 2001-2004, thus increasing local sales from 0.49 mn tons in 2001 to 0.88 mn tons in 2007.

Exports dominate flat steel sales, yet potential growth ap-pears locally

Flat steel production vs. local sales (2003-2008) Flat steel exports and its contribution to total sales (2003-2008)

0.0

0.3

0.6

0.9

1.2

1.5

1.8

2.1

2.4

2.7

2003 2004 2005 2006 2007 2008E

mn tons Production Local Sales

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

2003 2004 2005 2006 2007 2008E

mn tons

48%

50%

52%

54%

56%

58%

60%

62%

64%

66%Exports Share of Exports/Total sales


Despite growing flat steel production, the gap between local sales & demand wid-ened from 33k tons in 2003 to 167k tons in 2007, and an estimated gap of 193K tons in 2008. The widened gap is mainly attributed to the expanded demand in the local market by a CAGR of 13.3% over 2003-2007, in addition to an esti-mated growth of 2.5% in 2008. It is worth noting that such growth in local de-mand is driven by the country's strengthening economy, resulting in an increas-ing imports reaching 167k tons in 2007.

Flat steel supply shortfall is widening

November 11, 2008

73

EGYPT | STEEL

Flat steel consumption vs. local sales & imports (2003-2008)

Flat steel utilization rates (2003-2008)

RECENT DEVELOPMENTS On October 19, 2008, the levied LE 160/ton tariff on steel exports was removed, in an effort to make steel prices more competitive in the international markets – against the backdrop of the anticipated global recession spurred by the financial turmoil. Egypt's heavy reliance on imported raw materials drove the GoE to issue in 2007 four licenses for the production of billets and sponge iron with a combined annual production capacity of 8 mn tons, and an investment cost of US$15 bn. The four winners are Ezz Steel (ES), Suez Steel Company, Tiba for Iron & Steel and the Egyptian Company for Sponge Iron. Most notably, by the beginning of 2008, an-other two licenses were offered to two foreign investors for the first time. The first was awarded by Arcelor Mittal – the world's largest steel producer – won the bid in February 2008 with planned annual capacity of 3 mn tons in direct reduced iron (DRI) and billets. The former's capacity is set at 1.6 mn tons, while that of the lat-ter is planned to reach 1.4 mn tons. The second license was awarded by MAC Holding for Industries; a subsidiary of the Kuwaiti-based Al Kharafi Group, for the production of direct reduced iron with planned capacity of 1.6 mn tons and at the same price at which Arcelor Mittal won the tender Through its license acquisition, ES will establish, at EFS, an electric furnace to produce DRI with an annual capacity of 1.7 mn tons and a melt shop to produce 1.35 mn tons of molten steel distributed as follows: 0.8 mn tons for flat steel at EFS, and 0.55 mn tons for billets which will be directed to ESR to replace its im-ported billets. It is worth mentioning that said expansion is expected to commence operation by the beginning of 2011 and is expected to positively impact ESR rela-tive margins. Local steel prices are closely tied with international raw materials trends, as around 85-90% of it are imported. The slowdown in global demand reversed the up-trend followed by international steel prices since July 2008; by which a drop of 56% & 42% respectively in scrap & pig iron prices was witnessed over the past three months. Consequently, a sharp decline of 41% occurred in local rebars prices during the same period, reaching LE 3,900/ton by the end of October

0.0

0.2

0.4

0.6

0.8

1.0

1.2

2003 2004 2005 2006 2007 2008E

mn tons

0.00

0.05

0.10

0.15

0.20

0.25mn tonsLocal Sales consumption Imports


89.2%

85.4%80.5%

75.8%

67.2%

57.0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2003 2004 2005 2006 2007 2008E


Lifting up duties imposed on exports

Investment inflow in the feeding in-dustry with a for-eign tint, for the first time

A move towards integration

The decline in inter-national raw materi-als prices reversed the steel prices' up-trend

November 11, 2008

74

Domestic Market

- Removal of export duties - Modifying anti-monopoly law

- Offering licenses for steel feeding industries

- Construction boom - Solid growth in

dependant industries

Governmental Measures

Demand Driver

Supply-RelatedFactors

- Strengthening EBITDA - New capacities for steel

feeding industries on stream - Impact from export tariffs

EGYPT | STEEL

Local rebars prices vs. international pig iron prices (Mar 08-Oct 08)

Local rebars prices vs. international scrap prices (Mar 08-Oct 08)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 24-Oct-08

25-Oct-08

LE/ton

0

100

200

300

400

500

600

700US$/tonLocal Rebar Price Scrap

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 24-Oct-08

25-Oct-08

LE/ton

0

100

200

300

400

500

600

700

800

900

1,000

1,100US$/tonLocal Rebar Price Pig Iron

Source: ES & Bloomberg Source: ES & Bloomberg

MARKET DYNAMICS

GOVERNMENTAL MEASURES Since 2007, the government has been taking several actions and decisions to regulate the steel industry's expansions & trading activity which greatly influ-enced the steel industry. The following table summarized the recent actions taken by the GoE: Recent governmental measures



Revoking the export duties 19-Oct-08 Calling-off the LE 160/ ton duties previously imposedby the Ministry of Trade & Industry on steel exports.

POSITIVE

Modifying Anti Monopoly Law Jul-08 Raising fines the minimum level of fines charged perviolator from LE 30k to LE 100k and the maximumlevel from LE 10 mn/violator to LE 300 mn.

POSITIVE

Offering 2 licenses for steelfeeding industries to foreigninvestors for the first time

Feb-08 the first to Arcelor Mittal and the second to MACHolding for Industries in order to produce directreduced iron & billets.

POSITIVE

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75

EGYPT | STEEL

SUPPLY-RELATED FACTORS The monopolistic status of the steel industry, as ES currently controls 44.3% and 84.6% of rebars and flat steel capacities, respectively, enables the industry players to pass the increased production cost to the consumer. Despite that raw materials prices hiked by 55.3% during 1Q08, ES EBITDA margin increased to 26.7% vs 24.1% in 2007. Yet, the company's EBITDA margin decreased to 23.7% in 2Q08 due to the 58.6% increase in raw materials prices over the same period. Nevertheless, in terms of absolute values, the company's Earnings be-fore Interest Taxes Depreciation & Amortization (EBITDA) grew by 32.7% and by 25% during 1Q08 and 2Q08 compared to the same period one year earlier, reaching the respective levels of LE 1.3 bn and LE 1.4 bn.


ES EBITDA margin vs. imported raw materials prices by quarter (1H07-1H08)

ES EBITDA vs. raw materials prices by quarter (1H07-1H08)

314 323

463

734

26.3%26.7%

23.7%

27.3%

0

100

200

300

400

500

600

700

800

1Q07 2Q07 1Q08 2Q08

US$/ton

21%

22%

23%

24%

25%

26%

27%

28%Raw Materials Prices EBITDA Margin

314 323

463

734

1.4

1.0

1.3

1.1

0

100

200

300

400

500

600

700

800

1Q07 2Q07 1Q08 2Q08

US$/ton

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6LE bnRaw Materials Prices EBITDA

Source: ES & Bloomberg Source: ES & Bloomberg

The LE 160/ton export tariff which was levied on steel producers by the end of February 2007, led to a 34.6% drop in Egypt's rebars exports during 2007 reach-ing 0.62 mn tons. Similarly, after imposing said tariffs, the share of exports in ES total sales decreased from 47.4% in 1H07 to 26.4% by the end of 2007, followed by a further decline to 22.9% in 1H08. Yet, to mitigate the negative impact of the anticipated global economic slowdown the GoE decided to call off the export duties on steel exports on October 19, 2008.

Imposing the export duties led to a huge drop in exports


Offering 4 licenses for steelfeeding industries

Oct-07 Lienses were offered to local producers for theproduction of billets and sponge iron.

POSITIVE

Imposing duties on steelexports

Feb-07 Imposing an export duty of LE 160/ton on steelexports.

NEGATIVE

Strengthening EBITDA

November 11, 2008

76

EGYPT | STEEL

Egyptian rebars export pattern (2006-1H08) ES rebars export pattern (2006-1H08)

0.45

0.62

0.95

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

2005 2006 2007

mn tons

30.8%

26.4%22.9%

47.4%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2006 2007 1H07 1H08

Source: ES & CAPMAS Source: ES

DEMAND-PULL FORCES Steel consumption is closely tied to the mushrooming construction activity evi-denced in the correlation co-efficient of 0.871 between both factors. Construction activity in Egypt grew by a CAGR of 7.4% over 2004-2007, triggering rebars con-sumption to grow by a CAGR of 15.9% over the same time span

Construction boom

Construction activity vs. rebars consumption (2004-2008)

0

5

10

15

20

25

30

35

40

2004 2005 2006 2007 2008E

LE bn

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0mn tonsConstruction Activity Rebars Consumption

Source: ES & CAPMAS

Consumer goods and the locally assembled vehicles (Completely Knock down –CKD) are key consumers of flat steel, hence, exhibiting strong co-efficient correla-tion of 0.952 and 0.961, respectively. Growing production levels in both industries drove up the demand for flat steel which enjoyed a CAGR of 13.3% over 2004-2007.

Flat steel is closely tied with manufactur ing industries

November 11, 2008

77


EGYPT | STEEL

Flat steel consumption vs. consumer goods production (2004-2008)

Flat steel consumption vs. completely knock-down (CKD) vehicles (2004-2008)

0

5

10

15

20

25

30

35

40

45

2004 2005 2006 2007 2008E

000 units

0.0

0.2

0.4

0.6

0.8

1.0

1.2mn tonsLocally Assembled Vehicles Flat Steel Consumption

7.5

7.8

8.1

8.4

8.7

9.0

9.3

9.6

9.9

2004 2005 2006 2007 2008E

mn units

0.0

0.2

0.4

0.6

0.8

1.0

1.2mn tonsConsumer goods production Flat Steel Consumption


FUTURE OUTLOOK With an anticipated slow down in economic activities over the coming two years, the real-estate market, the main driver for steel rebars, will witness depressed growth, as it will mainly depend on existing projects. Hence, the demand for steel rebars is expected to grow with an AAGR of % over 2009 and 2010. Yet, after-wards the market will resume higher growth levels of 9.7% over 2011 and 2012, as the economy regains its strength. It is worth noting, that as there is no stated capacity additions in the rebars segment, utilization rates are expected to strongly decline over 2009 & 2010, yet as the economy regains its strength utilization rates will record high levels.

Rebars consumption, production & utilization rate (2006-2012)

Rebars market will be mainly tar-geting existing projects, as the economy slows down over the coming two years

83.8%

67.1%70.3%

69.8%

66.9%

76.2%72.0%

0

1

2

3

4

5

6

7

2006 2007 2008E 2009F 2010F 2011F 2012F

mn tons

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%Rebars Production Rebars Consumption Utilization Rate

The coming two years will have much of an impact on flat steel rather than on re-bars steel, as the former is extensively involved in the export market (around 56% of its sales is directed to the international markets in 2007) besides its sales to the local market. As the economy slows down, growth in manufacturing industries – namely consumer goods and CKD – will follow a depressed pace. Local flat steel market and exports are expected to decline by an average of 157k tons tons over 2009 and 2010, yet with an expected recovery in both, local and international mar-kets, demand for flat steel is to gain its strength, with demand & exports growing by a CAGR of 13.5% & 17.4% respectively over 2011 and 2012. It is worth men-tioning that the decrease in capacity utilization rate in 2011 is mainly due to the start of the commercial production of the added 0.8 mn tons of flat steel at EFS by the beginning of 2011.

The country's an-ticipated economic slowdown coupled with an expected decelerated global trade will have a dual impact on flat steel over the com-ing two years

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EGYPT | STEEL

Flat steel consumption, production & utilization rates (2006-2012)

62.3%61.6%

89.2%

80.5%85.4%

59.6%

71.7%

0.0

0.5

1.0

1.5

2.0

2.5

2006 2007 2008E 2009F 2010F 2011F 2012F

mn tons

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%Flat Production Flat Consumption Utilization Rate %

Source: ES & CICR estimates As it has been the case in historical trends, local & export rebars and flat steel prices are expected to follow the same pattern as the international raw materials prices over 2008-2012. It is worth mentioning that international raw materials prices are expected to continue declining in 2009 due to the slow down in global demand, yet starting from 2010; their prices will pick up to grow by a CAGR of 15.5% with the global economy gaining back its momentum. Local & export rebars prices are expected to decline in 2009, then to grow by a CAGR of 10.8% & 8.7% respectively over 2010-2012. As for flat steel, its local & export prices are ex-pected to decline in 2009, then to grow by a CAGR of 8.7% & 9.9% respectively over the same time span.

Rebars local prices vs. international raw materials prices (2006-2012)

Rebars exports prices vs. international raw mate-rials prices (2006-2012)

0

1,000

2,000

3,000

4,000

5,000

6,000

2006 2007 2008E 2009F 2010F 2011F 2012F

LE/ton

0

100

200

300

400

500

600

700

800

900

1,000US/tonRebars Local Raw Materials Prices

0

200

400

600

800

1,000

1,200

2006 2007 2008E 2009F 2010F 2011F 2012F

US$/ton Raw Materials Prices Rebars Exports


Local & export rebars and flat prices will follow international raw materials prices

November 11, 2008

79

EGYPT | STEEL


Flat local prices vs. international raw materials prices (2006-2012)

Flat exports prices vs. international raw materials prices (2006-2012)

0

200

400

600

800

1,000

1,200

2006 2007 2008E 2009F 2010F 2011F 2012F

US$/ton Flat Exports Raw Materials Prices

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2006 2007 2008E 2009F 2010F 2011F 2012F

LE/ton

0

100

200

300

400

500

600

700

800

900

1,000US$/tonFlat Local Raw Materials Prices


November 11, 2008

80

EGYPT | SUGAR

Despite the looming fear of global recession and the an-ticipated slowdown in the country’s economic perform-ance, the demand for a strategic commodity as sugar counts as a safe bet. The GoE’s promotion for beet culti-vation over cane as a means of mitigating the challenges posed by the scarce water resources and land; coupled with the former’s high tolerance to salinity and ability to produce high yields under saline soil, the focus has been directed to sugar beet. Hence, uplifting its share of total sugar production from 13% to 39% over 1998-2007. With the country’s growing population and expanding GDP/capita, and the increasing demand for bio-fuels, further room for growth is anticipated—especially that around 42% of the country’s sugar demand is imported. Most no-tably, the current decline in wheat procurement prices add to the beet’s growth potential. It is worth noting that the local beet industry enjoys higher margins than its peers. A defensive industry with Strong demand drivers: Egypt’s growing population and strengthening GDP/capita ensures a strong demand for sugar.

Good prospects for beet: Against the backdrop of a highly supportive government towards an expanded beet cultivation areas and higher productivity levels, beet cultivated areas grew with a CAGR of 12.7% over 2004-2008 reaching 228k feddans versus a declining trend in cane cultivated areas re-cording 310k feddans in 2008 down from 322k feddans in 2004.

Enhanced yield and supply shortfall support an inflow of investments: Besides the government support to expand beet cultivation areas, higher yields are targeted. Moreover, supply shortfall—with imports covering almost 42% of sugar de-mand— encouraged fresh investments. A new license was granted to Nile Company for sugar beet production which will be located at Nubareya. The company's annual production capacity is 125k tons and is expected to commence operations by 2009, starting off with refining activities and then followed by sugar beet production by 2010. Another line is expected to come on-stream in 2010 by Dakahlia Sugar Co. with an annual capacity of 120K tons.

Wheat is a key competing crop, yet beet’s increasing yield gives it a more competitive stance: The increase in wheat procurement price, definitely, has its negative impact on ex-panding beet cultivated areas. The rise in wheat procurement price in 2008 to LE 380/ardab versus LE 225/ton for beet pro-curement price dropped the beet cultivated areas by around 8%. Yet, the current decline in wheat procurement prices of LE 180/ardab versus an announced beet procurement price for 2009 of LE 335/ton adds to the beet’s potential. Moreover, the enhanced beet productivity by 8% throughout 2004-2007 com-pared with a declining pattern of 1.4% for wheat, fosters the beet’s future growth.

Higher margins than peers: EBITDA margin for the beet in-dustry in Egypt enjoyed a strong average of 37% in 2007, reg-istering a higher margin than that of its international peers that recorded 28% during the same year.

UPBEAT FOR BEET

GoE’s plan to expand beet cultivated area (horizontal) and enhance beet productivity (vertical). The planned increase in automated beet planting

will ensure higher yield. The growing sales of dependant-industries will

ensure strong sugar demand. Growing population and GDP/Capita will main-

tain a strong demand for sugar. As sugar producers can shift to refining, it acts

as a hedge in case the amount of crops supplied declines.

The ease of shifting to wheat cultivation forces producers to increase their beet procurement price, which impacts their margins, as procure-ment cost constitutes the bulk of sugar beet production cost. As beet seeds are imported, exposure to FX risk

exists. Exogenous factors as bad weather and crop

diseases can impact the amount of supplied crop to producers. The expected decline in shipping cost might

intensify competition from imported sugar. The anticipated decline in sugar by-products

prices may impact the overall margin.



FADWA HOSSAM ISSA [email protected]

DRIVERS

RISKS

0

200

400

600

800

1,000

1,200

2004 2005 2006 2007 2008E

000 tons

-15%-10%-5%0%5%10%15%20%25%30%35%40%

Sugar Cane Production Sugar Beet Production Growth in beet Growth in cane

KEY PERFORMANCE INDICATORS 5.7 Total sugar production CAGR (04-07)

19.5 Sugar beet production CAGR (04-07)

225 Beet procurement price (2008,LE/ton)

245 Added annual capacities (2010,k tons)

67 Self-sufficiency ratio (2007,%)

PAGE # COMPANY COVERED 115 Delta Sugar

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EGYPT | SUGAR

EGYPT SUGAR INDUSTRY IN EGYPT AN ADVANCED GLOBAL RANKING Egypt's cane yield per feddan recorded 50.8 tons in 2007/08 - about 1.5 times as high as that of the world's cane yield-placing the country at the second rank after Peru, which achieved a yield of 51.1 tons per feddan Top 20 countries in cane yield per feddan in FY07/08

Egypt is ranked 15th worldwide, in terms of sugar per-capita consumption which recorded 36.1 Kg in FY07/08 - about 1.6 times as high as the worldwide's per capita consumption during the same year. Such manifested jump (from a rank of 21 in FY1997/98) of per capita consumption pushed Egypt to be among the world's top 20 sugar producing countries in FY07/08, with a total sugar produc-tion of 1.66 mn tons - representing a share of 1% in global sugar production. On the regional level, Egypt enjoys the highest contribution of 24.1% in terms of consumption, while is ranked 2nd with its 31.9% share in terms of sugar pro-duction, following Turkey

Ranked 2nd in terms of cane yield

Ranked 15th in terms of per capita con-sumption

Top 20 countries in sugar per capita consump-tion in FY07/08

Top 20 countries in sugar production in FY07/08

Source: USDA & CICR estimates Source: USDA & CICR estimates

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Bra

zil

Indi

a

Chi

na

US

A

Thai

land

Mex

ico

Rus

sia

& U

rain

e

Aus

tralia

Pak

ista

n

Sou

th A

frica

Col

ombi

a

Phi

lippi

nes

Gua

tem

ala

Arg

entin

a

Indo

nesi

a

Turk

ey

Egy

pt

Iran

Cub

a

Japa

n

000 tons

51.1

50.8

50.2

48.8

45.7

43.8

43.8

42.0

41.5

39.6

29.8

0 10 20 30 40 50 60

Peru

Egypt

Tanzania

Senegal

Malawi

Zambia

Sudan

Burkina Faso

Ethiopia

Swaziland

World

Tons/Feddan

Source: USDA & CICR estimates

0

10

20

30

40

50

60

70

Cub

a

Bra

zil

Gua

tem

ala

Aus

tralia

Mal

aysi

a

Mex

ico

Can

ada

Arg

entin

a

Rus

sia

& U

krai

ne

Alg

eria

Mor

occo

Ven

ezue

la

Sou

th A

frica

Per

u

Egy

pt

Col

ombi

a

Thai

land

Indo

nesi

a

US

A

Sou

th K

orea

Wor

ld

Kg

November 11, 2008

82

EGYPT | SUGAR

MARKET STRUCTURE At present, the market consists of five public companies with a combined pro-duction capacity of 1.64 mn tons divided between cane & beet companies with the former holding a share of 61% and the latter a share of 39%. There is only a sole sugar cane producer in the local market namely, Sugar Integrated Indus-tries Company (SIIC) which controls 62.83% of total sugar capacity, 61% through its sugar cane facility and 1.83% through its sugar beet facility. The remaining four companies in the market use beet in producing sugar and hold a combined share of 37.2% of total sugar capacities. It is worth mentioning that Delta sugar is the largest Egyptian sugar beet producer with a share of 38.3% in local sugar beet capacities.

MARKET DEVELOPMENTS Cane and beet cultivated areas grew by a CAGR of 3.8% during 2004-2008, triggered by the rise in beet cultivated areas which recorded a CAGR of 12.7% reaching approximately 228k feddans in 2008 up from 141k feddans in 2004, whereas cane cultivated areas decreased from 322k feddans to 310k feddans over the same time span primarily due to its low procurement price amounting to LE 182/ton, in addition to the continuous decline in the amount of water per capita in Egypt reaching 850cu.m in 2008 down from 927cu.m in 1995. Such growth pattern contributed in raising beet's share in both, cane and beet culti-vated areas combined to 42.3% in 2008 up from 30.4% in 2004 and reducing cane's share from 69.6% in 2004 to 57.7% in 2008. Yet, in 2008 beet cultivated areas declined by 8.3% versus 2007 due to the significant rise in wheat pro-curement prices -the major competitor crop to beet- reaching LE 380/ardab (where 1 ton = 6.7 ardab) surpassing that of beet which amounted to LE 225/ton. Therefore, farmers were more inclined to grow wheat than beet during that season

Cane holds the lion's share

Beet cultivated areas were on the rise, yet a drop was witnessed in 2008

Local sugar capacity in 2008 Local sugar beet capacity in 2008

Source: CICR Database Source: CICR Database

Delta Sugar14.94%

Dakahlia Sugar7.33%

Nubareyya Sugar7.57%SIIC

1.83%

Sugar beet 39%

Sugar cane SIIC61%

Fayyoum Sugar7.33% Delta Sugar

38.28%

Dakahlia Sugar18.75%

Nubareyya Sugar

19.53%

Fayyoum Sugar18.75%

SIIC4.69%

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83

EGYPT | SUGAR

Over 2004-2007 sugar production grew by a CAGR of 5.7% over 2004-2007 to reach 1,757k tons in 2007, driven by the rising sugar beet production which increased by a CAGR of 19.5% over the same period to reach 682k tons in 2007; while sugar cane production declined by 0.4% reaching 1,075k tons in 2007, production is thus expected to record a decline of 5.5% in 2008 reaching 1,660K tons down from 1,757K tons in 2007. Said growth pattern of sugar beet & sugar cane over 2004-2008 contributed in raising the former's share from total sugar production to 37.8% in 2008 up from 26.9% in 2004 on the account of the latter's share in total sugar production which decreased from 73.1% to 62.2% over the same period

Rising sugar beet production drives up sugar production

Beet and cane cultivated areas (2004-2008) Share of beet & cane in the combined (cane & beet) cultivated areas (2004-2008)

Source: Ministry of Agriculture & CICR estimates Source: Ministry of Agriculture & CICR estimates

Sugar beet & sugar cane production growth pattern (2004-2008

Share of sugar beet & sugar cane production in total sugar production (2004-2008)

Source: Bloomberg, Al Ahram El Ektesady & CICR estimates Source: Bloomberg, Al Ahram El Ektesady & CICR estimates

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

2004 2005 2006 2007 2008E

000 feddans

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Beet Cultivated Area Cane Cultivated Area Growth in Beet Cultivated Areas Growth in Cane Cultivated Areas

0

200

400

600

800

1,000

1,200

2004 2005 2006 2007 2008E

000 tons

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Sugar Cane Production Sugar Beet Production Growth in beet Growth in cane

0% 10% 20% 30% 40% 50% 60% 70% 80%

2004

2005

2006

2007

2008E

Cane Share Beet Share

0% 10% 20% 30% 40% 50% 60% 70% 80%

2004

2005

2006

2007

2008E

Sugar Beet Share Sugar Cane Share

November 11, 2008

84

EGYPT | SUGAR

Sugar consumption is not expected to follow suit production in 2008, growing by 2.5% to reach 2,682k tons vs. a 5.5% decline in sugar production to reach 1,660k tons; thus reducing local production coverage from sugar to 61.9% in 2008 down from 67.2% in 2007. It is worth noting that ever since 2005 produc-tion growth has been outstripping that of consumption with the former recording an AAGR of 5.8% vs. 2.3% for the latter. Concurrently, local production cover-age from sugar has been on the rise reaching its peak of 67.2% in 2007

Rising production coverage, with a drop in 2008

Sugar production & consumption growth pat-tern (2004-2008)

Local sugar production coverage ratio (2004-2008)

Source: Bloomberg, Al Ahram El Ektesady & CICR estimates Source: Bloomberg , Al Ahram El Ektesady & CICR estimates

In an attempt to meet up with rising demand, most sugar companies engage in sugar refining activities during the beet off season which starts from July till De-cember amounting to a total capacity of 2 mn tons. It is worth mentioning that in early 2008, a new company specialized in sugar refining began operations namely the Saudi based Savola at Ain El Sokhna with an annual capacity of 750K tons Egypt has been a major importer of sugar due to the widening gap between local production and consumption, which pushed the country to rely on imported raw & refined sugar to cover approximately 42% of its needs. Moreover, raw sugar used to hold the lion's share 75% of total sugar imports with the remaining 25% directed to refined sugar. Yet, 2008 witnessed a significant rise in refined imports reaching a share of 56% of total imported sugar, mainly due to the arrival of the heavily sub-sidized refined sugar from India which was sold locally at a cheaper price of LE 2,200/ton versus that of LE 2,500/ton for the Egyptian sugar

Beet companies en-gage in refining activity during off season

Imports cover ap-proximately 42% of Egypt's sugar re-quirements

Share of refined & raw sugar imports in total sugar imports (2004-2008

Sugar imports pattern (2004-2008)

0

200

400

600

800

1,000

1,200

1,400

2004 2005 2006 2007 2008E

000 tons

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%Sugar Imports Imports Growth Rate

Source:USDA & CICR estimates Source: CAPMAS, Delta Sugar & CICR estimates

0

500

1,000

1,500

2,000

2,500

3,000

2004 2005 2006 2007 2008E

000 tons

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

Sugar Production Sugar ConsumptionSugar Production Growth Rate Sugar Consumption Growth Rate

60.9%

61.1%

61.6%

67.2%

61.9%

56% 58% 60% 62% 64% 66% 68%

2004

2005

2006

2007

2008E

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0%

2004

2005

2006

2007

2008E

Share of Raw Sugar Imports Share of Refined Sugar Imports

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EGYPT | SUGAR

Market Dynamics

Supply-Push Forces Sugar beet production is closely tied to beet yield, evidenced in the correlation co-efficient of 0.997 between both factors. Beet yield has been on the rise recording a CAGR of 2.7% during 2004-2007 to record 21.98 tons/feddan in 2007; thus boosting sugar beet production to grow by a CAGR of 19.5% over the same period reaching 682k tons in 2007. It is worth mentioning that sugar beet companies offer farmers several facilities to lure them to expand beet cultivation and prevent them from shift-ing into its main competing crops, namely wheat. Facilities offered include: providing farmers with beet seeds on credit to be repaid when the crop is har-

vested; supplying farmers with the needed pesticides and fertilizers' usage guide; and

Beet yield vs. sugar beet production (2004-2007)

Beet yield development pattern (2004-2007)

Source: Ministry of Agriculture Source: Ministry of Agriculture & Al Ahram El Ektesady

Sugar Market

Supply Factors Cost-Related Factors

Demand Factors Government Initiatives

Facilities to Farmers

Beet Procurement

Price

PopulationGrowth

Wheat Competition

Cost of Beet Seeds

GDP per Capita

Promoting Beet over Cane

Sugar Dependant Industries

High Procurement

Prices

Horizontal & Vertical

Expansion

Prices of Sugar By-products

19.0

19.5

20.0

20.5

21.0

21.5

22.0

22.5

2004 2005 2006 2007

Tons/Feddan

CAGR 2.7%

0

100

200

300

400

500

600

700

800

2004 2005 2006 2007

000 tons

19.0

19.5

20.0

20.5

21.0

21.5

22.0

22.5Tons/FeddanSugar Beet Production Beet Yield

Facilities offered by sugar beet compa-nies triggered in-crease in beet yield

November 11, 2008

86

EGYPT | SUGAR

Over the last few years, wheat has become a major competitor to beet as they are both winter crops and farmers can easily shift between them. The relation between both crops is reflected in strong inverse correlation co-efficient of -0.9997, implying that the increase in the former's cultivated areas lead to a de-crease in the latter's cultivated areas. In 2008, the decline in beet cultivated ar-eas is mainly due to the significant rise in wheat procurement price by almost 73% over 2007 reaching LE 380/ardab compared with LE 225/ton for beet. A pat-tern that occurred before in 2006 when beet procurement price reached LE 188/ton compared with LE 169/ardab for wheat, as such the former's cultivated areas recorded a growth of 11.4% vs a mere 2.6% growth for the latter. It is worth men-tioning that in an attempt to enhance beet cultivation, sugar beet companies de-cided as of 2009 to increase beet procurement price by 49% to reach LE 335/ton.

Sugar beet production vs. wheat production (2006-2008)

Growth in beet cultivated area vs. growth in wheat cultivated areas (2006-2008)

Source: Ministry of Agriculture, FAPRI & CICR estimates Source: Al Ahram El Ektesady, Ministry of Agriculture, FAPRI & CICR estimates

Wheat competes heavily with sugar beet, especially in 2008

COST-RELATED FACTORS The rising costs of imported beet seeds, farmers cultivating beet witnessed an in-creasing cost of beet seeds/feddan over the period 2004-2007 recording a CAGR of 8% reaching LE 285/feddan in 2007 compared with LE 226/feddan in 2004. More-over, the cost of beet seeds per feddan coupled with the procurement price are the major factors farmers take into consideration while determining beet cultivation, thus exposing sugar beet companies to the consistent pressure of raising beet procure-ment price following the increase in the seeds' cost. Such link was illustrated in the strong correlation co-efficient of 0.723 between the change in beet procurement price and the cost of beet seed/feddan. As such beet procurement price holds the lion share in total sugar beet production cost amounting to 71% followed by industrial costs (which includes fuel cost and spare parts) holding a share of 10.6% while the remaining 18.4% falls to wages, transportation, subsidies, packaging and depreciation costs.

Beet procurement price bears a key contribution

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

2006 2007 2008E

Growth in Beet Cultivated Area Growth in Wheat Cultivated Area

Wheat procurement price LE 380/ardab

Beet procurement price LE 225/ton





0

100

200

300

400

500

600

700

800

2006 2007 2008E

000 tons

6,500

7,000

7,500

8,000

8,500

9,000

000 tonsSugar Beet Production wheat production

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87

EGYPT | SUGAR

Delta Sugar production cost breakdown (2007)

Growth pattern of beet procurement price vs. seed cost/feddan (2003-2007)

Source: CAPMAS & Ministry of Agriculture Source: Delta Sugar Co

The rising prices of sugar beet by products-molasses and fodder- which took place in 2007 helped sugar beet companies mitigate the squeeze in their margins resulting from the sugar beet production rise. Delta's gross profit from sugar declined from 43% in 2006 to an expected 23% in 2008 yet, the company's overall gross profit margin (including molasses and fodder in addition to sugar) did not witness the same decline reaching 40% in 2008 down from 42% in 2006. It is worth mentioning that both molasses & fodder are directed mainly to the export market since the for-mer is mainly used in the manufacturing of alcoholic beverages as well as in the manufacturing of bio-fuels namely, ethanol, while the latter is used in feeding live-stock. Furthermore, the local industry's EBITDA margin scored an average of 37% over 2007, compared with an average of 28% for international peers.

Increasing prices of sugar beet by-products

Sugar beet gross profit margins vs overall gross profit margins (2006-2008)

Sugar beet margins vs. International Peers 2007

Source: Delta Sugar Co & Bloomberg Source: Delta Sugar Co

DEMAND-PULL FORCES Rising sugar consumption has long been fueled by rising population and GDP per capita registering a strong correlation of 0.998 with the former and 0.984 with the later. Over the period 2005-2008, population increased to reach 75 mn in 2008 fol-lowed by a rising level of income reaching US$2,247 up from US$1,412 in 2005 stimulating sugar per capita consumption from 35 kg/annum to 36 kg/ annum over the same time span.

Population growth along with evolving GDP per Capita spur sugar consumption

40%

23%

41.3%42.0%

26.4%

42.8%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

2006 2007 2008E

Overall Gross Profit Margin Sugar Beet Gross Profit Margin

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

160%

2003 2004 2005 2006 2007

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%Change in Cost/feddan Change in Procurment Price/feddan

37%

28%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Local Margins International Peers

Beet procurement price & bonus for early harvesting,

71.0%

Packaging material, 2.4%

Depreciation, 4.9%

Wages, 5.4%

Industrial costs (fuel+spare parts),

10.6%

Beet related cost (subsidy+transportat

ion), 5.6%

November 11, 2008

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EGYPT | SUGAR

GDP per capita vs. sugar consumption (2005-2008)

Population vs. sugar consumption (2005-2008)

Source: IDSC, Bloomberg & CICR estimates Source: CBE, Bloomberg & CICR estimates

Said increase in per capita income is mostly accompanied with a rise in the aver-age consumer spending, thus boosting sales of confectionary products & soft drinks i.e. expanding sugar consumption. Correlation co-efficient between sugar consumption and the former is 0.993 while with the latter is 0.986.

Expanded demand by sugar-dependant in-dustries

Confectionary sales vs. sugar consumption (2005-2008)

Soft drinks sales vs. sugar consumption (2005-2008)

Source: BMI, Bloomberg & CICR estimates Source: BMI , Bloomberg & CICR estimates

GOVERNMENT-INITIATIVES

Despite that Egypt's cane yield is ranked among the highest worldwide, the GoE's policy has been recently promoting beet cultivation, in an attempt to miti-gate the challenges posed by scarce water and land resources. The GoE is pro-moting beet cultivation through vertical (yield) and horizontal (acreage) expan-sions. Although beet crop is relatively new as it was first introduced in 1981; it has gained wide importance due to its tolerance to salinity along with its ability to produce high yields under saline soil compared with most other traditional winter crops In order to endorse farmers to cultivate beet and to control cane cultivation, the government increased the former's procurement price from LE 191/ton in 2007 to LE 225/ton in 2008 whereas it increased the latter's procurement price by LE 17/ton to LE 182/ton in 2008.

Promoting beet cultivation over that of cane

…through higher procurement prices

68,000

69,000

70,000

71,000

72,000

73,000

74,000

75,000

76,000

2005 2006 2007 2008E

000 Inhabitants

2,300

2,350

2,400

2,450

2,500

2,550

2,600

2,650

2,700000 tonsPopulation Sugar Consumption

0

500

1,000

1,500

2,000

2,500

2005 2006 2007 2008E

US$

2,300

2,350

2,400

2,450

2,500

2,550

2,600

2,650

2,700000 tonsGDP Per Capita Sugar Consumption

84.5

85.0

85.5

86.0

86.5

87.0

87.5

2005 2006 2007 2008E

000 tons

2,300

2,350

2,400

2,450

2,500

2,550

2,600

2,650

2,700

000 tonsConfectionary Sales Sugar Consumption

0

100

200

300

400

500

600

700

800

2005 2006 2007 2008E

US$ mn

2,300

2,350

2,400

2,450

2,500

2,550

2,600

2,650

2,700000 tonsSoft Drink sales Sugar Consumption

November 11, 2008

89

EGYPT | SUGAR

It is worth mentioning that beet cultivated in newly reclaimed lands grew by a CAGR of 74.8% over the period 2004-2007 reaching 14.6k feddans, whereas cane cultivated areas in newly reclaimed land witnessed a CAGR of 5.7% over the same time span.

…horizontal expansion

Beet cultivated areas in newly reclaimed lands (2004-2007)

Cane cultivated areas in newly reclaimed lands (2004-2007)

Source: Ministry of Agriculture Source: Ministry of Agriculture

FUTURE OUTLOOK To meet unsatisfied demand plans are underway to establish new sugar beet production plants . By 2010 Dakahlia Sugar Company will begin operating its second production line with a capacity of 120K tons, while Nile Company (Sawiris) will start operating its 125K ton production line raising total sugar beet production capacities from 1,390K tons in 2008 to 1,635K tons in 2010 including the 750K tons of Savola's sugar beet refinning plant which began operation early 2008. Following the government plan to promote beet area over cane, no sugar cane capacity expansions are expected in the future thus total sugar capacities are expected to reach 2,635K tons by 2010 up from 2,390K tons in 2008 driven only by expansions in sugar beet

The existence of a production-consumption gap amounting to 1,022K tons in 2008 being satisfied by imports, represents potential for further investments in the sugar industry – not only to meet up with the rising sugar consumption but also to eat up from the imports bulk. Given the GoE plans to expand beet culti-vated areas, it is expected that over 2008-2012 beet cultivated areas will grow by a CAGR of 10.7% - pushing production to reach around 2 mn tons by 2012

Beet drives future capacity expansions

Growth potential resides in sustainable sugar demand

0

5,000

10,000

15,000

20,000

25,000

2004 2005 2006 2007

Feddans

CAGR 74.8%

30,000

31,000

32,000

33,000

34,000

35,000

36,000

37,000

38,000

39,000

40,000

2004 2005 2006 2007

Feddans

CAGR 5.7%

November 11, 2008

90

EGYPT | SUGAR

Sugar production vs sugar deficit (2006-2012) Sugar consumption vs. sugar imports (2006-2012)

Source: CICR estimates Source: CICR estimates

Sugar beet ex-factory prices are expected to record an upward trend over the coming five years recording a CAGR of 10.3% over 2008-2012 reaching LE 3,862/ton in 2012 up from LE 2,606/ton in 2008 driven by the increase in beet procurement prices recording an expected CAGR of 18.6% over the same period

Beet procurement prices drive future sugar beet ex-factory prices

Beet procurement prices vs sugar beet ex-factory prices (2008-2012)


-

500

1,000

1,500

2,000

2,500

2006 2007 2008 2009 2010 2011 2012

000 Tons Sugar Production Production-Consumption Deficit

-

500

1,000

1,500

2,000

2,500

3,000

3,500

2006 2007 2008 2009 2010 2011 2012

000 Tons Sugar Consumption Sugar Imports

0

50

100

150

200

250

300

350

400

450

500

2008 2009 2010 2011 20120

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500Beet Procurment Prices Sugar Beet Ex-Factory Prices

November 11, 2008

91

EGYPT | TELECOM

The global telecom segment has been generating colossal revenues, which grew by a CAGR of 9% over 2004-2007 reaching US$1.8 trillion in 2007. Nevertheless, the outbreak of the global credit crunch and the subsequent regional economic slowdown are expected to derail the sector from its accelerating pace. However, the Egyptian telecom sec-tor growth is expected to deviate from such path exhibiting resilience to the upcoming storm; driven by its competitive burgeoning mobile segment – registering a CAGR of 51% over 2003-2007 - which is expected to stimulate a spillover effect in the other segments; primarily growth in the inter-net segment, driven by the recent application of 3G tech-nologies which enabled mobile operators to provide high speed internet services in new guise. Secondly, competi-tion in the fixed-line segment which, despite its monopolis-tic status and delayed liberalization, has been witnessing successive promotions by its incumbent operator to counter the flow of fixed-mobile substitution (FMS). Subse-quently, the sector's growth potential mainly resides in the mobile segment whose services are still not yet accessible to half of the population, and the under penetrated internet market, with its registered 13% penetration rate in 2Q08. Defensive demand sustained by socio-economic drivers: Escalating GDP per capita coupled with the expanding youth population have been generating sustainable demand for tele-com services. Intensifying competition fuels growth in the mobile: The introduction of competition following the entrance of the third mobile operator, Etisalat Misr (EM), have triggered exceptional mobile subscribers growth registering a Y-o-Y growth of 47% - reaching 41 mn subscribers and 54.4% penetration rate in 3Q08. 3G technology opens new battlegrounds for mobile opera-tors: The acquisition of 3G license, which entails the transfer of non-voice data in addition to voice data, allowed mobile opera-tors to enter the internet market and compete over the provi-sion of high speed connection in new guise—via mobile inter-net and portable USB modems. Accordingly, Vodafone Egypt (VFE) revealed that around 12% of its mobile subscribers had used mobile internet in October 2008. Broadband stimulates internet growth: High-speed internet connections (broadband) have been the primary driver behind the growth in internet users registering a CAGR of 206% com-pared to 36% recorded by free users, over 2003-2007. Mobile mania sweeps fixed-line: The exceptional growth in mobile came at the expense of a contracting fixed-line market triggered by fixed to mobile substitution wave. Hence, TE has been launching a number of promotional campaigns to counter such trend.

MOBILE, A RISING RING AMID AN ECONOMIC SWING

Egypt youth-based population secures a sustainable market for telecom services. Relatively low mobile penetration, compared to other regional peers, provides room for growth. Narrow broadband penetration rate provides significant growth potential. Acquisitions of 3G licenses by three opera-tors will open door for the provision of new services.

Global credit crunch are likely to limit the inflow of investments. Fluctuating GDP per capita is expected to decelerate growth in internet subscribers. The delayed introduction of competition to the fixed-line market will sustain the dimin-ishing growth rate of fixed-line subscribers.

SECTOR PERFORMANCE | 2004-2Q2008

NORAN ALI [email protected]

MAYAN EL MENSHAWY [email protected]

DRIVERS

RISKS

KEY PERFORMANCE INDICATORS 51 Mobile subscribers CAGR (03-07,%)

30 Internet Users CAGR (03-07,%)

7 Fixed-line subscribers CAGR (03-07,%) 54.4 Mobile penetration rate (3Q08,%) 13 Internet penetration rate (2Q08,%)

-

10

20

30

40

50

60

2004 2005 2006 2007 2Q08

mn subs

0%

10%

20%

30%

40%

50%

60%

70%

80%Telecom subs Mobile GR Fixed-line GR Internet users GR

COMPANIES COVERED PAGE# 133 Mobinil

143 Orascom Telecom (OT)

155 Telecom Egypt (TE)

November 11, 2008

92

EGYPT | TELECOM

GLOBAL TELECOMMUNICATIONS INDUSTRY Telecommunications have played a vital role in spurring economic development through the generation of substantial revenues which grew by a CAGR of 9% in only three years time, reaching US$1.8 trillion in 2007 compared to US$1.4 trillion in 2004. Looming global recession started to impose some obstacles on the ac-celerating path of the telecom industry, most notably investments - given the capi-tal-intensive nature of such industry. This was manifested in cases of major com-panies that started to reconsider expanding their activities in other area, such as Vodafone which decided to delay its service initiation in Qatar to 1Q09, due to lack of liquidity. The telecommunications market has been driven by mobile and internet users; which scored above average growth records, registering a CAGR of 24% and 19%, respectively over 2000-2007. Fixed lines lagged way behind with its 4% CAGR during the same time span.

CAGRs of the global telecom market segments by number of subscribers over (2000-2007)

Source: ITU

Despite the fact that the developed countries are the most penetrated region in mobile services with a rate of 95% in 2007, developing countries have been achieving a faster growth with subscribers base growing by a CAGR of 36.6% during 2000-2007 compared to 12.1% recorded by developed countries over the same time span. The same applies for the internet segment; by which developing region enjoyed a CAGR of 32% during 2000-2007, compared with 12% for devel-oped countries.

EGYPT TELECOM MARKET PROFILE Over FY05/06-07/08, the exceptional telecommunications growth has been a key driving force to the Egyptian economy registering a CAGR of 51% - outpacing the 19% CAGR witnessed by the country's GDP, during the same period. Accord-ingly, telecom revenues surged by 42% reaching LE 27.2 bn in FY07/08 up from LE 11.9 bn in FY05/06 ; thus enlarging its share of GDP from 1.9% to 3 %, over the same time span

Telecom: a key role in the economy, yet such growth may be hindered by ex-pected global reces-sion

Mobile and internet, the engine for tele-com growth

Developing region is driving mobile and internet growth

An engine for growth

16%

4%

24%

19%

0%

5%

10%

15%

20%

25%

30%

World Total subs. Fixed line subs. Mobile subs. Internet subs.

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EGYPT | TELECOM

In line with the global developments, mobile expansions led telecommunications growth with a CAGR of 51% over 2003-2007, followed by internet users.

Growth of telecom market segments' subscribers (CAGR 2003-2007)

Source: ITU; Telecom Operators, MCIT

KEY RECENT DEVELOPMENTS : THE MOBILE SEGMENT May 2007 witnessed the entrance of the third mobile operator - EM - following its license acquisition a year earlier for LE16.7 mn; entailing the provision of 2G/3G technologies. Such act triggered VFE to acquire the 3G license in January 2007 yet, operation started following EM. Eventually, Mobinil which launched its 3G service by September 2008. It is worth mentioning that the entrance of EM has eaten up the market shares of both operators with VFE incurring the largest drop of 5% compared to 3% in Mobinil’s share in 3Q08 compared to the same period a year earlier. Yet, Mobinil continues to dominate 46% of the market with 18.9 mn subscriber’s base, followed by VFE with 41% market share and a total of 16.6 mn subs, and then EM with its 13% market share and a total of 5.3 mn subs. Progressive market shares of mobile operators’ (2006-3Q08)

Source: Telecom Operators

Mobile, the flagship for telecom growth

The entrance of the third mobile operator with its 3G technology

7%

30%

51%

0% 10% 20% 30% 40% 50% 60%

Fixed line subs.

Internet users

Mobile subs.

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0%

2006

2007

3Q08

EM VFE Mobinil

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EGYPT | TELECOM

The last obstacle on the path of free competition was removed in April 2008 with the launch of Mobile Number Portability (MNP) service by the National Telecom Regulatory Authority (NTRA) for LE 75 service charge for subscribers who have at least one year subscription with a mobile operator, thus excluding EM subscrib-ers*. Subsequently, MNP intensified subscribers transfer to the new operator, re-flected in the growth in EM subscribers which registered an exceptional Q-o-Q growth of 110% in 3Q08, reaching 5.3 mn subscribers. Thus, nearly doubling its market share to 13% in 3Q08 compared to 7% a quarter earlier, in addition to the escalating churn rates borne by other operators, most notably Mobinil whose rate surged to 9.5% in 3Q08 up from 5.8% in 2Q08.** On the whole, subscribers re-corded a 16% Q-o-Q growth reaching 40.8 mn subscribers, over the same time span. QoQ Mobile Subscribers by operator Source: Telecom Operators MARKET DYNAMCIS * Mobile Number Portability (MNP) is a newly-developed telecom service that enables the mobile subscriber to change his operator without changing his own number. The MNP gives the subscriber all freedom to port his number to another operator without forcing him to lose his number. ** Al Gomhuria, 30 October 2008

MNP paves the road for free competition

Expanding youth GPD per capita

Growing IT clubs & ISPs Broadband growth

Pre-paid growth Intensified competition Technological advancement

Basic Drivers Internet Drivers

Telecom Drivers

Mobile Drivers

0

5

10

15

20

25

30

35

40

45

4Q07 1Q08 2Q08 3Q08

mn Subs.Mobinil VFE EM

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EGYPT | TELECOM

Egypt's favorable demographics acts as a driving force for mobile and internet services, especially that the country's innate demographic structure entails a significant share of youth within the age bracket of 15-45 years accounting for 50% of the total population. Powerful links exist between mobile subscribers, internet users and population growth, exhibited in strong co-efficient correlations of 0.88 and 0.98, respectively. In addition, the significant share of 21% held by the age group of 5-15 years lays solid potential for expanding demand.

Rising per capita income, namely following the cut in income tax to a flat rate of 20% in July 2006, fostered the affordability of telecom services. Accordingly GDP per capita has been strongly correlated with mobile subscribers' and inter-net users with a coefficient correlation of 0.99 for both factors.

Mobile subscribers & internet users vs. GDP per capita

Source: IMF, Mobile Operators

MOBILE-RELATED DRIVERS The pre-paid segment is the key driving force behind increasing mobile subscrib-ers, which recorded an extraordinary Y-o-Y growth of 74%, compared to 17% re-corded by post-paid in 2007. Consequently, pre-paid segment held the lion’s share of 95% of the total mobile subscribers' base compared to 5% held by post-paid segment in 3Q08.* Pre-paid dominance is attributed to Egypt's low income level; in addition to the intensified competition initiated by EM’s price war on the pre-paid front by removing 15% sales taxes on recharge cards. Thereafter, the other two operators pursued the same price cuts on pre-paid cards to secure their wide pre-paid base. Mobile market subscribers quarterly market mix over 4Q07-3Q08

Source: IMF, Mobile Operators

* Etisalat Misr subscribers mix is estimated from actual 3Q08 subscribers' figures.

Expanding youth- denominated population

Growing GDP per capita

Pre-paid driven market

-

5

10

15

20

25

30

35

2005 2006 2007

mn

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000US$Mob subs Internet users GDP per capita

0

5

10

15

20

25

30

35

40

4Q07 1Q08 2Q08 3Q08

mnPrepaid Post-paid

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EGYPT | TELECOM

Intensified competition characterizes the mobile market, namely in the pre-paid segment – offering lower per minute tariff and additional benefits in the form of free minutes, SMS and cheaper handsets; thus, fostering mobile affordability and widening the addressable mobile market. Yet, competition was extended to the international call market when the NTRA offered the license to operators in October 2007 for a payment of LE 100 for each existing subscriber and LE 20 for each additional subscriber in addition to revenue sharing fees at a maximum of 6%. EM was the only operator to acquire the license for LE 200 mn, while the other operators continued providing the services through Telecom Egypt (TE). Quarterly growth in mobile subscribers

Source: Newspapers; Telecom operators The adoption of advanced technology—namely the 3G - is another front through which mobile market growth was boosted. 3G technology is a key for upgrading operators’ capacities and the provision of data services such as mobile TV, video calling and high internet speed. EM initiated competition in technology adoption through adopting its 3.5G technology in May 2007, followed by its 3.75G adop-tion in November 2007. Launch date of 3G technologies in Egypt

Source: CICR

Intensified competition extends to the international market

Opting for technological edge

EM

3.5G

VFE

3G

EM

3.75G

Mobinil

3G

May 07

May 07

Nov 07 Sept 08

Operator

Technology

Operation Date

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08

Mobinil Alohat per sec. bill & removal of admin feesVFE Super

VFE Free Bouquet LE 0.3/min+free minsMobinil Star & Business offer LE0.22/min+free mins Mobinil & VFE Life time validity

EM Ahlan LE 0.39/min+removal of pre-paid card sales taxesVFE Easy Mobinil Ahsan nas LE0.20/min for selected nos.

Mobinil on-net promotion LE 0.20 mobile-to-mobile EM on-net promotion LE 0.15 mobile-to-mobile

EM combined Options offercontrolled monthly bill+ LE0.32 /min rate+free sms

VFE on-net promotion LE 0.20 mobile-to-

mobile

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EGYPT | TELECOM

To accommodate the rapid technological advancement, mobile operators have been keen to allocate considerable investments. For instance, to expand its net-work that currently covers 95% of Egypt, EM is expected to pump LE 2.5 bn by 2009.*

INTERNET DRIVERS Over 2003-2007, internet users grew by a 30% CAGR. 2007 witnessed a pick up in users' growth which surged by a 43% Y-o-Y growth to 8.6 mn subscribers and 12% penetration rate. Such growth was triggered by the rise in free users which grew by 52% in 2007 compared to 24% a year earlier, as a result of regained rise in the number of IT clubs that grew by 30% in 2007 compared to 14% a year ear-lier.** In 2Q08, internet users reached 9.7 mn and a 13% penetration rate. The growth in internet users was supported by increasing Internet Service Providers (ISPs) which reached 222 providers in 2007 up from 214 providers in 2004 and an expanding international internet bandwidth which grew by eight folds reaching 14866 Mb/s in 2007 up from 1595 Mb/s, over the same time span. Despite growth in numbers, internet adoption is still growing at a slow rate reflected in the drop in Egypt's e-readiness rank from the 55th rank in 2006, out of a total of 69 countries, with an index score of 4.30 to the 58th rank in 2007 with a score of 4.26.*** Limited adoption was attributed to low PC penetration rate estimated to be currently around 7% of the families****; the concentration of government initiative such as the PC for Every home and IT clubs initiatives in large metropolitans, Cairo and Alexandria; language barrier and the unavailability of enough Arabic content and the relatively expensive access fees. Internet users' growth pattern and penetration rate (2003-2007)

Source: MCIT, ITU

* Al-Gomhuria, October 30th 2008 ** IT Clubs are units established by MCIT, in collaboration with the private sector, to offer access to computers and the Internet at nominal fees, as well as IT training programs and electronic libraries. The purpose of the initiative is to offer communal solution to the problems of IT accessibility and awareness. ***E-readiness index is a ranking composed annually by the Economist Intelligence Unit EIU which measures the country’s information and communications technology (ICT) infrastructure and the ability of its consumers, busi-nesses and governments to use ICT to their benefits. The e-readiness rankings are a weighted collection of nearly 100 quantitative and qualitative criteria, organized into six distinct categories measuring the various com-ponents of a country’s social, political, economic and of course technological development. **** BMI, "Egypt Telecommunications Report Q32008."

Invest to grow

A growing IT clubs and ISPs, the backbone for internet growth

0

1

2

3

4

5

6

7

8

9

10

2003 2004 2005 2006 2007

mn subs

0%

10%

20%

30%

40%

50%

60%

70%Internet Users Internet Users GRP t ti t

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EGYPT | TELECOM

Over 2003-2007, the growth in internet users have been fueled by broadband subscribers which recorded the highest growth rate of a CAGR of 206%, replac-ing dial-up users which grew by 36% CAGR. Broadband growth was stimulated by a number of government-led tariff restructuring initiatives. Recently, TE al-lowed customers to jointly apply for a fixed-line and broadband line through its partnership with TEData. *

Broadband subscribers vs. internet users (2003-2007 )

Source: MCIT, ITU, NTRA

Mobile operators have recently entered the internet services market via the 3G technology, which entails the transfer of both voice data (a telephone call) and non-voice data (such as downloading information, exchanging email, and instant messaging). Accordingly, mobile operators started a wave of buying stakes in op-erating ISPs, mainly Class A **, exemplified in EM’s acquisition of leading stakes in Nile Online (NOL) and the Egyptian Company for Networks (EgyNet) in 2008; VFE's acquisition of 69.9% in Raya Telecommunications 2007; and Mobinil's strong affiliation to LINKdotNET through their common parent company, Orascom. Since May 2007, mobile operators have been racing in providing advanced ser-vices at competitive prices such as mobile internet, currently for LE1/day, USB modems and associated bundle services such as EM's offer which entails paying 6 or 12 months subscription fees and getting the USB for free; recent Mobinil's offer providing a laptop and USB modem for an average price of LE 1,600.*** Cus-tomers started to gravitate towards these services, in October 2008 VFE reported that almost 12% of its 17 mn customer base had used mobile internet service.

* Al-Gomhuria, 30 October 2008 ** Three categories of license are granted to those ISPs as follows: Class A are entitled to points of presence (POPs) in TE’s exchanges and the right to lease ports to other ISPs; Class B data carriers are given the same rights as Class A except for the leasing rights of ports to other ISPs; Class C provide Internet services to custom-ers.

*** Richard Daly, CEO Vodafone Egypt , Euro-money conference

High speed internet generates high growth

Mobile operators, new comers to the internet market

0

1

2

3

4

5

6

7

8

9

10

2003 2004 2005 2006 2007 Mar-08

mn Users

0

100

200

300

400

500

600000 subsInternet users Broadband subs

Broadband initiative50% drop in monthly charge to LE 150

37% drop in monthly charge to LE 95

53% drop in monthly charge to LE 45

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EGYPT | TELECOM

FIXED LINE MARKET Fixed-line subscribers have been growing at a diminishing annual rate which sig-nificantly slumped to 3.8% in 2006 compared to 9.5% a year earlier. Such drop was fueled by the intensified competition between mobile operators which had taken its toll on Telecom Egypt (TE)'s retail revenues which witnessed escalating drops from 2% in 2007 to 3% in 2Q08. Contraction in fixed-line growth can be also attributed to low rural penetration reaching 7% in 2006, despite the concen-tration of the majority of 57% of the population in these areas. TE has launched a number of promotional campaigns to reduce the fixed-mobile substitution (FMS) trend ending with its recent offer to remove the installation and administrative fees for new residential and commercial fixed lines till end of November 2008. Previous offers had negligible impact on subscribers' growth, illustrated in its 70% discount on installation fees promotion offered till December 2007, after which subscribers grew by declining Y-o-Y rate of 3.7% compared to 3.8% a year earlier.

Fixed line pattern (2001-2007)

Source: Telecom Egypt (TE)

In July 2008, TE adopted a new fixed-line tariff rebalance that aimed to stimulate added fixed-lines by slashing installation fees by 50% for both residential and commercial lines to LE 250 and LE 500 respectively; cutting fixed-to-mobile min-ute tariff by 33% in peak times and 14% in off-peak times to LE 0.30/min lower than the average LE 0.40/min charged by the mobile operators on mobile-to-fixed calls; in addition to reducing long distance call per minute rate by 20% to reach LE 0.16 (for more than 60 km) and LE 0.08 ( for less than 60 km). Such tariff is ex-pected to marginally lift up the number of added lines which was reflected in 1% growth recorded in September 2008 compared to July, two months after new tar-iffs implementation.

In September 2008, the National Telecommunication Regulatory Authority (NTRA) decided to finally postpone the auction for the second fixed-line license, after several delays, for a year due to uprising inflation in addition to the recent financial turmoil which made lending more difficult, especially in sectors requiring huge investments as the telecom sector (initial investments reach around US$1 bn for fixed-line network). The delay is expected to be extended for a period of two years until the next upturn in the global economy which is projected to occur by 2010.

A diminishing growth due to FMS trend

New tariff rebalance and a mild growth in fixed-line subscribers

Delayed competition due to credit crunch

0

2

4

6

8

10

12

14

16

2001 2002 2003 2004 2005 2006 2007 Jan-08

mn subs

0%

2%

4%

6%

8%

10%

12%

14%

16%

Fixed-line subs Available lines Penetration rate

November 11, 2008

100

EGYPT | TELECOM

FUTURE OUTLOOK The recent entrance of the new operator and the subsequent aggressive com-petition has recently boosted mobile proliferation with penetration rate reaching 54.4% in 3Q08. Over 2008-2009, mobile subscribers are projected to strongly rise by an average of 33% , due to the rolling-out of 3G network and services coupled with the existence of a considerable addressable market. Such trend will be reversed by 2010, as the market reaches its saturation stage; accord-ingly mobile growth is projected to grow by a diminishing rate. By 2012, mobile subscribers will approach the addressable market level estimated to reach 84% of the population, due to existence of inaccessible impoverished segment; thus, reaching 66.2 mn subscribers and an 82% penetration rate.

Mobile outlook ( 2008-2012)

Source: CICR Growth in internet users will be driven by the broadband segment, projected to grow by a CAGR of 34% compared to 15% by free users during the period of 2008-2012. Internet users' growth rate is expected to level off during 2008-2010, due to anticipated economic slowdown, growing by a projected annual growth rate of 18% compared to 31% recorded over 2005-2007; with internet users projected to reach 14.2 mn users and 18% penetration rate by 2010. Such trend will be reversed in 2011, driven by the anticipated pick-up in GDP per capita. Accordingly, internet penetration is expected to reach 24%, and that of broadband to reach 2.5% by 2012, given the existence of internet barri-ers manifested in high illiteracy rates and low income.

Internet outlook ( 2008-2012)

Source: CICR

Mobile growth on the peak for the short-run

Internet growth :an upward trend stifled by short downturn

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

2008 2009 2010 2011 2012

Thousands Population Addressable subs Mobile Subs.

0

5

10

15

20

25

2008 2009 2010 2011 2012

mn Users

-

0.50

1.00

1.50

2.00

2.50mn Subs

Internet users Broadband subs

November 11, 2008

101

EGYPT | WHITE CONSUMER GOODS (WCG) EGYPT | WHITE CONSUMER GOODS (WCG) EGYPT | WHITE CONSUMER GOODS (WCG)

Until recently, limited export potential has been one of the main deficiencies of the WCG industry and a key chal-lenge. Yet, nowadays given the anticipated global down-turn which is expected to reflect negatively on trade activi-ties, limited exports seems to be the industry's life-jacket amid the global storm. The white consumer goods industry (WCG) is a defensive industry, gaining particular strength with Egypt's growing population and the developed base of feeding industries. However, driven by its strong corre-lation with GDP per capita and interrelation with the real-estate market that are expected to witness lower growth levels; WCG demand is expected to continue growing yet with a slower pace registering 3% in 2009. Limited exports: Despite of the increasing WCG exports still they represent a minimal contribution averaging 6% of total local production over 2004-2007. Resilience stemming from targeting different social classes: The WCG market features a wide range of products with varying prices that suit the different social income classes, whereas imports - due to its relatively high price scheme - tar-get mainly the high end consumers constituting class A that represents only 2% of the population. Real-estate boom pushed demand higher: The real-estate boom witnessed in the past couple of years along with the strengthened GDP per capita and increasing marriage con-tracts exerted a pull towards WCG demand that registered a CAGR of 4.5% over 2004-07. Electric water heaters, a star performer: The move to the outskirt destinations as 6th of October and New Cairo and the absence of natural gas distribution networks in these destina-tions diverted the demand from gas to electric water heaters that was ranked the first in terms of growth registering a CAGR of 12.4% over 2004-07.

LIMITED EXPORTS IS A BLESSING

Growing population with favorable demo-graphic structure, as 48% of the population is below the age of 45, thus expanding mar-riage rates prospects. Limited exposure to international markets. Well established base of feeding industries (components and packaging). Various products targeting different social classes. Despite the rising cost of energy it is still lower than the global average. GoE's plan to pump LE 300 mn new invest-ments in stoves production.

Economic slowdown. Growing competition with a minimal cost passing ability. Decrease in propensity to purchase with the overall slowdown in the economy.


POTENTIALS

RISKS

KEY PERFORMANCE INDICATORS 4.6 WCG production CAGR (04-07,%)

4.5 WCG consumption CAGR (04-07,%)

24 Imports CAGR (04-07,%)

104 Coverage ratio (2007,%)

PAGE # COMPANY COVERED 139 Olympic Group

0 2,000 4,000 6,000 8,000 10,000

2004

2005

2006

2007

2008E

K Units

WCG Demand WCG Production

ALIA MAMDOUH [email protected]

November 11, 2008

102

The White Consumer Goods (WCG) market bears a number of special characteristics: A high level of seasonality by nature where the summer usually witnesses strong levels of demand due to the high marriage rates; the increasing demand for touristic real estate units. Moreover, the time span of religious feasts witness high levels of marriages. A relatively strong consumers' bargaining power due to the variety of products matching different income levels. On the other hand, the well-established feeding industries with various suppliers tend to give suppliers a low bargaining power before consumer goods manufacturers. A cyclical industry, driven by the health of the economy in general and activity in the real estate and housing sector in particular

A special industry en-joying a strong con-sumer leverage

Starting 2006 the WCG market leapfrogged by 5.1% versus a growth of 3.4% in 2005 – fueled namely by the jump in GDP/capita growth rate which recorded 8.2% in 2006 compared to 5.8% in 2005. 2007 followed through with an increase of 4.8% reaching 8.4 mn units. Electric water heaters led such growth with 18.9% in 2007— attributed to the move to the outskirt destinations as 6th of October and New Cairo and the absence of natural gas distribution networks in these destinations which diverted the demand from gas to electric water heaters.

Strong demand led by electric water heaters

Due to the necessity of after-sales services and the need to have an easy access to maintenance centers, production coverage maintained its high level of 1.04x.

Demand is mostly covered by local pro-duction

WCG Market Demand Growth by segment

Source: IDA & CAPMAS Source: IDA & CAPMAS

2007 imports registered higher growth rate of 52% - representing 83.5k of the added units – compared to an increase of 36% in 2006. Yet, imports still hold a minimal share of 3% from the total WCG market. It is worth noting that the major-ity of imported products target the high-end consumers. Despite the minimal share of 8% in the total imports, stoves registered the highest growth of 108% in 2007 – driven by the modern hi-tech stoves. On the other hand, exports wit-nessed slower growth of 3.9% than that of 2006 (14%), led by the electric water heaters accounting for 38% of total exports.

2007 witnessed a higher growth in im-ports

Generally, WCG market features a limited number of companies that bear a large size as it is the case in Olympic Group and El-Araby; followed by a second tier of companies as Kiriazi, Electrostar, Alaska, Universal and Fresh. Olympic Group and Kiriazi dominate the washing machines and refrigerators segments, while Olympic Group and Fresh dominate the electric water heaters segment. How-ever, when it comes to stoves, the market is very fragmented giving consumers a relatively strong bargaining power due to the presence of a number of producers with products addressing different segments of the society.

A private sector ori-ented industry with different concentra-tion levels throughout each segment

6,500

7,000

7,500

8,000

8,500

9,000

2004 2005 2006 2007

K Units WCG Production WCG Demand

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

2006 2007

Washing machines RefrigeratorsStoves Electric Water HeatersGas Water Heaters Total Market

EGYPT | WHITE CONSUMER GOODS (WCG)

November 11, 2008

103


GROWTH DRIVERS Urban housing demand—marriage contracts and the demand for 2nd housing units — highly affects WCG consumption . Urban demand has been witnessing a CAGR of 3.1% over 2004-07 which contributed to the growth in WCG market. It is worth highlighting that the expanding demand for second housing units – namely in the outskirt destinations – coupled with the demand for touristic real-estate units in the coastal areas act as driver to the rising WCG consumption.

Urban housing de-mand affects the de-mand for WCG

WCG main players Refrigerators Stoves Water Heaters

One-door Universal Electric

Olympic Group Olympic Group Olympic Group

Alaska Kiriazi Fresh

Toshiba Fresh GMC

Two-door Washing Machines Gas

Kiriazi Olympic Group El Masanaa

Olympic Group Kiriazi Universal

Electro Star Zanussi Olympic Group

Alaska GMC Fresh

National

Urban Demand vs. WCG Demand

Strong ties exist between WCG demand and levels of GDP/capita bearing a cor-relation coefficient of 0.997. Over 2004-07, levels of GDP/capita registered ro-bust growth of 7% (CAGR) peaking in 2006 with a y-o-y growth of 8.2% - hence, strengthening consumer purchasing power where private consumption/head wit-nessed a CAGR of 15.4% over 2004-07.

High GDP/capita strengthened the pur-chasing power

GDP/capita vs. WCG consumption

Source: IDA& CAPMAS

Source: IDA& IDSC

6,800

7,000

7,200

7,400

7,600

7,800

8,000

8,200

8,400

8,600

2004 2005 2006 2007

K units

470,000

480,000

490,000

500,000

510,000

520,000

530,000

540,000

550,000

560,000unitsWCG Demand Total Urban Demand

0

1,000

2,000

3,000

4,000

5,000

6,000

2004 2005 2006 2007

US$

6,800

7,000

7,200

7,400

7,600

7,800

8,000

8,200

8,400

8,600K unitsGDP per Capita WCG Demand

Source: Kompass

November 11, 2008

104


KEY CHALLENGES Steel prices, one of the main components of the WCG cost of production, skyrocketed over 2003-07 where flat steel prices grew at a CAGR of 16% recording a high level in 2007, reaching LE 3,601/ton with a y-o-y growth of 19% driven by the increase in its raw materials prices (iron ore, scrap and billets). Over and above, WCG production utilizes a more fine tuned type of flat steel that is relatively more expensive. Combined with the increasing plastic prices, another raw material used in the production process, moving in line with the increase in polyethylene price level driven by the recent surge in oil prices, WCG producers face immense risk with respect to their margins. However, with the current decline in oil and commodities prices, production costs challenges should fade away. Flat steel prices

Risk lies in rising raw materials prices, yet, not for long

2,700

2,800

2,900

3,000

3,100

3,200

3,300

3,400

3,500

3,600

3,700

2004 2005 2006 2007

LE

Decline of 3% due to the

transformation of China from net importer to

net exporter

Increase of 19% due to the hike in raw materials prices (iron ore, billets, ect..)

Source: Bloomberg Increasing competition is another threat facing both the concentrated and the fragmented segments of the WCG market. Within the concentrated segments of the market - washing machines, refrigerators and electric water heaters – the main players face competition from foreign producers in terms of high tech im-ported products. Nevertheless, stoves - one of the highly fragmented segments in the market - are relatively competitive as well due to the presence of a number of local producers offering different categories that match the varying income lev-els. Such expanding competition is the main reason behind the industry’s partial cost passing ability, where main players could not pass on the entire increase in production costs over the past year in order to ensure maintaining their market shares.

Growing competition and the minimal cost passing ability

Despite the slight improvement in the factors that hindered export contribution in the past years represented mainly in the inactive trade agreements, the market is still faced by a number of challenges within this respect. One of the main defi-ciencies within the produced goods is the limited designs within each segment along with the appreciating Egyptian pound versus the US$ which might exert more pressure on the industry's export potential. Yet, nowadays this pitfall turned out to be this industry’s life-jacket amidst the expected decline in exports driven by the global slowdown and shrinking external demand.

Limited export now acts as the only res-cue

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105


FUTURE OUTLOOK Affected by the slowdown in urban housing units demand; the expected slow growth in GDP/capita shedding its reflections on marriages rate, demand on WCG is expected to continue growing, yet at a slower pace of 3% in 2009. Demand outlook

A growing industry serving domestic de-mand

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2007 2008 2009 2010 2011

K unitsWashing Machines Refrigerators StovesElec Water Heat. Gas Water Heat.

Source: IDA, CAPMAS, CICR Forecasts

November 11, 2008

106

THIS PAGE IS INTENTIONALLY LEFT BLANK

November 11, 2008

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EGYPT | FURNISHING

AHMED ABDEL-GHANI [email protected]

Al-Ezz Ceramics & Porcelain (GEMMA) is a well-known brand of tiles in Egypt. Its main activities include produc-ing ceramics and porcelain tiles in addition to trading sani-tary ware. GEMMA targets the replacement market, with a 6% market share, so any expected slowdown in the real estate sector should have no effect on GEMMA's sales. Expansion of the company’s 6-mn sqm p.a. is underway and expected to start production early 2009. We believe said expansion will boost GEMMA's sales in both the local and international markets. Our DCF-led valuation indi-cates a 52% upside to LE 7.59, warranting a BUY with a MODERATE RISK rating.

New factory expansion expected to start in 2009 with LE 270 mn in capex: A 50% capacity increase from 12 mn sqm to 18 mn sqm is in process in order to meet expected local and international growth in demand for ceramic and porcelain prod-ucts. Having reached the maximum production capacity with a utilization rate of around 91%, GEMMA was in need for expan-sion - as we noted in our report dated May 3, 2007 .

Exports are a strategic target: GEMMA’s strategic target is to penetrate new markets, such as the US - the largest im-porter of tiles all over the world, to benefit off higher selling prices in addition to maintain existing markets in Greece, Saudi Arabia, and the Middle East. Similar to other local companies, GEMMA has a comparative advantage of low manufacturing cost, especially labor. We believe said advantage will be a positive catalyst for GEMMA to penetrate these markets, espe-cially the US which has a higher labor cost.

Distribution channels: GEMMA’s sales are generated through four channels: showrooms, projects (such as hospitals, hotels, and touristic villages), agents, and exports. In 2007, said projects and showrooms accounted for around 14% of GEMMA's total sales.

Has been a tax payer since 2007: GEMMA has historically benefited off a 10-year tax exemption (for its factory located in Al-Sadat City) which ended in December 2006. Starting 2007, GEMMA began paying income taxes.

Growth drivers: While demand for tiles should be driven in part by growth in the real estate sector, GEMMA mainly targets the replacement market. We believe that GEMMA's effective distribution channels, targeting exports, in addition to its capac-ity increase should all reflect positively on its sales growth.

Valuation and recommendation: On a DCF basis, we reached a 12-month target fair value of LE 7.59/share for GEM-MMA, implying a 52% upside potential. Traded at 12.6x 2009 expected earnings. Accordingly we rate this stock at BUY at MODERATE RISK.

AL-EZZ CERAMICS & PORCELAIN (GEMMA)

STOCK PERFORMANCE | 52 WEEKS

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12M FAIR VALUE | LE 7.59 BUY | MODERATE RISK

SHARE DATA Reuters; Bloomberg ECAP.CA , ECAP EYRecent price as of 6-Nov-08 LE 4.98No. of O/S shares 51.1 mnMarket cap LE 0,254.2 mn52-wk high / low LE 19.62/ LE 3.2Avg. daily volume / turnover 0.46 mn / LE 6.62 mn

COMPANY SYNOPSIS

Al-Ezz Porcelain (GEMMA) was established in 1981 under Law No. 159/1981 for the purpose of manufacturing, trading and distributing ceramics, porcelain, sanitary ware, taps and its related contracting works.

Currently, it is specialized in the production and trade of high-quality ceramics and porcelain tiles. In 1998, Al-Ezz Porcelain bought a 97.82% stake in Al-Ezz Ceramics and, accordingly, its name was changed into Al-Ezz Ceramics & Porcelain (GEMMA).

In 2004, Al-Ezz Ceramics was merged in Al-Ezz Ceramics & Porcelain (GEMMA). On the operational front, GEMMA has a 6% market share with a total production capacity of 12 mn sqm per annum.

Currently, GEMMA has an authorized capital of LE 1.8 bn and an issued capital of LE 255.2 mn, distributed over 51.05 mn fully paid shares at a par value of LE 5/share.

SHAREHOLDER STRUCTURE Al-Ezz Holding 63.9%Financial Holding Int'l Limited 5.7%Others 0.1%Free Float 30.3%Total 100.0%

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Balance Sheet (LE mn) 2007A 2008F 2009F 2010FAssets Cash & Cash Equivalent 12.3 14.1 19.6 24.3Net Receivables 149.3 122.6 178.7 226.9Total Inventory 118.5 131.0 182.5 226.9Advance Payments 7.2 8.2 11.4 14.2Other Trading Assets 0.0 0.0 0.0 0.0Other Current Assets 0.0 0.0 0.0 0.0Total Current Assets 287.4 276.0 392.3 492.4Net Plant 257.6 435.5 465.5 442.9Long-Term Investments 1.1 1.1 1.1 1.1Other Trading Non-Current Assets 2.9 2.9 2.9 2.9Other Non-Current Assets 2.3 2.3 2.3 2.3Intangibles 0.0 0.0 0.0 0.0Total Assets 551.3 717.7 864.0 941.6

Liabilities & Shareholders' Equity Short-Term Debt 72.2 81.4 219.2 256.7Current Portion Of LTD 46.7 41.6 47.2 45.0Accounts Payable 50.3 50.0 69.7 86.6Accrued Expenses 3.9 5.3 7.4 9.2Down Payments 15.2 17.3 24.1 29.9Taxes Payable 5.5 5.5 5.5 5.5Dividends Payable 0.0 0.0 0.0 0.0Other Spontaneous Finance 2.4 2.4 2.4 2.4Other Current Liabilities 1.8 1.8 1.8 1.8Total Current Liabilities 198.1 205.3 377.4 437.2Total Long-Term Debt 117.7 183.7 136.5 117.3Other Non-Current Liab. 0.0 0.0 0.0 0.0LTerm Spontaneous Fin. 0.0 0.0 0.0 0.0Total Liabilities 315.8 389.0 513.9 554.5Deferred Taxes 9.6 10.8 12.1 13.4Other Provisions 1.4 1.4 1.4 1.4Minority Interest 0.0 0.0 0.0 0.0Shareholders' Equity 224.6 316.5 336.7 372.3Total Liabilities & Net worth 551.3 717.7 864.0 941.6

Income Statement (LE mn) 2007A 2008F 2009F 2010FCapacity '000 Units 12,000 12,000 18,000 18,000 Units Sold '000 10,659 11,326 14,820 17,496 Revenues 313.2 357.5 495.9 615.6COGS (201.0) (228.8) (317.9) (395.2)Gross Profits 112.2 128.7 178.0 220.4SG&A (46.2) (53.0) (73.7) (91.8)EBITDA 65.9 75.7 104.3 128.5Dep. & Amort. (19.1) (19.3) (26.8) (34.4)EBIT 46.8 56.4 77.5 94.1Interest Expense (32.1) (31.5) (51.0) (48.4)Provisions 0.0 0.0 0.0 0.0Interest Income 0.0 0.0 0.0 0.0Investment Income 0.0 0.0 0.0 0.0Other Non-Operating Inc. (0.6) 0.0 0.0 0.0Other Non-Operating Exp. (3.2) 0.0 0.0 0.0EBT 10.9 25.0 26.5 45.7Taxes (including deferred taxes) (1.3) (6.0) (6.3) (10.2)NPAT 9.7 19.0 20.2 35.6Minority Interest 0.0 0.0 0.0 0.0Extraordinary Items 0.0 0.0 0.0 0.0Attributable Profits 9.7 19.0 20.2 35.6

Cash Flow 2007A 2008F 2009F 2010FNOPAT 45.4 50.4 71.2 84.0Dep. & Amor. 19.1 19.3 26.8 34.4COPAT 64.5 69.7 98.0 118.4WI Change 29.0 16.4 (82.3) (70.8)Other Current Items 0.1 0.0 0.0 0.0CF After Current Oper. 93.5 86.1 15.7 47.6Financing Payments (65.1) (78.2) (92.6) (95.6)Cash Before LT. Use 28.4 7.9 (76.9) (48.1)Net Plant Change (40.7) (197.1) (56.8) (11.9)FCFF 52.7 (111.0) (41.1) 35.7Others (2.0) 0.0 0.0 0.0CF Before Financing (14.3) (189.2) (133.7) (59.9)Short-Term Debt (5.1) 9.2 137.9 37.5Long-Term Debt 19.2 107.6 0.0 25.8Net-worth 0.0 72.9 (0.0) 0.0Grey Area 1.3 1.3 1.3 1.3Dividends 0.0 0.0 0.0 0.0Change in Cash 1.1 1.8 5.5 4.7

Fact Sheet 2007A 2008F 2009F 2010FROE 4.3% 6.0% 6.0% 9.6%ROS 3.1% 5.3% 4.1% 5.8%ROA 1.8% 2.6% 2.3% 3.8%ROIC 9.6% 7.9% 9.5% 10.4%

EBITDA Margin 21.1% 21.2% 21.0% 20.9%ATO 0.6 0.5 0.6 0.7WI/ Sales 65.8% 53.1% 54.8% 55.7%ALEV 2.5 2.3 2.6 2.5

Debt/ Tangible Networth 1.4 1.2 1.5 1.5Current Ratio 1.5 1.3 1.0 1.1

Per Share Ratios 2007A 2008F 2009F 2010FShare Price 4.98 4.98 4.98 4.98 No. Of Shares '000 51,045 51,045 51,045 51,045 EPS 0.19 0.37 0.40 0.70Div/Share 0.00 0.00 0.00 0.00Revenues/Share 6.13 7.00 9.71 12.06BV/Share 4.40 6.20 6.60 7.29

Gross Cash Flow/Share 1.26 1.37 1.92 2.32FCFF/Share 1.03 -2.17 -0.81 0.70EBITDA/Share 1.29 1.48 2.04 2.52EV/Share 9.37 10.71 12.49 12.71

Multiples 2007A 2008F 2009F 2010FP/E 26.3 13.4 12.6 7.1Div Yield % 0.0% 0.0% 0.0% 0.0%P/ Revenue 0.8 0.7 0.5 0.4EV/ Revenues 1.5 1.5 1.3 1.1P/ COPAT 3.9 3.6 2.6 2.1EV/ COPAT 7.4 7.8 6.5 5.5

P/ FCFF 4.8 -2.3 -6.2 7.1EV/ FCFF 9.1 -4.9 -15.5 18.2P/ EBITDA 3.9 3.4 2.4 2.0EV/ EBITDA 7.3 7.2 6.1 5.0P/ BV 1.1 0.8 0.8 0.7Source: Company reports and CICR estimates.

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Unlike other ginning companies, Arab Cotton Ginning Co. (ACGC) is now recognizing business opportunities that would be better achieved through a holding company. Indeed, ACGC revealed its intention to establish a holding company with ginning being one of the new entity's activi-ties. We believe this “DNA change" will positively affect ACGC's share allocation in investors' portfolios. To press ahead, the company retained most of its 2007 profits for future planned expansions including c. 16% (direct and indirect) stakes in Upper Egypt Flour Mills (UEFM), which has a large base of unutilized assets. Excess liquidity: ACGC formed a consortium to acquire UEFM, which has unutilized assets - cash, land bank, ware-houses, and cargo fleet. The latter allows UEFM to have a sizable market share in the shipping business in Upper Egypt. Also, ACGC is studying several other investment opportuni-ties , including real estate, according to which the company will diversify its operations and to press ahead with its holding company concept. Simple company structure: ACGC acquired 56.75% of Am-wal Al-Arabia through a share swap with Amwal El-Khaleej, bringing its total ownership in Amwal Al-Arabia to 100%. In addition, Amwal Al-Arabia acquired 39.64% of El-Nasr Clothes & Textiles (KABO) in June 2008 from its fully-owned subsidi-ary Modern Nile Cotton (MNC). Thus, ACGC had grouped its operations under two main subsidiaries: Amwal Al-Arabia and Egypt Cotton Ginning. Such a strategic move should further simplify the group's structure and management. Vertical integration: Investment in Amwal Al-Arabia will facili-tate ACGC’s both backward and forward integrations through its newly-restructured group of companies within the textiles and clothes industry. With this vertical integration, ACGC will be operating throughout the cotton value chain from ginning, exporting raw cotton, to spinning and weaving and textiles. Financial summary: Separate revenues grew by 58% to LE 62.4 mn in FY07/08 ended June 30, 2008 vs. LE 39.5 mn in FY06/07. Said increase was driven by a 50% increase in the quantity ginned and pressed in addition to price increases. On a consolidated basis, the company’s financial results were not comparable to those of previous years’ as ACGC has under-gone major restructuring. Valuation and recommendation: Based on our DCF valua-tion on a consolidated level, we reached a 12-month fair value of LE 10.1/share, hence we rate the stock a BUY. Said price implies an upside potential of 146%. Our DCF valuation in-cludes consolidated operations, company’s investments, and land values. We believe the company’s land makes up over 50% of the stock’s value, which explains management’s inten-sion to set-up its own real-estate company.

ARAB COTTON GINNING CO. (ACGC)

DNA change


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SHARE DATA

Reuters; Bloomberg ACGC.CA; ACGC EYRecent price as of 6-Nov-08 LE 4.10No. of O/S shares 251.7 mnMarket cap LE 1,032.0 mn52-wk high / low LE 14.44/ LE 3.17Avg. daily volume / turnover 4.15 mn / LE 40.15 mn

COMPANY SYNOPSIS

Arab Cotton Ginning Company is a shareholding service company established in 1977 according to ministerial decree #411/1963. The company’s main activities are cotton ginning, pressing, trading & marketing, exporting & importing, in addition to spinning synthetics, silk, and polyester. After a series of changes and capital increases, ACGC current authorized capital is LE 5,000 mn and the paid-in capital is LE 1,258.7 mn distributed over 251.7 mn shares with a par value of LE 5/share. According to its AGM dated October 8, 2008, the company announced its intent to establish a holding company by which ACGC’s management is considering changing its main activities from a pure ginning company to a holding company with ginning being one of its activities. It is expected that a share swap will be offered to existing company’s shareholders in the “will be” new formed holding company.

SHAREHOLDER STRUCTURE

ACGC BoD 2.4%Public sector 3.9%Companies 20.7%Employees shareholders Association

5.0%

Free Float 68.0%Total 100.0%

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Balance Sheet (LE mn) Jun-08 Jun-09 Jun-10 Jun-11Assets Cash & Cash Equivalent 786.4 902.0 1,031.5 1,157.7Net Receivables 168.6 211.1 268.2 326.0Total Inventory 398.5 395.8 475.6 527.0Advance Payments to Suppliers 8.7 2.4 13.6 14.5Other Trading Assets 36.6 36.6 36.6 36.6Other Current Assets 24.0 24.0 24.0 24.0Total Current Assets 1,422.8 1,571.9 1,849.5 2,085.8Net Plant 1,115.7 1,040.8 914.8 779.8Long-Term Investments 87.2 87.2 87.2 87.2Other Trading Non-Current Assets 40.1 38.2 38.2 38.2Other Non-Current Assets 0.8 0.8 0.8 0.8Intangibles 511.3 511.3 511.3 511.3Total Assets 3,177.9 3,250.1 3,401.6 3,503.0

Liabilities & Shareholders' Equity Short-Term Debt 317.3 307.4 331.3 293.9Current Portion Of Long-Term Debt 25.8 18.9 21.3 18.9Accounts Payable 45.8 47.9 52.0 55.4Accrued Expenses 0.0 0.0 0.0 0.0Down Payments to Customers 0.1 0.1 0.1 0.1Taxes Payable 17.0 0.0 0.0 0.0Dividends Payable 13.0 13.0 13.0 13.0Other Spontaneous Finance 0.0 0.0 0.0 0.0Other Current Liabilities 85.2 85.2 85.2 85.2Total Current Liabilities 504.3 472.5 502.9 466.4Total Long-Term Debt 91.0 73.3 52.3 33.5Other Non-Current Liabilities 9.7 1.2 1.2 0.0Long-Term Spontaneous Finance 0.0 0.0 0.0 0.0Total Liabilities 605.0 547.0 556.4 499.9Deferred Taxes 15.1 15.1 15.1 15.1Other Provisions 56.3 90.8 128.0 167.5Minority Interest 482.9 482.9 482.9 482.9Shareholders' Equity 2,018.5 2,114.3 2,219.2 2,337.7Total Liabilities & Equity 3,177.8 3,250.1 3,401.6 3,502.9

Income Statement (LE mn) Jun-08 Jun-09 Jun-10 Jun-11Revenues 1,154.5 1,269.9 1,371.5 1,453.8COGS (879.6) (916.8) (995.1) (1,060.1)Gross Profits 274.9 353.1 376.4 393.7SG&A (80.4) (88.4) (95.5) (101.3)EBITDA 194.4 264.7 280.9 292.5Depreciation & Amortization (116.2) (117.9) (128.8) (138.0)EBIT 78.3 146.8 152.1 154.5Interest Expense (52.7) (52.4) (53.9) (46.5)Provisions (31.3) (34.5) (37.2) (39.5)Interest Income 64.1 86.3 98.9 112.2Investment Income 260.5 15.6 17.1 18.8Other Non-Operating Income 9.7 9.7 9.7 9.7Other Non-Operating Expenses (11.9) (11.9) (11.9) (11.9)EBT 316.7 159.6 174.9 197.4Taxes (22.4) (31.9) (35.0) (39.5)NPAT 294.3 127.7 139.9 157.9Minority Interest (7.5) 0.0 0.0 0.0Extraordinary Items 6.2 0.0 0.0 0.0Attributable Profits 292.9 127.7 139.9 157.9

Fact Sheet Jun-08 Jun-09 Jun-10 Jun-11ROE 14.5% 6.0% 6.3% 6.8%ROS 25.4% 10.1% 10.2% 10.9%ROA 9.2% 3.9% 4.1% 4.5%ROIC 0.1% 3.8% 4.3% 4.1%EBITDA Margin 16.8% 20.8% 20.5% 20.1%

ATO 0.4 0.4 0.4 0.4WI/ Sales 52.5% 50.1% 56.9% 61.0%

ALEV 2.1 2.0 2.0 1.9Debt/ Tangible Networth 0.4 0.3 0.3 0.3Current Ratio 2.8 3.3 3.7 4.5

Cash Flow (LE mn) Jun-08 Jun-09 Jun-10 Jun-11NOPAT 1.7 97.9 117.1 115.1Depreciation & Amortization 116.2 117.9 128.8 138.0Gross Cash Flow (COPAT) 117.8 215.7 245.9 253.0WI Change (497.4) (31.5) (143.9) (106.8)Other Current Items 55.8 2.0 0.0 0.0Cash After Current Operations (323.8) 186.2 102.0 146.3Financing Payments (52.7) (78.2) (72.8) (67.8)Cash Before Long-Term Use (376.5) 108.0 29.2 78.5Net Plant Change (1,014.6) (42.9) (2.8) (3.0)FCFF (1,394.1) 141.3 99.2 143.2Others 182.6 91.2 113.9 127.6Cash Before Financing (1,208.5) 156.3 140.3 203.0Short-Term Debt 315.6 (10.0) 24.0 (37.4)Long-Term Debt 116.4 1.2 0.2 0.1Net-worth 1,215.8 6.4 7.0 7.9Grey Area 35.9 0.0 0.0 0.0Dividends (194.4) (38.3) (42.0) (47.4)Change in Cash 280.8 115.6 129.5 126.2

Per Share Ratios Jun-08 Jun-09 Jun-10 Jun-11Share Price 4.10 4.10 4.10 4.10Actual No. Of Shares '000 251,744 251,744 251,744 251,744 New No. Of Shares '000 251,744 251,744 251,744 251,744

EPS 1.16 0.51 0.56 0.63Diluted EPS 1.16 0.51 0.56 0.63Div/Share 0.30 0.15 0.17 0.19Revenues/Share 4.59 5.04 5.45 5.78 Units Sold/Share 2.4 2.2 2.2 2.0 BV/Share 8.02 8.40 8.82 9.29Gross Cash Flow/Share 0.47 0.86 0.98 1.01FCFF/Share (5.54) 0.56 0.39 0.57EBITDA/Share 0.77 1.05 1.12 1.16EV/Share 1.22 1.22 1.22 1.22

Multiples Jun-08 Jun-09 Jun-10 Jun-11P/E 3.5 8.1 7.4 6.5Diluted P/E 3.5 8.1 7.4 6.5 Div Yield % 7.3% 3.7% 4.1% 4.6%P/ Revenue 0.9 0.8 0.8 0.7EV/ Revenues [ EV/ Rev] 0.3 0.2 0.2 0.2 P/ COPAT 8.8 4.8 4.2 4.1 EV/ COPAT 2.6 1.4 1.2 1.2 P/ FCFF (0.7) 7.3 10.4 7.2EV/ FCFF (0.2) 2.2 3.1 2.1P/ EBITDA 5.3 3.9 3.7 3.5EV/ EBITDA 1.6 1.2 1.1 1.0P/ BV 0.5 0.5 0.5 0.4Note: A = Actual; F = ForecastedSource: ACGC and CICR forecasts

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Commercial International Bank (CIB) has successfully maintained its position as Egypt’s largest and most profit-able private bank. Despite strong inflationary pressures, CIB has maintained a cost-to-income ratio of 31.9%. Amidst the global financial crisis, CIB is a bank that deliv-ers double-digit growth with an ROAE of 42.6% vs. an in-dustry average of around 16%. Against the looming global liquidity, CIB is highly liquid with a loans-to-deposits ratio of 53%, holding the leading market share in both amongst private banks. The stock trades at 2009 PER and PBV of only 4.3x and 1.3x, respectively.

Growth across the board with an eye on the capital mar-ket: Following a stellar performance in 1H08 where the bal-ance sheet revealed an 18% expansion in assets to in excess of LE 56 bn and bottom-line growth of 45% to LE 962 mn, CIB increased its stake in CI Capital Holding (CICH) from 50.09% to 100%. CICH is a full-fledged investment bank with broker-age, asset management, investment banking, and research arms.

Efficient cost-to-income ratio despite slight upward pres-sures filtered through 1H08: In spite of pressures related to headcount increase, benefits adjustments, and inflation, the cost-to-income ratio still settled at a reasonable level of 31.9%.

Loan growth potential, high asset quality: With a CAR ratio of 12.8% (excluding interim profits), 1H08 showed a net loans-to-deposits ratio of 53% - indicative of liquidity - next to a su-perb asset quality as evident in a 2.8% NPLs/loans ratio and a 167% provisions coverage ratio. As we expect a risk-conscious growth in Egypt as inflationary pressures start eas-ing, CIB is poised to benefit from its strict risk assessment pol-icy which qualifies it for corner-to-corner loan growth including corporate, private, SMEs, retail, and mortgage loans. It is worth highlighting that CIB has neither sub-prime exposure nor any positions in banks currently under duress.

Regional agenda: CIB’s regional expansion plans include Algeria through two phases: (1) filing for the license which had been done and (2) start of operations pending the Algerian approval.

Low multiples despite strong performance: CIB currently trades at 2009 PER and P/BV of 4.3x and 1.3x versus a MENA average of 10.6x and 2.2x, respectively.

We forecast YoY earnings growth of 37% for 2008: In line with strong 1H08 performance, we expect 2008 to exhibit a 37% growth to LE 1,759.3 mn. We project a 5-year CAGR of 25% for both net banking income (NBI) and earnings.

*We have discontinued making a recommendation or target price on CIB since CIB now owns 100% of CI Capital.

COMMERCIAL INTERNATIONAL BANK (CIB)

Re-asserting leadership


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12M FAIR VALUE | NA*

SHARE DATA

Reuters; Bloomberg COMI.CA/ COMIQ.L; COMI EY

Recent price as of 6-Nov-08 LE 30.73No. of O/S shares 292.5 mnMarket cap LE 8,988.5 mn52-wk high / low LE 65.99/ LE 23.87Avg. daily volume / turnover 0.88 mn / LE 46.5 mn

COMPANY SYNOPSIS

Commercial International Bank (CIB) was founded by National Bank of Egypt (NBE) and Chase Manhattan Bank (CMB) in 1975 under the Open Door Policy. CIB became the leading private-sector bank in Egypt, providing diversified services to multinationals along with private-sector industrial companies. Since its successful IPO in September 1993, the bank’s stock had represented one of the blue chips in the Egyptian stock market. CIB offers a high quality exposure to a full-fledged business varying among corporate and retail banking, investment banking, securities brokerage, mutual funds, asset management, and insurance. Global finance magazine recently accredited CIB with 3 awards namely “Best Bank in Egypt”, “Best Trade Finance Provider in Egypt” and “Best Foreign Exchange Provider in Egypt” for 2008. CIB is currently present with 147 branches and units and targets 155 by year-end 2008.


Ripplewood Consortium 18.7%Free Float 81.3%Total 100.0%

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Balance Sheet (In LE mn) Dec-07 Dec-08 Dec-09 Dec-10

AssetsCash & Due from Banks 4,953.2 7,665.0 8,177.8 8,979.0Interbank Assets 13,883.2 14,401.7 14,562.9 15,054.7T-Bills & Government Securities 2,951.6 3,784.5 4,737.3 5,999.8Net Trading Investments 683.8 892.8 1,004.9 1,131.0Available for Sale Investments 2,286.2 3,674.0 4,216.1 4,838.0Brokers-Debit Balances 122.9 227.1 255.9 289.9Reconcilation Accounts 21.1 5.8 6.5 7.4Net Loans & Advances 20,478.6 25,919.7 30,322.4 35,133.1Held-to-Maturity Investments 443.9 494.7 557.3 631.6Investments in Subsidiaries 90.7 70.2 70.2 70.2Accrued Income & Other Assets 1,035.2 1,442.5 1,616.0 1,820.9Deferred Tax 51.9 25.8 28.9 32.6Net Fixed Assets 620.2 909.7 1,459.6 1,913.5Good Will 140.6 260.4 260.4 260.4Total Assets 47,763.2 59,774.0 67,276.2 76,162.0

Liabilities and Shareholders' EquityInterbank Liabilities 2,378.6 2,400.3 1,713.3 1,309.1Customer Deposits 39,476.1 49,941.7 56,466.3 63,589.3Accrued Expenses & Other Liabilities 798.4 827.3 832.3 889.4Brokers-Credit Balances 162.4 234.3 260.2 290.3Reconcilation Accounts 1.3 0.0 0.0 0.0Dividends Payable 336.7 486.4 594.2 728.0Provisions 397.9 441.0 499.0 559.2Medium-/Long-Term Loans 161.4 119.7 108.2 97.7Debt Securities 0.0 0.0 0.0 0.0Total Liabilities 43,712.7 54,450.6 60,473.4 67,463.0Paid-in Capital 1,950.0 2,925.0 2,925.0 2,925.0Reserves 2,095.2 2,389.7 3,859.5 5,745.2Retained Earnings 0.0 0.0 0.0 0.0Minority Interest 5.3 8.7 18.2 28.7Tier I Capital 4,045.2 5,314.7 6,784.5 8,670.2Tier II Capital 0.0 0.0 0.0 0.0Total Shareholders' Equity 4,050.5 5,323.4 6,802.8 8,699.0Total Liabilities & Shareholders' Equity 47,763.2 59,774.0 67,276.2 76,162.0Contingent Liabilities 11,529.0 13,664.4 15,985.4 18,700.6Total Footing 59,292.2 73,438.3 83,261.5 94,862.6

Income Statement (In LE mn) Dec-07 Dec-08 Dec-09 Dec-10

Total Interest Income 2,998.4 3,574.9 4,320.4 5,105.4Interest Paid to Clients & Banks 1,797.8 1,938.1 2,258.6 2,520.5Net Interest Income (NII) 1,200.5 1,636.7 2,061.8 2,584.9Provisions 251.0 317.0 357.2 377.6Net Interest Income AP 949.5 1,319.8 1,704.6 2,207.3Fees and Commissions Income 665.2 883.1 1,071.8 1,289.0Investment Income 71.5 274.5 355.1 444.2Foreign Exchange Income 167.8 384.2 518.9 615.5Other Incomes 374.6 410.4 273.4 293.6Ownership profits from subidiary company 0.0 0.0 0.0 0.0Non-Interest Income 1,279.2 1,952.2 2,219.2 2,642.4Operating Income (BP) 2,479.7 3,589.0 4,281.0 5,227.2Operating Income (AP) 2,228.7 3,272.0 3,923.8 4,849.7G&A Expenses and Depreciation 697.7 973.7 1,171.3 1,393.1Other Expenses 73.6 254.9 232.7 255.7Non-Interest Expense 771.4 1,228.7 1,404.0 1,648.8Net Operating Income 1,457.4 2,043.3 2,519.8 3,200.9Taxation 170.1 282.9 436.7 566.2NPAT 1,287.3 1,760.5 2,083.1 2,634.7Unusual Items 1.3 5.0 0.0 0.0Net Profit Before Minority Interest 1,288.5 1,765.5 2,083.1 2,634.7Minority Interest -2.7 -6.3 -9.5 -10.5Net Profit After Minority Interest 1,285.8 1,759.3 2,073.6 2,624.2Less: Non-Appropriation Items 0.0 193.9 228.5 289.2Net Attributable Income (NAI) 1,285.8 1,565.4 1,845.0 2,335.0

Profitability & Efficiency Ratios Dec-07 Dec-08 Dec-09 Dec-10

Net Interest Margin (NIM) 3.23% 3.53% 3.81% 4.23%RoAA 3.01% 3.27% 3.26% 3.66%RoAE 34.62% 37.54% 34.20% 33.86%Cost/Income 31.11% 34.23% 32.80% 31.54%Earning Assets / Total Assets 85.46% 82.37% 82.45% 82.53%

Productivity & Asset Quality Ratios Dec-07 Dec-08 Dec-09 Dec-10

Net Loans / Customer Deposits 51.88% 51.90% 53.70% 55.25%Interbank Ratio 5.8 6.0 8.5 11.5 Liquid Assets / Total Deposits 62.72% 60.91% 57.91% 56.62%Assets Utilization 10.03% 10.28% 10.29% 10.80%Capitalization Ratio 8.48% 8.91% 10.11% 11.42%NPLs / Total Loans 3.00% 2.80% 2.80% 2.80%Provision Coverage Ratio 166.3% 176.7% 176.5% 175.3%

Growth & Market Ratios Dec-07 Dec-08 Dec-09 Dec-10

Net Loans Growth 17.3% 26.6% 17.0% 15.9%Customer Deposits Growth 25.1% 26.5% 13.1% 12.6%EPS (LE) * 6.59 6.01 7.09 8.97P/E 7.0x 5.1x 4.3x 3.4xDPS (LE) 1.00 1.00 1.25 1.50Dividend Yield 2% 3% 4% 5%Retroactive BV/Share (LE) 13.85 18.20 23.26 29.74P/BV 2.2x 1.7x 1.3x 1.0x* EPS based on NPAUI** Cost/Income is based on Total non interest expense/ Total interest & non-interest incomeSource: CIB and CICR forecasts

November 11, 2008

113

EGYPT | BANKS

Crédit Agricole Egypt (CAE) is a successful medium sized Egyptian bank with an asset base of LE 22 bn and a NIM of 2.7%, generating a ROAE of 26% vs. a market average of 16%, amid concerns of a global recession. Despite global liquidity issues, CAE is highly liquid with a loans-to-deposits ratio of only 35% which it plans to expand in an under-penetrated and profitable market. The bank’s stock trades at projected 2009 PER and PBV of 4.9x and 1.5x, respectively. Our DCF-based 12-month fair value im-plies a 49% upside potential, therefore we rate it BUY with MODERATE RISK. Gifted good; capturing the fundamentals: 1H08 witnessed tapering growth largely due to a one-off expense related to the restructuring cost of an interest rate SWAP transaction worth LE 48 mn. Yet, we believe CAE enjoys the necessary funda-mentals to have a growth story. Apart from its high profitability ratios, CAE enjoys a reasonable asset quality including an NPLs/loans ratio of 6.5%, a provisions coverage ratio of 91%, and a CAR of 19.3% as of 1H08. With one-off costs behind, we believe CAE will start showing an improvement in 2009. Loan growth opportunities for a highly liquid bank: CAE is well positioned for loan growth leveraging on a high CAR ratio of 19.3% and a strong liquidity position through a loans-to-deposits ratio of only 35%. Its loans portfolio exhibited a strong expansion of 45% in 1H08. CAE targets full-fledged loan growth across all LoBs. Significant cost-to-income ratio, but benefited from provi-sion reversals & tax losses carried forward: 1H08 unraveled a cost-to-income ratio of 58.8% (or 48.6% excluding one-off charges) vs. 48.2% in 1H07. We expect the ratio to start improving starting 2009 onwards. Counteracting this, CAE had been benefiting from some positive surprises in its P&L during 2H07 including provision reversals and nil tax charges triggered by tax losses carried forward. Cheap multiples as growth reignites: CAE trades at 2009 PER and P/BV of 4.9x and 1.5x compared to a MENA average of 10.6x and 2.2x, respectively. Valuation and recommendation: We lowered our 12M target to LE 15.3/share mainly due to (1) a higher risk-free rate on the back recent hikes in benchmark rates by the Central Bank of Egypt (CBE) and (2) a higher risk premium to reflect the ongoing global financial crisis and potential consequences on Egypt. Still, the stock offers a 49% upside potential, urging us to maintain our BUY recommendation with its MODEARATE RISK rating.

CREDIT AGRICOLE EGYPT (CAE)

Cheap rating as growth re-ignites



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SHARE DATA

Reuters; Bloomberg [CIEB.CA; CIEB EY]Recent price as of 6-Nov-08 LE 10.31No. of O/S shares 287.0 mnMarket cap LE 2,959.0 mn52-wk high / low LE 28.48/ LE 8.94Avg. daily volume / turnover 0.29 mn / LE 6.7 mn

COMPANY SYNOPSIS Crédit Agricole Indosuez-Egypt started operations in 2001 when it acquired, along with El Mansour & El Maghraby for Investment & Development (MMID) 93.3% of Crédit International d’Egypte (CIE), previously owned by Crédit Commercial de France (CCF) and the National Bank of Egypt (NBE). In 2005, Crédit Agricole Indosuez-Egypt merged with Crédit Lyonnais (Egypt Branch), thus jointly founding CALYON Bank-Egypt, this came after France’s Crédit Agricole acquired France’s Crédit Lyonnais. In February 2006, Crédit Agricole Group along with MMID acquired 74.6% of Egyptian American Bank (EAB). Based on the decision of the EGM held on June 2006, the merge of the operations of EAB and CALYON Bank-Egypt under the name of Crédit Agricole Egypt (CAE) took place in September 2006. CAE currently operates a network of 56 branches.

SHAREHOLDER STRUCTURE Crédit Agricole S. A. 59.4%MMID 17.1%Local institutions 7.0%Retail 16.6%Total 100.0%

November 11, 2008

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EGYPT | BANKS | CAE


AssetsCash & Due from Banks 1,703.9 2,691.4 3,076.0 3,523.0Interbank Assets 10,700.1 10,722.5 11,191.1 12,053.9T-Bills & Government Securities 3,421.1 2,438.5 3,155.7 3,850.0Net Trading Investments 223.8 301.7 339.6 382.2Available for Sale Investments 46.1 88.0 107.0 130.0Net Loans & Advances 4,662.3 7,471.1 9,432.2 11,574.4Held-to-Maturity Investments 232.6 263.6 321.2 371.0Investments in Subsidiaries 25.3 25.7 25.7 25.7Accrued Income & Other Assets 334.7 364.7 417.6 479.0Net Fixed Assets 145.7 166.8 196.5 230.9Good Will 0.0 0.0 0.0 0.0Total Assets 21,495.6 24,534.1 28,262.4 32,620.2

Liabilities and Shareholders' EquityInterbank Liabilities 284.9 355.0 370.5 399.1Customer Deposits 18,735.2 21,376.7 24,756.3 28,720.6Accrued Expenses & Other Liabilities 434.7 562.5 618.9 689.1Dividends Payable 336.8 337.2 416.2 497.1Provisions 130.8 138.3 147.7 157.4Medium-/Long-Term Loans 0.0 0.0 0.0 0.0Debt Securities 0.0 0.0 0.0 0.0Total Liabilities 19,922.4 22,769.7 26,309.6 30,463.3Paid-in Capital 1,148.0 1,148.0 1,148.0 1,148.0Reserves 162.2 353.5 541.9 746.0Retained Earnings 262.9 262.9 262.9 262.9Tier I Capital 1,573.2 1,764.4 1,952.8 2,156.9Tier II Capital 0.0 0.0 0.0 0.0Total Shareholders' Equity 1,573.2 1,764.4 1,952.8 2,156.9Total Liabilities & Shareholders' Equity 21,495.6 24,534.1 28,262.4 32,620.2Contingent Liabilities 16,363.6 10,581.6 12,862.0 15,633.9Total Footing 37,859.2 35,115.7 41,124.5 48,254.1


Total Interest Income 1,320.7 1,572.6 1,820.5 2,093.5Interest Paid to Clients & Banks 811.7 971.4 1,102.7 1,245.3Net Interest Income (NII) 509.1 601.2 717.8 848.3Provisions -57.4 -3.2 23.0 40.3Net Interest Income AP 566.5 604.4 694.8 808.0Fees and Commissions Income 196.1 229.3 266.5 306.5Investment Income 50.2 9.2 10.1 11.1Foreign Exchange Income 77.1 144.0 173.2 199.2Other Incomes 85.7 74.9 100.5 107.1Non-Interest Income 409.0 457.3 550.3 623.9Operating Income (BP) 918.1 1,058.5 1,268.2 1,472.2Operating Income (AP) 975.6 1,061.7 1,245.1 1,431.9G&A Expenses and Depreciation 449.0 494.5 556.4 630.7Other Expenses 3.2 36.9 2.7 2.9Non-Interest Expense 452.2 531.4 559.2 633.6Net Operating Income 523.4 530.4 686.0 798.3Taxation 0.0 2.0 81.4 97.1NPAT 523.4 528.4 604.6 701.2Unusual Items 0.5 0.1 0.0 0.0NPAUI 523.9 528.4 604.6 701.2Less: Non-Appropriation Items 0.0 50.2 57.4 66.6Net Attributable Income (NAI) 523.9 478.2 547.1 634.6






Net Loans Growth 27.9% 60.2% 26.2% 22.7%Customer Deposits Growth 36.5% 14.1% 15.8% 16.0%EPS (LE) * 1.83 1.84 2.11 2.44P/E 5.6x 5.6x 4.9x 4.2xDPS (LE) 1.00 1.00 1.25 1.50Dividend Yield 10% 10% 12% 15%Retroactive BV/Share (LE) 5.48 6.15 6.80 7.52P/BV 1.9x 1.7x 1.5x 1.4x* EPS based on NPAUI** Cost/Income is based on Total non interest expense/ Total interest & non-interest incomeSource: CAE and CICR forecasts

November 11, 2008

115

EGYPT | FOOD & BEVERAGES

MIRETTE MOHAMED GHOZZI [email protected]

Delta Sugar (SUGR) is the local market leader in sugar beet manufacturing. The company managed over the last three years to operate above 100% utilization rate, while maintaining a low finished goods inventory level at year-ends. With a global market that started to use agricultural crops for the production of bio-fuel, SUGR is conducting feasibility studies for the establishment of an ethanol unit to start operations in 2010. We estimate said new revenue stream directed to exports will add 3% increase to our DCF 12-month fair value to LE 32.8/share, which implies a 49% upside potential, hence we rate it a BUY at LOW RISK.

An ongoing study for the establishment of an ethanol unit with an initial capex of US$15 mn, a new revenue stream directed to the export market. With rising oil prices and the global trend towards bio-fuel usage, SUGR is con-ducting feasibility studies for the establishment of an ethanol unit located in its current factory. According to its recent study, the unit will start operations by 2010 with an initial production capacity of 10k tons of ethanol manufactured from molasses and an initial investment cost of US$15 mn, entirely financed from the shareholders' equity.

Investment update: SUGR has currently frozen its expansion for the establishment of a new sugar beet factory in Sharkia as the company did not obtain the regulatory approvals for the required land. Said freeze will jeopardize SUGR's market share in view of the entry of new capacities, namely Nubaria Sugar - 30% owned by SUGR - which started operations in 2008, Dakahlia Sugar's expansion of a second production line, and the Greenfield Nile Sugar starting in 2010.

Growth drivers: As sugar is a strategic commodity with an inelastic demand, SUGR's revenues will grow at a 4-year CAGR of 14% over 2008-2012 with sugar beet sales leading the lion's share contributing with an average 72% of the sales mix.

Risks: SUGR has encountered a harsh 2008 season due to the shortage of beet crop as farmers converted to wheat culti-vation, enjoying a higher procurement price. Hence, sugar beet companies raised the beet procurement price for the fol-lowing season, implying a 38% increase in beet costs per 1 ton of sugar. Said increase will be partially passed on through selling prices with the other part absorbed by the company, pressuring SUGR's margins downward.

Valuation and recommendation: SUGR stock is traded at 8.9x expected 2009 earnings compared to a peer average of 10.2x. In our DCF, we used a WACC of 14.5%, suggesting a 49% upside potential to LE 32.8/share. This valuation takes into account the establishment of the ethanol unit which would add 3% upside potential to our valuation. Accordingly, we initi-ate coverage on the stock with a BUY at LOW RISK.

DELTA SUGAR

Sugar beet leader taps the bio-fuel market


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SHARE DATA

Reuters; Bloomberg SUGR.CA; SUGR EYRecent price as of 6-Nov-08 LE 22.00No. of O/S shares 98.7 mnMarket cap LE 2,170.3 mn52-wk high / low LE 64.7/ LE 13.11Avg. daily volume / turnover 0.18 mn / LE 7.08 mn

COMPANY SYNOPSIS

Delta Sugar was established in 1978 as an Egyptian joint stock company under the provision of investment law No. 230 of 1989 amended by Investment Guarantees and Incentives Law No. 8 of 1997 for the manufacturing of sugar beet and its byproducts namely molasses and fodder. SUGR contracts with farmers during the last quarter of the year for the quantity supplied of beet as it does not own cultivated lands and starts production from February to June, During its off-season period extending from July to December, SUGR refines raw sugar for others in exchange of a fee. SUGR operates one factory located in Kafr El-Sheikh comprising of two production lines with a combined annual production capacity of 245K tons of sugar beet, 100K tons of molasses and 100K tons of fodder. The company is the second key player in the Egyptian sugar market occupying 19% market share in 2007 following Sugar and Integrated Industries Co. (SIIC) - the sole sugar cane producer-while occupying the lion's share in sugar beet manufacturing with a market share of 48% in 2007. SUGR's authorized capital is LE 1 bn and an issued and paid-in capital of LE 493,252,500 distributed over 98,650,500 shares at a par value LE 5/share. SHAREHOLDER STRUCTURE Sugar & Integrated Industries C 55.7%Misr Insurance Company 13.0%Public Banks 9.6%Egyptian Endowment Auth. 6.4%KIMA 6.3%Free Float 9.1%Total 100.0%

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EGYPT | FOOD & BEVERAGES | DELTA SUGAR

Balance Sheet (LE mn) Dec-07 A Dec-08 F Dec-09 F Dec-10 F Cash Flow (LE mn) Dec-07 A Dec-08 F Dec-09 F Dec-10 FNOPAT 312.9 248.4 223.8 248.7

Assets Dep. & Amor. 33.1 33.9 35.4 36.7Cash & Cash Equivalent 310.0 427.1 443.5 520.7 COPAT 346.0 282.3 259.2 285.4Net Receivables 3.1 3.1 4.2 4.4 WI Change (4.3) (2.7) (9.6) (3.5)Total Inventory 143.1 147.6 178.3 187.7 Other Current Items 16.6 0.0 0.0 0.0Advance Payments 3.6 10.4 17.1 18.0 CF After Current Oper. 358.3 279.6 249.5 281.8Other Trading Assets 0.0 0.0 0.0 0.0 Financing Payments (36.2) (4.3) (4.3) (4.3)Other Current Assets 41.4 41.4 41.4 41.4 Cash Before LT. Use 322.1 275.3 245.3 277.6Total Current Assets 501.2 629.5 684.5 772.2 Net Plant Change (17.9) (17.1) (80.1) (53.3)Net Plant 481.6 466.1 510.8 527.4 FCFF 323.8 262.5 169.4 228.6Long-Term Investments 235.4 240.4 240.4 240.4 Others (16.1) (9.7) 24.6 26.8Other Trading Non-Current Assets 0.0 0.0 0.0 0.0 CF Before Financing 288.0 248.5 189.8 251.1Other Non-Current Assets 0.0 0.0 0.0 0.0 Short-Term Debt 0.0 (0.0) 0.0 0.0Intangibles 0.0 0.0 0.0 0.0 Long-Term Debt (22.7) 0.0 0.0 0.0Total Assets 1,218.1 1,335.9 1,435.6 1,539.9 Net-worth (37.9) 0.0 0.0 0.0

Grey Area 14.9 39.8 7.2 9.1Liabilities & Shareholders' Equity Dividends (69.5) (171.1) (180.5) (183.1)Short-Term Debt 0.0 0.0 0.0 0.0 Change in Cash 172.9 117.1 16.4 77.2Current Portion of LT Debt 0.0 0.0 0.0 0.0Accounts Payable 4.0 4.4 7.2 7.6 Fact Sheet Dec-07 A Dec-08 F Dec-09 F Dec-10 FAccrued Expenses 0.0 0.0 0.0 0.0 ROE 38.3% 26.8% 25.5% 26.4%Down Payments 64.0 72.1 98.2 104.8 ROS 29.8% 26.5% 19.7% 20.5%Taxes Payable 0.0 0.0 0.0 0.0 ROA 26.3% 18.0% 17.0% 17.6%Dividends Payable 171.1 180.5 183.1 203.4 ROIC 35.3% 25.2% 21.2% 22.0%Other Current Liabilities 91.8 91.8 91.8 91.8 Gross Margin 41.3% 40.1% 27.8% 28.8%Total Current Liabilities 330.9 348.8 380.3 407.6 EBITDA Margin 40.1% 38.9% 26.6% 27.6%Total Long-Term Debt 0.0 0.0 0.0 0.0 ATO 0.9x 0.7x 0.9x 0.9xOther Non-Current Liab. 0.0 0.0 0.0 0.0 WI/ Sales 7.6% 9.3% 7.6% 7.4%Total liabilities 330.9 348.8 380.3 407.6 Net Debt/EBITDA (0.7x) (1.2x) (1.3x) (1.4x)Deferred Taxes 15.0 24.8 31.5 40.2 Debt/ Tangible Equity 0.4x 0.4x 0.4x 0.4xOther Provisions 35.5 65.5 65.9 66.4 Current Ratio 1.5x 1.8x 1.8x 1.9xMinority Interest 0.0 0.0 0.0 0.0Shareholders' Equity 836.7 896.9 957.9 1,025.7 Per-Share Ratios (LE) Dec-07 A Dec-08 F Dec-09 F Dec-10 FTotal Liabilities & Equity 1,218.1 1,335.9 1,435.6 1,539.9 Share Price 22.00 22.00 22.00 22.00

Recent no. of shares (000) 98,651 98,651 98,651 98,651 EPS 3.25 2.44 2.47 2.75

Income Statement (LE mn) Dec-07 A Dec-08 F Dec-09 F Dec-10 F DPS 1.35 1.37 1.39 1.55Revenues/Share 10.90 9.22 12.53 13.38

Revenues 1,075.5 909.9 1,236.5 1,320.2 BV/Share 8.48 9.09 9.71 10.40COGS (630.8) (544.6) (892.9) (940.1) Gross Cash Flow/Share 3.51 2.86 2.63 2.89Gross Profits 444.7 365.3 343.6 380.0 FCFF/Share 3.28 2.66 1.72 2.32SG&A (13.2) (11.0) (15.0) (16.0) EBITDA/Share 4.37 3.59 3.33 3.69EBITDA 431.5 354.4 328.6 364.0 EV/Share 18.86 17.67 17.50 16.72Dep. & Amort. (33.1) (33.9) (35.4) (36.7)EBIT 398.4 320.5 293.3 327.4Interest Expense (10.4) (4.3) (4.3) (4.3) Multiples Dec-07 A Dec-08 F Dec-09 F Dec-10 FProvisions (0.4) (30.0) (0.4) (0.5) P/E 6.8x 9.0x 8.9x 8.0xInterest Income 5.7 12.0 12.3 14.6 Div Yield % 6.1% 6.2% 6.3% 7.0%Investment Income 4.0 4.0 4.0 4.0 P/ Revenue 2.0x 2.4x 1.8x 1.6xNet Other Non-Operating Inc./(Exp.) 8.7 8.7 8.7 8.7 EV/ Revenues 1.7x 1.9x 1.4x 1.2xEBT 406.0 310.9 313.6 349.9 P/ COPAT 6.3x 7.7x 8.4x 7.6xTaxes (85.5) (72.0) (69.5) (78.7) EV/ COPAT 5.4x 6.2x 6.7x 5.8xNPAT 320.5 238.9 244.1 271.2 P/ FCFF 6.7x 8.3x 12.8x 9.5xMinority Interest 0.0 0.0 0.0 0.0 EV/ FCFF 5.7x 6.6x 10.2x 7.2xExtraordinary Items 0.3 1.8 0.0 0.0 P/ EBITDA 5.0x 6.1x 6.6x 6.0xAttributable Profits 320.8 240.7 244.1 271.2 EV/ EBITDA 4.3x 4.9x 5.3x 4.5x

P/ BV 2.6x 2.4x 2.3x 2.1xSource: Company reports and CICR estimates.

November 11, 2008

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EGYPT | FOOD & BEVERAGES

INGY EL-DIWANY [email protected]

Eastern Company (EC) is a state monopoly tobacco pro-ducer in Egypt, producing its own brands with an 83% market share. The remaining balance is covered by for-eign brands also produced in EC through toll manufactur-ing for international producers. Owing to the non-cyclical nature of its goods, demand is expected to be maintained in the future. Yet, importing tobacco leaves remains the company's main concern. EC is expected to grow its net income at a 5-year CAGR of 11%. Trading at 7x 2008/09 earnings vs. a peer average of 12.6x, EC is trading at a 45% discount. We reached a 12-month DCF fair value of LE 306, implying a 40% upside potential, hence we reiter-ate our BUY recommendation at LOW RISK.

A defensive producer of a strategic commodity: Ciga-rettes (a cheap source of pleasure) are considered a strategic commodity in Egypt where a healthy growth potential for the tobacco business is provided even if the economy slows. Given the inelastic demand for its products, we expect top-line to maintain its growth post the recently-announced September price increase of LE 0.25/pack on eight local brands. How-ever, a slight shift from foreign to local brands is anticipated this year in the wake of May 5 measures which applied an average of 22% sales tax on the former versus only 11% on the latter.

Relocation to a new complex late 2010: Currently, EC is establishing a new industrial complex in the Sixth of October City with an estimated capex of LE 3.2 bn. New production techniques will be fully implemented once the factories are relocated, resulting in higher cost savings. Going forward, we believe demand for tobacco will be sustained, driven mostly by a low health awareness, a growing population, and in-creasing smoking habits among youth in the 15-35 age bracket, 34% of Egypt’s population.

An acquisition target? British American Tobacco (BAT), an international tobacco manufacturer, was said to be interested in Egyptian and Algerian cigarette monopolies as reported early 2008. BAT has effected a few M&A deals in 2008 for Turkish and Scandinavian tobacco companies, executed at an average of 11.3x 2007 EBITDA. We believe there is no inten-tion to sell EC in the short- to medium-term having postponed the establishment of its real estate company - prerequisite to privatization - to manage the sale of its LE 2 bn-worth land plots till relocation is completed.

Valuation and recommendation: We lowered our DCF valuation by 40% to LE 306/share vs. our previous 12-month fair value of LE 508/share dated November 28, 2007. This mainly came as a result of the 300-bps increase in risk-free rate and market risk premium apiece used in our DCF model in addition to the inclusion of debt and lease needed to fi-nance the expansions. Our 12 month value under the sale of land scenario is LE 386/share. EC is traded at 7x 2008/09 earnings vs. a peer average of 12.6x, a 45% discount.

EASTERN COMPANY (EC)

Back to a defensive company


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12M FAIR VALUE | LE 306

BUY | LOW RISK

SHARE DATA

Reuters; Bloomberg EAST.CA; ESTC EYRecent price as of 5-Nov-08 LE 217.99No. of O/S shares 25.0 mnMarket cap LE 5,449.8 mn52-wk high / low LE 530/ LE 177.91Avg. daily volume / turnover 0.02 mn / LE 5.8 mn

COMPANY SYNOPSIS

Eastern Company (EC) is a state monopoly tobacco pro-ducer with an 83% local market share for its own branded portfolio and the balance also catered through EC's toll manufacturing for foreign producers like Philip Morris (PM), British American Tobacco (BAT) and International Tobacco and Cigarette Company (ITCC) of Jordan. Its product range includes cigarettes, water pipe tobacco, cigars and minced tobacco. EC operates 20 factories in Giza, Tal-beya, Alexandria, Monouf, Tanta, and Assuit. Currently, EC is establishing a new integrated industrial complex in the Sixth of October City over a land with a size of 357 acres. Total estimated investment cost of the said complex is LE 3.2 bn. EC's major raw material is imported tobacco leaf, which represents about 60% of EC's total cost. For-bidden by law from growing tobacco in Egypt, EC imports all its needs of tobacco leaves from Zimbabwe, Malawi, China, India, Europe and Brazil. Lately when the COMESA agreement became effective, EC started importing 35% of its leaf requirements from the COMESA region. EC is subject to the volatility in the cultivation environment, price fluctuations of the imported tobacco leaf, in addition to the intensifying exposure to FX risk.


Holding Co. for Chemical Ind. 52.8%Empl. Shareholders' Assoc. 5.3%Public sector 4.7%Free Float 37.2%

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EGYPT | FOOD & BEVERAGES | EASTERN COMPANY

Balance Sheet (LE mn) Jun-08 A Jun-09 P Jun-10 P Jun-11 PAssets Cash & Cash Equivalent 224 726 746 1,080Net Receivables 36 33 35 37Total Inventory 2,043 2,054 2,085 2,151Advance Payments to Suppliers 0 0 0 0Other Trading Assets 0 0 0 0Other Current Assets 0 0 0 0Total Current Assets 2,304 2,814 2,866 3,268Net Plant 3,288 3,679 4,010 4,085Long-Term Investments 53 53 53 53Other Trading Non-Current Assets 0 0 0 0Other Non-Current Assets 49 52 55 58Intangibles 0 0 0 0Total Assets 5,694 6,598 6,984 7,463

Liabilities & Shareholders' Equity Short-Term Debt 538 0 0 0Current Portion Of Long-Term Deb 0 120 120 120Accounts Payable 208 220 234 242Accrued Expenses 90 92 98 101Down Payments to Customers 9 10 10 11Taxes Payable 1,086 1,086 1,086 1,086Dividends Payable 24 372 389 443Other Spontaneous Finance 0 0 0 0Other Current Liabilities 467 494 520 547Total Current Liabilities 2,423 2,395 2,457 2,550Total Long-Term Debt 0 480 360 240Other Non-Current Liabilities 0 0 0 0Long-Term Spontaneous Finance 0 0 0 0Total Liabilities 2,423 2,875 2,817 2,790Deferred Taxes 241 244 246 248Other Provisions 363 363 363 363Minority Interest 0 0 0 0Shareholders' Equity 2,667 3,117 3,559 4,062Total Liabilities & Equity 5,694 6,598 6,984 7,463

Income Statement (LE mn) Jun-08 A Jun-09 P Jun-10 P Jun-11 PNet Sales 3,819 4,041 4,249 4,473COGS (2,633) (2,802) (2,969) (3,062)Gross Profits 1,186 1,240 1,280 1,411SG&A (76) (80) (84) (89)EBITDA 1,110 1,160 1,196 1,323Depreciation & Amortization (161) (161) (164) (167)EBIT 949 999 1,032 1,155Interest Expense (28) (48) (72) (58)Provisions (2) (2) (2) (2)Interest Income 13 13 14 14Investment Income 1 1 1 1Other Non-Operating Income 44 44 44 44Other Non-Operating Expenses (44) (27) (27) (27)EBT 932 978 989 1,127Taxes (181) (196) (198) (225)NPAT 751 783 791 901Minority Interest 0 0 0 0Extraordinary Items 0 0 0 0Attributable Profits 751 783 791 901

Cash Flow (LE mn) Jun-08 A Jun-09 P Jun-10 P Jun-11 PNOPAT 1,314 803 834 930Depreciation & Amortization 161 161 164 167Gross Cash Flow (COPAT) 1,475 964 998 1,097WI Change (351) 7 (13) (56)Other Current Items 18 27 25 27Cash After Current Operations 1,142 999 1,011 1,068Financing Payments (28) (48) (192) (178)Cash Before Long-Term Use 1,113 951 819 891Net Plant Change (1,406) (553) (495) (242)FCFF (282) 419 491 799Others 4 27 28 29Cash Before Financing (288) 425 353 678Short-Term Debt 538.4 (538.4) 0.0 0.0Long-Term Debt 0 600 0 0Net-worth 328 39 40 45Grey Area (24) 0 0 0Dividends (710) (24) (372) (389)Change in Cash (156) 502 20 334

Fact Sheet Jun-08 A Jun-09 P Jun-10 P Jun-11 PROE 28.2% 25.1% 22.2% 22.2%ROS 19.7% 19.4% 18.6% 20.2%ROA 13.2% 11.9% 11.3% 12.1%ROIC 34.5% 18.6% 18.0% 18.5%Gross Profit Margin 31.1% 30.7% 30.1% 31.6%EBITDA Margin 29.1% 28.7% 28.2% 29.6%ATO 0.7 0.6 0.6 0.6WI/ Sales 46.4% 43.7% 41.8% 41.0%ALEV 2.1 2.1 2.0 1.8Debt/ Tangible Networth 0.9 0.9 0.8 0.7Current Ratio 1.0 1.2 1.2 1.3

Per Share Ratios Jun-08 A Jun-09 P Jun-10 P Jun-11 PShare Price 217.99 217.99 217.99 217.99Actual No. Of Shares '000 25,000 25,000 25,000 25,000 EPS 30.1 31.3 31.6 36.1Diluted EPS 30.1 31.3 31.6 36.1Div/Share 14.0 14.9 15.5 17.7Revenues/Share 152.8 161.7 170.0 178.9BV/Share 106.7 124.7 142.3 162.5Gross Cash Flow/Share 59.0 38.6 39.9 43.9FCFF/Share -11.3 16.7 19.6 32.0EBITDA/Share 44.4 46.4 47.8 52.9EV/Share 230.6 212.9 207.3 189.2

Multiples Jun-08 A Jun-09 P Jun-10 P Jun-11 PP/E 7.3 7.0 6.9 6.0Diluted P/E 7.3 7.0 6.9 6.0Div Yield % 6.4% 6.8% 7.1% 8.1%P/ Revenue 1.4 1.3 1.3 1.2EV/ Revenues [ EV/ Rev] 1.5 1.3 1.2 1.1P/ COPAT 3.7 5.7 5.5 5.0EV/ COPAT 3.9 5.5 5.2 4.3P/ FCFF -19.3 13.0 11.1 6.8EV/ FCFF -20.4 12.7 10.6 5.9P/ EBITDA 4.9 4.7 4.6 4.1EV/ EBITDA 5.2 4.6 4.3 3.6P/ BV 2.0 1.7 1.5 1.3Note: A = Actual; P = ProjectedSource: EC and CICR forecasts

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EFIC is a successful fertilizers company, specialized mainly in the production of phosphate fertilizers with a 70% local market share in SSP. In view of concerns over global recession, we believe slower sales growth would mostly be driven by selling prices rather than volumes, thanks to demand inelasticity of fertilizers. Moreover, Egypt is the largest country in the Middle East producing high-quality SSP, unlike other countries in the region which produce mainly other types of phosphate fertilizers. Hence, we do not expect demand for EFIC’s products to falter. Our DCF-based 12-month fair value indicates a 68% upside potential to LE 50.1, hence we rate the stock a BUY with LOW RISK. Locking sulfur cost: Global sulfur prices have decreased by 24.7% to US$550/ton in September 2008 vs. US$730 in July 2008. However , EFIC will not benefit from said decline having locked its sulfur requirements till June 2009 at US$700/ton. We believe that EFIC exports’ sales (around 30% of sales) will be slightly affected. On the local front, such a decrease in sul-fur prices will not affect EFIC’s local sales, thanks to its 70% market share of SSP and no price caps levied by the govern-ment on phosphate fertilizers. Thus, we believe that local EBITDA margin will balance the export EBITDA decrease.

New factory expansion: In order to increase its capacity, EFIC acquired a 256k-sqm land plot in Ain Al-Sokhna through its wholly-owned subsidiary Suez Company for Fertilizers Production (SCFP) for LE 38.4 mn.

Diversifying the product mix: EFIC will start the production of di-calcium phosphate in November 2008 with a total capac-ity of 20k tpa, split evenly between the local and export mar-kets.

A new fertilizers project: With six other companies, EFIC signed a memorandum of understanding (MoU) to establish a new plant - Egyphos - to produce phosphate fertilizers in Egypt. The new plant will be established in the city of Edfu in two phases, the first of which has a total investment cost of US$680 mn (split US$300 mn and US$380 mn in equity and debt, respectively) and an authorized capital of US$1.5 bn.

Growth drivers: While fertilizers consumption should be driven in part by population growth, EFIC's revenue growth should be positively affected by its diversified product mix and the Government of Egypt's plan to increase arable land over the coming few years. Moreover, growing demand for bio-fuels will drive demand for fertilizers as farmers look to improve land productivity and yield. In our opinion, this will be an opportu-nity for EFIC to take an advantage of, as the company em-barks on a strategic plan to grow its exports.

Valuation and recommendation: Our DCF-based model yielded a 12-month fair value of LE 50.1/share, implying a 68% upside potential. EFIC’s stock is currently traded at 4.5x 2009 expected earnings, a 41% discount to regional peers. Accordingly, we rate the stock a BUY with LOW RISK.

EGYPTIAN FINANCIA & INDUSTRIAL CO. (EFIC)

Leading the way through expansion


EGYPT | CHEMICALS


SHARE DATA Reuters; Bloomberg EFIC.CA; EFIC EYRecent price as of 6-Nov-08 LE 29.79No. of O/S shares 69.3 mnMarket cap LE 2,064.4 mn52-wk high / low LE 75/ LE 21.08Avg. daily volume / turnover 0.5 mn / LE 23.29 mn

COMPANY SYNOPSIS

Egyptian Financial & Industrial Company (EFIC) is a joint-stock company founded in 1929. EFIC's main activities are producing and trading phosphate fertilizers and chemicals. It produces two main products: i. Single super phosphate (SSP) in two forms

powdered (PSSP) and granulated (GSSP) ii. Sulfuric acid. EFIC is the largest producer of phosphate fertilizers in Egypt, dominating around 70% of SSP local market sales volume in 2007. Such a market share takes into account sales from Suez Co. for Fertilizers Production (SCFP), EFIC's 99.88%-owned subsidiary. EFIC has an authorized capital of LE 700 mn and an issued capital of LE 693 mn, distributed over 69.3 mn shares at a par value of LE 10/share.

SHAREHOLDER STRUCTURE Holding Company 25.3%Banks 12.8%Insurance Companies 0.9%Others 12.0%Free Float 49.0%Total 100.0%

AHMED ABDEL-GHANI

[email protected]

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Balance Sheet (LE mn) Dec-07A Dec-08F Dec-09F Dec-10FAssets Cash & Cash Equivalent 69.1 127.3 216.2 246.1Net Receivables 48.0 107.2 183.6 209.2Total Inventory 110.5 262.7 436.6 489.2Advance Payments 3.1 7.5 12.4 13.9Other Current Assets 56.2 56.2 56.2 56.2Total Current Assets 286.9 560.8 905.0 1,014.5Net Plant 923.4 1,025.4 1,036.8 1,045.4Long-Term Investments 179.2 195.7 213.8 233.5Other Non-Current Assets 1.5 1.5 1.5 1.5Intangibles 0.0 0.0 0.0 0.0Total Assets 1,390.9 1,783.4 2,157.1 2,294.9

Liabilities & Shareholders' Equity Short-Term Debt 295.6 515.1 492.9 366.7Current Portion Of LTD 60.3 47.2 44.8 44.8Accounts Payable 74.5 177.1 294.4 329.8Dividends Payable 84.4 132.0 285.3 458.2Other Current Liabilities 25.0 25.0 25.0 25.0Total Current Liabilities 539.8 896.3 1,142.4 1,224.5Total Long-Term Debt 175.7 130.9 83.5 38.7Other Non-Current Liab. 0.0 0.0 0.0 0.0Total Liabilities 715.5 1,027.2 1,225.9 1,263.2Deferred Taxes 10.5 10.5 10.5 10.5Other Provisions 36.0 36.0 36.0 36.0Minority Interest 0.1 0.1 0.1 0.1Shareholders' Equity 628.7 709.6 884.5 985.1Total Liabilities & Net worth 1,390.9 1,783.4 2,157.1 2,294.9

Income Statement (LE mn) Dec-07A Dec-08F Dec-09F Dec-10FRevenues 525.0 1,157.0 1,965.2 2,237.2COGS (335.6) (800.2) (1,326.4) (1,486.1)Gross Profits 189.4 356.8 638.8 751.1SG&A (25.1) (38.8) (46.9) (51.8)EBITDA 164.4 318.0 591.9 699.4Dep. & Amort. (15.9) (21.5) (44.3) (66.8)EBIT 148.4 296.5 547.6 632.6Interest Expense (31.5) (58.6) (52.8) (38.7)Provisions 0.0 0.0 0.0 0.0Interest & Investment Income 17.1 19.2 23.3 26.7Other Non-Operating Inc. 1.4 1.4 1.4 1.4Other Non-Operating Exp. 0.0 0.0 0.0 0.0EBT 135.6 258.5 519.5 622.1Taxes (19.3) (45.7) (59.3) (63.3)NPAT 116.3 212.9 460.2 558.7Minority Interest (0.0) 0.0 0.0 0.0Extraordinary Items 0.1 0.0 0.0 0.0Attributable Profits 116.4 212.9 460.2 558.7

Cash Flow Dec-07A Dec-08F Dec-09F Dec-10FNOPAT 129.2 250.8 488.3 569.3Dep. & Amor. 15.9 21.5 44.3 66.8COPAT 145.1 272.3 532.6 636.1WI Change 14.5 (113.1) (138.0) (44.2)Other Current Items 3.0 0.0 0.0 0.0CF After Current Oper. 162.6 159.2 394.7 591.9Financing Payments (63.5) (118.9) (100.0) (83.5)Cash Before LT. Use 99.0 40.3 294.7 508.3Net Plant Change (93.5) (123.5) (55.7) (75.4)FCFF 66.1 35.7 338.9 516.5Others 0.1 4.1 6.7 8.5CF Before Financing 5.7 (79.1) 245.6 441.4Short-Term Debt (0.5) 219.4 (22.2) (126.1)Long-Term Debt 18.5 2.3 (2.5) 0.0Net-worth (19.3) (25.5) (55.2) (67.0)Grey Area 0.2 0.0 0.0 0.0Dividends (52.9) (58.9) (76.8) (218.3)Change in Cash (48.3) 58.2 88.9 29.9

Fact Sheet Dec-07A Dec-08F Dec-09F Dec-10FROE 18.5% 30.0% 52.0% 56.7%ROS 22.1% 18.4% 23.4% 25.0%ROA 8.4% 11.9% 21.3% 24.3%ROIC 10.7% 17.3% 31.5% 38.4%Gross margin 36.1% 30.8% 32.5% 33.6%EBITDA Margin 31.3% 27.5% 30.1% 31.3%ATO 0.4 0.6 0.9 1.0WI/ Sales 16.6% 17.3% 17.2% 17.1%ALEV 2.2 2.5 2.4 2.3Debt/ Tangible Networth 1.1 1.4 1.4 1.3Current Ratio 0.5 0.6 0.8 0.8

Per-Share Ratios Dec-07A Dec-08F Dec-09F Dec-10FShare Price 29.79 29.79 29.79 29.79 No. Of Shares '000 69,302 69,302 69,302 69,302 EPS 1.68 3.07 6.64 8.06DPS 5.00 1.54 3.32 5.64Revenues/Share 7.58 16.69 28.36 32.28BV/Share 9.07 10.24 12.76 14.21

Gross Cash Flow/Share 2.09 3.93 7.69 9.18FCFF/Share 0.95 0.51 4.89 7.45EBITDA/Share 2.37 4.59 8.54 10.09EV/Share 36.47 37.95 35.63 32.74

Multiples Dec-07A Dec-08F Dec-09F Dec-10FP/E 17.7 9.7 4.5 3.7Dividend Yield 16.8% 5.2% 11.1% 18.9%P/ Revenue 3.9 1.8 1.1 0.9EV/ Revenues 4.8 2.3 1.3 1.0P/ COPAT 14.2 7.6 3.9 3.2EV/ COPAT 17.4 9.7 4.6 3.6

P/ FCFF 31.2 57.9 6.1 4.0EV/ FCFF 38.2 73.8 7.3 4.4P/ EBITDA 12.6 6.5 3.5 3.0EV/ EBITDA 15.4 8.3 4.2 3.2P/ BV 3.3 2.9 2.3 2.1Source: Company reports and CICR estimates.

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EGYPT | PHARMACEUTICALS

AHMED ABDEL-GHANI [email protected]

EIPICO is a successful generic pharmaceutical company. It is a low-cost producer in a sector of insensitive price demand, and is cash rich benefiting from high interest rates. In a highly volatile market amid concerns of a global recession, this company is capable of producing a steady double-digit growth, and an unrevealed ROE of 23% versus a WACC of 17.10%. With a PER of just 6x 2009 earnings it is undemanding to expect this to expand to 8x. Our DCF led target price indicates some 78% up-side to LE 43.68, and our rating therefore is BUY at LOW RISK.

Cash-rich, debt-free: EIPICO should benefit in a high inter-est environment. We also think that EIPICO's growth is robust even if the economy slows, thanks to the inelastic demand for its products. Hence, we do not expect demand for its products to falter; not least that its products are already competitively priced versus private sector peers.

New factory expansion to start in 2010 with capex of only LE 80 mn – less than 10% of 2008 revenues: EIPICO's new expansion plans should require around LE 80 mn in capex with target start date in 2010. While management has not re-vealed which products will be produced in the new extension, we reckon that it will gradually add 30% of incremental reve-nues starting 2010.

Investments update: EIPICO has discontinued its 98.6%- owned subsidiary EIPICO Tech, which was mainly estab-lished to develop research of incurable diseases (such as AIDS and cancer), due to its high investment cost required. Meanwhile, EIACO started production in July 2007 with an authorized capital of LE 200 mn and a paid-in capital of LE 80 mn. EIACO's current capacity is 100 mn ampoules p.a. and is expected to reach 800 mn ampoules p.a. over the next 3-4 years

Growth drivers: While drug consumption should be driven in part by population growth, an increasing health awareness and Egypt's new comprehensive medical insurance program should reflect positively on EIPICO's revenues. Moreover , the inauguration of Technological Center for Pharmaceutical In-dustries & Cosmetics (TCPIC), will enhance drug companies to improve their research and development.

Valuation and recommendation: The stock is traded at a PER of 6x 2009 expected earnings with a current dividend yield of 7%, which we think attractive for defensive 5-year earnings CAGR of 14%. Shorter-term valuation techniques imply it is undemanding to see the price rise 30% to a 8x 2009 expected earnings, and our DCF-based fair value indicates an 78% upside to LE 43.68/share. Both the shorter-term and longer-term valuations are significantly above the 17.10% WACC we use. This valuation does not take into account its 30%-owned Saudi operation, which could indicate further up-side potential when sufficient information is available. Accord-ingly we rate this stock a BUY at LOW RISK.

EIPICO

Expansion underway


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Reuters; Bloomberg PHAR.CA;PHAR EYRecent price as of 6-Nov-08 LE 24.50No. of O/S shares 72.1 mnMarket cap LE 1,766.5 mn52-wk high / low LE 40.95/ LE 18Avg. daily volume / turnover 0.07 mn / LE 2.32 mn

COMPANY SYNOPSIS EIPICO was established in 1980 but started production in 1985. Currently, the company's product mix is comprised of 247 products, with a generic/under-licensed mix of 80%/20%, respectively. The largest local private-sector pharmaceuticals producer, EIPICO’s market share hovers around 8%. It also exports to about 64 countries. Currently, EIPICO is in the process of expanding its factory. EIPICO has two subsidiaries: the first is the Egyptian International Ampoule Manufacturing Company (EIACO), a 99.7% ownership, and the second is Saudi Arabia-based Universal, a 30% ownership. EIPICO has an authorized capital of LE 850 mn and an issued capital of LE 721 mn, distributed over 72.1 mn shares at a par value of LE 10/share.

SHAREHOLDER STRUCTURE ACDIMA 43.1%Medical Union Investment 5.6%Banks & Insurance Companies 0.4%Others 0.2%Free Float 50.7%Total 100.0%

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Balance Sheet (LE Millions) Dec-07 A Dec-08 F Dec-09 F Dec-10 FAssetsCash & Cash Equivalent 416.9 483.3 582.8 709.0Net Receivables 227.9 249.0 281.0 323.2Total Inventory 338.8 354.1 395.1 449.2Advance Payment to Suppliers 0.0 0.0 0.0 0.0Other Trading Assets 0.0 0.0 0.0 0.0Other Current Assets 0.0 0.0 0.0 0.0Total Current Assets 983.5 1,086.4 1,259.0 1,481.3Net Plant 339.4 413.9 436.8 437.7Long Term Investments 39.3 39.3 39.3 39.3Other Trading Non-Current Assets 0.0 0.0 0.0 0.0Other Non-Current Assets 27.5 27.5 27.5 27.5Intangibles 217.4 198.9 180.4 161.9Total Assets 1,607.1 1,765.9 1,942.9 2,147.7

Liabilities & Shareholders' EquityShort-Term Debt 0.0 0.0 0.0 0.0Current Portion of Long-Term Debt 0.0 0.0 0.0 0.0Accounts Payable 26.2 24.3 26.9 30.3Accrued Expenses 0.0 0.0 0.0 0.0Down Payments to customers 0.0 0.0 0.0 0.0Taxes Payable 0.0 0.0 0.0 0.0Dividends Payable 137.4 162.0 183.2 209.7Other Current Liabilities 73.7 73.7 73.7 73.7Total Current Liabilities 237.2 260.0 283.8 313.7Total Long-Term Debt 0.0 0.0 0.0 0.0Other Non-Current Liabilities 0.0 0.0 0.0 0.0Long-Term Spontaneous Finance 0.0 0.0 0.0 0.0Total Liabilities 237.2 260.0 283.8 313.7Deferred Taxes 73.8 73.8 73.8 73.8Other Provisions 227.4 255.5 286.6 321.7Minority Interest 0.2 0.2 0.2 0.2Shareholders Equity 1,068.4 1,176.3 1,298.5 1,438.2Total Liab. & Shareholders' Eq. 1,607.1 1,765.9 1,942.9 2,147.7

Income Statement (LE Millions) Dec-07 A Dec-08 F Dec-09 F Dec-10 FRevenues 850.2 935.3 1,035.8 1,171.5COGS (incl. marketing expenses) (464.1) (505.0) (557.3) (627.9)Gross Profit 386.1 430.2 478.5 543.6G&A (21.6) (25.3) (28.0) (31.6)EBITDA 364.4 405.0 450.6 511.9Depreciation & Amortization (53.1) (53.9) (56.2) (60.8)EBIT 311.3 351.1 394.4 451.1Interest Expense (2.2) (2.2) (2.2) (2.2)Provisions (25.2) (28.1) (31.1) (35.1)Interest Income 16.5 21.2 22.6 23.0Investment Income 0.0 0.0 0.0 0.0Other Non-Operating Income 0.0 0.0 0.0 0.0Other Non-Operating Expenses 0.0 0.0 0.0 0.0Previous year gain/loss (5.0) 0.0 0.0 0.0EBT 295.4 342.0 383.7 436.8Taxes (63.5) (73.9) (83.6) (95.7)NPAT 231.9 268.1 300.1 341.1Minority Interest 0.2 0.0 0.0 0.0Extraordinary Items (0.0) 0.0 0.0 0.0Attributable Profits 232.2 268.1 300.1 341.1

Cash Flow (LE Millions) Dec-07 A Dec-08 F Dec-09 F Dec-10 FNOPAT 247.8 277.1 310.7 355.4Depreciation & Amortization 53.1 53.9 56.2 60.8Gross Cash Flow (COPAT) 300.9 331.0 367.0 416.2Working Investments Change (93.6) (38.2) (70.5) (92.8)Other Current Items (10.9) 0.0 0.0 0.0Cash After Current Operations 196.4 292.8 296.5 323.4Financing Payments (2.2) (0.4) 3.0 6.1Cash Before Long Term Use 194.2 292.4 299.5 329.5Net Plant Change (68.3) (109.9) (60.6) (43.3)FCFF 139.0 182.9 235.9 280.2Others 48.1 21.3 22.7 23.1Cash Before Financing 174.0 203.8 261.5 309.3Short-Term Debt 0.0 0.0 0.0 0.0Long-Term Debt 0.0 0.0 0.0 0.0Networth (22.4) 0.0 0.0 0.0Grey Area (10.2) 0.0 0.0 0.0Dividends (100.7) (137.4) (162.0) (183.2)Change in Cash 40.7 66.4 99.5 126.2

Fact Sheet Dec-07 A Dec-08 F Dec-09 F Dec-10 FROE 21.7% 22.8% 23.1% 23.7%ROS 27.3% 28.7% 29.0% 29.1%ROA 14.4% 15.2% 15.4% 15.9%ROIC 21.5% 21.2% 21.0% 21.3%Gross Margin 45.4% 46.0% 46.2% 46.4%EBITDA Margin 42.9% 43.3% 43.5% 43.7%ATO 0.5 0.5 0.5 0.5WI/ Sales 63.6% 61.9% 62.7% 63.3%ALEV 1.9 1.8 1.7 1.7Liabilities/Tangible Networth 0.3 0.3 0.3 0.2Current Ratio 4.1 4.2 4.4 4.7

Per Share Ratios Dec-07 A Dec-08 F Dec-09 F Dec-10 FShare Price 24.50 24.50 24.50 24.50No. Of Shares (mn) 72.1 72.1 72.1 72.1EPS 3.22 3.72 4.16 4.73Div/Share 1.70 2.25 2.54 2.91Revenues/Share 11.79 12.97 14.36 16.24 BV/Share 14.81 16.31 18.00 19.94 Gross Cash Flow/Share 4.17 4.59 5.09 5.77FCFF/Share 1.93 2.54 3.27 3.88EBITDA/Share 5.05 5.61 6.25 7.10EV/Share 18.72 17.80 16.42 14.67

Multiples Dec-07 A Dec-08 F Dec-09 F Dec-10 FP/E 7.6 6.6 5.9 5.2Div Yield % 7% 9% 10% 12%P/ Revenue 2.1 1.9 1.7 1.5EV/ Revenues 1.6 1.4 1.1 0.9EV/ FCFF 9.7 7.0 5.0 3.8P/ EBITDA 4.8 4.4 3.9 3.5EV/ EBITDA 3.7 3.2 2.6 2.1P/ BV 1.7 1.5 1.4 1.2Source: EIPICO and CICR estimates

November 11, 2008

123

EGYPT | STEEL

HANY MOHAMED SAMY, CFM [email protected]

EZDK is the largest integrated steel plant in Egypt and the lowest cost producer of steel in Egypt and the region, giv-ing the company an edge with the current expected slow-down in global economies. EZDK has a total capacity of 2.8 mtpa of long and flat steel, with no expansion plans. With the current turmoil over the short- to medium-term, we expect EZDK to face a reduction in utilization rates, yet a stable profit margin given the cost-price relationship of its business model. With a WACC of 18%, our DCF model indicates a 68% upside to a 12-month fair value of LE 1,502/share, thus retaining our BUY recommendation at a MODERATE RISK.

Competitive advantage: EZDK is considered the lowest cost producer in Egypt with a gross, EBITDA, and net margins of 40.2%, 37.8%, and 26%, respectively. Said cost advantage comes on the back of: (1) utilizing iron ore as the main input in the production process, (2) a higher production per worker (883 tpa vs. an international average of 588 tpa), and (3) a lower labor cost (US$13/ton in 2006 vs. an international aver-age of US$76/ton).

Synergies: EZDK is 53.24% owned by Ezz Steel (ES) in June 2008, resulting in synergies via increasing local market share, a better world ranking, strong product recognition, and a re-duction in operational and administrative costs that would en-hance financial position.

Growth drivers: Given Egypt's demographics, local construc-tion activity will always be the main growth driver for EZDK. Yet, we expect the current slowdown in real-estate activity to result in a mild slowdown in the construction activity which should take place over the coming years to fulfill the currently-contracted real-estate projects. On the global front, we expect a slowdown in the industrialization process*, resulting in a lower rate of utilization.

Industry dynamics: Because of international competition, the expected reductions in inputs' costs* will result in lower selling prices; yet, margins are expected to be maintained but with lower bottom line figures.

Government intervention: The recent removal of steel export tariffs of LE 160/ton should have a positive impact on EZDK, where 15% of production was exported in 1H08.

Valuation and recommendation: Our DCF model - using a perpetual growth rate of 1% and a WACC of 18% - yielded a 12-month fair value of LE 1502/share, implying a 68% upside potential. Commodity plays are currently out of favor, but EZDK is part of the steel quasi-monopoly, and maintains a stable margin. Lower steel prices should therefore stimulate construction volumes, providing a catalyst. Hence, we reiter-ate our BUY recommendation on EZDK with a MODERATE RISK rating.

EZZ AL-DEKHEILA STEEL - ALEXANDRIA (EZDK)

Company efficiency vs. market deficiency


0200400600800

1,0001,2001,4001,6001,800

Nov

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Dec

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Jan-

08

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08

Mar

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Apr

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Jul-0

8

Aug

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0.2

0.4

0.60.8

1.0

1.2

1.4mn shares

Volume IRAX CASE 30 - rebased

* Please refer to our industry section.

12M FAIR VALUE | LE 1,502

BUY | MODERATE RISK

SHARE DATA

Reuters; Bloomberg IRAX.CA; IRAX EYRecent price as of 6-Nov-08 LE 896.23No. of O/S shares 13.7 mnMarket cap LE 12,251.5 mn52-wk high / low LE 1579.99/ LE 706.02Avg. daily volume / turnover 0.02 mn / LE 22.89 mn

COMPANY SYNOPSIS

Al-Ezz Dekheila for Steel - Alexandria (EZDK), previ-ously known as Alexandria National Iron & Steel Com-pany (ANSDK), was established in 1982 under the provisions of law no. 43 as a joint venture between Egyptian public sector companies, Nippon Kokan, Kobe Steel & Tomen, and the International Finance Corporation (IFC). EZDK currently operates under law no. 8/1997. EZDK is the largest fully integrated steel factory in Egypt that produces both long and flat products with a total capacity of 2.8 mtpa, 64% of which is for long products with flat products making up the balance.

Ezz Steel owns a majority stake in EZDK amounting to 53.24%, which provided synergies for the whole group, created a strong entity that is capable of competing both locally and internationally.


Ezz Steel 53.2%National Investment Bank 10.5%Misr Insurance Co. 7.8%General Petro. Association 4.7%Banks, Ins Co. and Others 18.6%Free Float 5.2%

November 11, 2008

124

EGYPT | STEEL | EZDK

Balance Sheet (LE mn) 2007A 2008F 2009F 2010FAssetsCash & Cash Equivalent 1,674.6 514.3 450.7 1,189.7Net Receivables 326.8 455.2 397.8 433.5Total Inventory 1,390.9 2,045.6 1,871.1 2,013.7Advance Payment 0.0 0.0 0.0 0.0Other Trading Assets 0.0 0.0 0.0 0.0Other Current Assets 0.0 0.0 0.0 0.0Total Current Assets 3,392 3,015 2,720 3,637Net Plant 5,664 5,835 5,907 5,983Long-Term Investments 62.9 48.9 48.9 48.9Long-Term Loans Receivalbe 6.0 5.7 5.7 5.7Other Non-current Assets 0.0 0.0 0.0 0.0Intangibles 0.0 0.0 0.0 0.0Total Assets 9,125 8,905 8,681 9,675

Liabilities & Shareholders' EquityShort-Term Debt 1,353 783 724 1,056CP of Long Term Debt 376.2 372.1 372.1 372.1Accounts Payable 427.4 628.5 574.9 618.7Accrued Expenses 44.7 65.8 60.2 64.8Down Payments 0.0 0.0 0.0 0.0Taxes Payable 579.9 140.7 140.7 140.7Dividends Payable 478.8 0.0 0.0 0.0Royalties Payables / Due to Sister Co. 5.4 5.4 5.4 5.4Other Current Liabilities 22.5 22.5 22.5 22.5Total Current Liabilities 3,288 2,018 1,900 2,280Total Long-Term Debt 2,064.7 1,602.4 1,230.3 858.3Other Non-Current Liabilities 460.0 85.9 0.0 0.0Total Liabilities 5,813 3,706 3,130 3,139Deferred Taxes 0.0 472.6 0.0 0.0Other Provisions 51.9 51.6 0.0 0.0Minority Interest 0.0 0.0 0.0 0.0Shareholders' Equity 3,260 4,675 5,551 6,536Total Liab. & Equity 9,125 8,905 8,681 9,675

Income Statement (LE mn) 2007A 2008F 2009F 2010FSales 8,826 12,295 10,774 11,708Cost of Sales (5,279) (7,764) (7,121) (7,643)Gross Profit 3,547 4,531 3,653 4,065SG&A (208) (246) (215) (234)EBITDA 3,339 4,285 3,437 3,831Depreciation & Amortization (432) (440) (452) (477)EBIT 2,908 3,845 2,985 3,354Interest Expense (294) (307) (264) (275)Provisions 0 0 0 0Interest Income 109 30 34 33Investment Income 0 0 0 0Other Non-Operating Income 216 103 103 103Other Non-Operating Expenses (6) 0 0 0EBT 2,931 3,671 2,858 3,215Taxes (635) (734) (572) (643)NPAT 2,296 2,937 2,287 2,572Minority Interest 0 0 0 0Extraordinary Items 0 0 0 0Attributable Profits 2,296 2,937 2,287 2,572

Cash Flow (LE mn) 2007A 2008F 2009F 2010FNOPAT 2,431.8 2,671.4 2,413.3 2,710.8Depreciation & Amortization 431.7 440.2 452.4 477.2Gross Cash Flow (COPAT) 2,863.5 3,111.6 2,865.7 3,188.1Working Investments Change (17.7) (561.0) 172.7 (129.9)Other Current Items 168.1 0.0 0.0 0.0Cash After Current Operations 3,013.9 2,550.6 3,038.4 3,058.2Financing Payments (789.3) (683.3) (635.6) (646.9)Cash Before Long Term Use 2,224.6 1,867.3 2,402.8 2,411.3Net Plant Change (38.0) (611.9) (523.9) (553.8)FCFF 2,975.9 1,938.7 2,514.5 2,504.4Others 419 (226) 51 136Cash Before Financing 2,605.6 1,029.2 1,929.9 1,993.5Short-Term Debt 691.1 (570.1) (58.9) 332.1Long-Term Debt (214.5) (90.2) 0.0 0.0Networth (816.2) 435.8 114.3 128.6Grey Area (156.4) 472.3 (524.2) 0.0Dividends (957.7) (2,437.3) (1,524.8) (1,715.1)Change in Cash 1,151,769 (1,160,300) (63,625) 739,079

Fact Sheet 2007A 2008F 2009F 2010FROE 70.4% 62.8% 41.2% 39.4%ROS 26.0% 23.9% 21.2% 22.0%ROA 25.2% 33.0% 26.3% 26.6%ROIC 34.2% 33.6% 30.6% 30.7%Gross Profit MarginEBITDA Margin 37.8% 34.9% 31.9% 32.7%ATO 1.0 1.4 1.2 1.2WI/ Sales 14.1% 14.7% 15.2% 15.1%ALEV 2.8 1.9 1.6 1.5Liabilities/Networth 1.8 0.8 0.6 0.5Current Ratio 1.0 1.5 1.4 1.6

Per-Share Ratios 2007A 2008F 2009F 2010FShare Price 896.23 896.23 896.23 896.23No. Of Shares (000) 13,668 13,668 13,668 13,668

EPS 22.96 29.37 22.87 25.72DPS 14.25 19.58 15.25 17.15Revenues/Share 88.26 122.94 107.73 117.07 Capacity/Share N/A N/A N/A N/ABV/Share 32.60 46.74 55.51 65.36 Gross Cash Flow/Share 28.63 31.11 28.66 31.88FCFF/Share 29.76 19.39 25.14 25.04EBITDA/Share 33.39 42.85 34.37 38.31EV/Share 143.7 144.9 141.2 133.5

Multiples 2007A 2008F 2009F 2010FP/E 39.0 30.5 39.2 34.8Dividend Yield 2% 2% 2% 2%P/ Revenue 10.2 7.3 8.3 7.7EV/ Revenues 1.6 1.2 1.3 1.1P/ COPAT 31.3 28.8 31.3 28.1 EV/ COPAT 5.0 4.7 4.9 4.2 P/ FCFF 30.1 46.2 35.6 35.8 EV/ FCFF 4.8 7.5 5.6 5.3P/ EBITDA 26.8 20.9 26.1 23.4EV/ EBITDA 4.3 3.4 4.1 3.5P/ BV 27.5 19.2 16.1 13.7

Note: A = Actual; F = ForecastedSource: EZDK and CICR forecasts

November 11, 2008

125

EGYPT | STEEL


Ezz Steel (ES) is a leading local and regional steel pro-ducer with a 63% local market share. Even with the cur-rent global economic slowdown, ES is taking a longer-term perspective by expanding its capacities from a cur-rent 5.3 mtpa to 8 mtpa over the coming five years. Over the short- to medium-term, we expect ES to face a reduc-tion in utilization rates, yet a stable profit margin, given the cost-price relationship of its business model. With a WACC of 18%, our DCF model indicates a 212% upside to a 12-month fair value of LE 34.2/share, thus retaining our BUY recommendation with a MODERATE RISK. More acquisitions: Continuing its expansion strategy, ES increased its stake in Ezz Al-Dekheila for Steel - Alexandria (EZDK) from 50.28% in December 2007 to 53.24% in June 2008 to increase its stake in EZDK's earnings, and to enhance the decision making process. More long-term expansions: From a longer term perspec-tive, ES is in the process of expanding capacities, both locally and regionally. Local expansion is intended to: (1) increase flat steel production by 0.8 mtpa and (2) replace the 0.55 mtpa of imported billets with locally-produced ones to enhance profit margins and reduce FX exposure. Regional expansion of 3 mtpa is intended to diversify markets to mitigate risks. Said expansions will take place over the coming five years, with a total estimated investment cost of US$3 bn.

Expansion financing: During 3Q08, ES increased its capital via a 2-to-1 rights issue, representing 11% of total expansion costs with internal financing and external debt making up the balance. As ES has an excellent credit history, local banks will not be reluctant to finance expansions. Additionally, cost of machinery will be financed by the supplier via selling to ES on installment bases.

Growth drivers: Given Egypt's demographics, local construc-tion activity will always be the main growth driver for ES. Yet, we expect the current slowdown in real-estate activity to result in a mild slowdown in the construction activity which should take place over the coming years to fulfill the currently-contracted real-estate projects. On the global front, we expect a slowdown in the industrialization process,* resulting in a lower rate of utilization.

Industry dynamics: Because of international competition, the expected reductions in inputs' costs* will result in lower selling prices; yet, margins are expected to be maintained but with lower bottom line figures.

Government intervention: The recent removal of steel export tariffs of LE 160/ton should have a positive impact on ES, where 24% of production was exported in 1H08.

Valuation and recommendation: Our DCF model - using a perpetual growth rate of 1% and a WACC of 18% - yielded a 12-month fair value of LE 34.2/share, implying a 146% upside potential. Commodity plays are currently out of favor, but ES is a quasi-monopoly steel producer, and maintains a stable mar-gin. Lower steel prices should therefore stimulate construction volumes, providing a catalyst. Hence, we reiterate our BUY recommendation on ES with a MODERATE RISK rating. * Please refer to our industry section

EZZ STEEL (ES)

The long-term vision


05

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Volume ESRS CASE 30 - rebased


SHARE DATA

Reuters; Bloomberg ESRS.CA; /AEZDq.L | ALES EY

Recent price as of 6-Nov-08 LE 10.95No. of O/S shares 543.3 mnMarket cap LE 5,948.7 mn52-wk high / low LE 38.53/ LE 8.11Avg. daily volume / turnover 1.34 mn / LE 35.29 mn

COMPANY SYNOPSIS

Ezz Steel (ES) - previously known as Al-Ezz Steel Re-bars Co. (ESR) - is a joint stock company established in April 1994, to manufacture steel rebars in Sadat City. In 1995, ES acquired 90.7% of National Al-Baraka for Iron & Steel, - currently known as Al-Ezz Rolling Mills (ERM) - which produces straight and coiled rebars in 10th of Ramadan. ES facilities in Sadat and 10th of Ramadan have a combined production capacity of 1.4 mn tpa. Furthermore, ES owns 75.15% stake in Al-Ezz Flat Steel (EFS), which was established in July 1998 under the provisions of Law no. 8 (free zone systems), with a ca-pacity of 1.2 mn tpa of flat steel, most of which is directed to the export markets. EFS is planning to increase capac-ity by an additional 0.8 mn tpa by 2011. ES owns a 53.24% stake in Al-Ezz Dekheila for Steel- Alexandria (EZDK), previously known as Alexandria National Iron & Steel Company (ANSDK). EZDK is the largest integrated steel plant in Egypt with a capacity of 1.78 mn tpa of long products and 1 mn tpa of flat prod-ucts. ES is expanding regionally in Algeria with an additional 3 mn tpa of steel rebars. Finally, ES is planning to produce internally the imported billets as to enhance profitability margins. Said structure created a strong entity that is capable of competing both locally (63% market share for long and flat products) and internationally (ranged within the top 60 steel producers worldwide


Al-Ezz Holding 38.1%Egy Int'l Com Invest Co. 11.2%Egy Int'l Ind Invest 7.4%Dev Co For Metal Invest 7.4%Banks, Ins Co. and others 1.1%Free Float 34.8%

November 11, 2008

126

EGYPT | STEEL | EZZ STEEL

Balance Sheet (LE mn) 2007A 2008F 2009F 2010FAssetsCash & Cash Equivalent 1,891.8 2,477.8 1,777.8 1,777.8Net Receivables 265.4 378.0 331.3 367.2Total Inventory 2,547.6 3,644.2 3,271.7 3,514.7Advance Payment 125.3 184.1 165.2 177.5Other Trading Assets 0.6 18.8 18.8 18.8Other Current Assets 157.2 367.6 367.6 367.6Total Current Assets 4,988 7,070 5,932 6,224Net Plant 10,601 11,338 13,543 16,947Long-Term Investments 63.0 55.9 55.9 55.9Long-Term Loans Receivalbe 189.3 5.7 0.0 0.0Other Non-current Assets 6.3 0.4 0.4 0.4Intangibles 0.0 315.2 315.2 315.2Total Assets 15,848 18,786 19,847 23,542

Liabilities & Shareholders' EquityShort-Term Debt 1,370 99 240 1,586CP of Long Term Debt 1,901.1 1,616.4 1,167.3 1,167.3Accounts Payable 701.3 954.0 856.5 920.1Accrued Expenses 113.9 167.3 150.2 161.4Down Payments 616.3 877.9 769.3 852.8Taxes Payable 615.8 593.0 593.0 593.0Dividends Payable 137.2 328.5 328.5 328.5Royalties Payables / Due to Sister Co. 5.4 1.9 1.9 1.9Other Current Liabilities 148.3 72.2 72.2 72.2Total Current Liabilities 5,609 4,711 4,179 5,683Total Long-Term Debt 3,892.1 3,824.7 2,982.2 2,139.7Other Non-Current Liabilities 708.9 754.7 754.7 754.7Total Liabilities 10,210 9,290 7,916 8,578Deferred Taxes 0.0 0.0 0.0 0.0Other Provisions 91.7 91.7 91.7 91.7Minority Interest 1,970.9 3,405.7 4,534.9 5,801.8Shareholders' Equity 3,575 5,998 7,304 9,071Total Liab. & Equity 15,848 18,786 19,847 23,542

Income Statement (LE mn) 2007A 2008F 2009F 2010FSales 16,159 23,016 20,225 22,359COGS x-dep (11,852) (17,410) (15,673) (16,792)Gross Profit 4,308 5,606 4,552 5,568SG&A (371) (528) (464) (513)EBITDA 3,937 5,078 4,088 5,055Depreciation & Amortization (659) (695) (726) (818)EBIT 3,278 4,383 3,362 4,236Interest Expense (710) (508) (427) (539)Provisions (6) 0 0 0Interest Income 67 37 32 27Investment Income (0) 0 0 0Other Non-Operating Income 246 147 147 147Other Non-Operating Expenses 0 0 0 0EBT 2,875 4,060 3,114 3,871Taxes (653) (812) (623) (774)NPAT 2,222 3,248 2,491 3,097Minority Interest (1,100) (1,435) (1,129) (1,267)Extraordinary Items 0 0 0 0Attributable Profits 1,122 1,813 1,362 1,830

Cash Flow (LE mn) 2007A 2008F 2009F 2010FNOPAT 2,715 3,712 2,739 3,462Depreciation & Amortization 659 695 726 818Gross Cash Flow (COPAT) 3,374 4,407 3,465 4,280Working Investments Change 215 (700) 215 (133)Other Current Items (43) (264) 0 0Cash After Current Operations 3,546 3,442 3,680 4,147Financing Payments (1,529) (2,409) (2,043) (1,706)Cash Before Long Term Use 2,016.93 1,033 1,636 2,441Net Plant Change (18) (1,432) (2,930) (4,222)FCFF 3,528 2,010 749 (75)Others 346 (95) 185 174Cash Before Financing 2,345 (494) (1,109) (1,607)Short-Term Debt (203) (1,271) 141 1,346Long-Term Debt 891 1,549 325 325Networth (1,292) (662) (1,061) (1,175)Grey Area (474) 1,435 1,129 1,267Dividends (58) 29 (125) (155)Change in Cash 1,209 586 (700) 0Note: A = Actual; F = ForecastedSource: ES and CIBC forecastsFact Sheet 2007A 2008F 2009F 2010FROE 31.4% 30.2% 18.6% 20.2%ROS 6.9% 7.9% 6.7% 8.2%ROA 7.1% 9.7% 6.9% 7.8%ROIC 21.2% 25.2% 17.1% 17.7%Gross Profit Margin 26.7% 24.4% 22.5% 24.9%EBITDA Margin 24.4% 22.1% 20.2% 22.6%ATO 1.0 1.2 1.0 0.9WI/ Sales 10.5% 9.6% 9.9% 9.5%ALEV 4.4 3.1 2.7 2.6Liabilities/Networth 2.9 1.5 1.1 0.9Current Ratio 0.9 1.5 1.4 1.1


EPS 2.1 3.3 2.5 3.4DPS 0.3 0.3 0.2 0.3Revenues/Share 29.7 42.4 37.2 41.2Capacity/Share N/A N/A N/A N/ABV/Share 6.6 11.0 13.4 16.7Gross Cash Flow/Share 6.2 8.1 6.4 7.9FCFF/Share 6.5 3.7 1.4 -0.1EBITDA/Share 7.2 9.3 7.5 9.3EV/Share 20.7 16.6 15.8 16.7

Multiples 2007A 2008F 2009F 2010FP/E 5.3x 3.3x 4.4x 3.3xDividend Yield 3% 3% 2% 3%P/ Revenue 0.4 0.3 0.3 0.3EV/ Revenues 0.7 0.4 0.4 0.4P/ COPAT 1.8 1.3 1.7 1.4 EV/ COPAT 3.3 2.0 2.5 2.1 P/ FCFF 1.7 3.0 7.9 79.3- EV/ FCFF 3.2 4.5 11.4 (120.9)P/ EBITDA 1.5 1.2 1.5 1.2EV/ EBITDA 2.8 1.8 2.1 1.8P/ BV 1.7x 1.0x 0.8x 0.7x

Source: Company reports and CICR estimates

November 11, 2008

127

EGYPT | OIL & GAS

12M FAIR VALUE | US$5.1 BUY | MODERATE RISK

SHARE DATA

Reuters; Bloomberg MOIL.CA; MOIL EYRecent price as of 6-Nov-08 US$ 2.57No. of O/S shares 256.0 mnMarket cap US$ 0,657.9 mn52-wk high / low US$ 7.3/ US$ 2.3Avg. daily volume / turnover 0.73 mn / US$ 1.75 mn

COMPANY SYNOPSIS

Maridive & Oil Services Company (MOS) is a free-zone joint stock company established in 1978. MOS operates under Investment Law No. 8/1997. The company is located in Port Said with offices in Cairo, Alexandria, and Abu Dhabi. Maridive's major objective is to provide Offshore Support Vessels (Marine services) and Offshore Construction Services (Project services) to oil exploration and production companies. The company's operations are executed through the mother company as well as its subsidiaries: Maritide Offshore Oil Services, Valentine Maritime, and Maridve Offshore Projects (MOP). Maridive, with an experience of over 30 years, is currently the largest Egyptian marine and offshore oil services company and one of the largest regional players in terms of fleet size owned. The company owns 57 marine units. The company contracted for 16 marine units (vessels and barges) which will be gradually delivered by 2011. Maridive's operations have widely expanded. The group won a number of contracts in the Gulf region, Persian Gulf, Caspian Sea, Gulf of Mexico as well as North, West, and East Africa in addition to the Far East.

SHAREHOLDER STRUCTURE Offshore Oil Projects 21.4%Eleish Family 13.2%Zeid Family 13.2%Nadim Family 13.2%CIB 7.1%Horus PE Fund III 2.9%Free Float 29.0%Total 100.0%

MOHAMED HAMDY [email protected]

Maridive & Oil Services (MOS) sustained earnings growth with its fleet size growing from 3 vessels and 4 mooring boats in 1979 to 57 marine units in 2008. MOS continues to grow its fleet, having contracted for 16 new marine units, as well as upgrading its existing fleet to meet de-mand. MOS’s projects are global – with 80% of its reve-nues generated outside Egypt. Its share price, however, seems to have been suffering from waning oil prices, a risk - therefore - of lower E&P demand. Yet, MOS is well placed due to its relatively low-cost structure, offering competitive rates than its peers. As such it trades at 6.5x 2009e PER, and 99% below our SOTP 12-month fair value of US$5.1/share. We initiate coverage on the stock with a BUY and MODERATE RISK rating.

Global demand: Global demand for oil as a primary source of energy triggered exploration and production (E&P) activities in untapped offshore oil and gas reserves. Accordingly, MOS contracted for 16 new marine units.

Highly-integrated business model: MOS is a horizontally-integrated company providing offshore construction and sup-port to oil E&P companies. These services cover a wide range of both operational and production levels.

Barriers to entry: There are high barriers prevailing against the entrance of potential players into the market owing to the capital-intensive nature of the industry with high initial invest-ment and operational costs as well as strong technical capa-bilities required. Also, MOS has the edge to offer competitive daily rates than its competitors owing to its ability to source labor with lower packages compared to international markets.

Risks - global financial crisis and lower oil prices: The global financial crisis may have an impact on MOS's require-ments for financial facilities and foreign currencies to finance its operations and expansion plans. Meanwhile, should oil prices continue in their downtrend, offshore operations could reduce their production. Thus, demand for oil services - pro-vided by MOS - may feel the pinch.

Difficult weather conditions: This industry can be affected by difficult weather conditions that could damage vessels and equipment and result in the suspension of operations. The industry is seasonal depending on the storms that hit the re-gions in different times. The monsoon hits India, where the bulk of the Far East revenues are generated from, starting June till end of September. However, this is mitigated by the company's geographical diversification, such as Australia where the monsoon hits from December till early March. It is worth highlighting that one barge sank in June 2007 south of Pakistan due to the monsoon.

Valuation and recommendation: We used sum-of-the-parts (SOTP) valuation to value MOS’s businesses. We reached a 12-month fair value of US$5.1/share, implying a 99% upside potential and 45% above the IPO price. We initiate coverage on the stock with a BUY recommendation and MODERATE RISK.

MARIDIVE & OIL SERVICES (MOS)

Competitive global player


0.01.02.03.04.05.06.07.08.0

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November 11, 2008

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EGYPT | OIL & GAS | MARIDIVE

Balance Sheet (US$ mn) 2007A 2008F 2009F 2010FAssetsCash 6.3 163.9 170.4 246.7Time Deposits 3.1 4.1 5.5 7.5Net Receivables 98.9 81.9 113.6 158.3Total Inventory 5.8 6.0 8.3 12.0Advance Payments to Suppliers 0.3 0.4 0.5 0.7Other Trading Assets 0.3 0.3 0.3 0.3Other Current Assets 38.8 10.8 14.6 19.9Total Current Assets 153.6 267.4 313.2 445.4Net Plant 192.3 326.1 404.0 451.8Long-Term Investments 0.0 0.0 0.0 0.0Other Trading Non-Current Assets 1.9 1.9 1.9 1.9Other Non-Current Assets 0.1 0.8 0.8 0.8Intangibles 9.8 9.8 9.8 9.8Total Assets 357.7 606.0 729.8 909.7

Liabilities & EquityShort-Term Debt 24.5 0.0 0.0 0.0Current Portion of LT Debt 24.1 9.7 17.6 27.2Accounts Payable 40.8 11.3 15.6 21.2Accrued Expenses 6.7 11.3 15.6 21.2Down Payments to Customers 2.1 10.0 20.3 39.6Taxes Payable 0.0 0.0 0.0 0.0Dividends Payable 0.3 32.8 0.0 63.7Other Current Liabilities 4.2 7.4 7.4 7.4Total Current Liabilities 102.8 82.4 76.4 180.2Total Long-Term Debt 64.2 133.8 154.6 141.3Other Non-Current Liabilities 0.0 0.0 0.0 0.0Total Liabilities 167.0 216.3 231.0 321.5Deferred Taxes 0.2 0.0 0.0 0.0Other Provisions 1.7 2.1 2.1 2.1Minority Interest 22.5 33.9 41.7 48.5

Paid-in capital 85.0 102.4 102.4 102.4Additional paid-in capital 0.0 85.5 85.5 85.5Treasury shares 0.0 0.0 0.0 0.0Reserves 11.7 11.7 11.7 11.7Retained earnings 69.6 154.1 255.3 338.0

Shareholders' Equity 166.3 353.7 454.9 537.6Total Liab. & Equity 357.7 606.0 729.8 909.7

Income Statement (US$ mn) 2007A 2008F 2009F 2010FOCS 216.8 187.8 245.1 346.0OSV 47.3 74.7 108.2 135.2

Revenues 264.1 262.5 353.3 481.3

OCS (117.7) (102.1) (140.4) (198.4)OSV (22.3) (35.4) (48.8) (59.1)

Cost of Revenues (including provisions) (140.0) (137.5) (189.2) (257.5)

OCS 99.1 85.7 104.7 147.7OCS gross margin 45.7% 45.6% 42.7% 42.7%

OSV 25.0 39.3 59.4 76.1OSV gross margin 52.9% 52.7% 54.9% 56.3%

Gross Profit (including provisions) 124.1 125.0 164.0 223.8Gross Margin 47.0% 47.6% 46.4% 46.5%

OCS (11.4) (11.7) (14.2) (18.1)As a % of revenues 5.2% 6.2% 5.8% 5.2%

OSV (4.6) (6.5) (8.7) (10.7)As a % of revenues 9.7% 8.6% 8.1% 7.9%

SG&A (16.0) (18.2) (23.0) (28.7)As a % of revenues 6.0% 6.9% 6.5% 6.0%

OCS 87.7 74.0 90.4 129.6OCS EBITDA margin 40.5% 39.4% 36.9% 37.4%

OSV 20.4 32.9 50.6 65.5OSV EBITDA margin 43.2% 44.0% 46.8% 48.4%

EBITDA (including provisions) 108.1 106.9 141.0 195.1EBITDA Margin 41.0% 40.7% 39.9% 40.5%

EBITDA (excluding provisions) 110.6 109.9 145.7 201.2EBITDA Margin 41.9% 41.9% 41.2% 41.8%

Depreciation & Amortization (11.6) (16.0) (21.8) (28.1)EBIT 96.5 90.8 119.2 167.0Interest Expense (3.3) (6.1) (11.4) (10.7)Interest Income 0.2 1.8 3.4 4.9Investment Income 0.0 0.0 0.0 0.0Other Non-Operating Income 0.5 1.3 0.0 0.0Other Non-Operating Exp. (0.1) (0.5) (0.5) (0.5)EBT 93.8 87.2 110.7 160.7Taxes (1.7) (1.4) (1.7) (2.3)NPAT 92.2 85.9 109.0 158.3Minority Interest (12.3) (11.4) (7.8) (12.0)Extraordinary Items 0.2 10.1 0.0 0.0Net Profits 80.1 84.5 101.3 146.4

Net Margin 30.3% 32.2% 28.7% 30.4%

Cash Flow (US$ mn) 2007A 2008F 2009F 2010FNOPAT 82.5 78.1 109.8 152.7Depreciation & Amortization 11.6 16.0 21.8 28.1Gross Cash Flow (COPAT) 94.1 94.1 131.6 180.8WI Change (28.0) (0.3) (15.3) (18.1)Other Current Items (1.1) 31.1 (3.7) (5.3)Cash After Current Operations 65.0 124.9 112.6 157.4Financing Payments (13.4) (28.6) (17.9) (23.6)Cash Before Long-Term Use 51.6 96.3 94.6 133.7Net Plant Change (91.4) (139.8) (99.8) (75.8)FCFF (25.3) (46.0) 16.6 86.8Others 2.4 (0.8) (1.7) (2.3)Cash Before Financing (37.5) (44.2) (6.9) 55.6Short-Term Debt 17.2 (24.5) 0.0 0.0Long-Term Debt 49.6 79.3 38.3 13.9Net-worth (33.5) 114.3 7.8 6.8Grey Area 0.2 0.3 0.0 0.0Dividends 0.3 32.4 (32.8) 0.0Change in Cash (3.8) 157.6 6.5 76.3

Fact Sheet 2007A 2008F 2009F 2010FOCS revenue growth 2.6% -13.4% 30.5% 41.2%OSV revenue growth 22.2% 58.0% 44.8% 25.0%

Revenue growth 5.6% -0.6% 34.6% 36.2%

OCS gross profit growth 20.8% -13.5% 22.1% 41.1%OSV gross profit growth 45.9% 57.3% 50.9% 28.3%

Gross profit growth 25.1% 0.8% 31.2% 36.4%

OCS EBITDA growth 24.7% -15.6% 22.2% 43.3%OSV EBITDA growth 51.9% 60.9% 54.0% 29.4%

EBITDA growth 29.1% -1.2% 32.0% 38.3%

Earnings growth 49.8% 5.5% 19.8% 44.6%

Revenue mixOCS 82.1% 71.5% 69.4% 71.9%OSV 17.9% 28.5% 30.6% 28.1%

EBITDA mixOCS 81.1% 69.2% 64.1% 66.4%OSV 18.9% 30.8% 35.9% 33.6%

ROE 48.2% 23.9% 22.3% 27.2%ROA 22.4% 13.9% 13.9% 16.1%ROIC 27.4% 14.7% 16.4% 20.2%

ATO 0.7 0.4 0.5 0.5WI/ Sales -10.6% -0.1% -4.3% -3.8%ALEV 2.2 1.7 1.6 1.7Liabilities/Networth 1.0 0.6 0.5 0.6Current Ratio 1.5 3.2 4.1 2.5

Per-Share Ratios 2007A 2008F 2009F 2010FShare Price $2.57 $2.57 $2.57 $2.57No. of Shares ('000) 256,000 256,000 256,000 256,000

EPS 0.31 0.33 0.40 0.57DPS 0.00 0.00 0.00 0.25DIV./NPAUI 0% 0% 0% 44%Revenues/Share 1.03 1.03 1.38 1.88 BV/Share 0.65 1.38 1.78 2.10 Gross Cash Flow/Share 0.37 0.37 0.51 0.71FCFF/Share (0.10) (0.18) 0.06 0.34EBITDA/Share 0.43 0.43 0.57 0.79EV/Share 2.97 2.47 2.56 2.24

Multiples 2007A 2008F 2009F 2010FP/E 8.2x 7.8x 6.5x 4.5xDividend Yield 0.0% 0.0% 0.0% 9.7%P/ Revenue 2.5x 2.5x 1.9x 1.4xEV/ Revenues 2.9x 2.4x 1.9x 1.2xP/ FCFF -26.0x -14.3x 39.7x 7.6xEV/ FCFF -30.1x -13.8x 39.5x 6.6xP/ EBITDA 5.9x 6.0x 4.5x 3.3xEV/ EBITDA 6.9x 5.8x 4.5x 2.8xP/ BV 4.0x 1.9x 1.4x 1.2xSource: Maridive and CICR forecasts

November 11, 2008

129

EGYPT | CEMENT

GHADA REFKY [email protected]

Misr Beni Suef Cement (MBSC), a grey cement producer since 2003, comprises a mono-production line cement factory of 1.5 mtpa capacity. In view of the imposed li-cense fees of LE 251 mn for its new 1.5 mtpa production line, MBSC booked a significant provision of LE 156 mn in 2007. Yet, MBSC did not pay that fee till date awaiting the authorities' reply concerning its appeal stating that Beni Suef Cement (Titan Group) won at the auction held in Oc-tober 2008 an expansion license in the same governorate for just LE 134.5 mn. The stock is traded at PER of 3.5x 2009 earnings vs. a peer average of 7.5x, which may imply acquisitive interest. Our DCF-based valuation of LE 152.5/share suggests a 226% upside potential with a BUY at MODERATE RISK rating.

New production line: Said new line is expected to release its initial production by H209, with a required investment cost esti-mated at LE 1.2 bn.

Overcapacity utilization to be hit by 2010: We expect MBSC to maintain the same trend, outpacing the market ca-pacity utilization over 2008-12. Given the new capacities en-tering the cement market, we expect the 100%+ utilization rate by MBSC which registered 113% (the third highest rate) in 2007 to be hit gradually to 96% in 2012 - yet still higher than 79% for the market then.

Competitive post ban export price: MBSC was one of the first two companies permitted to export to Sudan during the 6-month export ban that ended in October 2008. MBSC had acquired a 16% export market share during April-August 2008, failing to obtain a better share relative to others permitted by the same time. We believe MBSC will be able to strengthen its export market share as exports resumed after the ban at US$75/ton - a competitive price compared to other local play-ers exporting at a minimum of US$85/ton.

Temporary cost advantage: MBSC did not pay the LE 35.1/cement ton produced clay resource development fees till date, awaiting for the authorities to reply to its appeal stating that (1) clay usage rate used to calculate said fee is incorrect, (2) a contract with the governorate was established to deliver clay at a fixed fee of LE 2.25/ton, and (3) several other industries use clay, such as the ceramics industry and - accordingly - should be charged the same fee as well.

Valuation and recommendation: Based on a cost of equity of 17.6%, our DCF model resulted in a 12-month fair value of LE 152.5/share, implying a 226% upside potential. Accord-ingly we rate this stock a BUY at MODERATE RISK.

MISR BENI SUEF CEMENT (MBSC)

Very cheaply rated versus peer group


020406080

100120140160180

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12M FAIR VALUE | LE 153 BUY | MODERATE RISK

SHARE DATA

Reuters; Bloomberg MBSC.CA; MBSC EYRecent price as of 6-Nov-08 LE 46.79No. of O/S shares 20.0 mnMarket cap LE 935.8 mn52-wk high / low LE 141.49/ LE 45Avg. daily volume / turnover 0.03 mn / LE 3.63 mn

COMPANY SYNOPSIS

Misr Beni Suef Cement (MBSC) was incorporated under Law no. 8/1997 in November 1997 as a shareholding company, with the objective of producing all kinds of cement and all other associated products. In August 1999, MBSC had its shares listed on the Egyptian Exchange (EGX). The company was established with a paid-in capital of LE 120 mn distributed over 12 mn shares at a par value of LE 10/share. Currently, MBSC has an authorized capital of LE 500 mn with a paid-in capital of LE 200 mn distributed over 20 mn shares with a par value of LE 10/share. In December 2006, MBSC signed a supplying & installation contract with the French company Polysius to expand its daily clinker production to 10k tpd. MBSC reached 2% local market share in 2007, selling 837k tons and 4% in 8M08, selling 961k tons. Meanwhile, 21% export market share in 2007, exporting 869k tons (c. 51% of production) and 23% in 8M08, exporting 169k tons (c. 15% of production).

SHAREHOLDER STRUCTURE Top Management 20.5%National Investment Bank 20.1%Individuals 6.3%Others 2.6%Free Float 50.5%Total 100.0%

November 11, 2008

130

EGYPT | CEMENT | MBSC

Balance Sheet (LE mn) Dec-07 Dec-08 Dec-09 Dec-10Assets Cash & Cash Equivalent 548.3 7.8 88.4 427.2Net Receivables 0.2 0.2 0.4 0.5Total Inventory 30.9 14.8 45.2 119.7Advance Payments 1.4 0.7 2.8 5.4Other Trading Assets 0.0 0.0 0.0 0.0Other Current Assets 0.0 0.0 0.0 0.0Total Current Assets 580.9 23.6 136.8 552.7Net Plant 776.3 1,477.5 1,562.0 1,421.8Long-Term Investments 10.0 0.0 0.0 0.0Other Trading Non-Current Assets 0.0 0.0 0.0 0.0Other Non-current Assets 12.5 0.0 0.0 0.0Intangibles 0.0 0.0 0.0 0.0Total Assets 1,379.7 1,501.1 1,698.9 1,974.5

Liabilities & Shareholders' EquityShort-Tem Debt 6.3 92.6 47.2 40.7CP Of Long-Term Debt 0.0 0.0 0.0 0.0Accounts Payable 54.1 88.8 153.9 197.6Accrued Expenses 6.7 29.6 40.9 18.1Down Payments 13.6 69.9 26.9 27.5Taxes Payable 0.0 0.0 0.0 0.0Dividends Payable 67.8 0.0 0.0 0.0Other Spontaneous Finance 0.0 0.0 0.0 0.0Other Current Liabilities 60.9 3.4 0.0 0.0Total Current Liabilities 209.3 284.3 268.9 283.9Total Long Term Debts 180.6 0.0 0.0 0.0Other Non-Current Liabilities 0.0 0.0 0.0 0.0Long Term Spontaneous Finance 0.0 0.0 0.0 0.0Total Liabilities 389.9 284.3 268.9 283.9Tax Provision 0.0 0.0 0.0 0.0Other Provisions 351.4 371.4 411.4 451.4Minority Interest 0.0 0.0 0.0 0.0Shareholders' Equity 638.4 845.3 1,018.5 1,239.2Total Liabilities & Equity 1,379.7 1,501.1 1,698.9 1,974.5

Income Statement (LE mn) Dec-07 Dec-08 Dec-09 Dec-10Capacity '000 Tons 1,500 1,500 2,250 3,000 Tons Sold '000 1,706 1,649 2,258 2,780 Revenues 588.3 639.6 980.8 1,255.0Cost of Goods Sold (180.6) (270.9) (515.3) (661.8)Gross Profits 407.7 368.6 465.5 593.3SG&A (11.0) (11.7) (18.0) (23.0)EBITDA 396.7 356.9 447.5 570.3Depreciation & Amortization (63.3) (64.7) (157.1) (190.8)EBIT 333.4 292.2 290.4 379.5Interest Expense (3.1) (11.6) (5.9) (5.1)Provisions (156.5) (40.0) (40.0) (40.0)Interest Income 0.0 0.2 4.3 18.1Investment Income 0.0 0.0 0.0 0.0Other Non-Operating Income 23.8 23.8 23.8 23.8Other Non-Operating Expenses 0.0 0.0 0.0 0.0EBT 197.6 264.7 272.6 376.3Taxes (4.5) (6.0) (6.2) (8.5)NPAT 193.1 258.7 266.5 367.8Minority Interest 0.0 0.0 0.0 0.0Extraordinary Items 0.0 0.0 0.0 0.0Attributable Profits 193 259 266 368

Cash Flow (LE mn) Dec-07 Dec-08 Dec-09 Dec-10NOPAT 321.0 294.1 284.2 371.0Depreciation & Amortization 63.3 64.7 157.1 190.8Gross Cash Flow (COPAT) 384.3 358.8 441.3 561.7Working Investment Change 14.4 130.6 0.8 (55.6)Other Current Items 17.3 (57.5) (3.4) 0.0Cash After Current Operations 416.1 432.0 438.7 506.1Financing Payments (19.6) (11.6) (5.9) (5.1)Cash Before Long-Term Use 396.5 420.4 432.8 501.0Net Plant Change (244.4) (765.8) (241.6) (50.5)FCFF 154.4 (276.4) 200.4 455.5Others (190.0) 567.1 (39.9) (188.0)Cash Before Financing (37.9) 221.7 151.3 262.5Short-Term Debt 5.6 86.3 (45.4) (6.5)Long-Term Debt 104.7 (177.2) 0.0 0.0Net Worth (7.7) (0.0) 0.0 0.0Grey Area (3.2) (20.0) 0.0 0.0Dividends (54.3) (119.5) (93.3) (147.1)Change in Cash 7.2 (8.7) 12.6 108.9

Fact Sheet Dec-07 Dec-08 Dec-09 Dec-10ROE 30.3% 30.6% 26.2% 29.7%ROS 32.8% 40.5% 27.2% 29.3%ROA 14.0% 17.2% 15.7% 18.6%ROIC 27.3% 22.5% 19.2% 21.4%Gross Margin 69.3% 57.6% 47.5% 47.3%EBITDA Margin 67.4% 55.8% 45.6% 45.4%ATO 0.4 0.4 0.6 0.6WI/ Sales -7.1% -27.0% -17.7% -9.4%ALEV 2.2 1.8 1.7 1.6Liabilities/Net worth 0.6 0.3 0.3 0.2Current Ratio 2.8 0.1 0.5 1.9

Per Share Ratios Dec-07 Dec-08 Dec-09 Dec-10Share Price 46.79 46.79 46.79 46.79New No. Of Shares '000 20,000 20,000 20,000 20,000 Actual No. Of Shares '000 20,000 20,000 20,000 20,000 EPS 9.66 12.94 13.32 18.39Diluted EPS 9.66 12.94 13.32 18.39DPS 3.39 2.59 4.66 7.36Revenues/Share 29.41 31.98 49.04 62.75Tons Sold/Share 0.09 0.08 0.11 0.14Capacity/Share 0.08 0.08 0.11 0.15BV/Share 31.9 42.3 50.9 62.0 Gross Cash Flow/Share 19.22 17.94 22.07 28.09FCFF/Share 7.72 -13.82 10.02 22.78EBITDA/Share 19.84 17.85 22.38 28.51EV/Share 28.72 51.03 44.73 27.47

Multiples Dec-07 Dec-08 Dec-09 Dec-10P/E 4.84 3.62 3.51 2.54Diluted P/E 4.84 3.62 3.51 2.54Div Yield % 7.2% 5.5% 10.0% 15.7% P/Revenues 1.59 1.46 0.95 0.75EV/ Revenues 0.98 1.60 0.91 0.44 P/ COPAT 2.43 2.61 2.12 1.67EV/ COPAT 1.49 2.84 2.03 0.98P/ FCFF 6.06 -3.39 4.67 2.05EV/ FCFF 3.72 -3.69 4.46 1.21EV/ Ton 382.89 680.39 397.59 183.11P/ EBITDA 2.36 2.62 2.09 1.64EV/ EBITDA 1.45 2.86 2.00 0.96P/ BV 1.47 1.11 0.92 0.76Source: Misr Beni Suef Cement & CICR forecast

November 11, 2008

131

EGYPT | CEMENT


Misr Cement (Qena) (MCQE), a cement producer since 2002, comprises a mono-production line cement factory of 1.5 mtpa capacity, with no revealed intension to ex-pand locally. Owing to its low capacity, no headway to its recently announced projects, forecasted significant low debt profile and cash-rich position, we believe MCQE could be a good acquisition target. ASEC Cement Hold-ing has been increasing its stake in MCQE to 26.18% via direct purchases from the stock market. With an 8% free float, MCQE will be a fruitful target if the public stake is negotiated to be offered for sale. Although MCQE is traded at a PER of 7.8x 2009 earnings, 8% premium to a peer average of 7.3x due to current unfavourable mar-kets' conditions, our DCF-based valuation suggest a 28% upside potential, hence we assign a BUY with a MODER-ATE RISK rating. Overcapacity utilization to be hit by 2010: We expect MCQE to maintain the same trend, outpacing the market ca-pacity utilization over 2008-12. Given the new capacities en-tering the cement market with 41% heading to Upper Egypt, we expect the 100%+ utilization rate by MCQE which regis-tered 119% (the second highest rate) in 2007 to be hit gradu-ally to 92% in 2012 - yet still higher than 79% for the market then. Exports heading south: Benefiting from its location in Upper Egypt, MCQE exports mainly to Sudan and other neighboring countries, which we believe is currently a better export market than that of Europe given the recent global financial crisis. Confirming its location advantage (according to figures re-leased by the Ministry of Investment), MCQE managed to ob-tain the highest export market share of 71% during April-August 2008 period over the other players permitted to export during the 6-month export ban which ended in October 2008.

Permanent cost advantage: In May 2008, a resource devel-opment fee for clay – an essential raw material for the cement production process – was imposed on cement producers amounting to LE 35.1/cement ton produced, which is expected to constitute around 10% of producers' cement cost bill in 3Q08. Since MCQE's extracted limestone contains the needed clay, MCQE has secured a cost advantage by not having to pay said fee.

A new market and a new business: MCQE is eyeing ce-ment expansion in Oman and a new phosphate fertilizer pro-ject in Egypt. Yet, we have not incorporated such develop-ments in our DCF valuation till further details are made avail-able.

Valuation and recommendation: Based on a cost of equity of 15.7%, our DCF model resulted in a 12-month fair value of LE 98.54/share. This valuation did not incorporate any of the recently-announced projects, which could indicate further up-side potential. Although trading at higher multiples than its peers we think it is strategically placed and note the stake building by ASEC. Accordingly we rate this stock a BUY at MODERATE RISK.

MISR CEMENT (QENA) (MCQE)

Strategically placed for acquisitive interest


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SHARE DATA

Reuters; Bloomberg MCQE.CA; MCQE EYRecent price as of 6-Nov-08 LE 76.99No. of O/S shares 30.0 mnMarket cap LE 2,309.7 mn52-wk high / low LE 90/ LE 55Avg. daily volume / turnover 0.02 mn / LE 1.57 mn

COMPANY SYNOPSIS Misr Cement (Qena) (MCQE) was incorporated under Law no. 159/1981 in May 1997 as a shareholding company, with the objective of producing and selling all kinds of cement and all other related construction products. In May 2000, MCQE had its shares listed on the Egyptian Exchange (EGX). The company was established with an authorized capital of LE 600 mn, and an issued and paid-in capital of LE 300 mn distributed over 30 mn shares with a par value of LE 10/share, maintaining said position till date. MCQE had provided FLSmidth in June 1999 the mechanical equipment supply, plant management, & equipment installation of its production line that had a total capacity of 1.4 mta. The plant had a total investment cost of LE 750 mn, releasing its production to the market in April 2002. The company had provided the technical management, the maintenance operations & supervising the operation & delivery of the queries' raw materials to Arab Swiss Engineering Company "ASEC"

MCQE has reached 3% local market share in 2007, selling 1,199k tons and 4% in 8M08, selling 1,019k tons. Meanwhile, 14% export market share was achieved in 2007, exporting 585k tons (c. 33% of production) and 41% in 8M08, exporting 301k tons (c. 23% of production). SHAREHOLDER STRUCTURE Asec Cement 26.2%Misr Insurance 20.1%Egyptian Investment Projects 10.0%Egyptian Kuwaiti Investment 9.8%Al-Ahly Capital Holding Co. 7.5%Banque Misr 7.5%Others 10.9%Free Float 8.0%Total 100.0%

November 11, 2008

132

EGYPT | CEMENT | MISR CEMENT (QENA)

Balance Sheet (LE mn) 2007A 2008F 2009F 2010FAssets Cash & Cash Equivalent 293.5 251.4 412.0 571.1Net Receivables 3.5 3.8 3.5 2.7Total Inventory 36.5 47.7 46.6 44.9Advance Payments 0.3 1.6 1.6 1.5Other Trading Assets 0.0 0.0 0.0 0.0Other Current Assets 0.0 0.0 0.0 0.0Total Current Assets 333.8 304.5 463.6 620.2Net Plant 617.5 603.4 593.5 583.2Long-Term Investments 0.8 0.8 0.8 0.8Other Trading Non-Current Assets 0.1 0.1 0.1 0.1Other Non-current Assets 19.4 23.4 23.4 23.4Intangibles 0.0 0.0 0.0 0.0Total Assets 971.7 932.3 1,081.5 1,227.8

Liabilities & EquityShort-Tem Debt 0.0 1.1 1.0 0.8CP Of Long-Term Debt 0.0 0.0 0.0 0.0Accounts Payable 25.3 31.1 30.4 28.3Accrued Expenses 0.1 0.1 0.1 0.1Down Payments 14.5 17.1 16.6 15.2Taxes Payable 2.4 2.4 2.4 2.4Dividends Payable 177.9 0.0 0.0 0.0Other Spontaneous Finance 0.0 0.0 0.0 0.0Other Current Liabilities 33.6 22.4 22.1 20.0Total Current Liabilities 253.9 74.3 72.6 66.9Total Long Term Debts 0.0 0.0 0.0 0.0Other Non-Current Liabilities 52.1 2.1 0.0 0.0Long Term Spontaneous Finance 0.0 0.0 0.0 0.0Total Liabilities 305.9 76.4 72.6 66.9Tax Provision 0.0 0.0 0.0 0.0Other Provisions 24.0 74.0 94.0 114.0Minority Interest 0.0 0.0 0.0 0.0Shareholders' Equity 641.7 781.9 914.9 1,046.8Total Liabilities & Equity 971.7 932.3 1,081.5 1,227.8

Income Statement (LE mn) 2007A 2008F 2009F 2010FCapacity '000 Tons 1,500 1,500 1,500 1,500 Tons Sold '000 1,784 1,759 1,575 1,386 Revenues 597.3 695.4 673.0 617.9Cost of Goods Sold (239.2) (299.8) (291.9) (272.2)Gross Profits 358.1 395.6 381.1 345.7SG&A (15.0) (24.3) (24.5) (22.9)EBITDA 343.2 371.3 356.6 322.8Depreciation & Amortization (39.3) (41.1) (43.0) (44.9)EBIT 303.8 330.1 313.7 277.9Interest Expense (0.5) (0.1) (0.1) (0.1)Provisions (21.8) (50.0) (20.0) (20.0)Interest Income 9.1 8.3 12.5 15.4Investment Income 0.3 0.0 0.0 0.0Other Non-Operating Income (Expense 0.7 0.7 0.7 0.7FX Gains (Losses) (4.7) (6.5) 0.0 0.0EBT 287.0 282.5 306.8 273.9Taxes (10.5) (10.3) (11.2) (10.0)NPAT 276.4 272.2 295.5 263.9Minority Interest 0.0 0.0 0.0 0.0Extraordinary Items 0.0 0.0 0.0 0.0Attributable Profits 276.4 272.2 295.5 263.9

Fact Sheet 2007A 2008F 2009F 2010FROE 43.1% 34.8% 32.3% 25.2%ROS 46.3% 39.1% 43.9% 42.7%ROA 28.5% 29.2% 27.3% 21.5%ROIC 43.8% 37.3% 29.9% 23.1%Gross Profit Margin 60.0% 56.9% 56.6% 55.9%EBITDA Margin 57.5% 53.4% 53.0% 52.2%ATO 0.6 0.7 0.6 0.5WI/ Sales 0.1% 0.7% 0.7% 0.9%Net Profit Margin 46% 39% 44% 43%ALEV 1.5 1.2 1.2 1.2Liabilities/Net worth 48% 10% 8% 6%Current Ratio 1.3 4.1 6.4 9.3

Cash Flow (LE mn) 2007A 2008F 2009F 2010FNOPAT 291.5 319.8 302.4 267.8Depreciation & Amortization 39.3 41.1 43.0 44.9Gross Cash Flow (COPAT) 330.9 360.9 345.4 312.7Working Investment Change 2.5 (4.3) 0.2 (0.9)Other Current Items 11.2 (11.3) 0.0 0.0Cash After Current Operations 344.6 345.3 345.6 311.8Financing Payments (3.0) (2.5) (2.5) (2.2)Cash Before Long-Term Use 341.6 342.8 343.1 309.6Net Plant Change (9.7) (27.0) (33.1) (34.6)FCFF 323.7 329.6 312.6 277.2Others (167.8) (9.3) (126.5) (93.4)Cash Before Financing 164.1 306.5 183.6 181.6Short-Term Debt 0.0 1.1 (0.1) (0.1)Long-Term Debt (15.0) 0.0 0.0 0.0Net Worth (46.6) 31.3 14.8 13.2Grey Area (14.2) 0.0 0.0 0.0Dividends (81.5) (341.2) (177.3) (145.2)Change in Cash 6.7 (2.3) 20.9 49.5

Per Share Ratios 2007A 2008F 2009F 2010FShare Price 76.99 76.99 76.99 76.99New No. Of Shares '000 30,000 30,000 30,000 30,000 Actual No. Of Shares '000 30,000 30,000 30,000 30,000 EPS 9.21 9.07 9.85 8.80Diluted EPS 9.21 9.07 9.85 8.80DPS 4.96 5.44 5.91 4.84Revenues/Share 19.91 23.18 22.43 20.60Units Sold/Share 0.06 0.06 0.05 0.05Capacity/Share 0.05 0.05 0.05 0.05BV/Share 21.4 26.1 30.5 34.9 Gross Cash Flow/Share 11.03 12.03 11.51 10.42FCFF/Share 10.79 10.99 10.42 9.24EBITDA/Share 11.44 12.38 11.89 10.76EV/Share 67.21 68.65 63.29 57.98

Multiples 2007A 2008F 2009F 2010FP/E 8.35 8.49 7.82 8.75Diluted P/E 8.35 8.49 7.82 8.75Div Yield % 6.4% 7.1% 7.7% 6.3% P/Revenues 3.87 3.32 3.43 3.74EV/ Revenues 3.38 2.96 2.82 2.81 P/ COPAT 6.98 6.40 6.69 7.39EV/ COPAT 6.09 5.71 5.50 5.56P/ FCFF 7.14 7.01 7.39 8.33EV/ FCFF 6.23 6.25 6.07 6.27EV/ Ton 1344 1373 1266 1160P/ EBITDA 6.73 6.22 6.48 7.16EV/ EBITDA 5.88 5.55 5.32 5.39P/ BV 3.60 2.95 2.52 2.21Source Misr Cement (Qena) & CICR forecast

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133

EGYPT | TMT

Mobinil's 3Q08 results proved strong despite macro, regu-latory, and market challenges. While revenues were in line, the driver for beating the bottom line forecast was lower costs, thanks to on-net traffic and a "cost efficiency program". This helped the company achieve its highest EBITDA margin in 2 years, albeit not sustainable going forward. One of the key investment catalysts for Mobinil is its high dividend yield of around 14% but with a high leverage. Having revised our model, we reached an 8% higher DCF value of LE 206 (+79% upside). With the stock traded at a 37% discount to EMEA peers, we rate it a BUY.

Positive results: 3Q08 results beat our and consensus esti-mates by 26% and 32%, respectively. While no surprise came on the top-line performance, substantial bottom-line growth was driven by lower-than-expected cost of revenues and opex, thanks to on-net traffic growth and a "cost efficiency program". This allowed Mobinil to achieve the highest EBITDA margin in the last 2 years. However, such a level may not be sustainable going forward due to the 3G 2.5% revenue sharing. We be-lieve at least the 45% target in 2008 is achievable.

Enduring challenges: Blended ARPU stabilized at LE 47 QoQ on 5% higher usage. While this elasticity may be seen as a bear point for those concerned about inflation in Egypt, infla-tion rates seem to be coming down. In view of the global finan-cial crisis, Mobinil is adequately liquid despite boasting the highest net debt/equity ratio of 4.5x; Mobinil’s interest cover-age ratio stands at a comfortable 4.7x. It had secured all its financial requirements for 2008 and also has the flexibility to do so in 2009 due to its low net debt-to-EBITDA of 1.3x vs. an industry average of 2x.

Interconnection dispute: TE filed a complaint with the Na-tional Telecom Regulatory Authority (NTRA) to change inter-connection prices with mobile operators, the result of which came in TE’s favor. Mobinil informed the NTRA of its rejection to the decision citing lack of a legal basis. Mobinil’s manage-ment confirmed that they will continue with the existing inter-connection agreement with TE "for years".

Valuation and recommendation: We revised our model in view of 3Q08 results and now-lower management guidance for capex and reached a 12-month fair value of LE 206/share (+8% vs. our previous valuation), suggesting a 79% upside. Should Mobinil maintain its dividend policy - as we believe, a key investment catalyst for Mobinil would be its high dividend yield of around 14% vs. an EMEA average of 10.8%. The stock is traded at a PER of 6.2x 2008 expected earnings, a 37% discount to an EMEA average of 9.8x. As such, we reit-erate our BUY recommendation with the same MODERATE RISK rating.

MOBINIL

Two in one: high growth...high dividend yield



SHARE DATA

Reuters; Bloomberg EMOB.CA; EMOB EYRecent price as of 6-Nov-08 LE 115.37No. of O/S shares 100.0 mnMarket cap LE 11,537.0 mn52-wk high / low LE 243/ LE 87Avg. daily volume / turnover 0.1 mn / LE 19.18 mn

COMPANY SYNOPSIS

Egyptian Company for Mobile Services “ECMS” (Mobinil) was established in November 1997 under the Investment Law No. 8/1997, granting it a 5-year tax holiday that ended in December 2003. The company started operation on May 21, 1998, when all the mobile-related assets of Telecom Egypt were sold off to Mobinil Telecommunications (Mobinil Telecom), a consortium comprised of one local and two international telecom giants, Orascom Telecom Holding (OTH), France Telecom Mobiles International (FTMI), and Motorola, respectively. Mobinil Telecom controls ECMS through its 51% combined stake. Early 2001, ownership of that consortium changed as Motorola divested its international mobile investments. Accordingly, both FTMI and OT purchased Motorola’s stake on a pro-rata basis. In July 2002, FTMI was replaced by Orange as a shareholder in the consortium, controlling 71.25% of Mobinil Telecom. On April 18, 1998, ECMS was formally awarded a 15-year license, renewable for a 5-year period to operate and expand the existing GSM 900 network. In 2005, ECMS was granted an access to 7.5 mhz of the 1800 mhz spectrum for a total payment of LE 1.24 bn. In July 2007, Mobinil decided to apply for 3G license for LE 3.4 bn to launch its commercial services in early September 2008. ECMS represents today the largest local GSM mobile operator in the Egyptian market in terms of subscribers (c. 19 mn subs). ECMS’s network currently covers most of the urban areas in Egypt. As of September 2008, Mobinil had 3,691 sites and 34 switches.

SHAREHOLDER STRUCTURE Mobinil Telecom 51.0% FT Orange Group 71.3% OTH 28.8%OTH 20.0%Free Float 29.0%Total 100.0%

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Balance Sheet (LE mn) 2007A 2008F 2009F 2010F Cash Flow (LE mn) 2007A 2008F 2009F 2010FAssets NOPAT 1,994 2,622 2,840 3,010Cash & Cash Equivalent 415 458 583 651 Depreciation & Amortization 1,286 1,585 1,760 2,115Net Receivables 264 319 368 410 Gross Cash Flow (COPAT) 3,279 4,208 4,600 5,125Total Inventory 116 145 177 194 Working Investments Change 411 387 524 333Advance Payment 32 40 52 59 Other Current Items 187 0 0 0Other Trading Assets 0 0 0 0 Cash After Current Operations 3,878 4,595 5,124 5,458Other Current Assets 0 0 0 0 Financing Payments (548) (985) (1,750) (1,725)Total Current Assets 826 962 1,179 1,314 Cash Before LT Use 3,329 3,609 3,374 3,733Net Plant 7,626 9,060 10,265 10,924 Net Plant Change (3,581) (2,898) (2,743) (2,553)Long-Term Investments 1 1 1 1 FCFF 297 1,697 2,381 2,905Prepaid Exp. 126 126 126 126 Others (72) (2,425) (84) (1,051)Other Non-current Assets 403 403 403 403 Cash Before Financing (323) (1,713) 546 129Intangibles 1,072 3,130 2,908 3,787 Short-Term Debt 217 197 1,173 1,942Total Assets 10,053 13,681 14,882 16,554 Long-Term Debt* 1,984 3,715 25 (301)

Networth (34) (668) 0 0Liabilities & Equity Grey Area 57 111 68 38Short-Term Debt 369 567 1,739 3,682 Dividends (1,715) (1,600) (1,686) (1,740)CP of Long Term Debt 327 327 816 816 Change in Cash 185 43 125 68Accounts Payable 1,112 1,418 1,811 2,065 * Including LT creditors license feesAccrued Expenses 632 806 1,030 1,175 Fact Sheet 2007A 2008F 2009F 2010FDown Payments 0 0 0 0 ROE 104.1% 138.1% 118.8% 98.5%Taxes Payable 372 372 372 372 ROS 22.2% 18.7% 18.4% 17.0%Dividends Payable 42 42 42 42 ROA 18.1% 13.6% 14.1% 13.1%Current portion of License fees 158 775 25 0 ROIC 37.2% 48.4% 40.7% 37.9%Other Current Liabilities 924 924 924 924 EBITDA Margin 45.1% 45.3% 44.0% 43.5%Total Current Liabilities 3,937 5,230 6,758 9,075Total Long-Term Debt 3,433 5,645 4,829 4,258 ATO 0.8 0.7 0.8 0.8Other Non-Current Liabilities 236 247 247 247 WI/ Sales -18.4% -29.3% -23.5% -19.2%LT creditors license fees 145 545 545 0 ALEV 5.7 10.1 8.4 7.5Total Liabilities 7,751 11,669 12,380 13,580 Liabilities/Networth 4.4 8.6 7.0 6.2Deferred Taxes 0 0 0 0 Current Ratio 0.2 0.2 0.2 0.1Other Provisions 547 657 723 759Minority Interest 4 5 7 9 Per-Share Ratios 2007A 2008F 2009F 2010FShareholders' Equity 1,752 1,350 1,772 2,207 Share Price 115.37 115.37 115.37 115.37Total Liab. & Equity 10,053 13,681 14,882 16,554 No. of Shares ('000) 100,000 100,000 100,000 100,000

No. Of Shares (,000)Income Statement (LE mn) 2007A 2008F 2009F 2010F EPS 18.24 18.65 21.06 21.73Yearend Subs (k) 15,118 20,283 23,493 25,606 DPS 16.70 16.00 16.86 17.40Revenues 8,200 9,950 11,429 12,766 DIV./NPAUI 92% 86% 80% 80%Cost of Revenues (1,656) (2,118) (2,697) (3,077) Revenues/Share 82.00 99.50 114.29 127.66 Gross Profit 6,545 7,832 8,732 9,689 Subscribers/1,000 Shares 151.2 202.8 234.9 256.1 SG&A (2,845) (3,325) (3,705) (4,138) BV/Share 17.52 13.50 17.72 22.07 EBITDA 3,700 4,507 5,027 5,551 Gross Cash Flow/Share 32.79 42.08 46.00 51.25Depreciation & Amortization (1,286) (1,585) (1,760) (2,115) FCFF/Share 2.97 16.97 23.81 29.05EBIT 2,414 2,922 3,267 3,436 EBITDA/Share 37.00 45.07 50.27 55.51Interest Expense (124) (446) (535) (753) EV/Share 153 176 183 196Imputed Interest 0 (200) (128) 0Provisions 0 62 0 0 Multiples 2007A 2008F 2009F 2010FInterest Income 30 43 44 49 P/E 6.3x 6.2x 5.5x 5.3xInvestment Income 0 0 0 0 Dividend Yield 14.5% 13.9% 14.6% 15.1%Other Non-Operating Income 3 0 0 0 P/ Revenue 1.4 1.2 1.0 0.9Other Non-Operating Expenses (3) (37) 0 0 EV/ Revenues 1.9 1.8 1.6 1.5EBT 2,319 2,345 2,647 2,732 P/ COPAT 3.5 2.7 2.5 2.3 Taxes (496) (478) (540) (557) EV/ COPAT 4.7 4.2 4.0 3.8 NPAT 1,823 1,867 2,108 2,175 P/ FCFF 38.9 6.8 4.8 4.0 Minority Interest (2) (2) (2) (2) EV/ FCFF 51.4 10.4 7.7 6.8Extraordinary Items 3 0 0 0 EV/Sub (US$) $188 $162 $146 $143Attributable Profits 1,824 1,865 2,106 2,173 P/ EBITDA 3.1 2.6 2.3 2.1

EV/ EBITDA 4.1x 3.9x 3.6x 3.5xDividends (1,670.0) (1,600.0) (1,686.0) (1,739.8) P/ BV 6.6x 8.5x 6.5x 5.2x

Note: A = Actual; F = ForecastedSource: Mobinil and CICR forecasts

November 11, 2008

135

EGYPT | HOUSING & REAL ESTATE

Nasr City Housing & Development (NCHD) is a one of the oldest local real-estate developer, targeting mainly the middle class. However, it is currently diversifying more into the luxurious market and the low-end housing. NCHD is a cash-rich, low-debt company with a well-located land bank, albeit with some disputes. With a WACC of 19%, our DCF model indicates a 37% upside to a 12-month fair value of LE 42.7/share, warranting a BUY recommendation with a HIGH RISK rating given its land disputes.

Solving its land bank disputes: During 1Q08, the Egyptian Civil Aviation Authority granted NCHD a building heights li-cense ranging between 12 and 18 meters for its land in Al-Nasr Gardens (ANG) amounting to 3.8 mn sqm. This will help the company pursue its development activities in a well-located area in New Cairo. Regarding its conflicts with the Ministry of Defense over the Alternative Land which amounts to 5.6 mn sqm, negotiations are underway; however, no partial settlement has been reached yet*.

Increasing its land bank and targeting the middle class: NCHD was able to acquire 179,634 sqm in the Sixth of Octo-ber City, through the national housing project, for a total con-sideration of LE 37 mn. Said land bank is earmarked for eco-nomic housing projects that will embrace apartments of 63-80 sqm. An additional 555,366 sqm will be acquired in the same area over the coming years. Said transaction will help the company diversify its target clientele by approaching the lower end of the middle class that represents a huge market with unsatisfied demand.

More diversification: At the onset of 2008, NCHD announced a joint venture contract with New Cairo for Real Estate Invest-ments (Katameya Heights) to construct a resort on ANG land owned by NCHD at a total cost of LE 5 bn. Said move would help NCHD diversify its clientele by targeting the high-end market to capitalize in its well-located land bank in the New Cairo area.

Cash-rich, low-leverage company: As of June 30, 2008, NCHD had a cash position of LE 238 mn and receivables of LE 591 mn, representing 20% and 50% of total assets, re-spectively. On the other hand, total debt amounted to LE 29 mn, only 2% of total assets. As such, NCHD should benefit from the current high interest rate environment.

Valuation and recommendation: We valued NCHD using the DCF method, yielding a 12-month fair value of LE 42.7/share, suggesting a 37% upside potential. Hence, we rate the stock a BUY with a HIGH RISK rating.

* Please refer to our report “Struggling for rights…struggling for wealth”, dated November 26, 2006, for a full description of NCHD's land problems.

NASR CITY HOUSING & DEVELOPMENT (NCHD)

Surviving the storm



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12M FAIR VALUE | LE 42.7 BUY | HIGH RISK

SHARE DATA

Reuters; Bloomberg MNHD.CA; NCHR EYRecent price as of 6-Nov-08 LE 31.22No. of O/S shares 100.0 mnMarket cap LE 3,122.0 mn52-wk high / low LE 82.45/ LE 18.32Avg. daily volume / turnover 0.67 mn / LE 37.01 mn

COMPANY SYNOPSIS

Nasr City Housing and Development was established in 1959 via presidential decree No. 815/1959 as a public company. With the issuance of Law No. 97/1983, the company became a subsidiary of the “Public Sector Housing Authority.” In 1991, the company followed law No. 203/1991, where the company became a subsidiary of “National Company for Construction and Development.” In 1995, NCHD’s shares were listed on Cairo and Alexandria Stock Exchanges (CASE), and in 1996, 75% of the company’s shares were floated, with NCHD becoming a shareholding company following Law No. 159/1981. Currently, NCHD has authorized capital of LE 150 mn, with issued capital of LE 100 mn distributed over 100 mn shares at a par value of LE 1/share. NCHD’s main activities are real estate and land development. The former contributed on average 72% of total executed work during FY06/07 and FY07/08, while the latter makes up the balance. NCHD has c.10.2 mn sqm in Nasr City, New Cairo and Sixth of October City, 64% or c.6.5 mn sqm, of which, are sellable. Additionally, 92% of the current land bank is facing disputes. SHAREHOLDER STRUCTURE

Nat. Co. for Const. and Dev. 15.1%Beltone Group 30.9%Banks, Ins Co., Others 17.1%ESOP 5.0%Free Float 32.0%Total 100.0%

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EGYPT | HOUSING & REAL ESTATE | NASR CITY H&D

Balance Sheet (LE mn) Jun-08 A Jun-09 P Jun-10 P Jun-11 PAssets Cash & Cash Equivalent 238.1 143.6 123.6 103.6Net Receivables 55.3 81.6 109.7 140.6Total Inventory 212.3 178.8 174.3 174.0Advance Payments to Suppliers 75.8 63.8 65.3 69.5Other Trading Assets 0.0 0.0 0.0 0.0Other Current Assets 22.3 16.7 16.7 16.7Total Current Assets 603.9 484.5 489.7 504.4Net Plant 12.9 13.3 13.8 14.2Long-Term Investments 13.1 13.1 13.1 13.1Other Trading Non-Current Assets 540.2 592.1 623.1 631.8Other Non-Current Assets 0.0 0.0 0.0 0.0Intangibles 3.8 3.8 3.8 3.8Total Assets 1,173.9 1,106.8 1,143.5 1,167.3

Liabilities & Shareholders' Equity Short-Term Debt 12.8 85.7 99.8 96.0Current Portion of Long-Term Debt 0.3 0.3 0.3 0.3Accounts Payable 199.0 200.4 199.8 200.4Accrued Expenses 0.0 0.0 0.0 0.0Down Payments 4.8 4.4 4.7 5.1Taxes Payable 53.2 0.0 0.0 0.0Dividends Payable 3.7 0.0 0.0 0.0Other Current Liabilities 466.5 435.4 404.2 373.1Total Current Liabilities 740.4 726.1 708.8 674.8Total Long-Term Debt 16.0 15.7 15.4 15.1Other Non-Current Liabilities 0.0 0.0 0.0 0.0Long Term Spontaneous Fin. 0.0 0.0 0.0 0.0Total Liabilities 756.3 741.8 724.2 689.9Deferred Taxes 0.0 0.0 0.0 0.0Other Provisions 122.2 134.0 145.8 157.6Minority Interest 21.6 27.1 33.1 39.5Shareholders' Equity 273.7 203.9 240.4 280.3Total Liab. & Shareholders' Equity 1,173.9 1,106.8 1,143.5 1,167.3

Income Statement (LE mn) Jun-08 A Jun-09 P Jun-10 P Jun-11 PSales 320.3 298.2 319.0 341.5Cost of Sales (165.1) (166.3) (170.8) (181.2)Gross Profit 155.2 132.0 148.2 160.3SG&A (27.3) (23.9) (25.5) (27.3)EBITDA 127.9 108.1 122.6 133.0Depreciation & Amortization (0.9) (1.2) (1.4) (1.4)EBIT 127.0 106.9 121.3 131.5Interest Expense (3.8) (12.0) (13.8) (13.3)Provisions (13.6) (11.8) (11.8) (11.8)Interest Income 13.3 15.3 10.7 9.1Investment Income 7.9 9.1 10.5 12.0Other Non-Operating Income 13.0 12.1 12.9 13.8Other Non-Operating Expenses (9.8) (6.9) (6.9) (6.9)EBT 133.9 112.6 122.8 134.5Taxes (22.0) (21.4) (23.4) (25.6)NPAT 111.9 91.2 99.5 108.9Minority Interest (5.8) (5.5) (5.9) (6.4)Extraordinary Items (1.1) 0.0 0.0 0.0NPAUI 105.0 85.7 93.5 102.5

Cash Flow (LE mn) Jun-08 A Jun-09 P Jun-10 P Jun-11 PNOPAT 84.9 31.4 92.0 99.5Depreciation & Amortization 0.9 1.2 1.4 1.4Gross Cash Flow (COPAT) 85.8 32.7 93.3 101.0WI Change 7.7 (36.4) (56.5) (42.5)Other Current Items (18.4) (25.6) (31.2) (31.2)Cash After Current Operations 75.1 (29.3) 5.7 27.3Financing Payments (4.1) (12.3) (14.1) (13.6)Cash Before Long-Term Use 71.0 (41.6) (8.4) 13.7Net Plant Change 4.1 (1.6) (1.8) (1.9)FCFF 97.6 (5.3) 35.1 56.6Others (14.5) 73.1 27.2 28.1Cash Before Financing 60.6 29.9 17.0 39.9Short-Term Debt (0.6) 72.8 14.1 (3.8)Long-Term Debt (7.7) 0.0 0.0 0.0Net-worth 12.9 (103.3) 0.0 0.0Grey Area (47.1) 5.5 5.9 6.4Dividends (80.3) (56.0) (57.0) (62.5)Change in Cash (62.3) (51.0) (20.0) (20.0)Note: A = Actual; F = ForecastedSource: NCHD and CIBC forecasts

Fact Sheet Jun-08 A Jun-09 P Jun-10 P Jun-11 PROE 38.3% 42.0% 38.9% 36.5%ROS 32.8% 28.7% 29.3% 30.0%ROA 8.9% 7.7% 8.2% 8.8%ROIC 19.2% 6.8% 17.3% 17.0%EBITDA Margin 39.9% 36.3% 38.4% 38.9%

ATO 0.3 0.3 0.3 0.3WI/ Sales 122.3% 93.9% 89.6% 87.9%

ALEV 4.3 5.5 4.8 4.2Debt/ Equity 2.8 3.7 3.1 2.5Current Ratio 0.8 0.7 0.7 0.7

Share Ratios Jun-08 A Jun-09 P Jun-10 P Jun-11 PShare Price 31.22 31.22 31.22 31.22No. Of Shares '000 100,000 100,000 100,000 100,000 EPS 1.05 0.86 0.94 1.02Div/Share 0.80 0.52 0.57 0.62Revenues/Share 3.20 2.98 3.19 3.42BV/Share 2.74 2.04 2.40 2.80Gross CF/Share 0.86 0.33 0.93 1.01FCFF/Share 0.98 -0.05 0.35 0.57EBITDA/Share 1.28 1.08 1.23 1.33EV/Share 29.13 30.80 31.14 31.30

Multiples Jun-08 A Jun-09 P Jun-10 P Jun-11 PP/E 29.7 36.4 33.4 30.5Div Yield % 2.6% 1.7% 1.8% 2.0%P/ Revenue 9.7 10.5 9.8 9.1EV/ Revenues 9.1 10.3 9.8 9.2P/ COPAT 36.4 95.6 33.5 30.9EV/ COPAT 33.9 94.3 33.4 31.0P/ FCFF 32.0 -584.0 89.0 55.2EV/ FCFF 29.8 -576.2 88.8 55.3P/ EBITDA 24.4 28.9 25.5 23.5EV/ EBITDA 22.8 28.5 25.4 23.5P/ BV 11.4 15.3 13.0 11.1


November 11, 2008

137

EGYPT | BANKS

National Société Générale Bank (NSGB) is the second largest private bank in Egypt following the successful ac-quisition of Misr International Bank (MIBank). Against the global financial issues and concerns of global recession, NSGB is able to steadily generate a double-digit ROAE of 24.1% that adjusts to 32% when excluding goodwill amor-tization vs. a market average of 16%. The stock is traded at 2009 PER and PBV of 4.8x - adjusts to 3.7x upon ex-cluding goodwill expense - and 0.9x, respectively. Our DCF-based 12-month fair value suggests a 98% upside potential to LE 35.76, therefore we rate it a BUY with MOD-ERATE RISK.

Strong 1H08; considering a half year dividend: NSGB demonstrated an outstanding 62% growth in bottom-line prof-its for 1H08, mostly driven by a one-off income worth LE 278.6 mn in reversed provisions and a 48% growth in total banking income. Conversely, the bank is also burdened with the an-nual amortization charge worth LE 362 mn related to the good-will of MIBank, ending 3Q10. The bank called for an EGM and AGM on November 12, 2008, to amend articles of incorpora-tion and accordingly approve the proposed half year DPS worth LE 0.25.

Core lending capacity and asset quality: NSGB enjoys a CAR ratio of 13.35% and a decent liquidity demonstrated by a net loans/deposits ratio of 61%, following a 13% growth in the loans portfolio in 1H08. NSGB targets diversified loan growth across all LoBs. The NPLs/loans is 8.5% at end of 1H08, down from 16% post MIBank acquisition.

Improved cost-to-income ratio in 2008: NSGB benefited from a positive surprise in its 1H08 P&L, namely one-off re-versed provisions, which led to an improved cost-to-income ratio of 41% - adjusts to 34.2% when excluding the said one-off item and ex-goodwill, compared to 56% - 35.1% ex-goodwill—in 1H07. We expect the ratio to show an improved trend throughout the projected period.

2008 forecast implies very cheap leading multiples :We forecast an earnings growth rate of 51% in 2008 to LE 1,018.8 mn. NSGB trades at leading 2009 PER and PBV of 4.8x (3.7x ex-goodwill) and 0.9x, respectively, much cheaper than the 2009 MENA average of 10.6x and 2.2x, respectively.

Valuation and recommendation: Using a risk-free rate of 11.5% and a market premium of 8% to reflect the contempo-rary global and local risks, we re-initiate our coverage on the bank with a 12-month fair value of LE 35.76/share, suggesting a 98% upside potential, therefore we rate it a BUY with MODEARATE RISK rating.

NATIONAL SOCIETE GENERALE BANK (NSGB)

Unleashing growth potential


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Reuters; Bloomberg NSGB.CARecent price as of 6-Nov-08 LE 18.05No. of O/S shares 302.9 mnMarket cap LE 5,468.1 mn52-wk high / low LE 45.45/ LE 17Avg. daily volume / turnover 0.15 mn / LE 5.76 mn

COMPANY SYNOPSIS

National Société Générale Bank (NSGB) was established in April 1978, by the French Société Générale Bank (SGB); one of the largest financial services group in the Eurozone, and National Bank of Egypt (NBE); Egypt’s largest public bank. In September 2005, NSGB acquired 90.7% of Egypt’s second largest private bank at the time; Misr International Bank (MIBank). NSGB is currently one of the largest private banks in Egypt. The bank operates in key businesses including retail banking, corporate and investment banking, alongside other activities offered through its affiliates such as leasing via “Sogelease”, NSGB Life Insurance company and ALD Automotive specialized in car rentals and fleet management. Currently, Société Générale owns 77.2 % of NSGB after acquiring NBE’s 18% stake in addition to another 6% in August 2005. As at September 2008, NSGB runs a network of 121 branches.

SHAREHOLDER STRUCTURE Société Générale Bank (SGB) 77.2%Free Float 22.8%Total 100.0%

November 11, 2008

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EGYPT | BANKS | NSGB


AssetsCash & Due from Banks 3,315.7 3,920.2 4,820.2 5,826.3Interbank Assets 13,537.5 12,498.9 12,365.2 12,952.7T-Bills & Government Securities 3,946.0 2,958.8 3,827.5 4,906.6Net Trading Investments 241.1 147.4 165.9 186.7Available for Sale Investments 3,632.1 3,746.7 4,135.6 4,564.9Net Loans & Advances 19,735.6 24,016.8 28,367.3 32,867.8Held-to-Maturity Investments 413.2 467.8 527.0 598.3Investments in Subsidiaries 39.2 41.7 41.7 41.7Accrued Income & Other Assets 634.5 880.9 985.2 1,110.3Net Fixed Assets 676.1 767.5 869.8 994.1Good Will 1,085.8 723.8 361.9 0.0Total Assets 47,256.7 50,170.5 56,467.4 64,049.6

Liabilities and Shareholders' EquityInterbank Liabilities 1,580.0 1,644.6 1,627.1 1,704.4Customer Deposits 39,299.4 41,092.6 46,580.2 52,757.3Accrued Expenses & Other Liabilities 1,143.6 1,153.4 1,009.5 1,051.5Dividends Payable 130.4 244.4 330.4 441.1Provisions 740.1 950.1 1,087.6 1,238.8Medium-/Long-Term Loans 58.8 57.2 51.3 46.1Debt Securities 0.0 0.0 0.0 0.0Total Liabilities 42,952.3 45,142.3 50,686.1 57,239.2Paid-in Capital 2,754.0 3,029.4 3,029.4 3,029.4Reserves 777.9 1,276.9 2,077.8 3,151.6Retained Earnings 0.4 0.4 0.4 0.4Tier I Capital 3,532.4 4,306.8 5,107.7 6,181.4Tier II Capital 772.0 721.5 673.6 629.0Total Shareholders' Equity 4,304.4 5,028.2 5,781.3 6,810.4Total Liabilities & Shareholders' Equity 47,256.7 50,170.5 56,467.4 64,049.6Contingent Liabilities 15,816.4 17,090.5 19,993.5 23,389.6Total Footing 63,073.1 67,261.1 76,460.9 87,439.2


Total Interest Income 3,047.3 3,317.4 4,030.0 4,745.5Interest Paid to Clients & Banks 1,834.4 1,818.3 2,201.3 2,496.2Net Interest Income (NII) 1,212.9 1,499.1 1,828.7 2,249.3Provisions 90.3 305.0 202.7 218.7Net Interest Income AP 1,122.6 1,194.1 1,626.0 2,030.6Fees and Commissions Income 447.5 599.3 713.9 828.1Investment Income 13.6 16.8 20.7 23.2Foreign Exchange Income 15.7 28.2 63.6 73.2Other Incomes 80.0 378.6 113.2 119.4Non-Interest Income 556.7 1,022.9 911.5 1,043.9Operating Income (BP) 1,769.7 2,522.0 2,740.2 3,293.2Operating Income (AP) 1,679.3 2,217.0 2,537.5 3,074.5G&A Expenses and Depreciation 984.5 1,094.7 1,220.3 1,287.5Other Expenses -6.8 -1.9 0.0 0.0Non-Interest Expense 977.7 1,092.8 1,220.3 1,287.5Net Operating Income 701.6 1,124.2 1,317.2 1,787.0Taxation 29.3 105.4 185.9 272.1NPAT 672.3 1,018.7 1,131.3 1,514.9Unusual Items 1.8 0.1 0.0 0.0NPAUI 674.2 1,018.8 1,131.3 1,514.9Less: Non-Appropriation Items 0.0 92.9 103.2 138.2Net Attributable Income (NAI) 674.2 925.9 1,028.1 1,376.7






Net Loans Growth 26.2% 21.7% 18.1% 15.9%Customer Deposits Growth 18.0% 4.6% 13.4% 13.3%EPS (LE) * 2.45 3.36 3.73 5.00P/E 8.1x 5.4x 4.8x 3.6xDPS (LE) 0.25 0.50 0.75 1.00Dividend Yield 1% 3% 4% 6%Retroactive BV/Share (LE) 14.21 16.60 19.08 22.48P/BV 1.3x 1.1x 0.9x 0.8x* EPS based on NPAUI** Cost/Income is based on Total non interest expense/ Total interest & non-interest incomeSource: NSGB and CICR forecasts

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139

EGYPT | CONSUMER


OLYMPIC GROUP (OG)

Away from global headache; yet inflation is a concern


Olympic Group (OG) maintained a remarkable market share of 30% in 2007 owing to its well diversified portfo-lio. Classifying its products as durables associated with a one-time buy rather than replacement, we believe that the global slowdown will not have a serious impact on local demand. Yet, inflationary pressures remain a concern. Growth in the coming few years is expected to be sus-tained from the delivery of housing units in new com-pounds, while long-term growth is expected to be driven from the new agreement with Electrolux. OG is traded at 5.5x 2008 earnings vs. peers' average of 7.6x. Our 12 month fair value is LE 55.1/share, with a 128% upside po-tential. Thus, we reiterate our BUY recommendation with Moderate risk.

Growth profile to be maintained. We believe that future de-mand will be driven from the delivery of most of the housing units of newly established compounds in 2010 in addition to growing urbanization and new marriages. Yet, inflationary pressures are expected to increase demand on lower priced brands and lower replacement market. Long-term earnings growth, estimated at a 5-year CAGR of 19%, is expected to be achieved on the back of alliance signed with Electrolux. More capacity is required to be added to expand with Electrolux with an estimated capex figure of LE 1.12 bn. The alliance, part of Electrolux's strategy to relocate its factories to low cost na-tions, is expected to add around LE 513 mn to EBITDA over the next 5 years. OG will export products produced on an OEM basis to Electrolux.

Future cost savings ahead. We believe that the current slow-down in steel prices is expected to give the company an edge for future savings in light of its hedging strategy to purchase its steel requirements 3-6 months in advance.

Valuation and recommendation. We downgraded our 12-month fair value using DCF to LE 55.1/share vs. LE 58.1/share in our previous update, reflecting i) 50-bps and a 200 bps increase in the discount rate and the market risk premium to 11.5% and 8%, respectively ii) a 100 bps decrease in the perpetuity growth rate to 3% reflecting inflationary pressures. Given that OG is traded at a 56% discount to fair value, thus we still maintain our BUY recommendation. Yet, we need to highlight the downside risk to our valuation which is the slow-down in sales of consumer durables mirroring the global slow-down. It is worth highlighting that our valuation incorporates (1) lower estimates of steel prices and (2) OG's exact stakes in Namaa and B.Tech post spin-off, announced early Septem-ber, where OG shareholders were given the option to request shares or cash. Since a larger than expected amount of shareholders requested cash, OG now has controlling stakes in Namaa and B.Tech. OG is traded at 5.5x 2008 expected earnings vs. peers traded at 7.6x expected earnings.

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12M FAIR VALUE | LE 55.1

BUY | MODERATE RISK

SHARE DATA

Reuters; Bloomberg OLGR.CA / OLGR EYRecent price as of 6-Nov-08 LE 24.13No. of O/S shares 60.1 mnMarket cap LE 1,450.2 mn52-wk high / low LE 89/ LE 17.75Avg. daily volume / turnover 0.1 mn / LE 6.76 mn

COMPANY SYNOPSIS

Established in 1995, Olympic Group (OG) dates back to the 1930s. It has factories in Cairo, the Tenth of Ramadan City, and the Sixth of October City. Since its acquisition of 79% of Ideal late 1997, OG has been maintaining a leading position in Egypt's white goods market. OG's portfolio is well segmented with products targeting different income classes. Exports contribute less that 10% of OG's top line. OG procures around 50% of the components used in manufacturing locally either from subsidiaries within the group or through other local suppliers. Meanwhile, OG procures 40% of its steel requirements locally, and the remaining balance is imported. Over the last five years, OG has been consolidating its business. In 2003 and 2004, OG consolidated five companies and increased its paid-in capital from LE 340 mn to LE 547.8 mn through (1) a stock dividend distribution and (2) a capital increase of LE 148 mn at par. In 2005, OG increased its stake in Ideal to 93% through a 1:2 share swap (one OG share to two Ideal shares). Accordingly, OG's paid-in capital increased by LE 52.9 mn to LE 600.7 mn. In early September 2008, OG announced the spin-off of Namaa and B.Tech through the distribution of 0.5 shares of Namaa and 0.4 shares of B.tech to OG shareholders as of September 9, 2008 for every 1 share owned in OG or the equivalent in cash (i.e. LE 5/OG share and LE 0.4/OG share, respectively).


Paradise Capital 52.0%Foreign Institutions 37.0%Local Institutions 8.0%Retail 3.0%

November 11, 2008

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EGYPT | CONSUMER | OLYMPIC GROUP

Cash Flow (LE mn) 2007P 2008F 2009F 2010FNOPAT 245 186 385 493Depreciation & Amortization 31 38 41 42Gross Cash Flow (COPAT) 276 224 425 535Working Investments Change (101) (147) (119) (148)Other Current Items (7) (22) 14 17Cash After Current Operations 169 54 320 404Financing Payments (89) (103) (153) (295)Cash Before Long Term Use 80 (49) 167 108Net Plant Change (82) (182) (581) (398)FCFF 86 (128) (261) 5Others (3) 462 51 67Cash Before Financing (5) 230 (363) (223)Short-Term Debt (1) 104 4 446Long-Term Debt 100 153 459 5Networth (112) (556) (284) (347)Grey Area 9 (40) 25 31Dividends 0 106 129 158Change in Cash (10) (3) (29) 71

Fact Sheet 2007P 2008F 2009F 2010FROE 20.2% 27.6% 29.2% 29.2%ROS 12.0% 11.1% 12.0% 12.1%ROA 11.9% 13.3% 12.7% 12.5%ROIC 14.6% 11.0% 16.4% 16.8%Gross Margin 27.5% 26.9% 27.4% 27.7%EBITDA Margin 15.7% 14.8% 16.0% 16.5%Adjusted EBITDA Margin** 17.2% 15.9% 16.9% 17.6%ATO 1.0 1.2 1.1 1.0WI/ Sales 35.7% 29.7% 29.5% 29.4%ALEV 1.7 2.1 2.3 2.3Liabilities/Networth 0.5 0.9 1.2 1.2Current Ratio 1.5 1.4 1.3 1.0

Per-Share Ratios 2007P 2008F 2009F 2010FShare Price 24.13 24.13 24.13 24.13No. Of Shares (,000) 60,076 60,076 60,076 60,076

EPS 3.8 4.4 5.7 7.0 DPS 1.5 1.7 2.3 2.8 Revenues/Share 31.6 39.7 47.8 57.9 BV/Share 18.8 16.0 19.6 23.9 Gross Cash Flow/Share 4.6 3.7 7.1 8.9 FCFF/Share 1.4 (2.1) (4.3) 0.1 EBITDA/Share 5.0 5.9 7.6 9.6 EV/Share 28.6 32.3 39.4 43.2

Multiples 2007P 2008F 2009F 2010FP/E 6.4x 5.5x 4.2x 3.5xP/ Revenue 0.8x 0.6x 0.5x 0.4xEV/ Revenues 0.9x 0.8x 0.8x 0.7xP/ COPAT 5.2x 6.5x 3.4x 2.7xEV/ COPAT 6.2x 8.7x 5.6x 4.9xP/ FCFF 16.8x -11.3x -5.6x 267.5xEV/ FCFF 20.0x -15.1x -9.1x 479.2xP/ EBITDA 4.9x 4.1x 3.2x 2.5xEV/ EBITDA 5.8x 5.5x 5.2x 4.5xP/ BV 1.3x 1.5x 1.2x 1.0xNote: P = Pro forma; F = Forecast NA= Not Available*Figures exclude Namaa and B.Tech**Adjusted EBITDA excludes lease expense but includes export subsidies.Source: OG and CICR forecasts

Balance Sheet (LE mn)* 2007P 2008F 2009F 2010FAssetsCash & Cash Equivalent 115 112 83 154Net Receivables 161 228 275 334Total Inventory 434 524 628 758Advance Payment 0 62 74 90Other Trading Assets 0 0 0 0Other Current Assets 0 0 0 0Total Current Assets 710 926 1,061 1,336Net Plant 444 589 1,130 1,487Long-Term Investments 515 251 259 269Other Non-Current Assets 235 119 139 166Other Non-current Assets 0 111 111 111Intangibles 1 1 1 1Total Assets 1,906 1,998 2,702 3,370

Liabilities & Shareholders' EquityShort-Term Debt 208 312 316 762CP of Long Term Debt 42 62 154 155Accounts Payable 153 190 228 276Accrued Expenses 0 14 17 21Down Payments 0 20 24 29Taxes Payable 0 7 7 7Dividends Payable 0 0 0 0Other Current Liabilities 73 67 80 97Total Current Liabilities 476 672 826 1,347Total Long-Term Debt 137 228 533 384Other Non-Current Liabilities 0 6 6 6Total Liabilities 612 905 1,365 1,736Other Provisions 99 68 72 76Minority Interest 68 64 89 120Shareholders' Equity 1,127 962 1,176 1,438Total Liab. & Equity 1,906 1,998 2,702 3,370

-0.99 -0.04 0.81 -0.96Income Statement (LE mn) 2007P 2008F 2009F 2010FRevenues 1,899 2,385 2,870 3,481Cost of Revenues (1,376) (1,743) (2,085) (2,517)Gross Profit 523 642 785 964SG&A (225) (289) (327) (390)EBITDA 298 353 458 574Adjusted EBITDA** 326 378 486 611Depreciation & Amortization (31) (38) (41) (42)EBIT 266 316 417 532Interest Expense (51) (61) (91) (142)Provisions 0 (4) (4) (4)Interest Income 2 4 3 4Investment Income (2) 3 7 10Other Non-Operating Income 47 53 70 90Other Non-Operating Expenses (1) (0) (0) (0)EBT 261 310 401 490Taxes (20) (25) (32) (39)NPAT 241 285 369 451Minority Interest (13) (20) (25) (31)Extraordinary Items - - - - Attributable Profits 228 265 344 420

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141

EGYPT | CONSTRUCTION & FERTILIZERS

Orascom Construction Industries (OCI) is one of the larg-est regional construction groups with diversified busi-nesses and a shrewd management team. Besides its "conventional" construction business, it once had a global cement business that was cashed out early 2008 with good timing and valuation only to shift gears towards the high-growth fertilizers sector. OCI's current fertilizers business model focuses on nitrogen fertilizers in Egypt and Algeria with a low-cost advantage of natural gas prices (between US$0.57-2/MMBtu). OCI is also looking into the phosphate fertilizers as a complement. The stock is currently traded at a 40% discount to intrinsic value but a 30% premium vs. peers based on 2008 EV/EBITDA multi-ple due to asymmetric market conditions and the fact that Algeria’s operation is yet to start by 2010. We re-initiate coverage with a BUY.

Modeling the fertilizers business: OCI's fertilizers business is evolving and should benefit from expected demand in the different fertilizers sub-segments (nitrogen and phosphate).

Management vision: OCI's management believes in growth via establishing new fertilizers plants or acquiring stakes in existing ones (á la EFC type-of-deal). Hence, we should ex-pect further expansion in 2008 and beyond, further boosting both revenues and investment income.

Capacities ramp-up: New capacities are on schedule with Egyptian Basic Industries Co. (EBIC) and Nigeria-based No-tore Fertilizers (NCIL) coming on stream in 4Q08 with full ca-pacity starting 2009, helping OCI take advantage of the cur-rent slack in global nitrogen fertilizers capacities. In addition, EFC's production capacity will increase in 2010, concurrent with the launch of OCI's Algerian fertilizers plant, Sorfert.

Nitrogen fertilizers prices rally: Although urea prices re-verted back to its normal levels (c. US$300/ton), ammonia prices are rallying up the scale reaching c. US$900/ton begin-ning 4Q08, just in time for the launch of EBIC - an ammonia producer. Thus, EBIC is expected to ride the ammonia peck.

Guaranteed output sales: OCI's fertilizers output is sold through both the retail and wholesale channels, with the latter backed with long-term take-or-pay agreements.

Cheap natural gas prices: OCI's fertilizers business is backed by long-term gas agreements with prescribed gas vol-umes and price formulas in the range of US$1.25-2/MMBtu valid for 20 years in Egypt and US$0.57/MMBtu valid for a similar period in Algeria.

Valuation and recommendation: We valued OCI based on a sum-of-the-parts basis and using the DCF model for its two main lines of business: construction and fertilizers. We reached a 12-month fair value of LE 330/share, implying an upside potential of 68%.

ORASCOM CONSTRUCTION INDUSTRIES (OCI)

Black pearl


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Reuters; Bloomberg OCIC.CA; OCIC EYRecent price as of 6-Nov-08 LE 197.00No. of O/S shares 214.8 mnMarket cap LE 42,309.9 mn52-wk high / low LE 485/ LE 182.09Avg. daily volume / turnover 0.27 mn / LE 88.23 mn

COMPANY SYNOPSIS

Orascom Construction Industries is incorporated under Law no. 159/1981 in April 1998 as a shareholding company, to undertake contracting activities and other related activities. OCI's operations encompass construction, fertilizers (nitrogen), and previously cement in US, Europe, MENA, and GCC regions. Currently, OCIC has an authorized and paid-in capital of LE 1,073.8 mn distributed over 214.77 mn shares with a par value of LE 5. In 1999, OCI joined in the cement business and had its shares listed on the Egyptian Exchange (EGX). Afterwards, it owned and operated a group including cement, ready-mix concrete and cement bag manufacturing operating in Egypt, Algeria, northern Iraq, Pakistan, UAE, Turkey and Spain, with a combined annual designed production capacity of 35 mn tons. In January 2008, OCI divested the cement LoB to Lafarge S.A., that paid EUR8.8 bn (US$12.9 bn) and assumed US$2 bn in debt, the deal was executed on the EGX. Starting 2008, OCI ventured in the fertilizers business by merging Egyptian Fertilizers Company (EFC), a subsidiary of ABRAAJ Capital (Abraaj) - a UAE company. The deal amounted to US$1.59 bn (cash and shares), also OCI assumed EFC's US$1.1 bn net debt. Through EFC, OCI owns a 20% stake in Notore Fertilizers, a Nigerian company. In addition, OCI established Egyptian Basic Industries Company (EBIC), another fertilizer plant in Egypt's Suez free zone, to be launched in 4Q08. A third fertilizers plant, Sorfert, is underway in Algeria, to be launched in 2H10. Also, OCI acquired 20% stake in Gavilon, a US fertilizer distribution company. Furthermore, OCI schemed a DAP/MAP project – phosphate fertilizers – in Algeria or Morocco.

SHAREHOLDER STRUCTURE Sawiris Family 60.0%Free Float 40.0%Total 100.0%


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EGYPT | CONSTRUCTION & FETILIZERS | OCI

Fact Sheet Dec-07 Dec-08 Dec-09 Dec-10ROE 13.8% 29.6% 44.3% 47.6%ROS 10.3% 21.5% 24.7% 26.8%ROA 1.2% 12.3% 14.7% 15.8%ROIC 8.6% 16.3% 11.4% 14.0%EBITDA Margin 18% 27% 21% 25%

ATO 0.1 0.6 0.6 0.6WI/ Sales 588.9% 17.4% 18.9% 19.8%

ALEV 11.6 2.7 3.4 3.4Debt/ Equity 1164% 125% 187% 182%Current Ratio 1.3 2.4 1.7 1.7

Cash Flow (in US$ mn) Dec-07 Dec-08 Dec-09 Dec-10NOPAT 693.1 803.6 602.4 876.7Depreciation & Amortization 163.9 98.3 102.1 158.6Gross Cash Flow (COPAT) 857.0 901.9 704.5 1,035.3WI Change (272.5) (566.0) (108.1) (145.1)Other Current Items (13,293.1) 199.1 (29.8) (19.1)Cash After Current Operations (12,708.5) 535.0 566.6 871.0Financing Payments (107.3) (105.3) (54.7) (74.0)Cash Before Long-Term Use (12,815.8) 429.7 511.9 797.1Net Plant Change (777.9) (2,108.3) (446.7) (660.8)FCFF (193.3) (1,772.3) 149.8 229.4Others 9,981.8 (1,005.1) 210.9 204.6Cash Before Financing (3,611.9) (2,683.7) 276.1 340.9Short-Term Debt 1,888.9 (580.1) 856.6 38.7Long-Term Debt 183.6 1,650.0 375.0 375.0Net-worth 1,211.0 1,866.3 (1,224.0) (674.1)Grey Area 595.3 783.1 78.3 181.2Dividends 0.0 (175.5) (217.9) (251.0)

Share Ratios Dec-07 Dec-08 Dec-09 Dec-10Share Price 35.65 35.65 35.65 35.65New No. Of Shares '000 214,771 214,771 214,771 214,771 Actual No. Of Shares '000 214,771 214,771 214,771 214,771 EPS 1.15 3.81 3.72 4.94Div/Share 51.90 0.82 1.01 1.17Revenues/Share 11.14 17.69 19.84 22.88Units Sold/Share 95.66 14.47 18.23 21.09BV/Share 8.27 12.87 11.06 12.89Gross CF/Share 3.99 4.20 3.28 4.82FCFF/Share -0.90 -8.25 0.70 1.07EBITDA/Share 2.04 4.83 4.07 5.68EV/Share 42.56 35.52 40.67 42.56

Multiples* Dec-07 Dec-08 Dec-09 Dec-10P/E 31.1 9.4 9.6 7.2Div Yield % 145.6% 2.3% 2.8% 3.3%P/ Revenue 3.2 2.0 1.8 1.6EV/ Revenues 3.8 2.0 2.0 1.9P/ COPAT 8.9 8.5 10.9 7.4EV/ COPAT 10.7 8.5 12.4 8.8P/ FCFF -39.6 -4.3 51.1 33.4EV/ FCFF -47.3 -4.3 58.3 39.8P/ EBITDA 17.5 7.4 8.8 6.3EV/ EBITDA 20.9 7.4 10.0 7.5P/ BV 4.3 2.8 3.2 2.8

Balance Sheet (in US$ mn) Dec-07 Dec-08 Dec-09 Dec-10Assets Cash & Cash Equivalent 4,260.7 1,678.3 1,222.6 1,232.2Net Receivables 959.8 1,346.6 1,548.0 1,791.0Total Inventory 130.3 201.5 234.0 307.5Advance Payments to Suppliers 0.0 3.8 4.0 9.1Other Trading Assets 13,843.3 233.1 292.7 335.4Other Current Assets 0.0 5.4 5.4 5.4Total Current Assets 19,194.1 3,468.6 3,306.6 3,680.7Net Plant 614.0 2,267.1 2,868.8 3,628.1Long-Term Investments 558.7 602.5 653.8 703.4Other Trading Non-Current Assets 129.2 38.6 45.1 50.5Other Non-Current Assets 0.0 0.0 0.0 0.0Intangibles 11.5 278.0 278.0 278.0Total Assets 20,507.5 6,654.8 7,152.3 8,340.8Liabilities & Shareholders' Equity Short-Term Debt 1,888.9 0.0 276.5 315.3Current Portion of LT Debt 46.9 0.0 0.0 46.9Accounts Payable 817.6 976.8 1,103.6 1,270.9Accrued Expenses 0.0 0.0 0.0 0.0Down Payments to Customers 0.0 9.0 8.3 17.5Taxes Payable 33.8 33.8 33.8 33.8Dividends Payable 11,146.6 0.0 0.0 0.0Other Spontaneous Finance 161.0 177.8 207.5 231.2Other Current Liabilities 239.0 259.8 259.8 259.8Total Current Liabilities 14,333.8 1,457.3 1,889.6 2,175.5Total Long-Term Debt 6,211.7 1,650.0 2,025.0 2,353.1Other Non-Current Liabilities 0.0 0.0 0.0 0.0Sales Tax 0.0 0.0 0.0 0.0Total Liabilities 20,545.6 3,107.3 3,914.6 4,528.6Deferred Taxes 0.0 0.0 0.0 0.0Other Provisions 409.3 409.3 409.3 411.0Minority Interest 0.0 373.9 452.3 633.7Shareholders' Equity 1,776.7 2,764.3 2,376.2 2,767.5Total Liab. & Equity 22,731.6 6,654.8 7,152.3 8,340.8

Income Statement (in US$ mn) Dec-07 Dec-08 Dec-09 Dec-10Revenues 2,391.7 3,799.4 4,261.4 4,913.6COGS (1,818.1) (2,547.4) (3,141.9) (3,411.4)Gross Profits 573.6 1,252.0 1,119.5 1,502.2SG&A (135.5) (215.3) (244.7) (281.6)EBITDA 438.1 1,036.7 874.9 1,220.7Depreciation & Amortization (163.9) (98.3) (102.1) (158.6)EBIT 274.2 938.4 772.8 1,062.0Interest Expense (107.3) (105.3) (54.7) (74.0)Provisions (15.2) (20.4) (24.0) (28.5)Interest Income 57.3 79.9 96.9 107.2Investment Income 22.9 32.0 112.0 106.9Other Non-Operating Income 20.6 20.7 23.9 26.6Other Non-Operating Expenses 8.0 13.0 15.1 16.8EBT 260.5 958.2 942.0 1,217.1Taxes (14.5) (139.8) (143.4) (155.8)NPAT 246.0 818.4 798.6 1,061.3

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143

Orascom Telecom (OT) managed to maintain leading mar-ket positions in its key markets, Djezzy (73% of OT's value) enjoys a high market share of 63%. While Mobinil and Tunisiana continued their strong performance, mar-gins and growth of Asian subsidiaries are affected by po-litical, economic, and competitive factors. Thus, we cut our valuations for all GSM subsidiaries in the wake of the global financial crisis and a higher interest rate environ-ment. Said downgrade was offset by the addition of OT's investments in Canada and North Korea. Longer term, OT will build value through mobile banking and investing in Africa. Our SOTP 12-month fair value is some 167% higher, trading at 11.3x adjusted earnings a 6% discount to other regional operators. Canada - a key catalyst to rescue value: In partnership with Canada-based Globalive, OT has won AWS spectrum in Can-ada at a price of C$442 mn to provide its services in all prov-inces except the Quebec. OT intends to invest US$500-700 mn with an IRR of 20%. OTH will enjoy operating in a high-income market with low penetration of 61% and a high ARPU of US$55 vs. OT's global ARPU of US$6.6. We valued OT's share in Globalive at US$1,530 mn, representing 10% of OT's total value. Building value through mobile banking and Africa: OT plans to further create value and develop its business through two key venues: (1) Mobile banking: Western Union (WU) and OT announced an alliance to introduce mobile remittance services in selected markets. Mobile banking is likely to appeal to a wide base of OT's users as it will ease financial and bank-ing transactions. Consequently, we expect a positive impact on OT's ARPU over the medium- to long-term. (2) Targeting small-sized investments: OT's management is targeting small-sized investment opportunities in Africa via Telecel Global. Very few opportunities in emerging markets: We reckon that the scarcity of investment opportunities in emerging mar-kets compelled OT to seek opportunities elsewhere in devel-oped markets and to continue its share buyback program. However, if investment opportunities pop up, OT may find it difficult to shore up funds for acquisitions, especially in such battered global credit markets. Valuation and recommendation: Following 2Q08 results we cut our sum-of-the-parts (SOTP) valuation by 9% to LE 96.1/share (US$86.8/GDR), which still implies a 167% upside po-tential over the recent market price. The stock is down 60% YTD and appears oversold over negative news flow from Asian markets. However, it trades at a PER of 11.3x expected 2008 earnings (adjusted for one-time items), 6% below the regional operators, the likes of Etisalat, MTC, Vodafone Group, and MTN. Until there is a positive news catalyst the shares are unlikely to reach its longer-term potential in the cur-rent environment. Yet, our DCF-based recommendation matrix places the stock as a BUY, albeit with a HIGH RISK rating.

ORASCOM TELECOM (OT)

A strategy shift or no EM growth in sight?


EGYPT | TMT


12M FAIR VALUE | LE 96.1 BUY | HIGH RISK

SHARE DATA

Reuters; Bloomberg ORTE.CA/ORTEq.L;

ORTE EYRecent price as of 6-Nov-08 LE 35.98No. of O/S shares 899.4 mnMarket cap LE 32,360.5 mn52-wk high / low LE 94.46/ LE 27Avg. daily volume / turnover 1.11 mn / LE 74.42 mn

COMPANY SYNOPSIS

Orascom Telecom Holding (OTH) is one of the leading regional mobile operators and among the largest in the Middle East and Africa. OTH’s GSM networks cover 5 main countries with a total population of more than 430 mn. OTH operates GSM operations in Egypt, Pakistan, Algeria, Tunisia, and Bangladesh. In December 2005, OTH had acquired 19.3% of Hutchison Telecom International Limited (HTIL) for US$1.3 bn. After receiving US$793 mn in special dividends from HTIL's sale of Hutch Essar, OTH sold its entire stake in HTIL for a total value of US$1.3 bn. Historically, OTH had restructured its operation with a wave of divestiture, selling its stakes in the Jordanian mobile operator, Fastlink and nine GSM mobile operators in Africa, in addition to Loteny (Ivory Coast), Oasis Telecom (DRC), and Libertis Telecom (Congo Brazzaville). In December 2007, OTH sold its GSM operator in Iraq to MTC-Atheer (Zain) for US$1.2 bn. By end of January 2008, OTH has been granted the first 25-year commercial license to provide mobile services in the Democratic People’s Republic of Korea (DPRK) or North Korea, using 3G technology with an exclusivity period of four years. In partnership with Canada-based Globalive, OTH won an AWS spectrum in Canada to start operations by mid 2009.

SHAREHOLDER STRUCTURE Weather Investments 51.9%Free Float 48.1%Total 100.0%

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EGYPT | TMT | ORASCOM TELECOM

Balance Sheet (LE mn) 2007A 2008F 2009F 2010F Cash Flow (LE mn) 2007A 2008F 2009F 2010FAssets NOPAT 7,165 4,715 6,447 7,210Cash & Cash Equivalent 6,893 11,409 11,563 11,798 Depreciation & Amortization 4,257 5,206 5,917 6,367Net Receivables 4,375 4,881 5,398 6,083 Gross Cash Flow (COPAT) 11,422 9,921 12,365 13,577Total Inventory 617 773 855 963 Working Investments Change (287) (417) 564 749Advance Payment 0 0 0 0 Other Current Items (4,624) (353) 0 0Other Trading Assets 5,144 100 100 100 Cash After Current Operations 6,511 9,151 12,929 14,326Other Current Assets 3,501 3,838 3,838 3,838 Financing Payments (6,441) (12,807) (7,257) (6,769)Total Current Assets 20,530 21,001 21,753 22,782 Cash Before LT Use 70 (3,656) 5,672 7,557Net Plant 26,689 31,483 32,681 32,767 Net Plant Change (7,811) (9,195) (6,310) (5,648)Long-Term Investments 0 2,778 2,653 2,227 FCFF (1,300) (44) 6,619 8,678Intangibles 12,187 12,267 10,511 8,767 Others 8,236 4,252 1,128 1,304Other Non-current Assets 3,975 1,324 1,324 1,324 Cash Before Financing 495 (8,599) 490 3,212Goodwill 0 0 0 0 Short-Term Debt 0 0 0 0Total Assets 63,381 68,854 68,922 67,868 Long-Term Debt 8,501 10,356 (29) (1,489)

Networth (4,776) 3,653 854 (0)Grey Area (563) 0 0 0

Liabilities & Equity Dividends (1,100) (893) (1,163) (1,488)ST Debt 10,234 4,634 4,581 3,130 Change in Cash 2,557 4,517 153 235Payables 13,277 12,704 13,867 15,410Accrued Expenses 0 0 0 0 Fact Sheet 2007A 2008F 2009F 2010FDown Payments 0 0 0 0 ROE 66.8% 11.8% 13.5% 15.3%Put Option Liabilities 0 0 0 0 ROS 43.2% 9.0% 10.6% 12.0%Other Current Liabilities 378 362 362 362 ROA 18.2% 3.9% 5.1% 6.5%Total Current Liabilities 23,890 17,701 18,810 18,902 ROIC 15.3% 8.9% 12.5% 14.7%Total Long-Term Debt 18,792 24,515 19,905 15,286 EBITDA Margin 43.7% 43.3% 42.6% 42.2%Other Non-Current Liabilities 2,877 3,078 3,078 3,078LT creditors license fees 0 0 0 0 ATO 0.4 0.4 0.5 0.5Total Liabilities 45,559 45,293 41,794 37,267 WI/ Sales 14.6% 17.5% 8.8% 1.1%Deferred Taxes 0 0 0 0 ALEV 4 3 3 2Other Provisions 0 0 0 0 Liabilities/Networth 3 2 2 1Minority Interest 521 817 1,200 1,735 Current Ratio 0.9 1.2 1.2 1.2Shareholders' Equity 17,301 22,743 25,928 28,865Total Liab. & Equity 63,381 68,854 68,922 67,868 Per-Share Ratios 2007A 2008F 2009F 2010F

Share price 35.98 35.98 35.98 35.98Income Statement (LE mn) 2007A 2008F 2009F 2010F No. of shares ('000) 899,403 899,403 899,403 899,403 Yearend Subs (k) 70,089 83,538 94,732 105,041 Proportionate Yearend Subs (k) 57,861 67,726 76,436 84,950 EPS 12.86 2.98 3.88 4.92Revenues 26,754 29,773 32,836 37,008 DPS 1.22 0.99 1.29 1.65

Djezzy 9,955 11,414 12,407 13,354 Revenues/Share 29.75 33.10 36.51 41.15 Mobilink 7,138 6,963 6,610 7,072 BV/Share 19.24 25.29 28.83 32.09 Mobinil 3,997 4,757 5,384 5,911 Gross Cash Flow/Share 12.70 11.03 13.75 15.10CHEO 0 14 550 1,381 FCFF/Share (1.45) (0.05) 7.36 9.65Tunisiana 1,499 1,875 2,056 2,131 EBITDA/Share 13.01 14.33 15.56 17.38Banglalink 1,091 1,569 2,051 2,582 EV/Share 60.59 55.70 50.35 43.34Telecel 0 0 0 0

GSM 23,679 26,593 29,059 32,430 Multiples 2007A 2008F 2009F 2010FNon GSM 3,075 3,180 3,777 4,578 P/E 2.8x 12.1x 9.3x 7.3x

EBITDA 11,699 12,886 13,991 15,628 Dividend Yield 3.4% 2.8% 3.6% 4.6%Djezzy 6,346 7,032 7,444 7,879 P/ Revenue 1.2 1.1 1.0 0.9Mobilink 3,163 2,891 2,775 3,041 EV/ Revenues 2.0 1.7 1.4 1.1Mobinil 1,816 2,128 2,263 2,455 P/ COPAT 2.8 3.3 2.6 2.4 CHEO 0 1 99 410 EV/ COPAT 4.8 5.0 3.7 2.9 Tunisiana 776 1,042 1,028 1,023 P/ FCFF (24.9) (735) 4.9 3.7 Banglalink (241) (118) 244 556 EV/ FCFF (41.9) (1,137) 6.8 4.5Telecel (28) 0 0 0 P/ EBITDA 2.8 2.5 2.3 2.1

GSM 11,832 12,977 13,853 15,364 EV/ EBITDA 4.7x 3.9x 3.2x 2.5xNon GSM (133) (90) 137 264 P/ BV 1.9x 1.4x 1.2x 1.1x

Depreciation & Amortization (4,257) (5,206) (5,917) (6,367) Note: A = Actual; F = ForecastedOthers (193)EBIT 7,441 7,488 8,073 9,261 Source: OTH and CICR forecastsNet Interest Exp./Inc. (2,731) (2,512) (2,446) (1,825)Share of Income/(Loss) of Associates 4,316 0 (125) (425)Net Profit from discont. operations 5,213 0 0 0Capital Gain (1) 0 0 0Gain (loss) from sale of Inv. (28) 149 0 0Non-Operating Inc., Net of Exp. 298 (161) 0 0EBT 14,507 4,964 5,502 7,011Taxes (2,571) (1,985) (1,626) (2,051)NPAT 11,935 2,978 3,876 4,960Minority Interest (372) (296) (383) (535)Extraordinary Items 0 0 0 0Attributable Profits 11,563 2,682 3,493 4,425

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Oriental Weavers Carpets (OWC), a vertically-integrated rug manufacturer, maintains a leading position in the lo-cal market and a strong footing in global markets. Faced with the challenges of a slowdown in its major markets, US and Europe, OWC started diverting unutilized capaci-ties to the local market in addition to penetrating new markets. Improvement in the company's margins is fore-seen on cooling-down of polypropylene prices. OWC’s earnings are expected to grow at a 5-year CAGR of 7%. The stock is traded at 5.3x 2008 earnings vs. a peer aver-age of 11.5x. Our 12-month fair value is LE 48.3/share, implying a 111% upside potential. Hence, we reiterate our BUY recommendation with High risk.

Tapping new channels – cooling-down of polypropylene prices. To offset the US and the European slowdown, OWC diverted unutilized capacities to the local market to meet strong demand. Also, OWC started penetrating new markets such as Chile, Brazil and Mexico. Furthermore, OWC opened new sales channels in the Gulf and Asia in addition to continu-ous diversification of its product mix towards high-end seg-ments. However, the US market remains OWC's center of at-tention, where steps to increase distribution network are taken to achieve further growth once the market picks up. On a dif-ferent front, gross margins were suppressed in 2007 on the back of the hike in polypropylene prices. However, polypropyl-ene prices started to cool down, on falling oil prices, which will help improve the company's margins over the coming period.

Establishing an LE 1.3-bn complex with a capacity of 42 mn sqm. We believe that the new industrial complex, planned to partially commence operation in 2009, will add further growth to the company. The project, planned to be built over three phases in nine years' time till 2016, will be financed with 55% debt and 45% equity. Owing to the global turmoil, plans to proceed with the phases of the complex will more likely de-pend on the global market situation.

Valuation and recommendation: We downgraded our latest valuation dated September 22, 2008 by 4% to LE 48.3/share. This reflected the following: (1) the 200-bps increase in the market risk premium to 8%, (2) the 100-bps reduction in the perpetuity growth to 3% on the back of the global slowdown, and (3) a slight reduction in the expected utilization rate of the new complex. We incorporated lower estimates of polypropyl-ene prices than the estimates we previously used. Still, the stock offers 111% upside potential vs. current market price, hence we reiterate our BUY recommendation. However, the ongoing US slowdown - expected to pick up in 2010 - coupled with the gradual decline of export rebates are still our main concerns for the company. Thus, we still maintain our HIGH RISK profile for OWC. OWC is currently traded at 5.3x 2008 earnings versus an international peer average of 11.5x.

ORIENTAL WEAVERS CARPETS (OWC)

Diverting to the local haven


EGYPT | CONSUMER



BUY | HIGH RISK

SHARE DATA

Reuters; Bloomberg ORWE.CA; ORWE EYRecent price as of 6-Nov-08 LE 22.89No. of O/S shares 74.6 mnMarket cap LE 1,707.6 mn52-wk high / low LE 52.87/ LE 17.12Avg. daily volume / turnover 0.17 mn / LE 6.95 mn

COMPANY SYNOPSIS

Oriental Weavers Carpets (OWC) was established in 1981 and is operating under Investment Law #8/1997. OWC is part of the Orientals Holding Co., which is involved in diversified fields including floor coverings, textiles, petro-chemicals, real-estate development, and investment. OWC is the leading Egyptian carpet manufacturer with a local market share of 85%. Also, OWC has a very strong posi-tion in the global market, retaining a decent market share of 14% in 2006. In the US, OWC had a market share of 6% in the area rugs market in 2007, while MAC had around 19% market share. Exports contributed around 63% of OWC's top line in 1H08 with sales to the US and Europe constituted almost 79% of exports. OWC adopts the verti-cal and horizontal integration methods in its manufacturing process. OWC processes its own polypropylene fiber, which is converted into yarn, and it manufactures and distributes finished products. OPC, a 12% owned subsidi-ary, supplies 80-90% of OWC's requirement of polypropyl-ene granules. Total fiber requirements are supplied through its subsidiaries OWF and EFCO. Carpets and rugs produc-tion processes are carried out through its main subsidiaries namely: Oriental Weavers Carpets (OWC), Oriental Weav-ers International (OWI), MAC, OW China, and OW USA. Lately, OWC diversified its portfolio to include new prod-ucts, such tapestry and Axminster which are free of poly-propylene. A series of developments took place in OWC's paid-in capital. Lately, in 2008 OWC distributed a 1:3 stock dividend, whereby the company’s paid-in capital reached LE 373 mn distributed over 74.6 mn shares.


Moh.Farid Khamis & Family 66.0%Institutions 23.0%Fitaihi Holding Group Co. 5.0%Amwal Al Khaleej 1.7%Free float 4.3%

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EGYPT | CONSUMER | OWC

Balance Sheet (LE mn) 2007A 2008F 2009F 2010FAssetsCash & Cash Equivalent 134 165 140 173Net Receivables 625 670 740 851Total Inventory 1,245 1,453 1,585 1,834Advance Payment 14 16 17 20Other Trading Assets 41 41 41 41Other Current Assets 0 0 0 0Total Current Assets 2,059 2,344 2,522 2,919Net Plant 1,801 1,822 1,855 1,866Long-Term Investments 88 105 105 105Other Non-Current Assets 107 115 121 129Intangibles 697 697 697 697Total Assets 4,752 5,083 5,300 5,716

Liabilities & Shareholders' EquityShort-Term Debt 531 318 145 388CP of Long-Term Debt 78 153 275 288Accounts Payable 508 573 625 723Accrued Expenses 22 24 27 31Down Payments 59 63 70 80Taxes Payable 38 38 38 38Dividends Payable 7 130 149 161Other Current Liabilities 92 105 109 125Total Current Liabilities 1,335 1,405 1,437 1,835Total Long-Term Debt 734 708 614 333Other Non-Current Liabilities 0 0 0 0Total Liabilities 2,068 2,112 2,051 2,168Deferred Taxes 0 0 0 0Other Provisions 68 67 67 67Minority Interest 213 261 317 376Shareholders' Equity 2,402 2,642 2,865 3,104Total Liab. & Equity 4,752 5,083 5,300 5,716

Income Statement (LE mn) 2007A 2008F 2009F 2010FRevenues 3,067 3,295 3,631 4,175Cost of Revenues (1,859) (2,102) (2,286) (2,646)Gross Profit 1,208 1,194 1,345 1,529SG&A (690) (649) (726) (835)EBITDA 517 545 618 694Depreciation & Amortization (163) (200) (219) (237)EBIT 354 344 399 457Interest Expense (97) (70) (66) (93)Provisions 0 0 0 0Interest Income 5 3 5 6Investment Income 3 4 5 5Other Non-Operating Income 121 129 138 138Other Non-Operating Expenses 6 3 0 5EBT 392 414 482 518Taxes (13) (43) (55) (58)NPAT 379 371 426 460Minority Interest (51) (48) (56) (59)Extraordinary Items 0 0 0 0Attributable Profits 328 323 370 401

Cash Flow (LE mn) 2007A 2008F 2009F 2010FNOPAT 314 292 344 399Depreciation & Amortization 163 200 219 237Gross Cash Flow (COPAT) 477 492 563 636Working Investments Change (118) (183) (143) (250)Other Current Items 94 12 3 16Cash After Current Operations 454 321 424 402Financing Payments (199) (148) (219) (368)Cash Before Long Term Use 254 174 205 34Net Plant Change (232) (221) (253) (248)FCFF 222 100 171 155Others 102 126 143 146Cash Before Financing 125 78 95 (68)Short-Term Debt 9 (212) (173) 243Long-Term Debt 51 127 182 7Networth (169) (1) (55) (59)Grey Area (3) 47 56 59Dividends (131) (7) (130) (149)Change in Cash (119) 31 (25) 34

Fact Sheet 2007A 2008F 2009F 2010FROE 13.7% 12.2% 12.9% 12.9%ROS 10.7% 9.8% 10.2% 9.6%ROA 6.9% 6.4% 7.0% 7.0%ROIC 9.4% 8.4% 9.6% 10.3%EBITDA Margin 16.9% 16.5% 17.0% 16.6%ATO 0.6 0.6 0.7 0.7WI/ Sales 45.7% 48.4% 48.0% 47.9%ALEV 2.0 1.9 1.9 1.8Liabilities/Networth 0.9 0.8 0.7 0.7Current Ratio 1.5 1.7 1.8 1.6

Per-Share Ratios 2007A 2008F 2009F 2010FRecent Share Price 22.89 22.89 22.89 22.89 New No. Of Shares ('000)* 55,249 74,607 74,607 74,607

EPS* 5.94 4.33 4.97 5.37DPS* 1.50 1.55 1.78 1.92Revenues/Share 55.5 44.2 48.7 56.0Capacity/Share N/A N/A N/A N/ABV/Share 43.5 35.4 38.4 41.6Gross Cash Flow/Share 8.6 6.6 7.5 8.5FCFF/Share 4.0 1.3 2.3 2.1EBITDA/Share 9.4 7.3 8.3 9.3EV/Share 44.8 36.5 34.9 34.1

Multiples 2007A 2008F 2009F 2010FP/E 3.9x 5.3x 4.6x 4.3xP/ Revenue 0.4 0.5 0.5 0.4EV/ Revenues 0.8 0.8 0.7 0.6P/ COPAT 2.7 3.5 3.0 2.7 EV/ COPAT 5.2 5.5 4.6 4.0 P/ FCFF 5.7 17.1 10.0 11.0 EV/ FCFF 11.1 27.3 15.2 16.4P/ EBITDA 2.4 3.1 2.8 2.5EV/ EBITDA 4.8 5.0 4.2 3.7P/ BV 0.5x 0.6x 0.6x 0.6x* Adjusted for 1-to-3 stock dividend.Note: A = Actual; F = ForecastedSource: Company reports and CICR forecasts

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EGYPT | BUILDING MATERIALS

PACHIN remains Egypt’s largest paint producer with a diversified product portfolio of architectural and industrial paints, capturing a 42% market share. Furthermore it is the sole local printing ink producer with a market share of 10%. PACHIN is considered a lucrative investment oppor-tunity, offering a 90% upside potential to our 12-month fair value. The stock is traded at 2007/08 P/E of 5.5x , with a 53% discount to an international peer average of 11.8x.

Perpetual exclusivity license: PACHIN had acquired a per-petual exclusive license for the Danish DYRUP trademark back in December 2006, covering sale and production in Egypt, Sudan, Libya, and Ethiopia. Its existence in such diver-sified markets allows PACHIN to reap the fruits of the real-estate booms in those markets, further balancing sales. Enjoying a 10-year tax exemption: PACHIN for Ink was es-tablished before the new Income Tax Law came into effect, thus it enjoys a 10-year tax exemption starting 2009.

Growth in the H&RE sector: The Egyptian real-estate sector is growing at an average annual growth rate of 7-9%. Said growth should positively impact the company's performance over the coming five years, especially in the decorative seg-ment, which is PACHIN'S main sales contributor (by 81%).

Decorative paints' growth led by synthetic paints: PACHIN boasts the largest market share (52%) in synthetic paints, thanks to scattered sales outlets all over Egypt. As such, this segment is poised to post the highest profit margin in view of the company's cost-passing ability of any increase in raw ma-terials prices.

Solid operational performance: PACHIN showed a strong growth historically with an earnings 4-year CAGR of 15% over FY02/03-FY06/07. Moreover the company was able to sustain its profitability margins with an EBITDA margin ranging be-tween 20-22% over the same periods. 9M FY07/08 revealed a bottom line profit of LE 85.8 mn, which is in line with our esti-mates of LE 110 mn for FY07/08. Valuation and recommendation: Applying our DCF valuation we reached a 12-month fair value of LE 57.7/share (US$3.4/GDR), implying a hefty upside potential of 90%. Thus, we up-grade the stock from HOLD to BUY recommendation with a MODERATE RISK rating. It is worth mentioning that company officials had revealed their intent to eventually dispose of Al-Amireya idle land post relocation to Al-Obour City. Incorporat-ing this plot of land NAV of LE 80 mn into our valuation en-hances our valuation by another LE 4/share.

PAINTS & CHEMICAL INDUSTRIES (PACHIN)

Wonders of colors


MARY MILAD [email protected]

0102030405060708090

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Volume PACH CASE 30 - rebased


SHARE DATA

COMPANY SYNOPSIS PACHIN was established in 1958 as an Egyptian joint stock company with a paid-in capital of LE 15 mn distributed over 150k shares at a par value of LE 100/share. PACHIN was nationalized in 1961. In 1962 and 1963 the Ammonia & Chemical Co., the Hinshold Paints & Oil Co. and Bahari Paints Co. were merged within PACHIN. On August 21, 1993, PACHIN executive regulations were amended to be in accordance with Public Sector Law #203/1991 and became affiliated to the Holding Company for Chemical Industries. In January 1994, paid-in capital was increased to LE 80 mn. In May 1994, paid-in capital was further increased to LE 100 mn. In August 1996, a stock split at a ratio of 10-to-1 took place to bring the number of shares to 10 mn. In October 1997, the company's article of incorporation was amended, by virtue of which, it became under the umbrella of Law #159/1981 as PACHIN became a private sector company, with a 27% stake floated on London Stock Exchange (LSE) via a GDR offering. Finally, in February 2000, PACHIN paid-in capital was doubled to LE 200 mn distributed over 20 mn shares at a par value of LE 10/share financed from reserves. The main business of the company is the production of paints, varnishes, printing inks, and animal bone products. PACHIN monopolized the Egyptian paints' market till early 1990s when low barriers-to-entry enticed many players to step in. PACHIN’s product mix also includes animal charcoal, used in sugar refining. Furthermore, it produces resins and sells the surplus to its competitors. SHAREHOLDER STRUCTURE Holding Co. for Chemical Ind. 37.4%Insurance companies 3.4%Funds & Instit. Investors (incl. 1% GDRs)

40.0%

Free Float 19.2%

Total 100.0%

Reuters; Bloomberg PACH.CA; PCLDq.L PACH EY

Recent price as of 6-Nov-08 LE 30.45No. of O/S shares 20.0 mnMarket cap LE 609.0 mn52-wk high / low LE 81/ LE 27.5Avg. daily volume / turnover 0.03 mn / LE 1.74 mn

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EGYPT | BUILDING MATERIALS| PACHIN

Fact Sheet Jun-07 A Jun-08 P Jun-09 P Jun-10 PROE 20.6% 21.5% 24.1% 25.6%ROS 19.3% 18.9% 19.2% 19.5%ROA 16.4% 17.1% 19.3% 20.6%ROIC 18.2% 18.7% 21.1% 22.4%EBITDA Margin 20.9% 20.4% 20.4% 20.5%

ATO 0.9 0.9 1.0 1.1WI/ Sales 40.1% 37.1% 34.2% 33.7%

ALEV 1.30 1.29 1.28 1.27Debt/ Tangible Networth 0.18 0.18 0.17 0.16Current Ratio 4.3 3.9 4.4 4.7

Cash Flow Jun-07 A Jun-08 P Jun-09 P Jun-10 PNOPAT 95.0 103.9 121.7 135.7Depreciation & Amortization 11.9 13.0 14.2 15.0Gross Cash Flow (COPAT) 106.8 116.9 135.9 150.6WI Change (39.9) (5.1) (16.9) (19.9)Other Current Items (2.5) (1.0) 1.0 0.0Cash After Current Operations 64.5 110.8 120.0 130.7Financing Payments (2.9) (1.9) (0.8) (0.3)Cash Before Long-Term Use 61.6 108.8 119.2 130.4Net Plant Change (19.4) (32.8) (11.4) (12.1)FCFF 47.6 78.9 107.6 118.6Others 26.8 1.9 7.1 1.7Cash Before Financing 69.1 77.9 114.9 120.0Short-Term Debt 1.9 9.5 (10.4) (4.1)Long-Term Debt (3.0) 0.0 0.0 0.0Net-worth 0.2 5.5 6.5 7.2Grey Area 6.4 1.2 1.5 1.8Dividends (70.2) (93.5) (110.2) (123.2)Change in Cash 4.3 0.6 2.4 1.7

Per Share Ratios Jun-07 A Jun-08 P Jun-09 P Jun-10 PShare Price 30.45 30.45 30.45 30.45Actual No. Of Shares '000 20,000 20,000 20,000 20,000 New No. Of Shares '000 20,000 20,000 20,000 20,000 EPS 5.04 5.50 6.48 7.25Diluted EPS 5.04 5.50 6.48 7.25Div/Share 3.50 4.68 5.51 6.16Revenues/Share 26.11 29.05 33.78 37.23Units Sold/Share 4.20 4.50 4.43 4.55BV/Share 24.50 25.60 26.90 28.35Gross Cash Flow/Share 5.34 5.84 6.79 7.53FCFF/Share 2.38 3.95 5.38 5.93EBITDA/Share 5.46 5.93 6.90 7.65EV/Share 26.43 26.43 26.43 26.43

Multiples Jun-07 A Jun-08 P Jun-09 P Jun-10 PP/E 6.0 5.5 4.7 4.2Diluted P/E 6.0 5.5 4.7 4.2Div Yield % 11.5% 15.4% 18.1% 20.2%P/ Revenue 1.2 1.0 0.9 0.8EV/ Revenues [ EV/ Rev] 1.0 0.9 0.8 0.7P/ COPAT 5.7 5.2 4.5 4.0EV/ COPAT 4.9 4.5 3.9 3.5P/ FCFF 12.8 7.7 5.7 5.1EV/ FCFF 11.1 6.7 4.9 4.5P/ EBITDA 5.6 5.1 4.4 4.0EV/ EBITDA 4.8 4.5 3.8 3.5P/ BV 1.24 1.19 1.13 1.07Note: A = Actual; P = ProjectedSource: PACHIN & CICR estimates

Balance Sheet (LE mn) Jun-07 A Jun-08 P Jun-09 P Jun-10 PAssets Cash & Cash Equivalent 114.6 118.8 124.9 136.6Net Receivables 65.6 64.9 62.9 69.4Total Inventory 165.1 171.0 198.9 218.9Advance Payments to Suppliers 0.0 0.0 0.0 0.0Other Trading Assets 0.0 0.0 0.0 0.0Other Current Assets 0.0 0.0 0.0 0.0Total Current Assets 345.3 354.7 386.8 424.8Net Plant 208.1 228.0 225.1 222.3Long-Term Investments 1.3 2.3 2.3 2.3Other Trading Non-Current Assets 33.8 34.8 33.8 33.8Other Non-Current Assets 9.5 9.5 9.5 9.5Intangibles 16.0 14.4 12.8 11.2Total Assets 613.9 643.4 670.0 703.6

Liabilities & Shareholders' Equity Short-Term Debt 8.0 17.5 7.1 3.0Current Portion Of Long-Term Debt 0.0 0.0 0.0 0.0Accounts Payable 35.2 33.1 38.5 42.3Accrued Expenses 8.4 9.4 10.9 12.0Down Payments to Customers 11.6 12.9 15.0 16.5Taxes Payable 7.1 7.1 7.1 7.1Dividends Payable 0.0 0.0 0.0 0.0Other Spontaneous Finance 0.0 0.0 0.0 0.0Other Current Liabilities 9.9 9.9 9.9 9.9Total Current Liabilities 80.3 89.9 88.6 90.9Total Long-Term Debt 0.0 0.0 0.0 0.0Other Non-Current Liabilities 3.8 0.0 0.0 0.0Long-Term Spontaneous Finance 0.0 0.0 0.0 0.0Total Liabilities 84.0 89.9 88.6 90.9Deferred Taxes 39.2 40.8 42.8 45.0Other Provisions 0.6 0.6 0.6 0.6Minority Interest 0.0 0.0 0.0 0.0Shareholders' Equity 490.0 512.0 538.0 566.9Total Liabilities & Equity 613.9 643.4 670.0 703.6

Income Statement (LE mn) Jun-07 A Jun-08 P Jun-09 P Jun-10 PNet Sales 522.2 580.9 675.6 744.6COGS (399.5) (447.3) (520.2) (572.5)Gross Profits 122.6 133.6 155.4 172.2SG&A (13.5) (15.0) (17.5) (19.2)EBITDA 109.1 118.6 137.9 152.9Depreciation & Amortization (11.9) (13.0) (14.2) (15.0)EBIT 97.28 105.6 123.7 137.9Interest Expense (2.9) (1.9) (0.8) (0.3)Provisions (0.1) (0.5) (0.5) (0.5)Interest Income 3.3 4.8 5.0 5.5Investment Income 3.4 3.7 4.1 4.5Other Non-Operating Income 2.1 2.1 2.1 2.1Other Non-Operating Expenses (0.5) (2.0) (2.0) (2.0)EBT 102.5 111.8 131.6 147.2Taxes (1.6) (1.7) (2.0) (2.2)NPAT 100.9 110.1 129.7 145.0Minority Expense (0.0) (0.1) (0.1) (0.1)Extraordinary Items 0.0 0.0 0.0 0.0Attributable Profits 100.9 110.1 129.6 144.9

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Palm Hills Developments (PHD) is an elite local real-estate developer, with its name associated with high-end resi-dential real-estate and resort projects, targeting mainly the upper class. PHD's key strength lies in its experi-enced management, well-recognized designs and finish-ing, a well diversified land bank all over Egypt amounting to 48.3 mn sqm, and a vertically-integrated business model. With a WACC of 22.7%, our DCF model indicates a 132% upside to our 12-month fair value of LE 18.76/share. We initiate a BUY recommendation with a MODERATE RISK rating. Diversifying into the middle class: As the luxurious market reaches saturation, PHD has targeted the middle class via Village Gate – Phase I project that encompasses residential apartments of 88 sqm. PHD was able to sell 62% of the pro-ject within 30 days of its lunch in June 2008. PHD is diversify more into the middle class to overcome the current saturation in the high-end. Regional expansion: To capitalize on the growing demand in Saudi Arabia, PHD announced the establishment of two pro-jects in Riyadh and Jeddah with an estimated value of LE 3 bn, with PHD's share amounting to 51%. Both projects spread over 6.7 mn sqm. Such a regional expansion is expected to widen the company's scope of operation and enhance its value.

Increasing its land bank: since the beginning of the year, PHD was able to increase its land bank by 31%, to reach 48.3 mn sqm, by acquiring: (1) 6.6 mn sqm in Saudi Arabia, (2) 0.8 mn sqm in the Sixth of October City, (3) 0.2 mn sqm in New Cairo, (4) 1.3 mn sqm on the North Coast, and (5) 1 mn sqm in Aswan.

Unrecognized revenues: 9M08 unit reservations grew by 54% to reach an all-time high of LE 3,668 mn compared to LE 2,377 mn in a year ago period. The increase in reservations had no effect on 9M08 consolidated net sales figure due to the revenue recognition method used by PHD where it recognizes its villas and town houses revenues from land upon signature of a contract, while revenues from construction are recognized on a percentage of completion basis with a minimum threshold of 50%. Revenues from apartments and multi tenant buildings are recognized upon delivery.

A vertically integrated business model: PHD has secured exclusive affiliation with Shehab Mazhar (a prominent de-signer), is cooperating with Coldwell Banker (a well-known real-estate broker), and signed a joint venture agreement with Hassan Allam Sons (a resourceful contractor). All above cre-ate a highly-efficient, vertically-integrated business model.

Valuation and recommendation: We used the DCF method to value PHD, yielding a 12-month fair value of LE 18.76/share, implying a 132% upside potential. Hence, we initiate coverage on the stock with a BUY recommendation and a MODERATE RISK rating.

PALM HILLS DEVELOPMENTS

Excavation for diversification

STOCK PERFORMANCE | SINCE IPO

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BUY | HIGH RISK

SHARE DATA

Reuters; Bloomberg PHDC.CA; PHDC EYRecent price as of 6-Nov-08 LE 8.10No. of O/S shares 465.9 mnMarket cap LE 3,774.0 mn52-wk high / low LE 25/ LE 7.06Avg. daily volume / turnover 0.6 mn / LE 5.16 mn

COMPANY SYNOPSIS

PHD was incorporated in 2005 as a joint stock company, working under the provisions of the Investment Guarantees and Incentives Law No. 8/1997 and the Companies' Law No. 159/1981, and the statutes of Capital Market Law No. 95/1992. PHD was established as a sister company of Al Ethadia to benefit from Law No. 8/1997 provisions. In January 2008, PHD acquired all the assets of Al Ethadia that was estab-lished in 1997 with the objective of developing residential housing projects in 6th of October City. PHD's core activities includes construction of integrated projects and management of its residential compounds post completion, resorts and associated entertainment activities, investment in real estate, and sale and lease of properties. In this regards, PHD owns 11 subsidiaries, and entered into strategic partnerships to pursue its development pro-jects over a land bank amounting to 48.3 mn sqm.


MMID 48.6%Goldman Sachs 5.3%Banks, Ins Co., Others 14.7%Free Float 31.4%Total 100.0%

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EGYPT | HOUSING & REAL ESTATE | PALM HILLS DEVELOPMENTS

Balance Sheet (LE mn) 2007A 2008F 2009F 2010FAssetsCash & Cash Equivalents 386 1,106 1,066 2,166Net Receivables 287 1,088 1,753 2,293Total Inventory 3,768 3,797 4,561 4,654Advance Payment 15 49 98 310Other Trading Assets 0 0 0 0Other Current Assets 74 0 0 0Total Current Assets 4,531 6,041 7,478 9,423Net Fixed Assets 480 509 508 507Long-Term Investments 109 120 120 120Long -Term Real Estate Investments 0 0 0 0Long-Term Loans 0 0 0 0Other Non-Current Assets 626 4,158 6,679 8,447Intangibles 0 0 0 0Total Assets 5,746 10,828 14,786 18,497

Liabilities & Shareholders' EquityShort-Term Debt 486 20 28 28CP of Long Term Debt 183 1 1 1Accounts Payable 789 274 283 350Accrued Expenses 1 2 4 14Deferred Revenues 1,000 5,171 8,886 10,371Taxes Payable 33 1 1 1Dividends Payable 0 0 0 0Royalties Payables 0 0 0 0Other Current Liabilities 265 621 621 621Total Current Liabilities 2,757 6,089 9,823 11,385Long-Term Debt 3 3 2 1Long-Term Land Purchase Liability 1,856 1,455 1,198 929Other Non-Current Liabilities 0 0 0 0Total Liabilities 4,616 7,547 11,023 12,315Deferred Taxes 0 0 0 0Other Provisions 0 178 536 1,670Minority Interest 99 90 81 72Shareholders' Equity 1,032 3,014 3,146 4,440Total Liab. & Equity 5,746 10,828 14,786 18,497

Income Statement (LE mn) 2007A 2008F 2009F 2010FNet Revenues 535 1,839 2,909 5,863Cost of Revenues (140) (446) (895) (2,835)Gross Profit 395 1,393 2,014 3,029SG&A (112) (184) (291) (586)EBITDA 283 1,210 1,723 2,442Depreciation & Amortization (2) (4) (8) (8)EBIT 281 1,205 1,715 2,434Interest Expense (42) (19) (4) (4)Interest on Land Purchase Liability (47) (53) (117) (117)Provisions 0 (178) (358) (1,134)Interest Income 8 5 7 11Amortization of Notes Receivables Discount 5 104 383 694Investment Income 0 0 0 0Other Non-Operating Income 5 5 5 5EBT 210 1,069 1,631 1,889Taxes (30) (214) (326) (378)NPAT 180 855 1,305 1,511Minority Interest 9 9 9 9Extraordinary Items 0 0 0 0Attributable Profits 189 864 1,314 1,520

Cash Flow (LE mn) 2007A 2008F 2009F 2010FNOPAT 281 959 1,389 2,056Depreciation & Amortization 2 4 8 8Gross Cash Flow (COPAT) 283 964 1,396 2,064Working Investments Change (866) (1,092) (529) (1,319)Other Current Items 102 430 0 0Cash After Current Operations (481) 302 867 746Financing Payments (42) (202) (5) (5)Cash Before Long Term Use (523.88) 100 862 741Net Plant Change (451) (33) (7) (8)FCFF (933) 269 860 738Others (112) 2 278 593Cash Before Financing (1,087) 68 1,134 1,326Short-Term Debt 486 (466) 8 (0)Long-Term Debt 182 0 0 (0)Networth 502 1,127 (911) 85Grey Area 73 (9) (9) (9)Dividends 0 0 (261) (302)Change in Cash 156 720 (40) 1,100

Fact Sheet 2007A 2008F 2009F 2010FROE 18.3% 28.7% 41.8% 34.2%ROS 35.3% 47.0% 45.2% 25.9%ROA 3.3% 8.0% 8.9% 8.2%ROIC 7.7% 20.2% 27.8% 28.8%Gross Profit Margin 73.8% 75.8% 69.2% 51.7%EBITDA Margin 52.9% 65.8% 59.2% 41.7%ATO 0.1 0.2 0.2 0.3WI/ Sales 426.3% -27.9% -94.9% -59.3%ALEV 5.6 3.6 4.7 4.2Liabilities/Networth 4.5 2.5 3.5 2.8Current Ratio 1.6 1.0 0.8 0.8


EPS 0.4 1.9 2.8 3.3DPS 0.0 0.0 0.6 0.6Revenues/Share 1.1 3.9 6.2 12.6Capacity/Share N/A N/A N/A N/ABV/Share 2.2 6.5 6.8 9.5Gross Cash Flow/Share 0.6 2.1 3.0 4.4FCFF/Share (2.0) 0.6 1.8 1.6EBITDA/Share 0.6 2.6 3.7 5.2EV/Share 8.7 5.8 5.9 3.5

Multiples 2007A 2008F 2009F 2010FP/E 20.0x 4.4x 2.9x 2.5xDiluted P/E 20.0 4.4 2.9 2.5P/ Revenue 7.1 2.1 1.3 0.6EV/ Revenues 7.6 1.5 0.9 0.3P/ COPAT 13.3 3.9 2.7 1.8EV/ COPAT 14.4 2.8 2.0 0.8P/ FCFF (4.0) 14.0 4.4 5.1EV/ FCFF (4.4) 10.0 3.2 2.2P/ EBITDA 13.3 3.1 2.2 1.5EV/ EBITDA 14.4 2.2 1.6 0.7P/ BV 3.7x 1.3x 1.2x 0.8x


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Raya Holding (RAYA) maintains a high market share in the mobile distribution segment and is considered the largest contact center in Egypt. We believe that the con-tribution of the Trade LoB (76% contribution to top line) will decrease because of the forthcoming slower pace of net adds of mobile subscribers. Still, RAYA is tapping more growth channels that will add value over the longer run. Furthermore, an M&A scenario is quite possible given that the stock is traded at a 9% lower than its par value of LE 5. Traded at 4.1x 2008 earnings vs. a peer av-erage of 10x yields a fair value that it is almost consistent with our DCF valuation of LE 11.5/share. Thus, we reiter-ate our BUY recommendation with MODERATE RISK.

Trade: main revenue generator, but ex-growth: RAYA's core operations of mobile handsets retail and distribution, IT and call center businesses have been better reflected in bot-tom-line profits since 2007. We believe the Trade LoB (the major revenue generator with a 76% contribution) will con-tinue to be RAYA's main segment. However, RAYA will be exposed to the forthcoming slower pace of net adds of mobile subscribers along with growing competition from other mobile retailers and distributors. We expect Trade LoB contribution to top line will decrease to 71% by end of 2012. We also reckon that RAYA's market share lies within the range of 30-35%.

Tapping more growth channels that will add more value over the longer run: For further expansions in the call center business, RAYA is planning to bid for the establishment of the contact center park in Maadi. Also, RAYA opened a new con-tact center with a capacity of 1,000 agents. In June 2008. RAYA inaugurated Nokia Maintenance Center in Egypt. Said center is considered the largest regional maintenance hub. Also, RAYA started penetrating the outsourcing, the con-sumer bill payment and the lease businesses.

Catalysts and risks: Participation in the contact center park and the penetration of its trade LoB to a new market are the main catalysts for further growth. Yet, competition remains the company's main risk. Competition is faced from local distribu-tors and retailers in the trade LoB whereas RAYA's IT LoB faces competition from Indian suppliers in the gulf.

A good acquisition target: We believe that RAYA could still be a potential target for acquisition, given that the stock is traded at 43% and 9% discount to book value and its par value of LE 5, respectively.

Valuation and recommendation: Our 12-month fair value is cut down from LE 15.2/share to LE 11.5/share after incorporat-ing (1) a higher discount rate and (2) revising our forecasts going forward, still offering a 152% upside potential – hence we reiterate our BUY recommendation. Due to the recent mar-ket sell-off, RAYA is traded at 4.1x 2008 earnings vs. interna-tional peers' average of 10x expected earnings.

RAYA HOLDING

An option on future growth


EGYPT | TMT


SHARE DATA Reuters; Bloomberg RAYA.CA; RAYA EYRecent price as of 6-Nov-08 LE 4.55No. of O/S shares 56.9 mnMarket cap LE 0,258.9 mn52-wk high / low LE 16.4/ LE 3.8Avg. daily volume / turnover 0.71 mn / LE 8.83 mn

COMPANY SYNOPSIS

Raya Holding (RAYA) is initially the offspring of a merger conducted in 1999 between seven companies in the IT and mobile distribution fields. Operating under Law 95/1992, RAYA’s activities encompass currently three main lines of business (LoBs), namely retail & distribution, contributing to around 76% of the company’s operations, IT, and Contact Center business after the sale of the Telecom LoB. Since its inception, the company underwent four development phases: 1) a merger phase, 2) a diversification phase that occurred in 2000 and 2001 whereby three companies were acquired and seven new companies were established. 3) Streamlining phase where mergers between small companies were effected and subsidiaries were renamed to consolidate the RAYA brand name in 2002. 4) Expansion phase starting 2003 and onwards, in which RAYA set its eyes on regional and international expansion. Currently, RAYA stands as one of the flagships in Egypt’s CIT industry, commanding a high market share in the local mobile distribution market, and capturing a considerable part of the IT segment with a broad array of services offered. In the IT LoB, RAYA has presence in Algeria, Nigeria, Saudi Arabia, Kuwait, UAE, and lately the US. On the retail level, RAYA is currently planning to reach a total of 105 outlets in Egypt by end of 2009, up from 62 outlets in 2Q08. In 1H07, RAYA launched Kazza Mizza retail chain addressing C and D classes. With 5 outlets in Algeria, RAYA also shop-in-shop agreements with 25 shops of Nedjma, the third mobile operator in Algeria.

SHAREHOLDER STRUCTURE Financial Holding Int'l LTD 12.0%Medhat Khalil & Family 4.1%El-Tawil Family & others 5.8%Public Sector 9.4%Free float 68.8%


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EGYPT | TMT | RAYA HOLDING

Balance Sheet (LE Millions) 2007A 2008F 2009F 2010FAssetsCash & Cash Equivalent 124 59 62 65Net Receivables 279 288 294 310Total Inventory 294 301 321 339Advance Payment to Suppliers 10 11 11 12Other Trading Assets 0 0 0 0Other Current Assets 0 0 0 0Total Current Assets 708 658 688 726Net Plant 232 270 270 271Long-Term Investments 28 30 30 30Other Trading Non-Current Assets 63 77 77 77Other Non-current Assets 76 80 80 80Intangibles 67 78 78 78Total Assets 1,175 1,193 1,223 1,261

Liabilities & Shareholders' EquityShort-Term Debt 246 203 177 158Current Portion of Long-Term Debt 21 20 19 19Accounts Payable 171 175 187 197Accrued Expenses 48 49 53 55Down Payments to customers 28 32 34 36Taxes Payable 18 10 10 10Dividends Payable 8 21 24 26Other Spontaneous Finance 0 0 0 0Other Current Liabilities 94 96 102 108Total Current Liabilities 634 607 607 610Total Long-Term Debt 69 59 40 21Other Non-Current Liabilities 1 1 1 1Long-Term Spontaneous Finance 0.0 0 0 0Total Liabilities 704 667 648 633Deferred Taxes 31.5 46 46 46Other Provisions 0 0 0 0Minority Interest 6 8 9 11Shareholders Equity 433 472 519 572Total Liab. & Shareholders' Equity 1,175 1,193 1,223 1,261

4% 3%Income Statement (LE Millions) 2007A 2008F 2009F 2010FRevenues 2,273 2,342 2,493 2,631

Trade LoB 1,951 1,833 1,912 1,976IT LoB 374 452 505 569Call Center LoB 67 79 98 110intercompany sales (119) (22) (23) (24)

Cost of Revenues (1,972) (2,005) (2,133) (2,249)Gross Profits 301 337 360 382SG&A (190) (201) (216) (229)EBITDA 110 135 144 153Depreciation & Amortization (16) (22) (27) (32)EBIT 94 113 118 121Interest Expense (24) (37) (31) (26)Provisions (13) (8) (8) (8)Interest Income 3 3 4 4Investment Income 9 8 8 9Other Non-Operating Income 47 7 7 7Other Non-Operating Expenses 0 0 0 0EBT 115 86 97 107Taxes (21) (22) (24) (27)NPAT 94 65 73 80Minority Interest 1 (2) (1) (2)Extraordinary Items - - - - Attributable Profits 95 63 72 79

Cash Flow (LE mn) 2007A 2008F 2009F 2010FNOPAT 82.1 69.6 93.3 94.7Depreciation & Amortization 16 22 27 32Gross Cash Flow (COPAT) 98 92 120 126Working Investments Change 23 (6) (9) (19)Other Current Items (48) 2 6 6Cash After Current Operations 73 88 117 113Financing Payments (33) (57) (51) (45)Cash Before Long Term Use 40 31 66 67Net Plant Change (94) (60) (27) (33)FCFF (21) 28 90 80Others 94 (2) 16 16Cash Before Financing 41 (31) 55 51Short-Term Debt 15 (43) (25) (19)Long-Term Debt 32 10 0 0Networth (47) (4) (1) (2)Grey Area 27 11 (3) (3)Dividends (62) (8) (21) (24)Change in Cash 6 (65) 3 3

0 0 (0) 0Fact Sheet 2007A 2008F 2009F 2010FROE 21.9% 13.4% 13.8% 13.7%ROS 4.2% 2.7% 2.9% 3.0%ROA 8.1% 5.3% 5.9% 6.2%ROIC 11.1% 9.5% 12.7% 12.7%Gross Margin 13.2% 14.4% 14.4% 14.5%

Trade LoB 10.7% 12.5% 12.5% 12.6%IT LoB 17.3% 16.7% 16.0% 15.8%Call Center LoB 41.5% 41.5% 40.7% 40.0%

EBITDA Margin 4.9% 5.8% 5.8% 5.8%ATO 1.9 2.0 2.0 2.1WI/ Sales 0.2 0.2 0.2 0.2ALEV 2.7 2.5 2.4 2.2Liabilities/Networth 1.6 1.4 1.2 1.1Current Ratio 1.1 1.1 1.1 1.2

Per-Share Ratios 2007A 2008F 2009F 2010FShare Price 4.6 4.6 4.6 4.6No. Of Shares (mn) 57.0 57.0 57.0 57.0EPS 1.7 1.1 1.3 1.4DPS 1.2 0.4 0.4 0.5Revenues/Share 39.9 41.1 43.7 46.2BV/Share 7.6 8.3 9.1 10.0Gross Cash Flow/Share 1.7 1.6 2.1 2.2FCFF/Share (0.4) 0.5 1.6 1.4EBITDA/Share 1.9 2.4 2.5 2.7EV/Share 8.3 8.5 7.6 6.9

Multiples 2007A 2008F 2009F 2010FP/E 2.7x 4.1x 3.6x 3.3xDividend Yield 27% 8% 9% 10%P/ Revenue 0.1x 0.1x 0.1x 0.1xEV/ Revenues 0.2x 0.2x 0.2x 0.1xP/ COPAT 2.6x 2.8x 2.2x 2.1xEV/ COPAT 4.8x 5.2x 3.6x 3.1xP/ FCFF -12.5x 9.2x 2.9x 3.2xEV/ FCFF -22.7x 17.2x 4.8x 4.9xP/ EBITDA 2.3x 1.9x 1.8x 1.7xEV/ EBITDA 4.3x 3.6x 3.0x 2.6xP/ BV 0.6x 0.5x 0.5x 0.5xSource: Raya Holding and CICR estimates

November 11, 2008

153

EGYPT | CEMENT


Sinai Cement (SCEM), a grey cement producer since 2001, comprises a mono-production line cement factory of 1.5 mtpa capacity with production off its second 1.5-mtpa line expected by end of 2008. By 2010 we believe that the Sinai market will witness competition between two grey cement players as the new player North Sinai Cement, a Greenfield license winner in October 2007, en-ters the market. The stock is traded at a PER of 2.5x 2009 earnings, a 67% discount to a peer average of 7.6x. Our DCF concluded 183% upside potential with a BUY at MODERATE RISK rating.

New production line: Early August 2008, SCEM announced the completion of all installation activities for its second 1.5-mpta production line. Total required investment cost is esti-mated at LE 950 mn. Overcapacity utilization to be hit by 2010: Given the new capacities entering the cement market, we expect SCEM’s utilization rate (132% in 2007 and the highest in the market) to decline gradually over 2008-12 to 100% in 2012 – yet still higher than 79% for the market then.

Immediate post ban exports: Although not permitted to ex-port during the 6-month export ban that ended in October 2008, SCEM was able to resume exporting as it immediately initiated export contracts at prices higher than SCEM's own expectations given the global slowdown. Said exports are mainly heading to the South (e.g. Eritrea, Djibouti, and Ethio-pia), which we believe is currently a better export market than that of Europe given the recent global financial crisis.

Investments: SCEM holds a 25.4% stake in Sinai White Ce-ment (SWCC), which comprises a production line of white cement, had acquired a license for a second production line in October 2007. Our DCF valuation includes such an invest-ment. On the other hand, SCEM is currently considering the ready-made concrete business. Yet, we have not incorpo-rated such development in our DCF valuation till further de-tails are made available.

Acquisitions? We understand that winners of recent licenses are permitted to join others during the pre-production phase, then can sell the whole investment by the initial production release if desired so. As such, we believe that SCEM may consider buying if and when it came available to re-seize con-trol of the whole area.

Valuation and recommendation: Based on a cost of equity of 17.7%, our DCF model resulted in a 12-month fair value of LE 92.97/share, implying a 183% upside potential. This valua-tion did not incorporate the ready-made concrete business, which could indicate further upside potential. Accordingly we rate this stock a BUY at MODERATE RISK.

SINAI CEMENT

Awaiting nearby competition with vigilance


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Volume SCEM CASE 30 - rebased


SHARE DATA

Reuters; Bloomberg SCEM.CA; SCEM EYRecent price as of 6-Nov-08 LE 32.86No. of O/S shares 35.0 mnMarket cap LE 1,150.1 mn52-wk high / low LE 78.89/ LE 29.02Avg. daily volume / turnover 0.05 mn / LE 3.45 mn

COMPANY SYNOPSIS

Sinai Cement (SCEM) was incorporated under Law no. 8/1997 in 1998 as a shareholding company; with the objective of producing cement, packages and all other cement products. In July 2000, SCEM had its shares listed on the Egyptian Exchange (EGX). The company was established with a paid-in capital of LE 250 mn distributed over 25 mn shares at a par value of LE 10/share. Currently, SCEM has an authorized capital of LE 1 bn mn with a paid-in capital of LE 350 mn distributed over 35 mn shares with a par value of LE 10/share. In August 2006, SCEM signed a contract with ASEC, ARASCO and FL Smidth to install an additional clinker capacity of 4k tpd equivalent to a cement capacity of 1.5 mtpa, commencing construction in September 2006. SCEM reached 5% local market share in 2007, selling 1,565k tons and 5% in 8M08, selling 1,404k tons. Meanwhile, 10% export market share in 2007 was reached, exporting 418k tons (c. 21% of production) and 4% in 8M08, exporting 31k tons (c. 2% of production).

SHAREHOLDER STRUCTURE Vica Misr Cement Industries 39.6%Sama Cement 9.4%Socisl Insurance Fund 9.4%Al-Arabia Co. for Indust. Inv. 5.8%Others 9.6%Free Float 26.1%Total 100.0%

November 11, 2008

154

EGYPT | CEMENT | SINAI CEMENT

Balance Sheet (LE mn) Dec-07 Dec-08 Dec-09 Dec-10Assets Cash & Cash Equivalent 18.1 23.5 350.0 740.0Net Receivables 7.2 8.4 14.8 13.6Total Inventory 53.0 104.5 220.4 202.1Advance Payment to Suppliers 4.5 8.0 16.9 15.5Other Trading Assets 0.0 0.0 0.0 0.0Other Current Assets 0.2 0.2 0.2 0.2Total Current Assets 83.0 144.6 602.2 971.4Net Plant 1,151.4 1,444.1 1,392.7 1,358.3Long-Term Investments 80.2 103.1 103.1 103.1Other Trading Non-Current Assets 0.4 0.4 0.4 0.4Other Non-current Assets 39.4 18.3 18.3 18.3Intangibles 0.0 0.0 0.0 0.0Total Assets 1,354.4 1,710.5 2,116.7 2,451.5

Liabilities & EquityShort-Tem Debt 4.6 121.0 44.7 40.4CP Of Long-Term Debt 0.0 0.0 0.0 0.0Accounts Payable 48.3 56.0 118.0 108.3Accrued Expenses 8.4 15.0 31.6 29.0Down Payments 18.6 22.2 38.7 35.6Taxes Payable 0.0 0.0 0.0 0.0Dividends Payable 61.1 0.0 0.0 0.0Other Spontaneous Finance 0.0 0.0 0.0 0.0Other Current Liabilities 62.8 72.9 71.8 71.8Total Current Liabilities 203.8 287.1 304.8 285.0Total Long Term Debts 0.0 0.0 0.0 0.0Other Non-Current Liabilities 1.1 22.0 11.0 0.0Long Term Spontaneous Finance 0.0 0.0 0.0 0.0Total Liabilities 204.9 309.1 315.8 285.0Tax Provision 0.0 0.0 0.0 0.0Other Provisions 15.6 21.9 31.9 41.9Minority Interest 0.0 0.0 0.0 0.0Shareholders' Equity 1,133.9 1,379.5 1,769.0 2,124.6Total Liabilities & Equity 1,354.4 1,710.5 2,116.7 2,451.5

Income Statement (LE mn) Dec-07 Dec-08 Dec-09 Dec-10Capacity '000 Tons 1,500 1,750 3,000 3,000 Tons Sold '000 1,983 2,072 3,316 2,918 Revenues 656.4 786.4 1,367.2 1,257.4Cost of Goods Sold (191.3) (341.7) (717.9) (658.5)Gross Profits 465.1 444.6 649.4 598.9SG&A (84.2) (65.9) (95.4) (95.9)EBITDA 380.9 378.7 554.0 503.0Depreciation & Amortization (37.2) (50.0) (99.4) (103.1)EBIT 343.7 328.7 454.6 400.0Interest Expense 0.0 (15.1) (5.6) (5.0)Provisions (6.3) (26.3) (10.0) (10.0)Interest Income 5.7 2.2 19.0 33.3Investment Income 0.0 0.0 0.0 0.0Other Non-Operating Income 0.0 0.2 0.2 0.2Other Non-Operating Expenses (1.7) 0.4 0.0 0.0EBT 341.5 290.1 458.2 418.4Taxes 0.0 0.0 0.0 0.0NPAT 341.5 290.1 458.2 418.4Minority Interest 0.0 0.0 0.0 0.0Extraordinary Items 0.0 (1.1) 0.0 0.0Attributable Profits 341.5 289.0 458.2 418.4

Fact Sheet Dec-07 Dec-08 Dec-09 Dec-10ROE 30.1% 20.9% 25.9% 19.7%ROS 52.0% 36.7% 33.5% 33.3%ROA 25.2% 16.9% 21.6% 17.1%ROIC 28.3% 21.5% 24.6% 18.1%Gross Margin 70.86% 56.54% 47.50% 47.63%EBITDA Margin 58.03% 48.16% 40.52% 40.00%ATO 0.5 0.5 0.6 0.5WI/ Sales -1.6% 3.6% 4.7% 4.7%ALEV 1.2 1.2 1.2 1.2Liabilities/Net worth 0.2 0.2 0.2 0.1Current Ratio 0.4 0.5 2.0 3.4

Cash Flow (LE mn) Dec-07 Dec-08 Dec-09 Dec-10NOPAT 326.1 326.7 453.5 400.0Depreciation & Amortization 37.2 50.0 99.4 103.1Gross Cash Flow (COPAT) 363.3 376.8 552.9 503.0Working Investment Change 20.1 (38.3) (36.1) 5.4Other Current Items 55.1 0.0 0.0 0.0Cash After Current Operations 438.4 338.5 516.8 508.4Financing Payments 0.0 (15.1) (16.6) (16.0)Cash Before Long-Term Use 438.4 323.4 500.2 492.3Net Plant Change (516.5) (342.7) (47.9) (68.7)FCFF (133.2) (4.2) 468.9 439.7Others 144.0 (1.2) (168.8) (127.5)Cash Before Financing 65.8 (20.5) 283.5 296.1Short-Term Debt 4.6 116.4 (76.3) (4.3)Long-Term Debt 0.0 11.0 11.0 11.0Net Worth (17.4) 14.4 22.9 20.9Grey Area (0.2) (20.0) 0.0 0.0Dividends (42.3) (118.9) (91.6) (83.7)Change in Cash 10.5 (17.6) 149.5 240.0

Per Share Ratios Dec-07 Dec-08 Dec-09 Dec-10Share Price 32.86 32.86 32.86 32.86New No. Of Shares '000* 35,000 35,000 35,000 35,000 Actual No. Of Shares '000* 35,000 35,000 35,000 35,000 EPS 9.76 8.26 13.09 11.95Diluted EPS 9.76 8.26 13.09 11.95DPS 1.25 1.65 2.62 2.39Revenues/Share 18.75 22.47 39.06 35.93Units Sold/Share 0.06 0.06 0.09 0.08Capacity/Share 0.04 0.05 0.09 0.09BV/Share 32.4 39.4 50.5 60.7 Gross Cash Flow/Share 10.38 10.76 15.80 14.37FCFF/Share -3.81 -0.12 13.40 12.56EBITDA/Share 10.88 10.82 15.83 14.37EV/Share 32.47 35.65 24.14 12.87

Multiples Dec-07 Dec-08 Dec-09 Dec-10P/E 3.37 3.98 2.51 2.75Diluted P/E 3.37 3.98 2.51 2.75Div Yield % 3.8% 5.0% 8.0% 7.3% P/Revenues 1.75 1.46 0.84 0.91EV/ Revenues 1.73 1.59 0.62 0.36 P/ COPAT 3.17 3.05 2.08 2.29EV/ COPAT 3.13 3.31 1.53 0.90P/ FCFF -8.63 -272.51 2.45 2.62EV/ FCFF -8.53 -295.61 1.80 1.02EV/ Ton 757.73 712.91 281.60 150.16P/ EBITDA 3.02 3.04 2.08 2.29EV/ EBITDA 2.98 3.29 1.53 0.90P/ BV 1.01 0.83 0.65 0.54* Not counting for the recently announced 100% stock dividendSource Sinai Cement & CICR forecasts

November 11, 2008

155

EGYPT | TMT


Telecom Egypt (TE) should benefit off tariff rebalancing starting 2H08, while its November promotion should have a positive impact beginning 2009. With the three mobile operators competing in voice calls and broadband ser-vices, TE is leveraging on the mobile sector growth pass-ing through its network related infrastructure leasing. With TE’s investment in Vodafone Egypt (VFE) contribut-ing significantly to the former’s bottom line. Capturing the growth in bandwidth demand, TE realized so far US$170 mn from its submarine cable project. Through its ISP pro-vider, TE has a leading market share of 56%. TE is looking for acquisitions given its low financial leverage. We reit-erate out BUY with 12M fair value of LE 24.3 (+56%).

Tariff rebalancing to revive top-line growth: Despite the decelerated growth pattern of fixed-line business and fixed-mobile substitution, thanks to noticeable competition from mo-bile operators, TE should start reaping the fruits of the tariff rebalancing applied effective July 2008 in addition to exploiting wireless traffic growth in its wholesale segment in 3Q08.

Wireless operators weigh down on revenues: TE is still the sole fixed-line operator in Egypt and should continue to be so for at least the next 1-2 years after the government postponed the second fixed-line auction till 2009. However, the company suffers from competition by mobile operators, particularly with the liberalization of the international market. All three mobile operators compete by offering lower tariffs for voice calls and launching wireless broadband offers, now a key threat to TE's ADSL services. On the other hand, we believe competitive roaming rates offered by mobile operators may also place fur-ther pressure on TE's international call revenues.

But TE is capitalizing on mobile market growth: Despite said competitive pressure from mobile operators, TE is lever-aging on the mobile sector growth through its wholesale seg-ment. TE exploits such growth through its mobile-to-fixed, mo-bile-to-international calls (mainly from Mobinil customers), and leasing infrastructure. Furthermore, the 44.8% investment in Vodafone Egypt (VFE) has a significant contribution to TE's bottom-line profits (as investment income) and cash flow (as dividends).

It's time to go regional: At time when global telecoms are feeling the pinch from an overall negative sentiment and a looming global slowdown, we believe it's time for TE to go for regional expansion at currently low valuation multiples.

Valuation and recommendation: We revised our financial forecasts slightly. However, we lowered our 12-month fair value by 3% to LE 24.3/share, mainly on account of recent interest rate hikes by the Central Bank of Egypt (CBE). This compelled us to raise the risk-free rate by 200 bps from 9.5% to 11.5%. In our view, VFE investment accounts for around 34% of TE's value. Given the current deterioration of TE's market price, our fair value still implies an upside potential of 56%; hence, we reiterate our BUY recommendation with a MODERATE RISK rating.

TELECOM EGYPT (TE)

It's time to go regional



SHARE DATA

Reuters; Bloomberg ETEL.CA/ETELq.L; ETEL

EYRecent price as of 6-Nov-08 LE 15.60No. of O/S shares 1707 mnMarket cap LE 26,629.2 mn52-wk high / low LE 23.9/ LE 10.7Avg. daily volume / turnover 1.85 mn / LE 35.18 mn

COMPANY SYNOPSIS

Delivering on its promise to privatize its state-run telecom company, the Government of Egypt (GoE) first transformed its Arab Republic of Egypt National Telecommunication Organization (ARENTO) into a jointstock company in 1998 according to Law No. 19/1998. Separating the regulatory and operating bodies, National Telecommunication Regulatory Authority (NTRA) was established in the same year to oversee the legal environment in Egypt and grant the company independence to operate on a commercial basis. Subsequently, ARENTO became known as Telecom Egypt (TE), truly reflecting its scope of business. TE is Egypt's sole fixed-line telecommunication operator offering retail telecommunication services including access, voice, and internet and data through its subsidiary TE Data. Further, it is the sole provider of wholesale services including broadband capacity leasing to ISPs, national and international interconnection services. TE is the largest provider of fixed-line services in the Middle East & Africa with more than 11.3 mn subscribers as of June 2008, implying a penetration rate of c.15%. TE participates in the growth story of Egypt’s fast-growing mobile market through its 44.8% stake in Vodafone Egypt (VFE), the second largest mobile operator in Egypt in terms of subs.

SHAREHOLDER STRUCTURE Government of Egypt (GoE) 80.0%Free Float 20.0%Total 100.0%

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Volume ETEL CASE 30 - rebased

November 11, 2008

156

EGYPT | TMT | TELECOM EGYPT

Balance Sheet (LE mn) 2007A 2008F 2009F 2010F Cash Flow (LE mn) 2007A 2008F 2009F 2010FAssets NOPAT 1,960 1,776 2,159 2,640Cash & Cash Equivalent 1,397 2,379 1,926 2,474 Depreciation & Amortization 2,923 2,811 2,914 3,005Net Receivables 3,101 3,213 3,453 3,743 Gross Cash Flow (COPAT) 4,883 4,587 5,073 5,645Total Inventory 508 565 613 638 Working Investments Change (74) (184) (254) (287)Advance Payment 79 85 92 96 Other Current Items 251 0 0 0Other Trading Assets 0 0 0 0 Cash After Curr. Ops. 5,060 4,403 4,819 5,358Total Current Assets 5,085 6,242 6,084 6,952 Financing Payments (1,890) (2,242) (2,106) (1,265)Net Plant 20,216 18,923 17,772 16,224 Cash Before LT Use 3,170 2,161 2,713 4,093Long-Term Investments 7,027 7,020 7,562 8,131 Net Plant Change (1,020) (1,492) (1,727) (1,422)Prepaid Exp. 0 0 0 0 FCFF 4,040 2,911 3,092 3,935Other Non-current Assets 2,039 2,243 2,467 2,714 Others 1,263 1,195 750 821Intangibles 224 149 114 79 Cash Before Financing 3,413 1,864 1,736 3,492Total Assets 34,591 34,576 33,999 34,099 Short-Term Debt (86) (7) 0 0

Long-Term Debt (1,127) 889 (0) 400Liabilities & Equity Networth 354 0 0 0Short-Term Debt 7 0 0 0 Grey Area (152) 5 7 5CP of Long-Term Debt 1,027 1,077 857 658 Dividends (1,716) (1,768) (2,195) (3,349)Bonds 800 800 400 400 Change in Cash 685 982 (453) 548Accounts Payable 130 132 143 149Accrued Expenses 193 188 204 213 Fact Sheet 2007A 2008F 2009F 2010FDown Payments 202 196 210 228 ROE 9.8% 10.2% 12.1% 14.6%Taxes Payable 736 698 751 814 ROS 25.4% 26.7% 30.8% 35.2%Dividends Payable 1 1 1 2 ROA 7.3% 7.9% 9.9% 12.3%Other Current Liabilities 1,905 1,910 1,905 1,900 ROIC 7.6% 6.8% 8.3% 10.1%Total Current Liabilities 5,001 5,002 4,471 4,363 EBITDA Margin (pre prov.) 53.9% 50.7% 52.1% 54.2%Total Long-Term Debt 2,351 1,763 906 248 EBITDA Margin (post prov.) 52.3% 49.5% 51.9% 54.0%Bonds 800 400 0 0 ATO 0.3 0.3 0.3 0.3Other Non-Current Liabilities 331 331 331 331 WI/ Sales 31.7% 32.8% 32.8% 32.7%Total Liabilities 8,483 7,495 5,707 4,942 ALEV 0.7 0.8 0.8 0.8Other Provisions 324 340 362 386 Liabilities/Networth 0.3 0.3 0.2 0.2Minority Interest 40 45 51 56 Current Ratio 1.0 1.2 1.4 1.6Shareholders' Equity 25,744 26,696 27,878 28,716Total Liab. & Equity 34,591 34,576 33,999 34,099 Per-Share Ratios 2007A 2008F 2009F 2010F

Share Price 15.60 15.60 15.60 15.60Income Statement (LE mn) 2007A 2008F 2009F 2010F No. of Shares ('000) 1,707,072 1,707,072 1,707,072 1,707,072Yearend ALIS ('000) 11,229 11,470 11,734 11,930 Yearend ADSL ('000) 222 386 620 831 EPS 1.48 1.59 1.98 2.45

Access 1,907 2,079 2,335 2,361 DPS 1.0 1.0 1.3 2.0Voice 3,289 3,099 3,107 2,823 DIV./NPAUI 67% 65% 65% 80%Internet & Data 1,271 1,125 1,376 1,749 Revenues/Share 5.85 5.97 6.42 6.96

Retail Revenues 6,466 6,303 6,817 6,934 BV/Share 15.08 15.64 16.33 16.82 Domestic* 767 1,160 1,553 2,415 Gross Cash Flow/Share 2.86 2.69 2.97 3.31International 2,699 2,735 2,591 2,532 FCFF/Share 2.37 1.71 1.81 2.31

Wholesale Revenues 3,466 3,895 4,144 4,948 EBITDA/Share 3.06 2.96 3.33 3.76Sales of telephone sets 61 EV/Share 17.23 16.10 15.50 14.68Revenues 9,993 10,198 10,961 11,881Cost of Revenues (3,306) (3,437) (3,727) (3,884) Multiples 2007A 2008F 2009F 2010FGross Profit 6,687 6,761 7,234 7,997 P/E 10.5x 9.8x 7.9x 6.4xSG&A (1,298) (1,589) (1,523) (1,560) Dividend Yield 6.4% 6.6% 8.2% 12.6%EBITDA before provisions 5,389 5,172 5,711 6,437 P/ Revenue 2.7x 2.6x 2.4x 2.2xProvisions (0) (16) (22) (24) EV/ Revenues 2.9x 2.7x 2.4x 2.1xRelease of unused provision 116 17 0 0 P/ COPAT 5.5x 5.8x 5.2x 4.7xImpairment loss (281) (124) 0 0 EV/ COPAT 6.0x 6.0x 5.2x 4.4xEBITDA after provisions 5,224 5,050 5,690 6,413 P/ FCFF 6.6x 9.1x 8.6x 6.8xDepreciation & Amortization (2,923) (2,811) (2,914) (3,005) EV/ FCFF 7.3x 9.4x 8.6x 6.4xEBIT 2,301 2,239 2,776 3,408 EV/Sub (US$) $489 $447 $421 $392Interest Expense (600) (501) (265) (83) P/ EBITDA 5.1x 5.3x 4.7x 4.2xInterest Income 81 169 125 171 EV/ EBITDA 5.6x 5.4x 4.7x 3.9xInvestment Income 1,070 1,304 1,446 1,564 P/ BV 1.0x 1.0x 1.0x 0.9xOther Non-Operating Income 296 143 0 0 Note: A = Actual; F = ForecastOther Non-Operating Expense (94) (67) 0 0 Source: TE and CICR forecastsEBT 3,054 3,286 4,082 5,061Taxes (513) (552) (686) (851)NPAT 2,541 2,734 3,396 4,210Minority Interest (7) (14) (19) (23)Extraordinary Items 0 0 0 0Attributable Profits 2,534 2,721 3,378 4,187

* Includes TE North revenues - - 693 711

November 11, 2008

157


TMG Holding (TMG) is a leading local and regional real estate developer, with a reputable track record and a 50-mn sqm land bank. TMG is mitigating the current risk of a slowing local real-estate market by targeting the middle class, expanding regionally, and diversifying its opera-tions. TMG’s reputation was the main reason behind in-creasing its sales over 1H08 even with a slower industry, leading to an LE 29.4 bn of almost secured, unrecognized sales to be booked onto the income statement over the coming 3.5 years. With a WACC of 16.3%, our DCF model indicates a 231% upside to our 12-month fair value of LE 12.8/share. Thus, we retain our BUY recommendation at a MODERATE RISK.

Sufficient sales to meet the slowdown: Assuming no other sales have taken place, which will not be the case, TMG will be able to overcome the current slowdown swiftly where total accumulated sales for undelivered units as of August 2008 reached LE 29.4 bn, to be recognized over the coming 3.5 years. This would translate into a net profit of LE 9 bn (a 30% net margin). We expect said figures to be achieved, consider-ing that 7.5% of contracted value will be deducted as a penalty in case the client returns the unit which would be a deterrent.

Targeting the middle class: As the luxurious market reaches saturation, TMG is currently targeting unsatisfied housing needs of the middle class which represents 26% of total popu-lation. TMG introduced in June 2008 its new products for the middle class (residential apartments of 80-110 sqm) which were welcome by a high demand: 8,900 units sold generating LE 5.8 bn over 40 days.

Diversifying revenues: In July 2008, TMG signed a 50-year renewable concession right agreement for Sultana Malak land in Luxor in Upper Egypt earmarked for constructing a luxury hotel and a 5-star Nile cruiser, both to be managed by the Four Seasons Hotel management.

Expanding in Saudi Arabia: With the potential strong de-mand in Saudi Arabia, TMG announced a 50-50 joint venture with the Al-Ola Development Co. to establish a mega housing project with 4,200 units in Riyadh at a total cost of SAR 6 bn over 3.1 mn sqm. Additionally, TMG acquired an additional 1 mn sqm in Riyadh, and signed an agreement to buy a 3.8-mn sqm land plot in Jeddah to construct an integrated residential city over a 6-year period with a total investment cost of SAR 5.5 bn.

Valuation and recommendation: We used the DCF model in valuing TMG, yielding a 12-month fair value of LE 12.8/share and a 231% upside potential. Hence, we reiterate our BUY recommendation on TMG with a MODERATE RISK rating.

TMG HOLDING

Stronghold in the face of the storm

STOCK PERFORMANCE | SINCE IPO

02468

1012141618

Nov

-07

Dec

-07

Jan-

08

Feb-

08

Mar

-08

Apr

-08

May

-08

Jun-

08

Jul-0

8

Aug

-08

Sep

-08

Oct

-08

LE

-

20.0

40.0

60.080.0

100.0

120.0

140.0mn shares

Volume TMGH CASE 30 - rebased



SHARE DATA

Reuters; Bloomberg TMGH.CA; TMGH EYRecent price as of 6-Nov-08 LE 3.87No. of O/S shares 2030.2 mnMarket cap LE 7,856.9 mn52-wk high / low LE 15.5/ LE 3.03Avg. daily volume / turnover 10.05 mn / LE 84.13 mn

COMPANY SYNOPSIS

Talaat Mostafa Group Holding Company was incorporated in April 2007 and currently has a paid-in capital of LE 20.302 bn, of which 49.85% is owned by the Talaat Mostafa family. TMG is a fully fledged touristic, housing, and real-estate company. With more than 20 years of experience in the development industry, TMG is considered one of the leading businesses operating in Egypt. TMG's vision is "community development" through establishing self-sustained residential city and community complexes for the upper and middle classes. TMG's activities also extend to the Hotels & Resorts segment. Its three hotels, Nile Plaza in Cairo, San Stefano in Alexandria and Four Seasons in Sharm El Sheikh are managed by the internationally reputable Four Seasons chain. A fourth hotel, Nile Hotel, is still under development. Soft opening is scheduled for late 2008. Finally, Arab for Hotels & Tourism Investment (ICON), 74% owned by TMG signed a 50-year renewable concession right agreement for Sultana Malak land in Luxor earmarked for constructing a luxury hotel and a 5-star Nile cruiser, both to be managed by the Four Seasons Hotel management. The group also started a JV in KSA to develop 3.1 mn sqm. At a total cost of LE SAR 6 bn. In July 2006, the group started the “Madinaty” project, over 33.6 mn sqm of land, making it the biggest all-inclusive enclosed city in the Middle East.


MMID 48.6%Goldman Sachs 5.3%Banks, Ins Co., Others 14.7%Free Float 31.4%Total 100.0%

November 11, 2008

158

EGYPT | HOUSING & REAL ESTATE | TMG HOLDING

Balance Sheet (LE mn) Dec-07 A Dec-08 P Dec-09 P Dec-10 PAssets Cash & Cash Equivalent 3,490.0 4,345.2 5,945.2 10,645.2Net Receivables 1,730.6 3,838.5 3,196.0 3,412.7Total Inventory 4,013.8 12,917.9 10,074.1 10,826.8Advance Payments to Suppliers 716.4 0.0 0.0 0.0Other Trading Assets 0.0 28.5 28.5 28.5Other Current Assets 0.0 1,040.7 1,160.7 540.7Total Current Assets 9,950.8 22,170.9 20,404.5 25,454.0Net Plant 2,839.9 3,653.6 3,274.9 3,423.8Long-Term Investments 1,024.9 967.7 1,236.7 1,505.6Other Trading Non-Current Assets 7,832.0 10,422.5 10,008.2 10,287.5Other Non-Current Assets 4,754.4 10.3 10.3 10.3Intangibles 16,579.4 15,418.2 14,257.0 13,095.8Total Assets 42,981.4 52,643.3 49,191.7 53,777.0

Liabilities & Shareholders' Equity Short-Term Debt 51.8 219.5 761.8 1,072.3Current Portion of Long-Term Debt 357.1 414.2 338.1 300.8Accounts Payable 301.8 14,633.9 5,153.5 2,732.4Accrued Expenses 0.0 6.8 6.3 9.0Down Payments 13,243.4 8,098.2 11,761.5 14,522.9Taxes Payable 3.3 150.4 150.4 150.4Dividends Payable 0.0 0.0 0.0 0.0Other Spontaneous Finance 0.0 1.5 1.5 1.5Other Current Liabilities 1,068.8 1,176.7 1,176.7 1,176.7Total Current Liabilities 15,026.3 24,701.1 19,349.8 19,966.0Total Long-Term Debt 3,858.8 3,684.4 3,229.7 2,831.5Other Non-Current Liabilities 0.0 0.0 0.0 0.0Long Term Spontaneous Fin. 0.0 0.0 0.0 0.0Total Liabilities 18,885.1 28,385.5 22,579.4 22,797.5Deferred Taxes 0.0 0.0 0.0 0.0Other Provisions 6.0 0.0 0.0 0.0Minority Interest 2,266.5 1,870.2 1,793.5 1,687.2Shareholders' Equity 21,823.9 22,387.6 24,818.7 29,292.3Total Liab. & Shareholders' Equity 42,981.4 52,643.3 49,191.7 53,777.0

Income Statement (LE mn) Dec-07 A Dec-08 P Dec-09 P Dec-10 PRevenues 1,875.7 6,791.3 5,072.9 7,830.1Cost of Revenues (966.6) (3,925.1) (2,297.1) (2,822.0)Gross Profits 909.2 2,866.2 2,775.8 5,008.0SG&A (267.0) (235.8) (176.1) (271.9)EBITDA 642.2 2,630.4 2,599.7 4,736.2Depreciation & Amortization (58.5) (142.7) (147.7) (158.1)EBIT 583.7 2,487.7 2,452.0 4,578.1Interest Expense (13.7) (85.6) (139.7) (164.4)Provisions 0.0 0.0 0.0 0.0Interest Income 78.3 304.2 416.2 745.2Investment Income 1,097.8 108.3 268.9 268.9Other Non-Operating Income 40.6 0.0 0.0 0.0Other Non-Operating Expenses (3.5) 4.1 4.1 4.1EBT 1,783.2 2,818.7 3,001.5 5,431.9Taxes (45.9) (484.5) (585.0) (1,065.1)NPAT 1,737.3 2,334.3 2,416.5 4,366.8Minority Interest (396.3) (396.3) (76.6) (106.3)Extraordinary Items 0.0 0.0 0.0 0.0NPAUI 1,341.0 1,937.9 2,339.9 4,260.5

Cash Flow (LE mn) Dec-07 A Dec-08 P Dec-09 P Dec-10 PNOPAT 541.1 2,150.3 1,867.0 3,513.0Depreciation & Amortization 58.5 142.7 147.7 158.1Gross Cash Flow (COPAT) 599.6 2,293.0 2,014.7 3,671.1WI Change (747.5) (3,682.1) (1,916.9) (905.7)Other Current Items 1,068.8 (970.2) (120.0) 620.0Cash After Current Operations 920.9 (2,359.4) (22.2) 3,385.3Financing Payments (13.7) (442.7) (553.9) (502.5)Cash Before Long-Term Use 907.1 (2,802.0) (576.1) 2,882.9Net Plant Change (2,898.4) (956.5) 231.0 (306.9)FCFF (3,046.3) (2,345.6) 328.8 2,458.4Others (24,971.1) 7,766.7 1,504.8 1,804.2Cash Before Financing (26,962.3) 4,008.3 1,159.7 4,380.1Short-Term Debt 51.8 167.6 542.4 310.5Long-Term Debt 4,215.9 239.9 (116.7) (97.3)Net-worth 20,482.9 (1,374.2) 91.2 213.0Grey Area 2,272.5 (402.3) (76.6) (106.3)Dividends 0.0 0.0 0.0 0.0Change in Cash 60.7 2,639.3 1,600.0 4,700.0Note: P = ProjectedSource: TMG and CIBC estimates

Fact Sheet Dec-07 A Dec-08 P Dec-09 P Dec-10 PROE 6.1% 8.7% 9.4% 14.5%ROS 71.5% 28.5% 46.1% 54.4%ROA 3.1% 3.7% 4.8% 7.9%ROIC 4.6% 16.3% 11.2% 15.9%EBITDA Margin 34.2% 38.7% 51.2% 60.5%

ATO 0.0 0.1 0.1 0.1WI/ Sales 39.9% 65.8% 125.8% 93.1%

ALEV 8.2 7.6 4.7 3.3Debt/ Equity 3.6 4.1 2.1 1.4Current Ratio 0.7 0.9 1.1 1.3

Share Ratios Dec-07 A Dec-08 P Dec-09 P Dec-10 PShare Price 3.87 3.87 3.87 3.87No. Of Shares '000 2,030,204 2,030,204 2,030,204 2,030,204 EPS 0.66 0.95 1.15 2.10Div/Share 0.00 0.00 0.00 0.00Revenues/Share 0.92 3.35 2.50 3.86BV/Share 10.75 11.03 12.22 14.43Gross CF/Share 0.30 1.13 0.99 1.81FCFF/Share -1.50 -1.16 0.16 1.21EBITDA/Share 0.32 1.30 1.28 2.33EV/Share 4.25 3.86 3.07 0.70

Multiples Dec-07 A Dec-08 P Dec-09 P Dec-10 PP/E 5.9 4.1 3.4 1.8Div Yield % 0.0 0.0 0.0 0.0P/ Revenue 4.2 1.2 1.5 1.0EV/ Revenues 4.6 1.2 1.2 0.2P/ COPAT 13.1 3.4 3.9 2.1EV/ COPAT 14.4 3.4 3.1 0.4P/ FCFF -2.6 -3.3 23.9 3.2EV/ FCFF -2.8 -3.3 19.0 0.6P/ EBITDA 12.2 3.0 3.0 1.7EV/ EBITDA 13.4 3.0 2.4 0.3P/ BV 0.4 0.4 0.3 0.3


cibc egypt year book 2009

Economy & Finance