20 - efg hermes · 3 the year ahead - 2020 core overweights for 2020: egypt, kenya, and pakistan we...

20

Late-Cycle Markets

THE YEAR AHEAD

2020 Focus on Growth in

2020

Table of Contents

THE YEAR AHEAD20

Executive Summary

Strategy Themes

Country Analysis

Sectors

Coverage Table

Contacts & Disclaimer

Executive Summary 3

Strategy Themes 5

Country Analysis 24

Sectors 75

Coverage Table 133

Contacts & Disclaimer 148

3

Executive Summary

THE YEAR AHEAD - 2020

CCoorree OOvveerrwweeiigghhttss ffoorr 22002200:: EEggyypptt,, KKeennyyaa,, aanndd PPaakkiissttaann We still like Pakistan for 2020e, despite the 4Q19 rally, given attractive valuations and improving macro stability. We expect 16% EPS growth for 2020e and policy rate cuts will drive outperformance vs FEM in 2020. Egypt hasbeen an outperformer since we went OW in 2016, but we still like the market, despite a disappointing 2019 (ex-COMI). With rates getting close to pre-2016 levels and EPS growth still on track, we see no reason why Egypt should be trading at a 25% discount to Frontier-x-GCC markets. In Kenya, the recent rate cap repeal offers room for aggregate earnings upgrades, while the CBK’s rate cuts, rebalancing by pension funds and a renewed IMF SBA, could provide more catalysts for the market. We believe that downside FX risks are limited in all three markets in 2020.

KKuuwwaaiitt iiss aa cclleeaarr OOWW ffoorr 11HH2200 aahheeaadd ooff EEMM uuppggrraaddee Kuwait remains a clear OW for us, ahead of the MSCI EM upgrade in May 2020 (MSCI to confirm on 31 December), while in the UAE, we see select opportunities within banks (EMIRATES, DIB and ADIB) and high yield at EMAARDEV – a higher conviction OW would require a broad market catalyst, such as the 100% FOL that FAB proposed in July. Finally, Sri Lanka equities should continue to benefit from Gotabaya Rajapaksa’s resounding win, deep into 2020.

UUnnddeerrwweeiigghhtt oonn SSaauuddii AArraabbiiaa,, QQaattaarr,, MMoorrooccccoo,, aanndd BBaannggllaaddeesshh Saudi Arabia and Qatar saw large earnings declines in 2019 (mainly led by the Chemicals sector), and overall non-oil GDP growth in both countries remains weak (albeit recovering in Saudi Arabia). Valuations in both markets are at the higher end of the historical range. Moreover, once FTSE Phase 5 for Saudi Arabia (+USD1.6bn) concludes in March 2020, there will be no more flows catalysts for any of these markets (unless FOLs are raised to 100%), making it difficult to justify an OW on either Saudi Arabia or Qatar. The key risk to our call is positioning, which remains very low by active managers in both markets. Morocco will become the second largest market in FM in 2020 – however, we think growth and valuations will put off many investors, although we do see the value in having some exposure to Morocco from a risk-adjusted returns perspective. In Bangladesh, top-down challenges keep us UW, despite the 2019 de-rating in the market’s valuation. We are Neutral on Vietnam (2021 congress means a political overhang) and Nigeria (valuations are cheap, but policy and growth outlook are weak).

Three top stock-specific calls in MENA for 2020: i) EMIRATES/DIB/ADIB – trading at an average 2020e P/E of 7x, 2020e P/B of 1.2x, while offering a 6% div. yield and 17.1% ROAE in 2020e. Emirates NBD and ADIB, on our estimates, will see up to cUSD1.1bn of index flows in 2020e and, should DIB raise its FOL to 40%, we expect it will see cUSD171mn of passive inflows as well; ii) KFH - we reiterate our view that the market is likely to continue assigning a franchise premium to KFH post the AUB deal, and this is the main basis for our continued Buy rating. KFH trades at c17x P/E in 2020e. Including AUB and assuming zero synergies, we expect its P/E would fall to c14x (deal adds c20% to EPS on a FY consolidation). KFH’s average P/E over the past five years was 19.5x and 17x since 2016. The name is expected to see cUSD1.1bn (including the additional USD350mn, pending AUB’s merger) of passive inflows in 2020; and iii) JUFO – after a tough 2019, we expect it to post a decent rebound in 2020e, as lower rates will support earnings, and we see JUFO as the key investable name to play the consumer recovery in Egypt.

Three stock-specific calls for FEM in 2020: i) KCB (Kenya) will see ROEs improve to c25% by FY23e, from 21.9% in FY18 and should re-rate further with the Kenyan market in 2020 – it is trading at 6x 2020e P/E. We do not like the acquisition of NBK, but expect the rate cap repeal will allow it to absorb the potential restructuring costs; ii) we believe HNB in Sri Lanka, trading at 5x 2020e P/E, will be supported by a sentiment-driven rally in 2020 and will itself see a strong earnings recovery in 2020; and iii) MBB is one of Vietnam’s strongest banks, trading at 6x 2020e P/E, and it will be a key beneficiary of the launch of the Diamond Index ETF in 2020. The recent placement may also allow for better liquidity in the name.

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Top picks for 2020: UAE banks, KFH, and JUFO in MENA; KCB, MBB, and HNB in FEMTop picks for 2020: UAE banks, KFH, and JUFO in MENA; KCB, MBB, and HNB in FEM

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Executive Summary


KKeeyy iinnddeexx eevveennttss aanndd ppaassssiivvee iinnfflloowwss wwiitthhiinn oouurr ccoovveerraaggee iinn 11HH2200 March 2020: FTSE Saudi Arabia Phase 5 (+USD1.6bn), as well as the potential addition of ARNB, BSFR, EMIRATES, MABANEE, and deletions of MEZZAN and BAFL (Pakistan).

May 2020: MSCI EM inclusion of Kuwait (+USD3.3bn from EM trackers). We also expect the additions of EMIRATES and ADIB (pending FOL increase to 40% for ADIB) into MSCI EM.

MSCI FM100 exclusion of Kuwait and AUB (-USD240mn expected over four tranches) to flow mainly into Vietnam, Kenya, Romania, Nigeria, and Bangladesh.

FFMM aanndd FFEEMM iinnvveessttoorrss sshhoouulldd kkeeeepp aann eeyyee oonn KKuuwwaaiitt’’ss uuppggrraaddee The Kuwait upgrade is the outstanding flow event for our coverage in 2020. Kuwait is currently c35% of the MSCI FM Index (following the late 2019 weight increase), and it is set to be upgraded to EM in May 2020. The upgrade will mean cUSD3.3bn of passive inflows into Kuwait, but also implies that cUSD240mn of passive money benchmarked to the MSCI FM100 Index will exit Kuwait and AUB KK, and cUSD126mn will flow into Vietnam. Most of the remainder will flow into Kenya (USD31mn), Romania (USD22mn), Nigeria (USD19mn), and Bangladesh (USD18mn). Equally important for our coverage is the transition trade by actively-managed FM funds: current AUMs for our sample of FM and FEM funds are cUSD5.4bn, down from USD9bn in January 2018, and we estimate that these funds still hold around cUSD0.75-1bn in Kuwait. This money is bound to circulate to other Frontier and small EMs in 2020, which should be broadly supportive for our markets.

WWaattcchh sseeaassoonnaalliittyy:: 11QQ eeffffeeccttss ffoorr EEMM aanndd UUSS eelleeccttiioonnss aarree kkeeyy ffaaccttoorrss ttoo wwaattcchh We expect the Fed to keep rates on hold in 2020e, while we see oil prices relatively stable given OPEC+ cuts and a potential US-China trade deal could continue to support prices. However, we think there are two seasonality factors that are worth watching out for in EM: i) in 2018-19, the bulk of EM returns and flows were registered in 1Q, and recovery of flows into EM ETFs in late 2019 suggest that this trend could continue in 2020; and ii) performance in US election years is usually below average, which could mean that any 1Q rallies may fade as we enter 2H20e, with US elections set for November. It goes without saying that US-China relations and other geopolitical events are key factors to watch as well. Overall, we see a mediocre year for MENA and FEM indices performances, but within the broader benchmarks, we see opportunities.

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Strategy Themes


FEM Strategy Note 09 December 2019

Macro Strategy Report

Frontier Emerging Markets in 2020

We focus on 11 key MENA and Frontier Emerging countries in our 2020 yearbook: Bangladesh, Egypt, Kenya, Kuwait, Morocco, Nigeria, Pakistan, Qatar, Saudi Arabia, the UAE and Vietnam; we also include Sri Lanka, where we have limited coverage, in our comparative analysis.

The opening section summarises our assumptions for 2020 and our expectations for country total returns for the year. Eleven country sections follow, highlighting key strategy and macro themes, and then overviews for major sectors in our coverage. We conclude with a valuation table for the 287 stocks in our coverage across 22 countries.

2020 assumptions and themes

Seasonality may mean a strong 1Q20, but markets still feel heavy at the end of a long expansion Kuwait’s EM upgrade will send ripples through FM – passive flows will benefit Vietnam the most But liquidity and FO constraints will mean FEM benchmark becomes more relevant Shifting local liquidity will be a major driver in Kenya, Pakistan, and maybe Nigeria Multiple expansion is likely to be limited, but earnings growth should be strong off a low 2019 base

Country calls

Core Overweights: Egypt, Kenya, and Pakistan Other Overweights: Kuwait (1H20), UAE (2H20) and Sri LankaNeutral: Nigeria and Vietnam Underweights: Bangladesh, KSA, Morocco, and Qatar

Figure 1: Country weights with valuations

Based on Bloomberg consensus multiples for country benchmark indices, except for MSCI in Vietnam and Bangladesh

YTD TR ADVT VT MCAP P/E P/B DY (%)

Country Weight (USD) (USDmn) 20d/3m (USDbn) 2019 2020 2021 2020 2020

Egypt OW 20.7% 34.0 0.9x 47.6 10.1 8.1 7.0 1.57 3.8

Kenya OW 19.2% 6.7 1.1x 23.0 10.5 9.1 7.4 1.67 6.3

Kuwait OW 21.8% 89.8 0.9x 100.0 13.9 12.8 11.8 1.36 4.0

Pakistan OW -5.3% 38.1 1.5x 48.0 6.8 5.8 5.3 1.09 7.8

Sri Lanka OW 7.5% 5.1 1.5x 14.8 9.3 7.9 N/A 0.95 3.3

UAE OW 3.1% 58.1 1.2x 246.1 9.9 9.5 9.0 1.18 5.4

Nigeria NEU. -8.1% 9.5 1.2x 32.2 7.2 6.4 5.7 1.18 7.4

Vietnam NEU. 10.7% 36.8 1.2x 188.9 20.2 15.9 13.2 3.13 2.6

Bangladesh UW -10.7% 8.0 1.0x 34.7 12.8 9.5 N/A 1.09 3.4

KSA UW 4.4% 754 1.0x 488.9 17.4 15.3 14.3 1.68 4.3

Morocco UW 6.7% 11.4 1.2x 62.8 18.7 17.5 15.7 2.51 3.7

Qatar UW 3.0% 56.6 1.1x 153.4 14.4 13.3 12.4 1.44 4.3

DM 24.7% - - 17.8 16.3 14.9 2.29 2.5

EM 10.5% - - 13.8 12.1 10.7 1.51 3.1

FEM 9.3% - - 13.6 12.2 10.9 1.69 3.7

FM 13.1% - - 13.3 12.0 10.7 1.75 4.9

MENA 4.5% - - 15.0 13.7 12.8 1.68 4.5

Note: Price as of 1 December 2019 Source: Bloomberg

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Strategy Themes




MENA stock picks

In our Buy list, we add JUFO (Egypt) - we see margin improvements driving better earnings in 2020-21e We remove TMGH (Egypt) seeing no catalysts for the name in the near term In our Sell list, we remove Chemanol (KSA), down 21% in 2019 YTD

Figure 2: MENA Top 20 List

Price as of 1 December 2019

Ticker Country Price TP Rating Perf. Mcap 3MADVT PE (x) PB (x) DY (%)

LCL LCL YTD (%) (USDbn) (USDmn) 2019e 2020e 2021e 2020e 2020e

COMI EY Egypt 78.8 94.9 Buy 33.0 7.1 7.0 11.3 9.6 8.6 2.1 2.2

SWDY EY Egypt 12.0 20.0 Buy (33.1) 1.6 1.4 7.1 6.4 5.8 1.4 10.0

EAST EY Egypt 15.0 22.5 Buy (7.9) 2.1 1.5 9.5 8.3 7.5 3.7 8.0

EKHO EY Egypt 1.35 2.10 Buy 25.9 1.4 1.0 11.4 7.2 5.6 2.0 6.7

JUFO EY Egypt 8.5 13.5 Buy (24.4) 0.5 0.5 23.8 15.8 11.2 2.9 3.5

NBK KK Kuwait 1.01 1.05 Buy 27.3 22.0 12.7 16.9 16.0 14.6 2.0 3.5

KFH KK Kuwait 0.73 0.81 Buy 31.2 17.0 16.2 20.2 18.1 16.2 2.5 3.0

ZAIN KK Kuwait 0.59 0.46 Neu. 30.7 8.5 5.0 16.6 15.2 14.2 1.7 5.1

HUMANSFT KK Kuwait 3.05 6.30 Buy (7.1) 1.2 1.3 11.1 10.2 9.3 5.7 6.9

SABB AB KSA 34.1 38.0 Buy 4.4 18.7 19.4 18.4 13.6 11.9 1.2 4.4

ARNB AB KSA 25.5 23.0 Neu. 19.9 10.2 11.4 11.9 13.0 12.4 1.3 4.2

AOTHAIM AB KSA 75.3 98.0 Buy 7.3 1.8 2.3 19.0 17.2 15.8 4.4 4.6

SADAFCO AB KSA 123 166 Buy 22.7 1.1 1.2 18.2 16.4 15.2 3.0 4.1

EXTRA AB KSA 69 100 Buy 7.0 0.9 2.2 17.2 14.6 11.3 4.6 4.4

EMIRATES UH UAE 11.7 15.6 Buy 36.9 17.7 12.0 5.2 6.5 6.2 0.9 3.8

DPW DU UAE 12.5 25.0 Buy (26.7) 10.4 3.4 8.2 8.1 7.6 0.8 3.5

DIB UH UAE 5.3 6.9 Buy 6.0 9.5 7.2 8.1 8.2 7.7 1.4 7.1

EMAARDEV UH UAE 3.6 5.7 Buy (18.4) 3.9 2.9 3.6 3.9 3.4 1.4 14.4

ADIB UH UAE 5.1 6.5 Buy 31.0 5.1 3.3 8.6 8.5 8.0 1.3 5.9

ALDAR UH UAE 2.2 3.0 Buy 35.6 4.6 4.6 10.3 9.1 8.5 0.7 7.4

Source: Company data, EFG Hermes estimates

Figure 3: MENA Sell Ideas


Ticker Country Price TP Rating Perf. Mcap 3MADVT PE (x) PB (x) DY (%)


QNBK QD Qatar 19.3 18.6 Neu. (1.3) 48.6 13.2 13.2 12.4 11.7 2.3 3.4

QIBK QD Qatar 14.9 15.9 Neu. (2.2) 9.6 3.5 12.9 12.3 11.3 2.4 4.0


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Strategy Themes




FEM stock picks

In our Buy list, we add LUCK and HCAR in Pakistan, as we look to add beta to the list We keep UBL as our preferred bank exposure in Pakistan, but remove MCB We add JUFO and remove TMGH in Egypt, mirroring the change in the MENA Top 20 List We add HNB in Sri Lanka to play the expected earnings recovery and multiple expansion in 2020 We keep our allocations to Egypt, Kenya, Kuwait, Mauritius, Nigeria, and Vietnam unchanged In our Sell list, we add CITY (Bangladesh) and Guinness (Nigeria), and remove FCEPL (Pakistan)

Figure 4: FEM Top 15 List


Ticker Country Price TP Rating Perf. Mcap 3MADVT P/E (x) P/B (x) DY (%)


EKHO EY Egypt 1.35 2.10 Buy 25.9 1.4 1.0 11.4 7.2 5.6 2.0 6.7

JUFO EY Egypt 8.5 13.5 Buy (24.4) 0.5 0.5 23.8 15.8 11.2 2.9 3.5

EQBNK KN Kenya 51.0 73.7 Buy 46.3 1.9 1.9 9.4 7.3 5.9 1.5 4.9

EABL KN Kenya 196 240 Buy 12.2 1.5 0.4 17.4 17.0 14.0 4.5 4.4

KNCB KN Kenya 50.0 88.5 Buy 33.5 1.5 1.0 6.6 5.8 4.4 1.1 7.0

NBK KK Kuwait 1.01 1.05 Buy 27.3 22.0 12.7 16.9 16.0 14.6 2.0 3.5

ZAIN KK Kuwait 0.59 0.46 Neu. 30.7 8.5 5.0 16.6 15.2 14.2 1.7 5.1

MCBG MP Mauritius 305 432 Buy 11.7 2.0 0.4 7.7 7.3 6.7 1.2 4.3

GUARANTY NL Nigeria 30.5 44.8 Buy (11.6) 2.5 1.9 4.8 4.2 3.9 1.1 11.5

UBL PA Pakistan 163 205 Buy 33.3 1.3 1.0 10.4 6.6 5.0 1.0 8.0

LUCK PA Pakistan 420 589 Buy (3.3) 0.9 2.9 11.9 10.2 10.5 1.2 2.6

HCAR PA Pakistan 224 244 Buy 26.7 0.2 0.2 8.3 16.7 13.7 1.8 2.7

HNB SL Sri Lanka 179 235 Buy (15.3) 0.4 - 6.7 5.1 4.1 0.6 3.6

MWG VN Vietnam 109,000 200,900 Buy 25.3 2.1 3.7 14.3 11.2 9.6 3.0 2.0

MBB VN Vietnam 22,150 45,819 Buy 23.0 2.0 4.5 6.4 5.9 5.0 1.1 -


Figure 5: FEM Sell Ideas


Ticker Country Price TP Rating Perf. Mcap 3MADVT P/E (x) P/B (x) DY (%)


BKSB OM Oman 0.11 0.11 Neu. 0.3 0.7 1.0 16.3 10.7 8.4 0.8 5.6

CITYBA BD Bangladesh 22.4 23.7 Sell (22.1) 0.3 0.3 8.1 8.1 6.8 0.8 1.8

GUINNESS NL Nigeria 31.0 25.0 Sell (56.9) 0.2 0.1 12.4 94.2 22.5 0.8 4.7


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Strategy Themes




2019 in review – Rate cuts and trade tensions

Review of key calls from end of 2018

We did not expect Fed rate cuts in 2019, but we were right to expect USD strength Overweights on Egypt, KSA and Kuwait worked well, but we were too early on Pakistan Underweights on Bangladesh and Qatar went in our favour We upgraded Kenya and the UAE to OW during the year and downgraded KSA

Figure 6: FX effects drove Egypt and Pakistan’s 2019 performances Index total return and FX return for 2019 YTD

Note: Local benchmark indices apart from Vietnam and the UAE (both MSCI) Source: Bloomberg, EFG Hermes calculations

Figure 7: FM outperformed with low volatility in 2019

MSCI benchmarks, rebased to 100 = 30 November 2018


Figure 8: MENA recommendations outperformed benchmark

MENA Top 20 list and Sell ideas vs MENA benchmark, 100 = 30 Nov. 2018


Figure 9: FEM recommendations outperformed benchmark

FEM Top 15 list and Sell ideas vs FEM benchmark, 100 = 30 Nov. 2018


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Strategy Themes




2020 factors to watch - End of the cycle blues 2.0

We assume that US rates, oil prices and currencies for our coverage will be relatively stable However, a key factor to watch is the clear seasonality in EM flows and performance in 2018-19 Another seasonal trend: performance in US election years is usually below average US politics, US-China relations and other geopolitical events are key factors to watch We see a mediocre year for overall index performance in 2020

The backdrop seems favourable for strong performances from EM and FM in early 2020. The change in Fed policy direction in 2H19 and successive cuts in EM policy rates have driven a reversal in DXY. The prospect of a weaker USD, a reversal of monetary tightening in the US, and increasing talk of a trade truce between the US and China bode well for emerging markets, which are starting to see inflows again for the first time since 1Q19.

Figure 10: USD rallied since 2018 as US rates rose quickly, but peaked right after the Fed started easing again; consensus now expects no further cuts for the foreseeable future…

Source: Bloomberg, EFG Hermes Calculations

Figure 11: …this could lead to another wave of ETF inflows, which have been seasonally strong in in 4Q-1Q since 2018

Net flows into EM ETFs in USDbn


It helps that the US, and to a lesser extent, DM valuations are way above those in EM, while consensus currently expects 14% EPS growth in 2020e in EM vs 10% EPS growth in the US (S&P500 and MSCI EM indices). Indeed, we have seen strong performances from selected coverage markets – notably Pakistan, Kenya, Kuwait, and Sri Lanka – in the final quarter of 2019, though major aggregates (SPX, EAFE, EM) have been outperforming FM and FEM.

Having said that, the question is, will the rally in EM and select Frontier carry beyond the beginning of the year? Data for 2018 and 2019 suggests that EM inflows reversed after 1Q and started to recover towards year-end. Similarly, when we look at the performance of EM, FM and key markets within our coverage, we find that 1Q in 2018-19 has been the best quarter for these markets in general. Key exceptions are the UAE, Qatar and Morocco. We attribute this to Qatar’s strong performance in 2H18, on the back of index events, and some strong performance in the UAE in 3Q19 as FAB announced plans to raise FOLs to 100%, and EMIRATES lifted its FOL to 20% on 1 September, which helped support the UAE markets in that quarter. Finally, the strongest quarter in Morocco seems to be the fourth quarter, and we attribute this to seasonality in Morocco, where local institutions tend to reshuffle their portfolios in 4Q driving a surge in liquidity and performance for local equities.

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Strategy Themes

THE YEAR AHEAD - 2020FEM Strategy Note 09 December 2019


Election years can be challenging

Moreover, we note that index performance is generally below average in a US election year and we see few reasons why this should not be the case in 2020. We think that the Fed will be wary of cutting rates aggressively in 2020 and believe that any truce in US-China tensions will be expedient and temporary. EM rate cuts and stimulus in China, and even Germany, may offer some relief, but ultimately we see the market in a late cycle mood that will weigh on indices, particularly in late 2020.

Figure 13: EM discount to DM widening again

MXWO P/E ratios less MXEF P/E ratios

Source: Bloomberg, EFG Hermes calculations

Figure 14: History suggests EM & DM are weak in US election years Average annual index USD price returns (current year return in brackets)

Note: T = same calendar year as US presidential elections Source: Bloomberg, EFG Hermes calculations

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Figure 12: Will we continue to see strong first quarters and muted performance for the rest of the year?

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Strategy Themes




Global factors - Oil is steady and trade growth is weak

Our general investment perspective for 2020 is, therefore, cautious. We expect markets will be robust in early 2020, but struggle as US elections loom. We do not expect major cuts in US rates and think that oil prices will trade within a relatively tight range – our oil price assumption is for Brent to average USD66/bbl in 2020. Risks currently appear to be to the downside: the LT Brent curve indicates a tight range of USD56-USD61/bbl. Downside risks to oil prices in 2020e include slower-than-expected global growth and increased US exports. Upside risks include another wave of heightened geopolitical tensions in MENA, but a resolution on US-China trade talks could mean a short-term bounce in commodity prices. A supporting factor for oil could come from the fact that the Fed is no longer raising rates, and should this translate into a weaker USD in 2020e, that could be supportive for commodities.

Figure 15: Brent forwards imply a tight range for oil

Brent dated forwards USD/bbl

Source: Bloomberg

Figure 16: Trade growth is weak again

Y-o-Y growth in export volumes (3m average)

Source: cpb.nl

The trade negotiations between the US and China and the uncertainty of the outcome will likely continue to weigh on global sentiment and global trade. Chinese demand has been a key source of growth for EM and FM countries in the past 20 years, but ongoing global uncertainties have clearly weighed on global growth and, in turn, global trade. Emerging Asia ex-China export growth has been in negative territory (on a Y-o-Y basis) since November 2018, while world exports have generally been negative since December 2018. Of our markets, Vietnam is unsurprisingly the most sensitive to news flow about global trade.

We believe that decent returns can be made in key FEM and MENA markets, but think that this performance will be driven by shifting local liquidity – Kenya, Pakistan, Egypt, Sri Lanka, and Nigeria – as well as passive flows around Kuwait’s EM upgrade. Discretionary foreign flows into FEM and MENA are unlikely to be sustained through the year.

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12

Strategy Themes




FEM and MENA - Performance expectations for 2020

Highest 2020e earnings growth expectations in: Egypt and Sri Lanka Best chance of multiple expansion: Egypt, Pakistan, Sri Lanka, and Kenya Dividend yields are highest in: Nigeria, Pakistan, the UAE, Kenya ,and Kuwait Low probabilities of severe FX weakness in 2020 – Bangladesh and Sri Lanka are highest risk

We look at expected drivers of FEM and MENA equity market returns in 2020 for each of the major FEM and MENA markets. Multiple expansion and earnings growth are the most important for the short run (Fig. 13 below), but dividends are a consistent positive contributor and are a useful source of ‘funding’ in markets that have de-rated (Nigeria, the UAE, and Pakistan stood out in 2019). Finally, we look at the effect of FX moves on USD returns.

Figure 17: EM has re-rated in 2019 YTD, with limited drag from FX despite CNY breakdown

Drivers of USD returns for the MSCI EM Index

Note: EPS change is a residual value in charts, FX change derived from MSCI EM FX Index Source: Bloomberg, EFG Hermes calculations

Figure 18: Breakdown of USD total returns in 2019 YTD for our focus markets

Note: All local benchmark indices except MSCI in Pakistan, Bangladesh and Vietnam Source: Bloomberg, EFG Hermes calculations

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13

Strategy Themes




Summary of 2020 total return expectations

Our preferred FEM markets – Egypt, Pakistan, Kenya, and Sri Lanka – in 2020 offer earnings growth of +15%, potential multiple expansion and, in the case of Kenya and Pakistan, solid dividend yields. We seeonly middling risks of FX weakness for these markets in 2020, with the exception of Sri Lanka whereexpansionary policy may increase pressure on LKR. Our preferred GCC markets offer lower total returnprospects, but with zero FX risk. Moreover, we think there is a good chance that our top GCC pick, Kuwait,overshoots in 1H20 as multiples continue to expand. The UAE’s value opportunity will become moreapparent, we think, after Kuwait’s EM upgrade. After a bonanza of index trades in recent years, includingChina A-shares and KSA, Kuwait is the only country index trade in play in 2020 - we think that investor pre-positioning is far from over. Vietnam stands to be the chief beneficiary of passive flows away from Kuwait inMay-August 2020, but active flows are likely to favour a broader mix of FEM markets including Egypt andPakistan.

Figure 19: Our focus markets – total return expectations for 2020

Sorted by expected 2020 local currency total return (product of P/E expansion and 2020e earnings growth, plus 2020e dividend yield)

Country Weight TR LCL TR USD P/E P/E Multiple Trail. P/E NI % PX

LCL DY (%) TR LCL REER REER FX

2019 YTD

2019 YTD 2018 2019 change end-

2020 2020 2020 2020 2020 Z-Score

Chg. 2019

12m risk

Egypt OW 8.6% 20.7% 15.5 10.1 15% 11.6 22% 40% 3.8 44% 0.8 19% 2

Kenya OW 20.0% 19.2% 12.7 10.5 15% 12.1 16% 34% 6.3 40% 2.1 1% 2

Pakistan OW 6.0% -5.3% 9.4 6.8 10% 7.5 16% 27% 7.8 35% (0.8) -4% 2

Sri Lanka OW 6.3% 7.5% 9.9 9.3 10% 10.2 20% 32% 3.3 35% 0.5 3% 3

Nigeria NEU. -8.6% -8.1% 6.6 7.2 5% 7.5 11% 16% 7.4 24% 1.2 9% 2

Bangladesh UW -10.7% -10.7% 10.7 12.8 0% 12.8 15% 15% 3.4 19% 2.6 3% 3

Kuwait OW 21.9% 21.8% 16.8 13.9 0% 13.9 9% 9% 6.1 15% 2.0 2% 1

Vietnam NEU. 10.7% 10.7% 21.6 20.2 -5% 19.1 16% 10% 2.6 13% 1.9 2%0.0 2

UAE OW 3.1% 3.1% 9.4 9.9 10% 10.9 -3% 7% 5.4 12% 1.0 -2% 1

Morocco UW 8.1% 6.7% 20.2 18.7 0% 18.7 7% 7% 3.7 10% (0.2) 0% 2

Qatar UW 3.3% 3.0% 15.5 14.4 -5% 13.7 11% 6% 4.3 10% 1.1 -1% 1

KSA UW 4.4% 4.4% 19.4 17.4 -5% 16.5 7% 1% 4.3 6% 1.1 -1% 1

Note: FX risk shown as subjective measure: 1 – 0% move vs USD in 2020; 2 - <5% move vs USD in 2020; 3 - >5% move vs USD in 2020 Source: Bloomberg, EFG Hermes estimates

14

Strategy Themes




Factor 1 - Earnings growth expectations

Consensus shows two clusters of earnings growth expectations in MENA and FEM – the most expensive is in GCC plus Morocco, where the UAE is notably the least expensive market by far, but with the lowest 2020 growth expectations (5% consensus) – Saudi Arabia has the highest earnings growth expectations in this group (14% for 2020e, slowing sharply in 2021e). However, we note that we are considerably below consensus in our growth expectations for these two markets – downgrades to consensus expectations are likely in 2020, we think.

Elsewhere in our coverage, a cluster of FEM markets offers 10-20% EPS growth in 2020e for less than 10x 2019e P/E – we are overweight in four of five of these (Pakistan, Egypt, Kenya, and Sri Lanka), though in the last case we note that the growth outlook may not be sustainable.

Figure 20: Two valuation clusters in FEM and MENA

2019 P/E (Y-axis) and 2019-21e EPS CAGR (X-axis) – BBG consensus

Source: Bloomberg

Figure 21: We are more bearish than consensus in KSA and the UAE 2020e growth in net income – consensus and EFGH coverage

Note: We use VNIndex in Vietnam, a better match with EFGH coverage Source: Bloomberg, EFG Hermes estimates

In our coverage, analysts made swinging cuts to 2019 and 2020 expectations in 2019 – the biggest cuts were to materials and industrials names in the GCC. It was only in Pakistan that we saw an increase in 2019 earnings estimates for non-financials, thanks to the impact of devaluation on earnings for USD-hedged businesses. In Vietnam, we upgraded earnings estimates for banks because of the impact of recoveries on the bottom line, but non-financials earnings were cut slightly.

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15

Strategy Themes



We see non-financials being the main driver of earnings growth in many of our markets in 2020 after disappointments in 2019. However, this recovery is not necessarily being driven by cyclical businesses – for example in Kenya and Pakistan alike, utilities will bring new capacity online in 2020, driving strong growth. Elsewhere, such as in Bangladesh and Nigeria, favourable base effects will flatter non-financials’ earnings after earnings compression in 2018 and 2019. Macro headwinds remain strong in a number of our markets, and the likelihood of a truly cyclical earnings recovery seems to be highest in Egypt and Saudi Arabia.

Figure 23: Non-financials drag 2019 earnings growth in Africa, KSA Sector contribution to 2019 EFG coverage earnings growth


Figure 24: Non-financials drive growth in EG, BD and KSA in 2020 Sector contribution to 2019 EFG coverage earnings growth


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Figure 22: Earnings estimates saw large downgrades in 2019 (biggest downgrades at non-financials)

Change in 2019e and 2020e aggregate earnings estimates by market since December 2018


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16

Strategy Themes




Factor 2 - Valuations relative to history

Aggregate valuations are far from depressed in FM and the GCC, recent and pending index trades (and earnings downgrades) having lifted forward P/E multiples over the past year. However, a number of individual FEM and MENA markets still trade well below their long-term averages on several valuation measures (Fig. 31), and we expect multiple expansion in 2020 due to foreign flows and/or changes in local monetary conditions that force an increase in equity allocations.

Figure 25: On P/B, FM looks more expensive than EM and GCC

P/B ratio for MSCI indices – Z-score (SDs from long-term average)

Source: Bloomberg, EFG Hermes estimates

Figure 26: On 12m fwd P/E, three indices at 1SD above LT average 12m fwd P/E ratio for MSCI indices – Z-score (SDs from long-term average)


Foreign flows drive multiple expansion in 2019, more to come through passive flow in 2019 Foreign flows were very strong in the GCC in 2019, thanks to the Saudi Arabia EM upgrade and other index trades. These inflows came in spite of the potentially negative impact from funding trades on existing members of the EM benchmarks – surprisingly, Qatar saw only one month of net outflows, a testament to the ongoing shift towards passive mandates away from active management.

Figure 27: Index trades drove consistent foreign bids in GCC

Monthly net foreign buying (USDmn)

Source: Stock exchanges, EFG Hermes calculations

Figure 28: Flows have been far more volatile in FEM from 2Q19… Monthly net foreign buying (USDmn)


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Bangla Kenya EgyptNigeria Pakistan Sri LankaVietnam (RHS)

17

Strategy Themes




We think that foreign flows will remain positive in the GCC in 2020. Those related to the Kuwait MSCI EM upgrades should lift multiples higher in 1H20. Saudi Arabia will receive the final tranche of FTSE upgrade flow in March, and KSA large caps and Qatar will remain supported by passive flows from new ETF unit creations, in our view.

Kuwait upgrade will send ripples through FEM The Kuwait upgrade is the outstanding flow event for our coverage in 2020. Kuwait is currently c35% of the MSCI FM Index (following the late 2019 weight increase), and it is set to be upgraded to EM in May 2020. The upgrade will mean that cUSD240mn of passive money benchmarked to the MSCI FM100 Index will exit Kuwait and AUB KK, most likely in four monthly tranches in May-August 2020 (the precedent was set when Pakistan and Argentina were upgraded in 2017 and 2019). The structure of the FM100 index, which currently caps the combined index weight of the top two markets at 40%, means that we expect that most of this money – cUSD126mn using current index composition – will flow into Vietnam in four equal phases. The remaining cUSD61mn will flow primarily into Kenya (USD31mn), Romania (USD22mn), Nigeria (USD19mn), and Bangladesh (USD18mn). Morocco’s weight in the FM100 index will fall as it becomes the second-largest market – it will see an outflow of USD5mn.

Equally important for our coverage is the transition trade by actively-managed FM funds. AUMs for the sample of FM and FEM funds that we track are down to cUSD5.4bn, from USD9bn in January 2018, and we estimate that these funds still hold around cUSD0.75-1bn in Kuwait. This money is bound to circulate to other Frontier and small EMs in 2020, which should be broadly supportive for our markets. However, one important risk to this transition trade is redemptions as asset allocators consider the future of the FM sub-asset class (‘What happens to Frontier?’, below on page 23). In addition, liquidity and foreign room constraints (Vietnam) could limit the flow of foreign funds away from Kuwait to FM, as investors look at the broader Frontier Emerging Index and favour markets such as Philippines, Colombia, Peru, Egypt, and Pakistan over FM Africa and FM Asia.

Figure 29: Egypt inflation will rise, but still room to cut rates

Average and current real interest rates (policy rate less CPI inflation)

Source: Bloomberg, central banks

Figure 30: Nigeria has massive EY premium, even after recent rally 12m fwd market earnings yields less 12m T-bill yields

Source: Bloomberg, central banks

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18

Strategy Themes




Local flows will be critical in Kenya, Pakistan, and maybe Nigeria and Egypt Outside the GCC, local flows are likely to be as important as foreign flows in 2020. Late-2019 saw a resurgence of local appetite in Kenya, Nigeria, and Pakistan, thanks to rate cap repeal, a collapse in local T-bill yields, and expectations of policy rate cuts, respectively. We question the sustainability of the move in Nigeria – clearly local funds are very underweight on equities, but the growth outlook is poor. In Egypt, rate cuts have so far failed to catalyse lasting local interest – volumes remain low. However, we think that policy settings appear more favourable in Kenya and Pakistan for a more lasting shift into stocks. In Sri Lanka, a combination of political change, and new management at the CBSL is likely to drive a more expansionary fiscal and monetary stance that could benefit the market, at least in the short run. We note that valuation multiples are still well below LT averages in Kenya and Pakistan, and also Sri Lanka, and we expect multiple expansion in 2020.

Figure 31: Most OW markets are trading well below their LT averages on several valuation measures

Coloured columns show current P/E or P/B vs. LT average (green is below, red is above); final column is 2020e multiple change

Note: Z-score shows SDs above or below LT average, based on 9-10 years of weekly data; we show investable and non-investable indices for Vietnam; combined Z-score averages those for trailing and fwd PE, PB, and dividend yield Source: Bloomberg, EFG Hermes calculations

Combined Multiple(x) Z-Score (x) Z-Score (x) Z-score Z-score Change

Egypt OW 11.8 -0.38 8.4 0.20 1.8 -0.42 -0.17 15%Kenya OW 12.1 -0.70 9.4 -1.12 1.8 -0.81 -1.10 15%Kuwait OW 14.8 -0.50 12.9 -0.20 1.4 0.46 0.02 0%Pakistan OW 9.2 -0.78 6.1 -1.36 1.2 -1.47 -0.87 10%Sri Lanka OW 11.9 -0.70 8.1 -1.21 1.0 -1.15 -0.97 10%UAE OW 9.9 0.05 9.5 0.31 1.3 0.39 0.32 10%Nigeria NEU. 7.1 -0.49 6.5 -0.58 1.3 -1.22 -1.48 5%MXVI NEU. 20.0 0.62 16.2 0.68 3.5 0.01 0.40 -5%VNIndex NEU. 15.9 0.69 13.7 0.43 2.3 0.72 -5%Bangladesh UW 12.6 -0.83 9.7 -1.56 1.2 -0.76 -0.97 0%KSA UW 20.3 1.30 15.5 1.73 1.7 -0.42 0.52 -5%Morocco UW 20.4 -0.32 17.6 0.22 -0.05 0%Qatar UW 14.8 0.66 13.4 1.23 1.5 -0.61 0.44 -5%

Trail. PE 12m fwd PE Trail. PB

0.67

2.6 -0.47

19

Strategy Themes




Factor 3 - Dividends

Yields are high enough in some markets to be significant drivers of total returns – valuations in Pakistan and Nigeria are particularly depressed, and the prospect of falling yields for risk-free assets is driving local investors into names offering high yields, such as Nigerian banks. In Pakistan, we think that while current yields on utilities are low – neither HUBCO nor KAPCO shows up in our screen below – there is the potential for significant yield growth in the sector as cashflows improve in the energy sector.

Elsewhere in our coverage, high payout ratios in Kuwait reflect low growth prospects, while the government continues to encourage high payouts in Saudi Arabia. Payout ratios are the lowest in our coverage in Sri Lanka, but there is the potential for a positive payout surprise should credit quality improve; Vietnamese banks, however, will hoard capital as they move to Basel II compliance.

Figure 32: Low payouts mean depressed yields in Egypt and Sri Lanka despite low P/E ratios

2020e dividend yields for focus markets and key MSCI aggregates, 2020e payout ratio (RHS)


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20

Strategy Themes



Figure 33: Top two dividend payers in each of our focus markets

Filtered for stocks with ADVT > USD100k, MCAP > USD250mn, 2020 payout ratio

MCAP ADVT P/E (x) DY ND/EBITDA

Country Ticker Sector Price TP Rating (USDbn) (USDmn) 2019e 2020e 2020e 2020e 2020e

Bangladesh OLYMPI BD Staples 183 205 Neu. 0.4 0.11 19.5 17.3 3.5 48 (1.1)

Bangladesh BATBC BD Staples 1,073 1,201 Neu. 2.3 0.43 19.8 17.1 2.8 34 (0.2)

Egypt HDBK EY Financials 43 75 Buy 0.3 0.13 2.6 2.5 14.0 35 N/A

Egypt SWDY EY Industrials 12 20 Buy 1.6 1.45 7.1 6.4 10.0 66 (0.3)

Kenya KNCB KN Financials 50 89 Buy 1.5 0.99 6.6 5.8 7.0 41 N/A

Kenya COOP KN Financials 16 19 Buy 0.9 0.17 7.6 7.3 6.2 46 N/A

Kuwait HUMANSFT KK Discretionary 3.05 6.30 Buy 1.2 1.26 11.1 10.2 6.9 70 (0.7)

Kuwait INTEGRAT KK Discretionary 0.50 0.60 Buy 0.4 0.95 12.3 9.9 6.0 60 0.1

Nigeria ZENITHBA NL Financials 19 34 Buy 1.6 1.92 2.9 2.8 17.2 49 N/A

Nigeria UBA NL Financials 7.1 10.7 Buy 0.7 0.30 3.4 3.0 12.1 36 N/A

Oman NBOB OM Financials 0.19 0.20 Neu. 0.8 0.16 7.1 6.6 9.2 61 N/A

Oman OTEL OM Telecoms 0.61 0.98 Neu. 1.2 0.14 4.0 3.8 8.2 32 2.4

Pakistan EFERT PA Materials 69 88 Buy 0.6 1.12 6.1 5.5 14.5 79 0.2

Pakistan PSO PA Energy 183 352 Buy 0.5 2.08 3.9 3.7 9.4 35 2.9

Qatar QATI QD Financials 3.07 4.30 Buy 2.7 1.03 9.5 9.1 6.5 64 N/A

Qatar DHBK QD Financials 2.53 2.83 Neu. 2.1 0.88 11.2 9.9 5.9 58 N/A

KSA BUDGET AB Discretionary 34 38 Neu. 0.6 2.30 13.7 13.4 5.8 78 (0.0)

KSA NCB AB Financials 46 47 Neu. 36.8 22.0 13.9 41.3 4.8 69 N/A

UAE EMAARDEV UH RE 3.60 5.40 Buy 3.9 2.92 3.6 3.9 14.4 45 (1.9)

UAE RAKCEC UH Industrials 1.56 2.35 Buy 0.4 0.10 8.6 7.7 9.7 75 3.1

Vietnam FPT VN IT 56,400 78,400 Buy 1.6 4.35 12.7 10.8 5.3 58 0.0

Vietnam MWG VN Discretionary 109,000 200,900 Buy 2.1 3.75 14.3 11.2 2.0 23 0.2


Payout (%) (%)

21

Strategy Themes




Factor 4 - FX depreciation

We see relatively little risk of major FX depreciation in our focus markets for 2020 after several major moves – Egypt, Nigeria, Pakistan, and Sri Lanka – in recent years. It is true that several markets have real effectiveexchange rates that are well above their long-term averages. However, while REER moves were a usefulsanity check during BoP crises in Egypt and Pakistan in recent years, they are not sufficient to predict futureFX movements. In Vietnam’s case, REER appreciation has been accompanied by improvements inproductivity. Meanwhile, Kenya and Bangladesh have seen improvements in their BoP positions since 2018that appear to reduce the chances of a large adverse FX move in 2020.

Figure 34: KES and BDT look expensive, EGP has moved a lot

REER: Z-score (SD relative to LT avg.) and 2019 % change (RHS, to Oct 2019)

Source: Brueghel, EFG Hermes calculations

Figure 35: BoP looks better for Kenya and Bangladesh

12m trailing current account balance plus FDI in GDP

Source: Bangladesh Bank, Central Bank of Kenya

We have given a subjective FX score for the markets in our coverage (Figure 36) based on the probability of USD-LCL moves in 2020. A score of 1 is reserved for GCC markets with well-supported USD pegs; a score of 2 is for markets, where we see a chance of limited FX movement, thanks to strong reserve positions andpolicy preferences; a score of 3 is for those markets where we may see a USD/LCL move of more than 5% in 2020.

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Strategy Themes



Figure 36: Risk weights for FX effects in 2020

Source: EFG Hermes estimates

Figure 37: USD strength could put pressure on FEM currencies

USD trade-weighted (other important partners), rebased to 100 = Nov 2014

Source: Bloomberg

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Strategy Themes




Figure 38: If Kuwait is upgraded, Vietnam to dominate Frontier… Current and pro-forma weights for MSCI FM Index members

Nov-19 Jun-20

Vietnam 18.3% 30.0%

Morocco 9.2% 15.1%

Nigeria 5.4% 8.8%

Kenya 5.2% 8.5%

Romania 4.9% 8.1%

Slovenia 2.6% 4.2%

Bangladesh 2.3% 3.8%

Mauritius 2.1% 3.4%

Kazakhstan 1.7% 2.8%

Bahrain 5.4% 2.5%

Croatia 1.5% 2.4%

Oman 1.4% 2.2%

Lebanon 1.0% 1.7%

Sri Lanka 0.9% 1.5%

Jordan 0.8% 1.4%

Tunisia 0.6% 1.0%

Senegal 0.6% 0.9%

Estonia 0.4% 0.7%

Lithuania 0.2% 0.4%

Serbia 0.2% 0.4%

Ivory Coast 0.1% 0.2%

Kuwait 35.2% 0.0%

Source: MSCI, EFG Hermes estimates

Figure 39: …and in FEM, Philippines will be a third, Colombia, Peru, and Vietnam will combine to form the next third Current and pro-forma weights for MSCI FM Index members

Nov-19 Jun-20

Philippines 25.9% 31.9% Colombia 9.5% 11.7% Peru 9.0% 11.1% Vietnam 8.7% 10.7% Morocco 4.4% 5.4% Egypt 3.7% 4.6% Argentina 3.5% 4.3% Nigeria 2.6% 3.1% Kenya 2.5% 3.0% Romania 2.3% 2.9% Slovenia 1.2% 1.5% Bangladesh 1.1% 1.4% Mauritius 1.0% 1.2% Kazakhstan 0.8% 1.0% Bahrain 2.6% 0.9% Croatia 0.7% 0.9% Pakistan 0.7% 0.8% Oman 0.7% 0.8% Lebanon 0.5% 0.6% Sri Lanka 0.4% 0.5% Jordan 0.4% 0.5% Tunisia 0.3% 0.4% Senegal 0.3% 0.3% Estonia 0.2% 0.2% Lithuania 0.1% 0.1% Serbia 0.1% 0.1% Ivory Coast 0.1% 0.1% Kuwait 16.7% 0.0%

Source: MSCI, EFG Hermes estimates

Index Matters – What happens to the frontier?

MSCI is expected to confirm Kuwait’s upgrade by 31 Dec 2019 What will the frontier Index look like next year? What about FEM?

We expect MSCI to confirm Kuwait’s upgrade (by 31 Dec 2019), which will be effective in May 2020, driving cUSD3.3bn of inflows into Kuwait that should account for c0.7% of MSCI EM. Kuwait’s expected exit from Frontier and FEM will continue to raise questions about the relevance of the asset class as the index becomes less liquid (i.e., how long would it take to deploy USD1bn in Nigeria, Kenya, and Morocco?), and its biggest market Vietnam faces foreign room issues for popular stocks (i.e., can foreign active frontier funds really be 30% in Vietnam?). The current alternative (MSCI FEM Index) has its own issues, such as different requirements for FM and EM markets, as well as concentration in Philippines, once Kuwait exits (one third of the benchmark). A big question, which will be answered in 2020 and beyond, will FM just become an off-benchmark part of GEM strategies? Or do frontier markets deserve standalone attention? Furthermore, the drop in active AUMs for frontier funds from 2014 and 2018 peaks is not an encouraging sign, but at the same time it is hard to ignore the long-term appeal of Frontier Asia and Africa, and if bundled within GEMs they will become a rounding error, in our view.

2020

Country Anlaysis

THE YEAR AHEAD20

MENA

Asia

Sub Sahara Africa

Egypt

Saudi Arabia

UAE

Kuwait

Qatar

Morocco

Pakistan

Vietnam

Bangladesh

Nigeria

Kenya

Egypt 25

Saudi Arabia 31

UAE 37

Kuwait 41

Qatar 45

Morocco 49

Pakistan 53

Vietnam 59

Bangladesh 63

Nigeria 67

Kenya 71

25

Egypt Country Analysis


Egypt (Overweight)

A tale of COMI vs. Egypt-x-COMI in 2019, will the rest catch up in 2020?

The return of liquidity to the equity market, particularly, Egypt-x-COMI is very much needed Falling T-bill yields and benchmark rates help, but it is clear to see that falling rates on CDs are the key Bottom-up and top-down, Egypt still scores highly within MENA and EM. Top 20 list: COMI, EKHO, SWDY, JUFO, and EAST

We recommended an OW position on Egypt (in place since Nov 2016) in last year’s yearbook, and Egypt has delivered – MSCI Egypt Index has returned 36% in USD terms vs. 6% for MENA and 11% for EM. However, a closer look suggests that those who bought COMI (and other off-benchmark names such as FWRY, CLHO, EFID and ISPH) have had a different experience in Egypt in 2019 compared to those who bought other benchmark names. COMI has substantially outperformed MSCI Egypt mid-caps (down YTD) and MSCI Egypt small-caps (flat YTD). This is surprising, given the expected upside for Egypt-x-COMI at the beginning of 2019.

Figure 1: Egypt-x-COMI has underperformed MENA and EM

Indices rebased to 100 = 31 Dec 2018

Source: MSCI, Bloomberg, EFG Hermes Calculations

Figure 2: Rates and T-bill yields are almost back at normalised levels, but its valuation is still 20% below the historical average (2011 to date) EGX30 index positive P/E vs. Egypt discount rate (%) and 12-month yield (%)


We attribute the discrepancy to the wider Egyptian market relying more on both local sentiment and liquidity, while COMI, for example, is almost entirely driven by foreign liquidity. Egypt’s index is highly correlated to liquidity momentum. Interestingly, looking at overall liquidity in EGP over a 12-month rolling average basis, we find that COMI’s liquidity in EGP terms has held up much better than the rest of the market, which we believe explains its relative outperformance in 2019. Another factor possibly driving the weak performance is weak private consumption growth, which was evident in key consumer staples names (JUFO, DOMT and OLFI) that saw TTM revenue growth of just 4.4% as of 9M19, down from 18.4% in 2018. We should see some recovery in 2020 given falling rates, stronger EGP and weaker inflation. We also note that these companies are leveraged in EGP terms and should see margin expansion in 2020e, which could drive strong EPS growth. As such, this could be one sector to watch in 2020e after a very weak performance in 2019e.

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Figure 3: Lack of local liquidity, which is down 31% in 2019 vs. 2018 is one of the major reasons behind the weak broad market performance YTD

EGX30 capped and uncapped vs. 12-month rolling average ADVT EGPmn


Figure 4: The discrepancy between the liquidity collapse in Egypt-x-COMI vs. relatively stable ADVT for COMI partly explains the market performance, particularly YTD and since the Apr 2018 high 12-month rolling average ADVT in EGPmn


The investment case from a bottom-up perspective remains unchanged. Our Egyptian coverage is trading at 11x 2019e P/E, with a 2019-21e EPS CAGR of 20% (i.e., a PEG ratio of 0.55x), with a market cap weighted upside of 45%. Egypt’s discount to Ems\ is near an all-time high and the market has one of the lowest PEG ratios in EM, next to Turkey and Pakistan. In addition, real GDP growth over 2019-21e is expected to be amongst the highest in EM, according to the IMF. The main risks for Egyptian equities are: i) slower-than-expected drop in CDs rates leading to a continuation of weak local liquidity; and ii) weaker-than-expected private consumption growth. We note that the EGP has appreciated c10% YTD, and the REER is now at the LT average. We do not expect the EGP to experience any major depreciation in the near future; however, it is a factor to watch for USD returns.

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Figure 5: Egypt’s discount to EM is near all-time highs (excl. 2011)

12-month forward P/E – Egypt vs. EM

Source: MSCI, Bloomberg, EFG Hermes calculations

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MSCI Egypt IMI 12-month forward P/E (x) - LHS MSCI EM IMI 12-month forward P/E (x) - LHS Discount/Premium (RHS)

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Macro easing sets in to support growth

The economy is about to enter its first year in four without any form of macro tightening, opening room for a more favourable environment for economic growth. We, therefore, see room for private sector activity to recover gradually in 2020, with interest rates nearly back to their pre-devaluation levels and fiscal consolidation coming to an end. We do expect, though, this recovery to be gradual as the economy slowly pushes away the dust of austerity. Egypt is a domestic demand-based economy, so it will take time for investment to recover until consumer demand also picks up. The latter has been unsurprisingly going through one of its weakest periods in recent decades; private consumption growth grew less than 1% in 9M18/19, well below the population growth of 2.5%.

Figure 6: Private consumption growth has been quite weak in the past couple of years, due to economic adjustment In Y-o-Y change

Source: Ministry of Planning, CBE

Figure 7: Private sector activity is yet to recover; monetary and fiscal easing should help this recovery Index; readings below 50 points to contraction

Source: Markit

Egypt’s inflation has fully normalised in 2019, opening room for CBE to press full gear on monetary easing, and bringing policy rates back to their pre-devaluation levels (just 50bps above). We expect 150-200bps of policy rate cuts in 2020, with inflation set to stabilise at 6-7%, providing room for the CBE to cut rates further, while still offering foreign portfolio investors a lucrative real yield. Current nominal, net-of-tax yields, are just below 12%.

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On the fiscal side, consolidation has been achieved, with the liberalisation of fuel subsidies in July 2019. The gov’t turned into gradual fiscal easing by utilising the savings from fuel liberalisation to boost domestic demand, doubling both the minimum wage and pensions, while also increasing public wages by 12% and also maintaining a primary surplus of 2% of GDP. Going into FY20/21, we think the gov’t will tactically move to boost domestic demand, while not jeopardising its fiscal discipline.

For example, the gov’t has recently reduced gas prices for a number of energy-intensive industries and reduced prices of key staples distributed along ration cards. Nevertheless, we do expect the overall fiscal deficit to narrow over the coming two years, thanks to lower interest rates, which will: i) reduce the borrowing cost; and ii) extend the debt maturity profile of the gov’t; a move that will also reduce the borrowing costs.

Figure 8: Inflation normalised in 2019, opening significant room for CBE to cut rates; we still see another 100bps of cuts in 2020 In %

Source: CBE

Figure 9: CBE likely to keep a close eye on providing carry trade investors with 2-3% of positive real rates margin

In %; yields on 1-year T-bill are net of tax

Source: CBE

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On the external front, we expect a largely stable USD-EGP, with a bias towards a small margin of weakness. Fundamentally, we see Egypt continuing to run relatively affordable current account deficits of 2.9% of GDP in FY20 and 3.6% in FY21, thanks to: i) continued recovery in the tourism sector, breaking new highs; ii) further improvement in the energy balance; and iii) muted domestic demand growth, which is likely to keep the import bill in check. On the other hand, the capital account will likely remain supportive, with high real yields and a positive macro outlook maintaining the attractive carry trade.

The future health of CAD, though, will largely depend on the extent of the recovery in non-oil exports and foreign direct investment, two drivers that lagged behind in the past three years. Non-oil exports’ performance, since the devaluation, was rather underwhelming, growing on average by 14% in the two years since the devaluation before showing a surprising drop in the past fiscal year. This drop was one of the key factors resulting in the widening of CAD, which came despite record tourism revenues and energy balance turning into a surplus.

Figure 10: Tourism revenues hit a record-high in FY19, and the energy balance was back in the black…

In USDbn

Source: CBE, EFG Hermes estimates

Figure 11: …but non-oil exports and FDI are yet to show signs of sustainable growth, which is key to preserve external sector’s stability and boost productivity In USDbn

Source: CBE

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Egypt Macroeconomic Indicators (Year-end Jun)

2017a 2018a 2019e 2020e 2021e

233.9 250.3 302.9 367.8 410.3

4.1% 5.3% 5.5% 5.8% 5.7%

95.2 97.5 99.8 102.2 104.7

2,457 2,567 3,034 3,598 3,920

Real Sector

Nominal GDP (USDbn)

Real GDP growth

Population (mn)

Per capita GDP (USD)

CPI inflation (%, Avg.) 23.3% 21.6% 13.9% 5.9% 7.6%

(37.3) (37.3) (38.0) (41.9) (47.6)

5.6 11.1 13.0 15.1 16.5

4.4 9.8 12.6 15.1 17.3

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(14.4) (6.0) (8.2) (10.6) (15.2)

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Trade balance (USDbn)

Services balance (USDbn)

Tourism (USDbn)

Suez canal (USDbn)

Private transfers (net) (USDbn)

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Current account balance (% of GDP)

FDI (USDbn) 7.8 7.4 5.5 6.3 7.3

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Tax revenues (USDbn)

Subsidies (USDbn)

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Gross external government debt (% of GDP) 14.9% 19.0% 18.9% 17.2% 16.7%

3.4 17.3 18.0 18.0 15.0

31.3 44.3 44.4 43.5 41.7

14.83 17.73 17.60 16.23 16.55

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38.0% 10.1% 12.5% 15.4% 17.2%

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NFAs in the banking system (USDbn)

Foreign reserves (USDbn)

Exchange rate versus USD (Avg.)

Benchmark lending interest rate (end of period)

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Private sector credit growth (%, eop)

Private sector credit (% of GDP) 28.3% 24.4% 22.8% 23.5% 24.3%

Source: Central Bank of Egypt, Ministry of Finance, CAPMAS and EFG Hermes estimates

31

Saudi Arabia Country Analysis


Saudi Arabia (Underweight)

Valuation says Sell, but flows and positioning could prevent a big drop

One last big index trade left in March 2020, then the market needs to find different drivers. Valuation and EPS growth outlook are challenging, but market remains under owned by active funds. Who will be the big marginal sellers in the market? Top 20 List: AOTHAIM, SADAFCO, EXTRA, ARNB, and SABB.

We had been OW on Saudi Arabia from 19 Feb 2018 to 15 July 2019, as we expected the market to outperform due to cUSD20bn of passive inflows in 2019. Over that period, the MSCI Saudi Arabia Index returned 27% (including 16% from end-2018 to 15 July 2019), outperforming EM by 35% and MENA-x-Saudi by 12%. Since we went UW on 15 July, Saudi Arabia is down 12%, underperforming MENA-x-KSA by 9% and EM by 12%. As we expected, the drop from this year’s high on 2 May 2019 was mainly driven by large caps, which lost 16% vs a drop of 8% for mid-caps and a gain of 7% for small-caps. Despite the correction, Tadawul is still trading at 1-standard deviation above its historical average P/E, and the earnings growth outlook for 2020e is not particularly encouraging as banks’ earnings are expected to be flattish and the risk/reward for KSA petchems looks skewed to the downside as these stocks’ valuations appear to be pricing in a strong earnings recovery in 2020e.

What are the key upside risks to Saudi Arabia’s earnings outlook in 2020? For petchems, a quick resolution to the US-China trade war, along with aggressive stimulus packages from the world’s largest economies, could trigger a prolonged restocking cycle that could drive prices and spreads back above normalised levels, especially if some of the capacity in the pipeline is delayed. For banks, continued high growth in mortgages could offset the impact of lower rates and is an upside risk to our 2020e aggregate earnings growth estimate of just +0.4%.

We believe there will be minimal pushback on our negative views on Saudi Arabia’s valuation and aggregate earnings growth outlook. Furthermore, we believe that it will be even more challenging in 2020e to find new attractive stories within the small- and mid-cap space as seen in 2019, particularly as many investors

Figure 12: Earnings estimates for Saudi Arabia have been lowered by 17% for 2019e and 2020e, but the market’s valuation remains elevated at 1-standard deviation above the historical average. How long can the index disconnect from underlying fundamentals?


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switched into cash and/or small- and mid-cap names post the market hitting this year’s high. This is also evident in current active foreign positioning within the Saudi market.

32



Figure 13: Small- and mid-caps have outperformed YTD and since this year’s high, but they are not cheap

P/E (x) Positive P/E (x)

Div. yield (%)

YTD (%)

Watch list to 2 May 2019

2 May 2019

to date

Large-caps 17.6 15.7 4.4% 5.4% 63% -18%

Mid-caps 27.7 21.2 2.8% 9.2% 42% -9%

Small-caps 27.9 21.1 2.4% 23.6% 11% 5%


Figure 14: Most owned names by foreigners in Saudi Arabia are mainly small- and mid-caps Ownership-x-strategic investors as a % of market cap


What could challenge the fundamental/bottom-up view on the Saudi market in 2020e? The key risks we see to our view on the Saudi market in 2020e are: i) a strong recovery in non-oil growth, especially if the Saudi government announces major project awards; ii) a strong IPO debut by Aramco, which could trigger a technical breakout on the Tadawul index and drive retail and local institutions’ liquidity back into the market and drive a strong run in the Saudi index lasting at least up until Mar 2020, when the last phase of FTSE inclusion is implemented (more than USD2bn of inflows expected); iii) GCC institutions bringing back some of the cUSD1.5bn that they net sold in Saudi Arabia YTD, especially as the country’s weight in regional benchmarks will rise following the listing of Aramco; and iv) strong passive inflows into EM, 3% of which will find its way into a Saudi market that is underowned by active GCC/foreign investors and where 12% of the free float was recently taken up by passive funds that would not sell, unless faced with redemptions and/or global EM funding trades due to index rebalancing.

Figure 15: Locals and GCC investors sold Saudi in 2019; buyers were mainly passive trackers, which means that the float is shrinking and marginal sellers could be difficult to find without redemptions

Net flows in 2019 (up to 14 Nov) in USDbn

Source: Tadawul, EFG Hermes calculations

Figure 16: Considering that Saudi Arabia accounts for more than 50% of GCC’s weight, but only 35% of active non-local ownership, this indicates that foreign and GCC investors are heavily UW on the market. KSA has less USD invested in it than the UAE

Source: Stock Exchanges, EFG Hermes calculations

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Further macro normalisation to drive growth in 2020

Saudi Arabia’s GDP growth is set to accelerate in 2020, driven by growth in both oil and non-oil sectors. We forecast real GDP growth will strengthen to 2.3%, compared to an expected contraction of 0.8% in 2019. Oil production is likely to be higher in 2020, considering production disruptions in Sep, following the attacks on Aramco’s facility. The non-oil sector is also set to accelerate as economic normalisation settles in further. Next year will be the second one without fiscal measures hitting the consumer – barring a sugar tax that is likely to have an insignificant impact on consumer spending. Saudisation is also easing, with no new measures approved, leading us to expect near full-moderation of expat departures in 2020 (the pace was already notably moderating in 2019). We, therefore, expect non-oil GDP growth to accelerate to 3.5% in 2020, from an expected 2.7% in 2019.

Signs of expected stronger non-oil growth in 2020 are already evident in a jump in project awards of 54% in 11M19, with the absolute level of awards reaching a three-year high; we note, though, that the growth was driven entirely by the hydrocarbons sector. Together with a parallel pick-up in public investment, the construction sector yielded its first growth in nearly four years in 1H19, growth that is also reflected in the recovery of cement sales.

Figure 17: Total project awards jumped 54% Y-o-Y in 11M19, though this was driven largely by oil and gas In USDbn

Source: MEED Projects

Figure 18: Construction sector showed in 1H19 the first signs of recovery in nearly four years Real Y-o-Y change

Source: General Authority for Statistics

The fiscal impulse, however, is likely to be mixed, with the gov’t planning to cut spending by 3% in 2020 and by nearly the same magnitude in the following couple of years, in an effort to reach a balanced budget by 2023. The spending cut in 2020 will be focused on current expenditure, with capital spending to remain largely flat.

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We note that, despite these spending cuts, the gov’t is running the risk of missing its 2023 balanced budget target, in light of depressed oil prices. Indeed, the latest fiscal document shows that the gov’t had reduced expected revenues for the next three years by an average of 19%, likely due to a downward revision of oil price estimates, and leading to 15% average cut in spending. This resulted in the deficit widening 12% on average, reaching 2.9% of GDP in 2022 just one year ahead of the deadline for the balanced budget target.

Figure 19: Gov’t planning to cut overall spending in next three years as it aims to reach a balanced budget by 2023

In SARbn (LHS), In Y-o-Y change (RHS)

Source: Ministry of Finance

Figure 20: Fiscal deficit set to narrow, thanks largely to spending cuts, though running the risk of not meeting the 2023 target In SARbn (LHS), In % of GDO (RHS)

Source: Ministry of Finance

This fiscal retrenchment is planned to be balanced, in parallel with a growing role for the Public Investment Fund (PIF) as it assumes a bigger role in driving the country’s growth story. PIF has a project portfolio of cUSD550bn, led by Neom City at USD500bn, with some of the projects having seen their cycles kicked off. These include Neom, the Red Sea Project and Qiddiyah (the entertainment city). We note, though, that all these projects are still at quite a preliminary stage, with these initial awards mainly involving the very early construction work (including roads and workers’ accommodation).

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We, therefore, envisage a largely moderate pick-up in credit growth in 2020 and in overall investment growth, coming in line with our expectation of a slight acceleration in non-oil economic activity in 2020. In this context, we see risks to our growth outlook mainly to the downside and will arise from any higher fiscal retrenchment – in case oil prices dipped below USD60/b – or in case of slower-than-expected progress in project implementation.

Figure 21: Credit growth not yet showing signs of strong recovery as investment activity is picking up only gradually… Y-o-Y change

Source: SAMA

Figure 22: …but mortgages remain a bright spot, thanks to gov’t initiatives to boost home ownership Y-o-Y change in retail real estate loans

Source: SAMA

0%

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6

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Saudi Arabia Macroeconomic Indicators (Year-end Dec)

2017a 2018a 2019e 2020e 2021e

688.6 782.5 748.7 778.5 787.4-0.7% 2.2% -0.8% 2.1% 2.2%1.3% 2.1% 2.7% 3.2% 3.1%32.6 33.4 34.0 34.6 35.3

21,114 23,418 22,008 22,476 22,32754.3 72.0 65.0 66.0 60.0

Real SectorNominal GDP (USDbn)Real GDP growthReal non-oil growthPopulation (mn)Per capita GDP (USD)Oil price (Brent, USD/b Avg.)CPI inflation (%, Avg.) -0.8% 2.5% -1.8% 1.5% 2.0%

98.4 170.3 143.5 147.9 131.3170.2 231.6 205.8 210.0 193.3

51.6 62.8 68.7 75.3 82.4(60.4) (68.4) (71.0) (75.0) (79.0)(38.3) (37.3) (32.9) (31.6) (30.7)

10.4 72.2 47.5 49.6 31.11.5% 9.2% 6.3% 6.4% 3.9%

External SectorTrade balance (USDbn)HC exports (USDbn)Non-HC exports (USDbn)Services balance (USDbn)Net transfers (USDbn)Current account (USDbn)Current account (% of GDP)FDI (USDbn) (5.9) (18.0) (5.0) (3.0) (1.0)

116.2 162.9 160.5 142.1 133.368.2 78.4 84.0 87.9 93.8

248.0 287.7 279.7 270.8 262.3-9.6% -6.5% -5.6% -6.3% -5.7%(63.6) (46.4) (35.2) (40.9) (35.3)-9.2% -5.9% -4.7% -5.2% -4.5%

70.7 77.8 77.5 72.0 65.8-18.7% -12.8% -10.0% -6.6% -4.2%

Fiscal SectorHC revenues (USDbn)Other revenues (USDbn)Spending (USDbn)Primary balance (% of GDP)Fiscal balance (USDbn)Fiscal balance (% of GDP)Budget breakeven oil price (USD/b)Net domestic claims on government (% of GDP)Gross external government debt (% of GDP) 7.1% 8.7% 11.8% 13.2% 15.0%

528.3 523.1 538.7 553.5 559.93.75 3.75 3.75 3.75 3.75

2.0% 3.0% 2.5% 2.5% 2.5%-1.0% 2.3% 6.3% 12.0% 6.2%-0.8% 3.0% 3.5% 5.0% 6.0%

Monetary SectorNFAs in the banking system (USDbn)Exchange rate versus USD (Avg.)Benchmark lending interest rate (end of period)Broad money growthPrivate sector credit growth (%, eop)Private sector credit (% of GDP) 54.0% 48.9% 52.9% 53.4% 56.0%Source: SAMA, General Authority for Statistics, IMF and EFG Hermes estimates

37

UAE Country Analysis


UAE (Overweight)

Value evident on DFM, but catalysts beyond FOL increases hard to find

Both sell-side (target price based upside) and buy-side (allocation) seem bullish on the UAE… …which is justified on valuation/yield grounds, but where are the sizable incremental buyers?FOLs will be supportive, and we see this playing out for EMIRATES and ADIB in 2020, possibly DIB. Top 20 List picks: EMIRATES, ADIB, DIB, DPW, EMAARDEV and ALDAR.

We started the year as Neutral on the UAE, and up until 15 July 2019 (when we turned OW), the UAE had underperformed MENA by 7.5%. Since we turned OW, the UAE has outperformed MENA by 3.6%. This means that our country call on the UAE has effectively worked, as we were net Neutral for most of 2019. As we approach the dividend season in 1H20, we see UAE equities attracting more interest on the back of high yields on offer vs. the rest of the region. More importantly, we see the UAE as the most compelling GCC market for 2020 from a bottom-up perspective, especially once index events in Saudi Arabia (FTSE Phase 5 in March 2020) and Kuwait (May 2020) play out.

Figure 23: UAE is the consensus’ favourite GCC market…

Bottom-up consensus upside for MSCI GCC constituents


Figure 24: …and this is reflected in active money positioning

Active allocations (excl. locals) relative to S&P GCC benchmark weight

Source: S&P, Bloomberg, EFG Hermes calculations

Watch out for developments on FAB’s 100% FOL proposal The UAE’s Cabinet announced on 2 July 2019 that the seven emirates can set FOLs (foreign ownership limits) at 100% across a number of sectors (122 economic activities are eligible). At the time, it was unclear whether listed companies would be able (or willing) to raise FOLs to 100%, but on 17 Jul 2019 the board of FAB (the largest listed UAE company) proposed to remove its FOL cap (40%), with the suggestion that other listed companies in the UAE may follow suit. FAB’s statement added that “this will support the country’s leadership in positioning the UAE amongst one of the most attractive economies for foreign direct investments.” FAB added that removing FOLs “would be subject to the supervision of regulatory authorities and would require amendments to the current laws and policies.” We see FAB’s BoD proposal as a call for action from the largest company in the UAE. The move (if and once it happens) should unleash the untapped potential of the UAE market, which has been undervalued for some time. We calculate that at 100% FOLs across the board, the key UAE names (and potential additions) within MSCI UAE Standard Index would see cUSD5bn of passive inflows assuming index providers recognise these moves and our estimated free float numbers (potential active GEM inflows could be a multiple of that number if they wish to maintain their current relative position).

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In the meantime, focus should be on names that can act within current regulations, especially banks. We acknowledge that what FAB is proposing could take some time as during FAB’s 2Q19 earnings call the management said that for the change to be implemented at FAB and other banks it would require the following changes to made: i) Commercial Law, which allows a maximum of 49% foreign ownership; ii) FDI Law; and iii) Federal Law for the Central Bank and financial institutions, which requires that the national shareholding must not be less than 60%. As a result, in the short term, we focus on names that can act within the current FOL regulations, particularly banks, such as EMIRATES, which has already raised its FOL to 20% (and is considering going to 40%), while ADIB’s BoD is proposing to raise its FOL to 40%. This leaves DIB as the only major bank not to have disclosed its intention to go to 40% FOL. We believe a basket of EMIRATES, DIB and ADIB offer good exposure within UAE allocations in 2020.

We think that a re-rating in multiples requires fresh liquidity injection, which we believe can be achieved by FOL increases and by developing a bigger local mutual funds/pension funds industry that invests in local equities to take advantage of the current low valuations/high yields. Beyond that, we think a weaker USD and improved sentiment towards EM could bode well for the UAE (especially Dubai equities). This is evident from the major pullback DPW has seen as a result of US-China trade war concerns, and we believe its share sell-off has been overdone and does not reflect the underlying operations or fundamentals.

Figure 26: Dubai’s discount to MENA, EM, and Abu Dhabi is clear to see, but the market needs a catalyst to re-rate 12-month forward P/E (x)

Source: Bloomberg, MSCI, EFG Hermes

Figure 27: Dubai has some of the highest yields (EMAARDEV at 15%, DIB at 7%...) 12-month forward dividend yield (%)

Source: Bloomberg, MSCI, EFG Hermes

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Figure 25: What are the UAE key names that could still increase FOLs within current regulations? Highlighted names are part of our MENA Top 20 List

MSCI inflows FTSE inflows MSCI inflows FTSE inflows Total flows Total flows

(USDmn) (USDmn) x ADVT x ADVT (USDmn) x ADVT

FAB UH Equity* 546 0 66 0 546 66

DIB UH Equity 114 57 24 12 171 35

ADIB UH Equity** 168 32 62 12 200 74

EMIRATES UH Equity** 605 303 57 29 908 86

ETISALAT UH Equity 627 313 174 87 940 262

DU UH Equity 134 54 464 187 189 650

Total 2142 732 79 27 2954 106

*FAB’s FOL has already been increased, it depends on MSCI making the adjustment – we keep an eye on May 2020 and its annual free float review**ADIB, EMIRATES, and DU inclusion will depend on liquidity and the stocks having a free float bigger than 50% of MSCI UAE cut-off at the time. For FTSE,it will just depend on liquidity for DU and EMIRATES as ADIB is already a constituent. EMIRATES easily passes liquidity requirements; DU’s liquidity needs toimproveSource: MSCI, FTSE, EFG Hermes estimates

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Expo to provide one-off boost to growth in 2020

We expect the UAE’s economy to witness an uptick in activity in 2020 as it hosts the much-awaited Expo 2020, an event that officials expect to attract 25mn visitors. As a result, we forecast non-oil growth to accelerate marginally in 2020 to 3.2%, from an expected 2.7% in 2019. We do not see the Expo, though, as providing more than a one-off boost to an economy that has been facing a number of cyclical and structural challenges that drove overall growth to multi-year lows.

Nevertheless, beyond the event, the weak macro backdrop is likely to persist as the economy remains subject to structural and cyclical impediments, namely weaker domestic and external demand, due to a stronger dollar and lower oil prices and a waning fiscal impulse as projects for the upcoming Expo 2020 near completion; hence, we still expect weaker growth beyond the Expo, unless the external environment starts to show signs of improvement.

Fundamentally, therefore, we continue to foresee weak macro fundamentals. Cyclically, the economy is feeling the brunt of a lethal combination of a strong dollar and weak oil prices, which is taking its toll, in particular, on Dubai’s economy. This combination has been weighing on tourist arrivals from key markets like Saudi Arabia, Kuwait and Oman, which suffer from low oil prices. While tourist arrivals continue to inch upwards, the weakened purchasing power of visitors and oversupply in hotel rooms have diminished the profitability of the sector and constrained employment generation.

In parallel, the economy is also constrained by slowing global trade, which has weighed on the key logistics and transportation sectors. Trade at Jebel Ali is clearly pointing to such weakness. Lower oil prices are keeping Abu Dhabi’s fiscal impulse within a tight rope; indeed, latest data show that non-oil GDP still contracted in 2019. Moreover, the nine initiatives within the stimulus package, Ghadan 21, have been focusing mostly on providing non-financial support to the economy, including loan guarantees, discount on electricity tariffs and faster and more efficient licencing for businesses.

In addition to cyclical pressures, the economy is facing structural bottlenecks, in particular, in the case of Dubai, where the successful growth model has likely reached a plateau. To tackle these bottlenecks, the gov’t announced several reform measures, which focus on reforming the visa system, reducing the cost of doing business, as well as opening up the economy to foreign investment. So far, the measures have not run deep enough to yield some results as authorities need to push further and deeper.

Figure 28: PMI clearly pointing to slower economic activity

Index; readings above 50 indicate expansion

Source: Markit

Figure 29: Project awards fell in 2019 to multi-year lows

Non-oil & gas project awards in USDbn


48

50

52

54

56

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17

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7

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Mar

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Chemical Construction Industrial Water Power Transport

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Source: Markit Source: MEED Projects

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UAE Macroeconomic Indicators (Year-end Dec)

2016a 2017a 2018e 2019e 2020eReal SectorNominal GDP (USDbn) 357.3 382.8 425.2 427.0 444.0Real GDP growth 3.0% 0.8% 1.7% 2.4% 2.9%Real non-oil growth 3.2% 2.5% 2.4% 2.7% 3.2%Population (mn) 9.9 10.1 10.4 10.7 11.1Per capita GDP (USD) 36,251 37,759 40,765 39,724 40,083Oil price (Brent, USD/b Avg.) 44.1 54.3CPI inflation (%, Avg.) 1.8% 1.8% 3.1% -2.0% 1.8%

External SectorTrade balance (USDbn) 68.5 81.0 106.6 116.6 118.6HC exports (USDbn) 46.5 58.2 82.5 89.6 91.7Non-HC exports (USDbn) 248.7 255.6 270.9 291.0 291.0Services balance (USDbn) (18.2) (15.0) (13.7) (12.4) (11.1)Net transfers (USDbn) (39.1) (41.2) (43.2) (45.2) (47.0)Current account (USDbn) 13.2 27.5 51.1 60.6 62.3Current account (% of GDP) 3.7% 7.2% 12.0% 14.2% 14.0%FDI (USDbn) (4.0) (3.7) (2.5) (2.0) (1.0)

Fiscal SectorHC revenues (USDbn) 45.0 54.1 68.8 74.8 76.4Other revenues (USDbn) 58.1 56.1 64.2 69.0 72.5Spending (USDbn) 110.3 116.5 130.8 133.0 137.0Primary balance (% of GDP) -2.2% -1.8% 0.4% 2.4% 2.6%Fiscal balance (USDbn) (7.2) (6.2) 2.2 10.7 11.9Fiscal balance (% of GDP) -2.0% -1.6% 0.5% 2.5% 2.7%Budget breakeven oil price (USD/b) 59.4 69.5 76.7 72.6 71.8Net domestic claims on government (% of GDP) 4.3% 4.6% 3.9% 4.0% 4.0%Gross external government debt (% of GDP) 69.5% 63.9% 58.2% 58.0% 55.8%

Monetary SectorNFAs in the banking system (USDbn) 72.4 89.5 115.7 143.9 162.5Exchange rate versus USD (Avg.) 3.67 3.67 3.67 3.67 3.67Benchmark lending interest rate (end of period) 1.0% 1.8% 2.5% 3.0% 3.5%Broad money growth 3.3% 4.1% 7.2% 8.5% 6.4%Private sector credit growth (%, eop) 5.8% 0.7% 2.5% 3.5% 5.0%Private sector credit (% of GDP) 83.9% 78.8% 72.8% 75.0% 75.7%Source: Central Bank of UAE, IMF and EFG Hermes estimates

40

65.0 66.071.2

41

Kuwait Country Analysis


Kuwait (Overweight)

EM inclusion to continue to support performance in 1H20

MSCI is set to confirm Kuwait’s May 2020 upgrade by end-Dec 2019, driving cUSD3.3bn inflows… …these flows should keep the market supported until May 2020Multiple expansion still muted due to EPS growth. Peak GCC inclusion multiples imply more upside Basket to play inclusion trade: NBK, KFH, ZAIN, AGLTY, and MABANEE

In our 2019 Year Ahead note, we were OW on the Kuwaiti market. This has worked out nicely with MSCI Kuwait delivering a c24% total return, outperforming EM by 13%, MENA by 17%, and FM-x-GCC by 15%. We continue to believe, barring any domestic political shocks, that Kuwait’s outperformance is likely to continue until May 2020 supported by cUSD3.3bn inflows as we believe that MSCI will confirm Kuwait’s upgrade in December 2019, which will result in increased inflows into the market in the run-up to the inclusion trade at the COB on 28 May 2020.

Figure 30: Kuwait’s non-local ownership is below regional peers…

Non-local ownership as a % of float available to non-locals for S&P GCC composite index

Source: Bloomberg , EFG Hermes calculations

Figure 31: …non-locals net bought cUSD2.5bn since June 2018, including cUSD1.65bn from FTSE trackers, implying real positioning at cUSD900mn vs. cUSD3.3bn expected inflows Net non-local flows in USDmn since MSCI’s watchlist addition in June 2018

Source: Boursa Kuwait , EFG Hermes calculations

There are other supporting factors for Kuwait: i) stable macro outlook; ii) higher weight in frontier benchmarks, driven by the latest removal of NBK’s liquidity adjustment factor, which resulted in NBK becoming 17% of MSCI FM and FM/FEM funds becoming even more UW; iii) still-low non-local ownership relative to regional markets; and finally iv) the strongest earnings growth in the GCC so far in 2019, with earnings expected to grow another 9% Y-o-Y in 2020e. Kuwait’s EPS growth in 2019 meant that multiples for MSCI Kuwait still have room to expand when compared to previous GCC inclusion trades.

Some key dates to watch ahead:

By end-December 2019 – MSCI expected to confirm Kuwait’s upgrade 19 March 2020 – FTSE March rebalancing, we expect MABANEE KK (cUSD54mn, 34x ADVT) and ALMUTAHE KK (cUSD16mn, 63x ADVT) to be added and MEZZAN KK (cUSD8mn, 148x ADVT) to be deleted 12 May 2020 – MSCI confirms the final list of Kuwaiti constituents that will join the MSCI EM index 28 May 2020 – MSCI EM inflows into MSCI Kuwait constituents. Kuwait set to account for 0.73% of MSCI EM and receive cUSD3.3bn of passive inflows

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In terms of flows and positioning, we calculate that Kuwaiti stocks saw cUSD2.5bn of net foreign inflows since MSCI’s watchlist in June 2018. These included cUSD1.65bn of passive inflows due to FTSE and S&P EM inclusions. This implies real net foreign inflows of just cUSD900mn since June 2018 compared to cUSD3.3bn of passive inflows (c30%). As such we see more room for foreign inflows into Kuwait ahead of May 2020. Relative to other GCC upgrades, Kuwait’s performance is lagging since the decision was made, owing to its strong performance before MSCI’s confirmation this year. However, we note that on valuation, Kuwait’s multiples expansion is still way below what we have seen in previous GCC upgrades.

Figure 32: Previous GCC MSCI EM inclusion trades imply more upside for Kuwait

Perf. watch list to implementation

Perf. decision to implementation Trailing P/E (x)

Multiple expansion decision to

implementation

(%) (%) Watch list

Decision Implementation

Implementation multiple vs.

5-year averagepre-

implementation

(%)

UAE* - 98% N/A 15 21.4 70% 42%

Qatar* - 54% N/A 12.1 20.5 57% 69%

Saudi Arabia** 46% 22% 16.6 18.9 21.4 22% 13%

Median - 54% 21.4 57% 42%

Kuwait*** 36% -1% 14.7 17.3 16.5 10% -5%

*Watch list addition was 2008, decision was 11 Jun 2013 and implementation on 29 May 2014;**Saudi Arabia was added to the watch list on 20 Jun 2017, upgraded on 20 Jun 2018 – multiples and performance data for Saudi are calculated as of 2May 2019 peak level for the market;***Kuwait was added to the watchlist on 20 Jun 2018. Implementation multiple and performance data are latest availableSource: MSCI, Bloomberg and EFG Hermes estimates

Figure 33: MSCI Kuwait EM inclusion simulation

Ticker Index Est. flows Est. EM weight (%) x ADVT

NBK KK Equity Standard 1,441 0.320% 102

KFH KK Equity Standard 641 0.142% 71

ZAIN KK Equity Standard 302 0.067% 76

AUB KK Equity Via KFH 323 0.072% 80

BOUBYAN KK Equity Standard 119 0.027% 122

AGLTY KK Equity Standard 178 0.040% 87

MABANEE KK Equity Standard 101 0.022% 99

BURG KK Equity* Standard 60 0.013% 15

GBK KK Equity Standard 100 0.022% 28

KPROJ KK Equity Small Cap 5 - 12

WARBABAN KK Equity Small Cap 7 - 3

BPCC KK Equity Small Cap 10 - 13

HUMANSFT KK Equity Small Cap 10 - 8

NIND KK Equity Small Cap 8 - 5

KIB KK Equity Small Cap 5 - 2

JAZEERA KK Equity Small Cap 3 - 3

ALIMTIAZ KK Equity Small Cap 3 - 5

NRE KK Equity Small Cap 2 - 5

INTEGRAT KK Equity Small Cap 2 - 2

Total 3,322 0.73% 61

*BURG KK unlikely to make the cut due to low free float market cap, unless its market cap is 11% above GBK KK and/or MABANEE KK, which ever is lowerSource: MSCI, EFG Hermes estimates

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Moderate growth outlook; eyes on general elections

Kuwait’s growth outlook is likely to remain moderate in 2020 as weak oil prices, concerns on geopolitical risks and sluggish implementation of the investment programme are balanced with an expansionary fiscal policy. The latter has been a strong driving force of the economy, with spending up 23% in the past two years. We expect overall GDP growth to rebound to 1.7% in 2020, as oil production normalised from this year’s sharp cuts, in compliance with OPEC+ agreement. Meanwhile, we expect non-oil real GDP growth to remain largely unchanged at 2.5% in 2020.

Project awards have continued to disappoint in 2019, falling 32% Y-o-Y in 10M19 and are on their way to record the fourth consecutive year of decline. While public capital expenditure has been on the rise in the past few years, we think lower awards reflect the lack of strong vision for growth in the country. Aside from some infrastructure projects – mostly in the power and transportation sectors implemented in the past couple of years – as well as a few petrochemical ones, there are not many projects in the pipeline that portray any theme for the economy. In parallel, private consumption has moderated in 2019, as indicated by slowing retail credit growth and value of POS transactions.

We note that the government’s strong fiscal impetus amidst lower oil price environment, and with lower local production of hydrocarbons, meant the country’s fiscal space has been narrowing. Total expenditure has jumped 23% in the two years leading to FY18, with spending hitting an all-time high of 54% of GDP in 2018/19. Bearing in mind these elevated spending levels, we estimate the budget break-even (BBE) oil price for Kuwait has jumped to USD70/b from the USD50-60/b seen over the past three years. This could pose some risks for tighter fiscal policies in the medium term, in our view. Nevertheless, the country will continue to enjoy healthy fiscal and external positions that will allow the gov’t to sustain spending in the short term. The fundamental fiscal balance (excluding transfers to the Future Generation Fund and including investment income) will remain in surplus, despite elevated spending and depressed oil prices and production. The current account balance will also remain at a comfortable double-digit surplus.

Politics has been back to the forefront recently, with the Cabinet resigning after MPs had sought a no-confidence vote against the interior minister over abuse of power. We see the move as a non-event, with a new gov’t to be formed soon; it is a reminder, though, of the country’s policy inconsistency, given repeated gov’t reshuffles. Eyes will soon turn to upcoming parliamentary elections to be held next year, when it will be important to see whether the country elects less of a challenging Parliament as in the previous couple of years.

Figure 34: Non-oil GDP growth to remain stable… M

Real non-oil GDP growth

Source: CBK, EFG Hermes estimates

Figure 35: …as fiscal spending compensates slow investment drive Project awards in USDbn


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Kuwait Macroeconomic Indicators (Year-end Dec)

2017a 2018a 2019e 2020e 2021eReal SectorNominal GDP (USDbn) 120.7 140.6 140.0 143.2 147.2Real GDP growth -4.7% 1.2% 0.2% 1.7% 1.9%Real non-oil growth 2.6% 2.3% 2.4% 2.5% 2.5%Population (mn) 4.5 4.6 4.7 4.8 4.9Per capita GDP (USD) 26,813 30,420 29,632 29,641 29,781Oil price (Brent, USD/b Avg.) 54.3 71.2CPI inflation (%, Avg.) 1.5% 0.6% 1.0% 1.4% 1.8%


Fiscal SectorHC revenues (USDbn) 47.1 61.0 57.8 58.3 58.9Other revenues (USDbn) 25.7 24.1 25.6 27.4 29.2Spending (USDbn) 63.3 67.5 75.5 78.8 82.2Primary balance (% of GDP) 7.3% 11.8% 4.9% 3.9% 2.9%Fiscal balance (USDbn) 9.5 17.5 7.9 6.9 6.0Fiscal balance (% of GDP) 7.9% 12.5% 5.6% 4.8% 4.1%Budget breakeven oil price (USD/b) 52.1 58.7 69.9 71.4 72.8Net domestic claims on government (% of GDP) -9.4% -10.3% -12.0% -13.3% -14.5%Gross external government debt (% of GDP) 45.2% 41.0% 45.5% 48.2% 50.4%

Monetary SectorNFAs in the banking system (USDbn) 54.5 59.7 65.3 70.8 76.4Exchange rate versus USD (Avg.) 0.30 0.30 0.30 0.30 0.30Benchmark lending interest rate (end of period) 2.8% 3.0% 2.8% 2.8% 3.0%Broad money growth 3.8% 3.9% 1.4% 1.7% 2.5%Private sector credit growth (%, eop) 275.5% 393.7% 4.5% 4.0% 5.0%Private sector credit (% of GDP) 30.8% 27.5% 28.9% 29.3% 30.0%Source: Central Bank of Kuwait, Ministry of Finance, IMF and EFG Hermes estimates

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45

Qatar Country Analysis


Qatar (Underweight)

Overall market to remain range bound as large caps are still expensive

Large-caps are still expensive; as such, the market is likely to remain range bound Passive inflows/outflows to remain a big influence on the Qatari market 100% FOL could be the next catalyst, but not for QNBK/IQCD/MPHC/ORDS/QEWS (c68% of MSCI Qatar) No Qatari stocks in MENA Top 20 list

Our UW call on Qatar has also worked out well in 2019. The MSCI Qatar Index has lost 4% YTD, underperforming MENA by 11% and EM by 14%. More importantly, our recommendation to rotate out of large caps in Qatar has worked with small- and mid-caps outperforming large caps by 15% and 6%, respectively. Looking ahead, we continue to see large caps in Qatar as expensive, with a weak earnings growth outlook and few catalysts on the horizon, especially given that all key Qatari companies are at 49% FOL. More importantly, while a move to 100% FOL would be a catalyst for the market, the free float limitations on some of the large- and mid-caps would mean that they would not benefit, including QNBK, which accounts for more than 40% of the MSCI Qatar Index.

Figure 36: QNBK remains above its peak 2014 valuation…

QNBK price-to-book ratio with historical average and +1/-1 standard deviation bands


Figure 37: …leaving the index range bound and impacted by index rebalancing MSCI Qatar Index


With a decent weight in EM (94bps) and relatively low turnover ratio (due to relatively poor liquidity), Qatar remains highly supported by inflows into EM ETFs, but conversely it is negatively impacted by outflows from EM ETFs and/or around MSCI / FTSE index rebalancing events, where Qatari constituents see outflows as passive funds make room for other changes within EM. Simulating the impact of a USD1bn inflow/outflow into EM trackers, Qatar is by far the most impacted country within the EM universe, with such flows accounting for 35% of the constituents’ turnover.

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The Qatari Index has been largely range bound YTD with big moves around May and August’s MSCI outflows driven by Saudi and China-A inclusions

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Risks to our UW call on Qatar include: i) big wave of EM ETFs inflows; ii) a continuation of limited local supply despite high valuations, which is evident from the lack of big pullbacks following index events, more recently observed in MPHC and QFLS that continue to trade near all-time high valuations; iii) the ending of the GCC embargo giving a ST boost to the market, although at current valuations such a bounce should be short-lived; and, last but not least, iv) a 100% FOL increase driving cUSD820mn inflows, which could see locals rotating into other names and, therefore, giving a boost to the wider market.

Figure 38: Impact of a USD1bn inflow/outflow into/out of EM trackers as a % of 20-day ADVT is most visible in Qatar


Figure 39: Who would benefit from 100% FOL? We see up to USD800mn of inflows if such a move was undertaken by Qatari companies

MSCI est. flows (USDmn) MSCI x ADVT FTSE est. flows

(USDmn) FTSE x ADVT Total est. flows (USDmn) Total x ADVT

QIBK QD Equity 172.4 89.0 83.1 42.9 255.5 131.9

CBQK QD Equity 106.3 40.0 51.2 19.3 157.5 59.3

MARK QD Equity 106.0 33.1 51.1 16.0 157.1 49.1

QFLS QD Equity 57.0 24.6 27.4 11.9 84.4 36.5

QIIK QD Equity 54.5 6.9 26.3 3.3 80.8 10.2

QATI QD Equity 49.4 57.8 23.8 27.8 73.2 85.6

BRES QD Equity 18.1 15.3 8.7 7.4 26.8 22.7

QEWS QD Equity 4.1 4.6 0.0 0.0 4.1 4.6

QNBK QD Equity 0.0 0.0 0.0 0.0 0.0 0.0

IQCD QD Equity 0.0 0.0 0.0 0.0 0.0 0.0

MPHC QD Equity 0.0 0.0 0.0 0.0 0.0 0.0

ORDS QD Equity 0.0 0.0 0.0 0.0 0.0 0.0

Source: MSCI, FTSE, EFG Hermes estimates

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47



Growth slowing as investment programme matures

Qatar’s long-term outlook is set for slower growth, especially on the non-oil side as gov’t reduces investment programme, with the gov’t’s investment programme well in advanced stages. Non-oil growth has weakened markedly in 2019, contracting 1.1% in 2Q19 and heading for the slowest pace in at least two decades. Slower growth is broad-based, reflected in weakness in key economic sectors, including manufacturing, construction, trade and financial services.

Most of the country’s key projects, which were the driving sources of growth in the past few years are reaching their final stages, with no major non-oil projects in the pipeline. This leads us to foresee the weakness in the economy to persist over the coming two years, as the country succumbs to cyclical pressures, with the growth phase coming to an end. Persistent weakness in non-oil activity leads us to estimate growth in the sector to slow down to 2.5% in 2020, from an estimated 2.6% in 2019, with construction, manufacturing and trade likely to continue driving the slowdown.

The slowdown in the real estate sector remains a source of concern: the sector is already facing the headwinds of a weak macro backdrop, but it is still set to see some decent supply ahead of FIFA World Cup 2022. For example, the retail sector has seen its available space nearly double in the past few years, and additional supply is yet to hit the market. Latest trends show prices of residential property failing to show any signs of recovery, while the number of transactions is also receding.

The flipside, though, of the fiscal retrenchment is the rather solid fiscal and external positions that are also complemented with stable hydrocarbon prices. We forecast the current account balance to remain in a surplus of 6.3% of GDP in 2020 and 5.6% in 2021. In parallel, we forecast a fiscal surplus of c3% of GDP in the coming two years. In addition, Qatar, at USD58-60/b, possesses one of the lowest budget breakeven oil prices in the GCC. Considering the positive fiscal outlook, we expect a reduction in debt levels, which stand at above 100% of GDP, when considering the foreign liabilities of the domestic banking system. We forecast overall debt to ease towards 97% of GDP by 2021.

As growth is slowing, the gov’t is firmly pressing ahead for a second birth of the gas industry, with plans to boost LNG export capacity by 43% to 110mn tonnes per year. The investments required by this expansion are likely to act as a cushion to non-oil activity in the coming few years, especially with authorities planning to fund these investments locally, in what will provide a good growth opportunity for the banking sector.

Figure 40: Non-oil growth weakening significantly…

In Y-o-Y change

Source: Planning and Statistics Authority

Figure 41: …caused largely by reduced public investments

In QARbn (LHS), in % (RHS)

Source: IMF, EFG Hermes estimates

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Source: Planning and Statistics Authority Source: IMF, EFG Hermes estimates

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Qatar Macroeconomic Indicators (Year-end Dec)

2017a 2018a 2019e 2020e 2021eReal SectorNominal GDP (USDbn) 166.9 191.4 193.4 199.7 206.8Real GDP growth 1.6% 1.5% 1.5% 1.8% 1.9%Real non-oil growth 3.8% 3.2% 2.6% 2.5% 2.6%Population (mn) 2.6 2.7 2.8 2.8 2.9Per capita GDP (USD) 63,191 71,555 69,865 70,745 71,796Oil price (Brent, USD/b Avg.) 54.3 71.2CPI inflation (%, Avg.) 0.2% 0.5% -0.5% 1.2% 1.5%


Fiscal SectorHC revenues (USDbn) 41.0 57.2 58.8 58.2 58.7Other revenues (USDbn) 3.8 3.8 3.9 5.0 5.2Spending (USDbn) 55.8 56.6 57.3 57.1 58.2Primary balance (% of GDP) -28.8% 3.2% 4.5% 5.3% 4.8%Fiscal balance (USDbn) (11.0) 4.4 5.4 6.1 5.7Fiscal balance (% of GDP) -6.6% 2.3% 2.8% 3.0% 2.8%Budget breakeven oil price (USD/b) 59.3 59.8 60.1 58.0 58.5Net domestic claims on government (% of GDP) 39.1% 29.4% 27.5% 27.2% 26.9%Gross external government debt (% of GDP) 18.8% 21.6% 27.6% 23.7% 20.1%

Monetary SectorNFAs in the banking system (USDbn) (20.5) (24.5) (34.8) (42.6) (47.3)Exchange rate versus USD (Avg.) 3.64 3.64 3.64 3.64 3.64Benchmark lending interest rate (end of period) 2.5% 2.5% 2.3% 2.3% 2.3%Broad money growth 21.3% -6.5% 1.1% 1.9% 1.4%Private sector credit growth (%, eop) 6.4% 13.0% 20.0% 14.0% 10.0%Private sector credit (% of GDP) 78.8% 77.7% 92.3% 101.8% 108.2%Source: Qatar Central Bank, Ministry of Planning and Statistics, IMF and EFG Hermes estimates

48

65.0 66.0 60.0

49

Morocco Country Analysis


Morocco (Underweight)

Positioning is low, index weight is rising. Will FEM/Africa funds buy it?

Morocco is the largest Africa-x-SA market and will be the second largest in FM from 1 Jun 2020. Morocco’s weight in FM will increase to 13.2% in June 2020 from 9.2% currently. Equity yields are attractive vis-à-vis sovereign bonds, which will keep valuations elevated. ATW is the best large-cap story from our Moroccan coverage.

Morocco is a perennial Underweight for FEM and Africa-x-South Africa dedicated funds – foreigners owned c12% of free float (3% of MCap) in 2017. In light of Morocco’s rising benchmark weight – the second largest in FM from May 2020 – we see it as a source of low-correlation returns. We think that Morocco’s rising weight in FM and FEM benchmarks should lead more investors (FM, FEM, MENA or Africa ex-SA) to consider it on its own merits - a low-beta market, offering relatively uncorrelated returns (partly because of FX policy), with some smaller-cap plays on export diversification and a developing consumer story. Morocco is unlikely to provide high returns over the near term, but it offers different drivers of USD performance that can be valuable when global markets are stressed.

Figure 42: Morocco is increasingly a key FM and FEM market…

Weight in MSCI indices (%)

Source: MSCI, EFG Hermes calculations

Figure 43: …but continues to lag behind its African peers in terms of foreign interest Allocation to Morocco as a % of total Africa-x-South Africa vs. benchmark

Source: IMF CPIS , MSCI , EFG Hermes calculations

Low risk-free rates and trapped local liquidity (institutions must keep 90-95% of assets onshore) mean the market will not trade in line with FM and FEM aggregates. One of the major deterrents for investors has always been high valuations with an average historical P/E of 18.2x. Currently, the market is trading at 20.8x and while this is elevated, it is still below 2017 highs of 24.5x. Tax is a source of ST earnings risk: after (ongoing) audits in 2018, a social solidarity’ tax of 2.5% will weigh on 2019-20e earnings. Local institutions dominate turnover, which is highly seasonal, and focus on higher yield names. Large-caps continue to build up their African exposure with government support, recently venturing from Francophone WAEMU and CEMAC countries into English-speaking countries. ATW is our preferred large-cap under coverage. Smaller caps such as HPS, LBV, MUT and DRI (all uncovered) offer better-than-aggregate prospects for growth, in our view.

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Figure 44: Morocco is likely to remain an expensive market…

MXMA P/E vs. historical average (2000 to date) with +1/-1 STDEV bands


Figure 45: ...as low rates will likely keep local funds interested in equities MXMA dividend yield (%) vs. interbank rates (%)


Morocco has a relatively low correlation with other major African FEM peers – Egypt, Nigeria and Kenya – as well as other key FEM markets. Within EM, it is more correlated with Poland and Romania. This is likely due to currency regimes and respective economic ties. All three economies are geared to EU growth (70% of Morocco’s 2017 exports went to Europe, compared to 87% and 78% for Poland and Romania, respectively), and the MAD, PLN and RON are correlated with the EUR. In general, currency movements explain a high proportion of total USD equity returns in EM and FM. While Morocco is gradually relaxing its currency regime, it is reasonable to expect that total returns from Morocco will retain a higher correlation with those from its Europe-facing peers rather than African and other FEM markets, whose key reference currency is still the USD. Of the major FM and FEM currencies, the MAD is by far the most correlated to the EUR. This will be a source of additional returns should the EUR recover against the USD.

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Figure 46: Currency can be a major driver of total equity returns, and the MAD’s track record is better than peers

Key African currencies vs USD rebased to 100 = 31 Dec 1999


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Growth has been weak, but recovery cycle could start in 2020

Economic growth in Morocco slowed down in 2019, thanks to a contraction in the agriculture sector, due to poor rainfall, which resulted in a drought. Meanwhile, non-agriculture growth remained largely stable at 2.9%, as poor growth in the mining, industry and construction sectors was balanced, with accelerating growth in utilities, trade and tourism. Economic growth is set to strengthen in 2020, with the agriculture sector reversing its fortunes, on expectation of a good raining season; rarely has the agriculture sector contracted two years in a row. The IMF forecasts headline GDP growth to accelerate to 3.8% in 2020, from an expected 3.0% in 2019. The non-agriculture sector is also set to contribute to this acceleration, with growth rising to 3.9% from 3.4%, driven by steady growth in exports, particularly in automotive and textiles, as well as rising private consumption.

Monetary policy can potentially provide some support to economic growth, considering the subdued inflation environment and global accommodative monetary policy. The Central Bank reduced reserve requirements in Sep for the first time in five years, cutting them by 200bps to 4%, in an effort to stimulate credit growth. Inflation is likely to remain low, in absence of moderate domestic demand, low oil prices and inflationary fiscal measures; hence, we can see there exists room for policy rate cuts. We are doubtful, though, about the Central Bank’s appetite to cut rates, considering that rates are already low, and previous rate cuts have failed to stimulate credit growth much; it last cut rates in 2016.

The country’s fiscal stance continues to be healthy, with a fiscal deficit of 3.7% of GDP in 2019 that is set to narrow to 3.3% in 2020, thanks partially to proceeds of privatisation. Future reforms aim to bring the deficit down to a constant 3% of GDP, in order to bring public debt down to 60% of GDP; these reforms will focus on reduced tax exemptions, reduced wage bill and modernising SOEs.

We note, though, the country is facing elevated social challenges, reflected in a number of small social upheavals in the past few years. Indeed, Central Bank Governor Abdellatif Jouhari warned in mid-2019 that the economy is struggling to cope with rising social demands. In parallel, the King announced, around the same time, the establishment of a committee that will be in charge of elaborating a new developing model to tackle social inequalities and pushed for a Cabinet reshuffle. The committee will focus on areas such as education, health, agriculture and taxation. So far, authorities have maintained macro discipline, also supported in context of a USD3bn Precautionary Liquidity Facility with the IMF, but risks clearly exist that, with social pressure on the rise, authorities might loosen fiscal policies, in order to appease that pressure.

Figure 47: Non-agriculture GDP growth is set to accelerate in 2020, on higher industrial growth In Y-o-Y change

Source: HCP, IMF

Figure 48: Credit growth picked up in 2019, driven mostly by trade and agriculture sectors In Y-o-Y change

Source: Bank Al-Maghrib

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Figure 49: Morocco Macroeconomic Indicators (Year-end Dec)

2017a 2018a 2019e 2020e 2021e

Real GDP growth (%) 4.2% 3.0% 2.7% 3.7% 4.1%

Nominal GDP (USDbn) 109.7 118.5 119.0 124.5 132.8

Inflation (annual average, %) 0.8% 1.9% 0.7% 1.1% 2.0%

Population (mn) 34.9 35.2 35.6 36.0 36.3

GDP per capita (USD) 3,148 3,366 3,345 3,464 3,656

General government net lending/borrowing (% of GD) -3.5% -3.7% -3.7% -3.3% -3.0%

General government primary net lending/borrowing (% of GDP) -0.9% -1.3% -1.2% -0.9% -0.8%

General government gross debt (% of GDP) 65.1% 65.0% 65.3% 64.5% 63.2%

Current account balance USDbn) (3.8) (6.5) (5.3) (4.7) (4.2)

Current account balance (% of GDP) -3.4% -5.4% -4.5% -3.8% -3.1%

Source: IMF

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53

Pakistan Country Analysis


Pakistan (Overweight)

Good returns ahead, but no broad recovery until 2021

Valuations are still attractive, despite 4Q19 rally – we shift towards cyclicals for 2020 IMF programme, plus weak opposition give confidence on government policy BoP rebalancing is underway – more fiscal consolidation needed and reserve build-up Expect 16% earnings growth in 2020e, rate cuts and a cyclical earnings recovery in late 2020 Risks: Delays to rate cuts, FATF blacklist and delayed fiscal consolidation

We still see a very strong case for Pakistan equities in 2020e, despite the strong recovery in 2H19. The market continues to trade well below LT averages on a P/B basis and at only 6x 12m fwd P/E. Investors regained confidence in late 2019, against a backdrop of stabilising macro and clearer decision-making from the government under the IMF programme, limited political opposition, hopes of interest cuts and Pakistan maintaining its grey list status under the FATF’s October review. The benchmark KSE100 (a total return index) was up 20% in July-December 2019 and is up 10% YTD. We expect the performance in 2020 to be driven by the SBP’s monetary stance (a rate cut by 2H20 looks likely), earnings delivery for banks, signs of a bottoming out for cyclicals and capital inflows. We have three Pakistan names in the FEM Top 15 list: UBL, HCAR and LUCK.

Macro rebalancing – Inflation, SBP policy, BoP support from capital flows, fiscal consolidation After two years of rate hikes and PKR weakness, current account drivers have improved, and the market is now waiting for a more relaxed monetary policy as it eyes economic growth. We think the market got slightly a little ahead of itself in late 2019 in expecting rate cuts. While the SBP’s tone has become more dovish in 2H19, driving lower yields on PIBs, we think that monetary easing will have to wait for inflation to peak and for FX reserve coverage to improve. Nevertheless, we think that easing will be a major driver for the market in 2020 as locals rotate away from debt securities.

Figure 50: Still well below long-term P/B average after late 2019 rally MSCI PK IMI P/B ratio with LT average +/- 1 standard deviation


Figure 51: Yields drive returns, but there are signs of multiple expansions Drivers of USD returns for MSCI PK IMI index

Note: Multiple expansions are a residual for illustration purposes; 2019 is YTDSource: Company data, EFG Hermes estimates

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Valuations are still attractive over the medium term; time to buy cyclicals Despite the recent rally in 2H19, Pakistan is trading at a steep discount to its LT average – at 6x 12m fwd P/E (LT average of 7.7x). Historical data suggest a strong negative correlation between fwd P/E multiples and three-year returns, with current valuations implying a three-year total return CAGR of c40%. The current economic adjustment is not over, with more work needed on the fiscal side as the cyclical slowdown continues. However, a number of structural changes should help during the recovery, such as improved law & order, better power supply, and stronger corporate balance sheets. We have recently added more cyclical names to our recommended stocks list for Pakistan, believing that the worst may well be over. We still have a preference for blue-chip names, but think that higher-beta stocks, like HCAR and MLCF, will continue to do well on the upswing. We see diminishing returns from holding E&P stocks that have preserved value in the past three years, particularly given the supply overhang as the government considers secondary offerings. However, we think that PPL, PSO, HUBCO and KAPCO may re-rate if there is some relief on the circular debt issue and also believe that utilities will surprise with dividends in 2020.

Figure 52: Financials to lead the charge in 2020e, utilities to support Drivers of earnings growth for EFG Hermes’ Pakistan coverage

Note: We estimate calendar-year earnings for companies with split FY Source: Company data, EFG Hermes estimates

Figure 53: Foreigners bought banks and materials in 2019

Net foreign buying by sector Jan-Nov 2019 (USDmn)

Source: PSX

Foreigners net buyers again in 2019 as PKR stabilises, albeit in small volumes Foreigners have been net buyers this year (mostly concentrated in banks and materials), having sold USD1.7bn of equities in 2015-18. We expect that such flows will pick up in 2020, augmented by the rebalancing in the MSCI FM index in May 2020 – Pakistan is likely to see increasing off-benchmark flows, funded by the Kuwait upgrade. However, Pakistan has not been helped in these past three years by being a small fish in a large pond (just 3bps weight in the MSCI EM Index). Carry trade investors have become active in 2H19 as USDPKR appreciated slightly, with total net inflows into PKR T-bills of over cUSD1.2bn. Such flows are augmenting reserves and may also cap risk-free rates, but inflows on the scale of Egypt and Nigeria seem unlikely.

Risks to bullish call – Low-quality BoP improvement, fiscal consolidation, FATF blacklist, and NPLs The current account continues to improve, printing a surplus in late 2019, but most of the shift has come from imports compression – the exports recovery has been lacklustre. FDI remains low. A Eurobond issue in late 2019-early 2020 will help to refinance maturing Eurobonds, but other debt payments require a steadier improvement in the external position. Meanwhile, tax revenues have improved, but overall tax targets have not been met, and so fiscal space for a stimulus is limited in the short term. A failure to reduce the fiscal gap will delay economic recovery. The market will watch IMF reviews closely, as well as Pakistan’s progress on becoming compliant with FATF guidelines. Finally, we do not see any repeat of the 2008-9e NPL spike, butworse-than-expected NPLs would limit earnings growth in 2020e. N

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Firmly restoring macro stability, but growth is still subdued

Pakistan’s macro economy is progressing confidently, with macro stabilisation in the first few months of its newly signed three-year IMF programme. In the first four months of the year, the country’s external adjustment gained further pace, the USD-PKR appreciated, fiscal deficit targets were achieved, and exports showed signs of recovery. Challenges persist, though, with still-ambitious fiscal targets to be met over the coming few years and foreign reserves still remaining low.

External adjustment has been strong, so far, in FY20, with CAD narrowing 74% Y-o-Y in 4MFY20, translating into 1.5% of GDP vs. 5.6% last year, along with delivering the first surplus in almost four years in October. The adjustment was particularly positive, in light of the backdrop of weak remittances (down c2% Y-o-Y), as the adjustment was entirely driven by the narrowing of the trade deficit, thanks primarily to a sharp contraction in imports and relatively tame growth in exports. The quality of adjustment has been, so far, relatively poor, resting far more on imports compression, which is clearly reflecting weakening domestic demand, rather than export growth. The latter has been, thus far, quite moderate (only 3.4% YTD), though there are a few reasons to believe this should improve gradually, including a pick-up in export volumes.

The narrowing of the CAD, in tandem with inflows, along with the IMF agreement from multilateral agencies, have helped the SBP to start rebuilding its FX reserves, albeit very gradually. YTD, the SBP managed to reduce its forward position by USD2bn and increased its gross reserves by USD1.6bn; the latter, though, still only covers two months of imports. In a positive development, foreign inflows into the local debt market have hit the USD1bn mark, reflecting growing investor confidence. The SBP, therefore, seems to be moving slowly but surely in boosting its reserves position; a key upside is the potential issuance of Eurobonds, which we see potentially raising USD2-3bn that should provide a decent boost to reserves.

Figure 54: External adjustment gained pace lately, albeit still driven by imports compression In USDbn (LHS), in three-month average Y-o-Y change (RHS)

Source: SBP

Figure 55: SBP’s foreign reserves on an uptrend, albeit still barely covering two months of imports In USDbn (LHS), in months (RHS)

Source: SBP

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On the fiscal front, the picture also looks encouraging, with the fiscal deficit reduced by 36% Y-o-Y, along with a primary surplus of 0.5% of GDP (vs. 0.1% last year). The better-than-expected fiscal outturn, which fairly met the IMF’s targets, banked on significant growth in non-tax revenue and a strong 16% Y-o-Y growth in tax revenues. The latter, though, missed the IMF’s quite-ambitious target by 9%, though we do not see this as a major source of concern especially that it was largely due to a miss on customs revenue, driven by a sharper-than-expected imports compression. We note that any revenue shortfall during the year will be compensated for with cuts in development expenditure.

Both fiscal and monetary adjustments have pushed inflation to five-year highs of +11% early in FY20. We see inflation has largely peaked, though it could still be subject to some volatility in the short term, thanks to volatile food prices, as well as base effects. We might, therefore, see some elevated readings between Nov and Feb before inflation starts to normalise. Moreover, the gov’t is yet to approve the electricity tariff adjustment for FY20, which, again, leaves us wary of inflation in the short term. We, therefore, do see prospects of monetary easing before mid-2020, when inflation should have eased towards 10%, we estimate, and the SBP boosted its reserves position.

Figure 56: Inflation accelerated to five-year high

In %

Source: Public Bureau of Statistics (PBS)

Figure 57: Reserves position not yet supportive of rate cuts

In months (RHS), in % (LHS)

Source: SBP

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With rates remaining high and gov’t pressing ahead with fiscal consolidation, we maintain our view of a subdued GDP growth environment of 2-4% over the next couple of years. This does not mean we doubt the country’s foundation for sustainable growth, but we have yet to see improvement in core fundamentals, especially exports, to ensure a sustainable path for a growth recovery. Upside risks include: strong export recovery, monetary easing and CPEC’s phase two.

Figure 58: Credit growth slows down…

In Y-o-Y % change

Source: SBP

Figure 59: ...and industrial production remains in the red

Y-o-Y % change in large scale manufacturing

Source: PBS

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59

Vietnam Country Analysis


Vietnam (Neutral)

Finely balanced in 2020

Much cheaper than two years ago and macro backdrop remains broadly favourable… …but 2021 Congress means political overhang, while private sector credit is likely to slow againWe are therefore Neutral for 2020, but look for cheaper FOL stocks to re-rate Watch for stock-specific drivers rather than broad market moves – FOL index ETFs could help Government is creating room for investment – watch for stimulus in 2021 We like MWG and MBB and believe both names are worth the FOL premium

Two years of multiple contraction have left Vietnam trading well below late 2017 highs, though the market is still at a substantial premium to EM and FM peers. The investable MSCI Vietnam index trades at 16.5x 12m fwd P/E, well below the early 2018 peak (24.5x), but above the 10-year average (14.0x); similarly, the broader VNIndex trades at 13.8x 12m fwd P/E down from the early 2018 (19.7x). Vietnam’s valuation premium is justified by structural factors, such as high GDP growth, high FDI, export diversification, as well as relatively high ROEs.

We think that Vietnam will remain a favoured market for FEM-dedicated funds in 2020, as well as receiving significant off-benchmark allocations from those EM funds that are prepared to look past low FOLs and less-than-straightforward trading conditions. Vietnam also attracts regional institutional and retail flows. Additionally, Vietnam is set to receive the lion’s share of reallocated passive FM funds as Kuwait is upgraded to MSCI EM status in mid-2020.

Figure 60: Markets has traded sideways before party congresses Key Vietnam indices, year before party congress in grey

Source: Bloomberg

Figure 61: How much more room for credit stimulus?

Private sector credit in GDP (revised estimate assumes 25% increase in GDP)

Source: SBV, IMF WEO, EFG Hermes estimates

However, we do not expect it to be plain sailing for the Vietnamese market in 2020. Credit growth is likely to remain relatively slow, given capital constraints at state-owned commercial banks (SOCBs) and already-high credit penetration, while export growth will be managed with one eye on the US, which added Vietnam to its watchlist for currently manipulation in May 2019. Meanwhile, government spending on infrastructure is likely to be slow - despite recent revenue beats that have created fiscal space – because of the chilling effect of anti-corruption campaigns on decision-making.

We also note that the Vietnamese market is usually range-bound in the year preceding the five-yearly National Congress of the Communist Party of Vietnam as the next generation of rulers is decided. We expect a similar lack of direction in the lead-up to the 13th Congress in January 2021, which will be particularly important because Nguyen Phu Trong is likely to retire as both Party General Secretary and Head of State.

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MSCI VN VNIndex VN30

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PSC/Estimated revised GDP PSC/GDP

Ratio up 26-33% since end-2014

59

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Figure 62: Well-owned in USD terms, but FOLs cap % ownership Foreign portfolio ownership in MCAP, 2018 ownership in USDbn (RHS)

Source: IMF CPIS, Bloomberg, stock exchanges

Figure 63: ETF AUMs have doubled since late 2017

Cumulative flows into VN-dedicated ETFs (USDmn), AUMs (USDmn, RHS)

Source: Bloomberg

Apart from the above-mentioned MSCI-related flows, we see some factors that could drive individual stock performance in 2020. The launch of ETFs tracking the Diamond Index (of FOL stocks) could encourage a re-rating in those names – this has already been seen in 2019 in the performance of names like FPT, MWG, and MBB. Capital raising for banks could also create opportunities to release stock to foreigners and thus lift prices for depressed sectors, like the banks.

Looking further out, the passing of the 2021 Congress will create a clear opportunity for the government to relaunch investment in infrastructure and thus support sustainable growth. Recent fiscal reforms and the pending revision in GDP estimates will create more room for public sector investment – political will is the missing ingredient at this stage, in our view.

Figure 64: Foreign money dominates staples and, surprisingly, banks Foreign ownership (USDbn), foreign share in MCAP (%, RHS)

Source: Vietstock, EFG Hermes calculations

Figure 65: Access ETFs could drive some re-rating in FOL stocks VN30 Index with bands indicating 12m fwd PE multiples


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Minor hiccups, but strong growth is intact

Vietnam’s strong growth story stands robust going into 2020, though risks are clearly mounting, given a turbulent external environment. The country’s open, export-oriented economy is feeling the brunt of a weakening global macroeconomic backdrop, which poses risks to the manufacturing sector and exports at large. The ongoing trade war between the US and China presents some opportunities for the economy – by diverting trade away from China – though the overall shockwaves it is creating around the globe still pose risks to the country’s growth outlook.

Indeed, weaker external demand drove real GDP growth to moderate to an estimated 6.5% in 2019, down from a robust 7.1% in 2018. The slowdown was also driven by a decline in international prices and the outbreak of African swine fever, both of which dampened agricultural output. Sluggish credit growth, subdued inflation and slower import growth were all signs of weakening investment growth. Private consumption, though, has held up strongly, demonstrated by robust growth in the services sector.

The IMF forecasts GDP growth to be maintained at 6.5% in 2020, as strong domestic demand, supported by low inflation, and still-growing exports support economic growth. Slower export growth, though, will result in the narrowing of the current account surplus to 1.9% of GDP in 2020 and 1.7% in 2021, from 2.2% in 2019. Meanwhile, the fiscal deficit is forecast to continue narrowing, hitting below 4% of GDP by 2021, thanks to strengthened tax collections and contained current expenditures, partially through ongoing reduction in public employees. Finally, inflation is set to be maintained at 3.5-4%.

In light of the risk of escalation of external pressure, authorities will likely consider some cushions, in order to boost demand intrinsically. In the previous few years, authorities relied more on the external sector to boost the economy and utilised this chance to tighten its grip on credit growth as it pushes for fiscal consolidation to reduce public debt levels. Credit growth has been brought down to 13% Y-o-Y in 2018 against 17% in 2017 and is expected to grow in line with to GDP growth going forward (8.4% in 9MCY19). Authorities might need to reverse this tightness – on both the fiscal and monetary fronts – in order to boost domestic demand. This can be supported by well-anchored inflationary risk, with headline inflation remaining below the Central Bank’s target of 4%. Authorities also need to keep focus on structural reforms in order to maintain strong growth prospects. This includes stabilising revenue generation, re-structuring SOEs to boost productivity and banking reforms.

Figure 66: Real GDP growth set to moderate in 2019-20…

Y-o-Y change

Source: IMF

Figure 67: …with slower export growth driving smaller CA surpluses In % of GDP

Source: IMF

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Source: IMF Source: IMF

62



Figure 68: Vietnam Macroeconomic Indicators (Year-end Dec)

2017a 2018a 2019e 2020e 2021e

Real GDP growth (%) 6.8% 7.1% 6.5% 6.5% 6.5%



Population (mn) 93.6 94.6 95.5 96.4 97.3


General government net lending/borrowing (% of GDP) j -4.7% -4.4% -4.4% -4.3% -4.0%



Current account balance USDbn) 4.7 5.8 5.7 5.4 5.3

Current account balance (% of GDP) 2.1% 2.4% 2.2% 1.9% 1.7%

Source: IMF

62

63

Bangladesh Country Analysis


Bangladesh (Underweight)

Cheaper, but signs of stress persist

2019 justified our Underweight call; market is cheaper as we await catalysts GP episode remains an overhang and banking sector problems are still in play Low FDI may be the reason for the lacklustre export performance NSC issue looks to have turned a corner, but banks are now financing the deficit Efforts to support the market have not been successful – retail is skeptical Top-down questions will continue to hamstring good stocks like BRAC and Square

Bangladesh was one of the worst-performing FEM markets in 2019, with the DSEX down 12% vs. a rise of 9% for the MSCI FM Index. Small caps have underperformed, likely due to a deterioration in retail sentiment. This was very positive at the start of the year after a landslide victory for the Awami League and the introduction of fresh blood into the Cabinet. However, the post-election rally ran out of steam (ADVT in 11M19 was USD58mn, down from USD91mn in 1Q19), and we understand that retail investors continue to build cash balances. Weak 3Q19 results did not help, and attempts by the authorities to shore up the market – for example, by eliminating non-listed stocks from banks’ calculations for maximum equity exposure – have been met by a decent retail offer.

Figure 69: Consistent de-rating over the past two years

MSCI Bangladesh – price and trailing 12m P/E ratio (RHS)

Note: No valuation data is available for the benchmark DSEX index Source: Bloomberg

Figure 70: Foreigners bought post-election, but no follow-through Monthly net foreign buying (USDmn), DSEX Index (RHS0

Source: DSEX, media reports

Meanwhile, a number of self-inflicted wounds – namely, the GP saga and the failure to address lingering problems in the banking system - have led to consistent foreign selling throughout the year (USD33mn net outflow in 10M19). Foreigners were net sellers for an eight consecutive month in October (USD11.5mn net outflow). We acknowledge some improvement in underlying conditions, but prefer to remain Underweight relative to FEM peers for now.

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Accentuating the positive – NSC issue is being resolved and BoP is better The government has been effective in one area, National Savings Certificates (NSCs), where heavy buying has drained the banking system and, arguably, the stock market of liquidity in the past few years. The stock of NSCs outstanding rose to the equivalent of 27% of banks’ deposits in June 2019, from 12% in June 2014. The government stopped selling NSCs at post offices in April, and it has linked NSC purchases to tax OD numbers to prevent abuse. It also slightly increased the tax payable on NSC income in the FY19/20 budget in June. NSC growth has since slowed sharply since mid-year to 0.8% M-o-M, down from 2.8% M-o-M in late 2016.

Figure 71: NSC issue is finally slowing, but so is loan growth…

M-o-M change in banks' deposits, NSCs outstanding and PSC (3m average)

Source: Bangladesh Bank

Figure 72: …but exports spurt is already slowing

Y-o-Y change in textile exports (3m average)

Source: BB and other central banks

Another positive is the improvement in the balance of payments – the trailing 12m CA deficit has shrunk to 1.2% of GDP (from a 3.7% deficit 12 months ago), which is nearly covered by FDI of 0.9%. Central bank reserves have stabilised at USD32bn, roughly seven months of trailing imports of GDP. However, it is notable that the CA improvement has only partly been down to exports, which have slowed sharply in recent months and are still overwhelmingly driven by ready-made garments. However, the CA recovery has been accompanied recently by a fall in credit growth, itself a side effect of higher government borrowing (because the NSC channel is closing). Bangladesh is far from being a highly-indebted country, but it is hard to see a strong sustainable stock market performance without a resolution of the bigger issues, such as low FDI, high NPLs and problem loans, and a potentially-overvalued currency.

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Vietnam Bangladesh Sri Lanka Pakistan

Textile share in exports:VN – 12%BD – 74%LK – 48%

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Strong growth story; fiscal remains a source of concern

Bangladesh’s economy continues to maintain robust macroeconomic stability, with an impressive growth profile. Despite the slowdown in private investment before the election, growth remained relatively strong at 8.1% in FY19, on the back of a robust manufacturing sector and strong growth in private consumption, thanks to remittance inflows and exports. IMF is expecting this strong momentum to continue, on the back of strong macroeconomic foundations, with growth to remain robust, at above 7.6% in FY20.

Growth will continue to be supported by strong remittances, which are providing significant support to private consumption. Rising exports, which continue to be driven by production shifts out of China, are set to provide strong footing to the manufacturing sector and investment overall. The latter will also benefit from the implementation of public investments in infrastructure megaprojects. Inflation is projected to remain around 5.5%, matching the Central Bank’s target, with balance or risks tilted to the upside. Upward revision in natural gas prices, recent VAT reforms and possible crop production losses, due to the recent floods, all present upside risks to inflation.

Current account balance is expected to remain in deficit, albeit broadly almost flat in FY20, at around 2.1% of GDP, against 2.0% in FY19, but much smaller than the 3.6% in FY18. Although the need for capital goods linked with infrastructure projects and imported LNG will keep the current account under pressure, slowdown in overall import growth, strong momentum for exports and remittances are likely to provide enough cushion at the external front. Exports remain supported by rapid growth in the readymade garments sector, which is also benefiting from shifts outside of China, whether due to lost competitiveness or trade war with the US. Nevertheless, the concentration of exports – whether by type of markets or product – remains a key risk for exports growth, particularly in the wake of a secular global slowdown.

Against this positive outlook, fiscal concerns linger, with the fiscal deficit likely to remain elevated in 2020, driven by a combination of increased spending on subsidies, pensions and infrastructure, as well as revenue underperformance. Subsidies were expanded recently to include 2% subsidy on remittances, 1% additional cash subsidy on RMG exports and 2-4% subsidy for various categories of garment exports, according to the World Bank. The country is still lagging behind in key fiscal reforms, including reviewing tax expenditure, reducing trade protection and implementing a modern VAT. The World Bank described the latest change to VAT legislation as a missed opportunity, as recent amendments will result in a complex and distortionary implementation of the tax as the single rate has been modified to multiple special rates.

Figure 73: Growth outlook remains strong, but debt is rising

Y-o-Y change (LHS), in % of GDP (RHS)

Source: IMF

Figure 74: Fiscal deficit rising on higher spending, revenue shortfalls In % of GDP

Source: IMF

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Figure 75: Bangladesh macroeconomic indicators (Year-end Dec)

2017a 2018a 2019e 2020e 2021e

Real GDP growth (%) 7.6% 7.9% 7.8% 7.4% 7.3%



Population (mn) 163.2 164.9 166.6 168.3 170.1







Source: IMF

66

67

Nigeria Country Analysis


Nigeria (Neutral)

Valuation says buy, but policy and growth keep us Neutral

Nigeria stocks are still trading close to post GFC-lows, with 11% premium for earnings yield over T-bills Change in OMO policy is forcing pension funds back into blue-chips… …but the macro backdrop is not promising – growth is slow and policies are contradictoryStrong 2020e non-banks’ earnings growth will be driven by the low base effect LDR targets could drive loan growth – and earnings – beats for banks, but beware of side effects We stay Underweight – GTB stays in our FEM picks list, Nestle is the best non-bank name

Nigerian stocks rallied in 4Q19 off a very low base as a ban on non-bank purchases of CBN Open Market Operations (OMOs) took effect. The ban pushed yields on NGN T-Bills much lower - by 490 bps to 8.4% in the 10 weeks until late November 2019 - forcing local institutions into higher-yielding equities. Data on asset allocation for local pension funds, shows a steady reduction in equity allocations in the past five years in favour of rising exposure to sovereign assets. The reduction in equity allocation accelerated in 2019 after the pension regulator removed minimums for exposure to variable return assets – local stocks accounted for less than 5% of pension funds AUM in August 2019, down from around 14% five years ago.

Figure 76: Still trading at post-GFC lows, but with slow EPS growth MSCI Nigeria IMI index with bands showing 12m fwd P/E ratios

Source: Bloomberg

Figure 77: T-bill yield collapse has forced a fresh look at equities 12m fwd earnings yield (MSCI Nigeria IMI) and 12m T-bill yield

Source: Bloomberg

Spike in local institutional buying in 4Q19, blue chips outperformed in yield hunt Our analysis suggests that pension funds have allocated very little new cash to local stocks in the past few years. However, stock exchange data shows a big spike in local institutional buying in October this year as the new OMO policy took effect. Net local institutional buying totalled USD66mn in October (the latest month for which we have data) vs. 9M19 average of just USD14mn. Pension funds remain relatively conservative, we believe. Tellingly, the MSCI Nigeria Index, with its greater weight of blue chips, outperformed the broader Nigeria All-Share index in November – MSCI Nigeria rose 6.4%, while the All-Share rose just 2.6%. We suspect that pension funds are largely focused on high-yielding banks.

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20%

22%

24%

Dec

-17

Feb-

18

Apr

-18

Jun-

18

Aug

-18

Oct

-18

Dec

-18

Feb-

19

May

-19

Jul-1

9

Sep-

19

Nov

-19

12m fwd EY 12m T-bills

67

68



Foreigners, however, have been net sellers for much of the year – a total outflow of USD143mn in 10M19, with USD77mn net sold in October, alone, in the face of strong local bids. Poor growth and inconsistent policy choices have discouraged foreign buying, we believe, in spite of the dramatic fall in valuation multiples since President Buhari’s re-election in early 2019. Also, we note rising concerns on the outlook for the NGN. We believe that ST currency risks are limited, given the high reserve coverage and note that foreign carry trade investors – still earning yields in the low teens – are keeping faith in the NGN’s short path.

Figure 78: Pensions’ equity allocations are at a five-year low

Pension funds AUM (NGNbn) and equity share in AUM (RHS)

Source: Pencom, EFG Hermes calculations

Figure 79: Foreigners happy to sell into local institutional bids

Monthly net foreign buying (USDmn), rebased indices 100 = Dec. 2018

Note: No net foreign buying data available for November 2019 Source: SEC, Bloomberg

Nevertheless, we think it will be hard for Nigerian stocks to break out to higher multiples without a shift to more coherent economic policies that can support sustainable growth. Such policies are likely to include the unification of exchange and interest rates and the relaxation of trade restrictions. Of course, a strong rally in oil prices would buy Nigeria more time, but we do not believe that higher oil prices are sufficient enough for a sustained re-rating. Therefore, we are cautious about chasing the late 2019 rally much higher.

Figure 80: Local funds are looking for yield to replace T-bills

2020e dividend yields, payout ratio (RHS)

Note: Chart caps Guinness 2020e payout of 446% Source: EFG Hermes estimates

Figure 81: Banks still driving growth, staples and cement on the turn Drivers of EFG Hermes' coverage aggregate earnings growth

Note: We estimate calendar year earnings for stocks with a split FY Source: Company data, EFG Hermes estimates

0%

2%

4%

6%

8%

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12%

14%

16%

0

2,000

4,000

6,000

8,000

10,000

12,000

Sep-

14

Jan-

15

May

-15

Sep-

15

Jan-

16

May

-16

Sep-

16

Jan-

17

May

-17

Sep-

17

Jan-

18

May

-18

Sep-

18

Jan-

19

May

-19

Sep-

19

Pension AUM (NGNbn) Equity % (RHS)

70

75

80

85

90

95

100

105

(100)

(80)

(60)

(40)

(20)

0

20

40

Dec

-18

Jan-

19

Feb-

19

Mar

-19

Apr

-19

May

-19

Jun-

19

Jul-1

9

Aug

-19

Sep-

19

Oct

-19

Nov

-19

Net foreign buying NGSE All-share (RHS)MSCI NG (RHS)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

ZEN

ITH

BA

UBA

GU

ARA

NTY

WA

PCO

DA

NG

CEM

STA

NBI

C

AC

CES

S

GU

INN

ESS

NES

TLE

NB

FBN

H

INTB

REW

2020 DY Payout (RHS)

-20%

-10%

0%

10%

20%

30%

40%

50%

2017 2018 2019e 2020e 2021e

Financials Staples Cement TOTAL

68

69



How far can unorthodox policies take the economy?

Nigeria’s macroeconomic environment is likely to remain challenging in 2020, with authorities showing no serious intention to press ahead with the much-needed structural reforms. Policy continuation was reinforced with the presidential elections held in Feb – where incumbent President Muhamadu Buhrai won a second term – and Central Bank of Nigeria’s Godwin Emifele saw his term extended for five more years. The Central Bank of Nigeria (CBN) is pressing ahead with its unorthodox economic policies, resting its entire monetary policy framework on maintaining currency stability. Meanwhile, the country’s fiscal policy is hampered with low revenues and rising interest expense. As such, we forecast economic growth to be up only a notch in 2.4% in 2020 – from an expected 2.3% in 2019 – driven primarily by some marginal acceleration in non-oil economic activity. The latter is likely to benefit from better agriculture growth, as well as higher credit growth.

The CBN proceeded in 2019 with more of its unorthodox monetary policy in 2019, putting a floor to banks’ loan-to-deposit ratio, prevented local institutions from buying OMOs and imposed FX controls on milk imports. Efforts to boost credit have yielded some results, with growth in credit to the private sector accelerating to 11.5% Y-o-Y in Oct vs. 1.9% in Dec. We think this acceleration is likely to continue in 2020, providing some marginal support to growth.

This recently resurgent credit growth might be challenged, due to potential inflationary pressures in 2020, if the government presses ahead with plans to increase VAT to 7.5% and increase the minimum wage. Both measures are likely to be inflationary; hence, might put the CBN under pressure to tighten monetary policy to control these inflationary pressures. We also note in this context the recent uptick in food inflation as a result of the border closure which interrupted the supply of key staples. We, therefore, see these various inflationary pressures as a key source of downside risk for the country’s growth outlook in 2020.

We note these potential inflationary pressures are likely to widen the Naira’s misalignment further, with its long-term real effective exchange rate. We do not see, however, imminent risks for a devaluation to the Naira, as long as oil prices remain above USD50/b, but we do not see the current economic policy as providing long-term stability to the Naira either. Policy inconsistency is manifested in the CBN’s loss of more than USD5bn in foreign reserves in 2019 up to Oct as the current account turned to red, thanks to rising imports. Efforts to boost credit growth, which will only result in higher imports, will clearly keep pressure high on external balances at a time of depressed oil prices.

Figure 82: Credit growth picking up lately…

Y-o-Y change

Source: CBN

Figure 83: …partially causing CA to turn to red

Foreign reserves (LHS) and current account balance (RHS) in USDbn

Source: CBN

-2%

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8

Sep-

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(4)

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4

6

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50

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Mar

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Jul-1

7

Sep-

17

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-17

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Jul-1

8

Sep-

18

Nov

-18

Jan-

19

Mar

-19

May

-19

Jul-1

9

Sep-

19

Thou

sand

s

CA Official reserves

69

70



Nigeria Macroeconomic Indicators (Year-end Dec)

2017a 2018a 2019e 2020e 2021eReal SectorNominal GDP (USDbn) 341.2 353.4 385.5 421.6 461.4Real GDP growth 0.8% 1.9% 2.3% 2.4% 2.7%Real non-oil growth 0.5% 2.0% 2.0% 2.5% 2.8%Population (mn) 190.9 195.9 201.0 206.1 211.4Per capita GDP (USD) 1,787 1,804 1,918 2,045 2,183Oil price (Brent, USD/b Avg.) 54.3 71.2CPI inflation (%, Avg.) 16.5% 12.1% 11.5% 11.5% 11.0%

External SectorTrade balance (USDbn) 13.1 22.3 9.8 7.1 3.1HC exports (USDbn) 42.3 58.4 57.3 59.1 59.9Non-HC exports (USDbn) 3.5 4.7 6.0 6.5 7.0Services balance (USDbn) (13.2) (26.1) (30.0) (31.0) (31.0)Net transfers (USDbn) 22.0 24.1 26.7 29.3 32.2Current account (USDbn) 10.4 5.3 (8.6) (8.6) (10.2)Current account (% of GDP) 3.0% 1.5% -2.2% -2.0% -2.2%FDI (USDbn) 2.2 0.6 2.0 2.0 2.6

Fiscal SectorHC revenues (USDbn) 3.4 5.7 6.4 7.4 7.6Other revenues (USDbn) 4.6 4.2 4.7 5.4 6.1Spending (USDbn) 22.2 24.1 28.7 28.3 30.0Primary balance (% of GDP) -5.5% -5.7% -6.2% -5.0% -5.1%Fiscal balance (USDbn) (15.5) (16.7) (20.6) (18.2) (19.2)Fiscal balance (% of GDP) -4.2% -4.0% -4.6% -3.7% -3.6%Budget breakeven oil price (USD/b) 90.2 94.7 98.7 104.4 110.1Net domestic claims on government (% of GDP) 3.2% 3.8% 6.4% 6.5% 6.5%Gross external government debt (% of GDP) 5.1% 6.1% 7.4% 7.9% 8.6%

Monetary SectorNFAs in the banking system (USDbn) 46.6 50.9 45.3 42.8 38.0Exchange rate versus USD (Avg.) 333.32 361.48 360.00 360.00 360.00Benchmark lending interest rate (end of period) 14.0% 14.0% 13.5% 13.5% 13.5%Broad money growth 0.6% 16.4% 11.9% 8.0% 6.0%Private sector credit growth (%, eop) -5.7% 1.9% 12.0% 14.0% 13.0%Private sector credit (% of GDP) 18.2% 16.5% 17.0% 17.8% 18.3%Source: Central Bank of Nigeria, National Bureau of Statistics, IMF and EFG Hermes estimates

70

65.0 66.0 60.0

71

Kenya Country Analysis


Kenya (Overweight)

Stay overweight on multiple catalysts for 1H20

Market re-rated in late 2019 on the rate cap repeal, now at 10x 12m fwd P/E (below LT avg. of 11x) 2020 could see earnings upgrades, though beware of rising provisions as banks’ NIMs widen More catalysts: CBK rate cuts, IMF SBA, and rebalancing by pension funds Seasonality suggests strong performance in early 2020 Recovery in credit growth post rate caps could kindle much-needed economic stimulus Kenya picks: EQBNK, KCBK, and EABL

The Kenyan market has delivered a total return of c20% YTD, having recovered in late 2019 with the repeal of interest rate caps, which justified our OW call on the market. We expect the positive performance to continue into 2020, supported by strong seasonality trend in 1Q20, monetary easing, re-positioning by local institutions (pension funds’ equity allocation at the lowest level in 10 years in December 2018, Fig 88) and the likelihood of a new IMF SBA facility being agreed. A second IMF staff visit to discuss the SBA facility is scheduled for early 2020.

Figure 84: Foreign appetite was boosted by the rate cap repeal in 4Q19… Monthly net foreign buying (USDmn), foreign share in monthly VT

Source: NSE

Figure 85: …which prompted a strong market rally in October

NSEASI Index, 20d ADVT (USDmn, RHS)

Source: NSE

The CBK’s decision to cut its policy rate by 50bps to 8.5% at its final 2019 meeting has added to the positive sentiment after the rate cap repeal, and we believe monetary easing will continue in early 2020. Our inflation expectations lead us to think the CBK could cut its policy rate by another 50-100bps by the end of 1Q20. Local institutions have remained invested in fixed income for most of 2019, but the impact of the rate cap repeal on local rates and monetary easing could force more local institutional money back into equities next year, in our view.

Foreigners made an intermittent return to Kenya in 2019 after strong sell-offs in 2018, and much of 2017. YTD foreign buying was at USD9.65mn as of October 2019, and we estimate that foreign portfolio investors own 15% of MCAP, still below historical highs of 30%. We believe that a new Treasury team, which has made some encouraging moves on the fiscal consolidation front and a stable macro environment, could enhance foreign investor sentiment next year, especially now that rate caps are out of the picture. Nonetheless, elevated political noise and changes in tax measures remain key downside risks in 2020, while talk of a constitutional referendum continues to simmer ahead of the election in 2022.

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(80)

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16

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6

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18

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-18

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8

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-18

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19

Apr

-19

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9

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-19

Foreign share in turnover (RHS) Net foreign buying

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2

4

6

8

10

12

130

135

140

145

150

155

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165

170

Nov

-18

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-18

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Jul-1

9

Aug

-19

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19

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-19

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-19

20d ADVT (USDmn, RHS) NSEASI Index

71

72



Figure 86: Kenya has re-rerated, albeit still far from peak multiples MSCI Kenya IMI with bands showing 12m fwd P/E multiples


Figure 87: Seasonality suggests 1Q20 will be strong

Average & medium monthly NSEASI perf. since 2008, 2019 data (RHS)


FX concerns were tamed this year, with a steady improvement in the country’s external balance. KES is down 1.8% YTD against USD, with the KES recovering slightly with the rate cap repeal in 4Q19. We think that a recovery on the domestic demand side could slightly increase pressure on KES, but expect little deprecation since FX reserves remain comfortable at USD8.9bn, equivalent to 5.6 months of imports cover.

We expect 18% earnings CAGR for our coverage for 2019-21e, but believe that there is some potential for upgrades to consensus estimates that could put downward pressure on earnings multiples. The repeal of rate caps will reduce regulatory risks for the banks, and we expect that the banking sector will continue to show leadership in 2020 after several years in which SAFCOM dominated.

Figure 88: Pension fund equity allocations are still relatively low Local pension fund equity allocation, total pension AUM (KESbn, RHS)

Source: Retirement Benefits Authority

Figure 89: Financials will add to continued SAFCOM earnings growth EFGH coverage – sector contributions to aggregate earnings growth


500

1,000

1,500

2,000

2,500

3,000

3,500

Dec

-10

May

-11

Oct

-11

Mar

-12

Aug

-12

Jan-

13Ju

l-13

Dec

-13

May

-14

Oct

-14

Mar

-15

Sep-

15Fe

b-16

Jul-1

6D

ec-1

6M

ay-1

7N

ov-1

7A

pr-1

8Se

p-18

Feb-

19Ju

l-19

14x

12x

10x

8x

6x

-11%

-6%

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6%

11%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

Jan

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May Jun Jul

Aug Se

p

Oct

Nov

Dec

Mean Trimmed Mean Median Recent (RHS)

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400

600

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1,400

0%

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10%

15%

20%

25%

30%

35%

40%

45%

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10

Dec

-10

Jun-

11

Dec

-11

Jun-

12

Dec

-12

Jun-

13

Dec

-13

Jun-

14

Dec

-14

Jun-

15

Dec

-15

Jun-

16

Dec

-16

Jun-

17

Dec

-17

Jun-

18

Dec

-18

Equity allocation Total pension AUM (RHS)

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

2015

2016

2017

2018

2019

e

2020

e

2021

e

Financials Telecoms Utilities Energy Cement TOTAL

72

73



Expect a boost as rate caps are removed; watch the fiscal

The repeal of rate caps after four years is likely to shape the Kenyan economy gradually over the coming few years, in our view. The caps have been a key overhang on economic activity in the past few years, leading to a significant slowdown in credit growth as banks refrained from extending credit. We, therefore, expect the economy will receive a boost in 2020, as the repeal of rate caps boosts credit growth, complemented by steady growth in agriculture and higher capital inflows as sentiment improves. With the repeal of the rate caps, we expect three main changes in economic forces. First, we see the move providing the floor for monetary policy to enhance its transmission; we, therefore, see room for the Central Bank of Kenya (CBK) to cut policy rates in 2020. The inflation backdrop is also supportive of monetary easing, with inflation standing between 4-5% at end-2019, a level we expect to be maintained in 2020, leaving inflation well within the CBK’s targeted inflation band of 2.5% to 7%. Key risks to the inflation outlook in 2020 are: new tax measures, revival of demand side pressures and fluctuations in the rain season. Second, we expect credit growth to continue its shy recovery, witnessed since the beginning of this year, as banks are now free to price new loans based on borrowers’ risk profiles. This, in particular, should boost credit growth for small and medium enterprises, which were the first to feel the brunt of the rate caps. Accelerated credit growth should also be supported further by our expectation of policy rate cuts. Finally, we expect the gradual pick-up in credit growth to boost domestic demand and, in turn, imports, possibly reversing the decline in imports, which drove a narrower trade deficit. This transition could eventually be providing the Shilling less of the accommodative environment it had enjoyed lately. We note all these changed dynamics are likely to happen gradually, as loans are going to be re-priced as they mature. The boost to growth outlook stands in contrast to the still-worrying fiscal trends, where the gov’t is under pressure to deliver much-needed fiscal consolidation amidst rising debt. Tax revenue’s share in GDP has been on a sustained decline lately, driving the Treasury to scale back spending; thereby, delivering a low-quality fiscal consolidation that has also not prevented debt levels from climbing. We also remain wary of gov’t borrowing costs in 2020, as yields may face upward pressure, due to lower demand on gov’t debt from commercials banks. The gov’t now has a chance to tackle this urgent matter, whether through the recent change in the Finance Ministry or the renewal of the SBA facility to boost fiscal reforms.

Figure 90: Subdued inflation leaves room for policy rate cuts… Y-o-Y headline inflation, policy rate (%)

Source: Kenya Bureau of Statistics

Figure 91: …which will be another boost to credit growth Y-o-Y change in private sector credit growth

Source: Central Bank of Kenya

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16%

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73

74



Figure 92: Kenya Macroeconomic Indicators (Year-end Dec)

2017a 2018a 2019e 2020e 2021e

Real GDP growth (%) 4.9% 6.3% 5.6% 6.0% 5.8%



Population (mn) 163.2 164.9 166.6 168.3 170.1







Source: IMF

74

2020

Sectors

THE YEAR AHEAD20

Financials

Consumer

Healthcare

Real Estate

Industrials

Materials

Telecom

Financials 76

Consumer 84

Healthcare 94

Real Estate 100

Industrials 108

Materials 112

Telecom 124

76

Financials Sector


FEM Banks 08 December 2019

Page 3 of 10Page 3 of 10

Financials

Loan growth is recovering from a weak base; we expect median loan growth of 9% for our coverage Asset quality is a concern going into 2020 for part of our coverage on the weaker macro backdrop and higher interest rates Further rate cuts by the Fed should weigh on NIMs of GCC banks, but Kenya and Pakistan should continue to see NIM expansion on rate cap repeal and domestic monetary tightening cycle, respectively Our top picks in MENA are CIB, ENBD, KFH, Gulf Bank and Credit Agricole Egypt; within our frontier markets coverage, we like: KCB, Guaranty, MCB Group Mauritius, MB Bank, MCB Pakistan and BRAC Bank. We are generally cautious on Saudi banks in view of higher valuations, prospects of NIM compression, and it is still early in the credit quality cycle

Key sector themes

Loan growth is weak, but recovering. After declining for three years, we expect loan growth for our FEM universe of banks to recover modestly. We forecast median loan growth of 9.0% in 2020e for our coverage, strengthening from 6.7% in 2019. On a regional basis, we see the strongest growth in our African banks coverage (median growth of 14%), followed by Asian banks (median: 11%), while loan growth in MENA banks (median: 6%) continues to be anemic due to lower government spending and weak private sector credit appetite.

Weaker macro environment is translating to higher credit risks in Asia and the GCC: Higher deficits, lower government spending and the weak macro environment are putting pressure on asset quality across our banks’ coverage, particularly in economies with high loan-to-GDP ratios. Further cuts in the Fed rate could provide some respite to asset quality concerns in the GCC, where domestic interest rates track US rates. Within Asia, Sri Lankan banks have been going through a strong asset-quality deterioration cycle, while Pakistan and Bangladesh banks are facing rising risks to asset quality. Vietnam’s high growth rates, particularly in retail lending, are also raising some asset-quality concerns.

Margins – Local versus global. Falling global interest rates, weakening economies and regulatory changes are putting pressure on margins. Most GCC Central Banks have responded to the Fed rate cuts, and that is likely to keep margins under pressure in the near term. However, the repeal of rate caps in Kenya and the monetary-tightening cycle in Pakistan should support strong NIM expansion in 2020.

Top picks – A combination of quality management, earnings growth and value: We prefer banks that have strong domestic franchises, higher quality management, good credit risk management and strong earnings growth outlook. Our top picks in MENA are: CIB, ENBD, KFH, Gulf Bank and Credit Agricole Egypt. Within the non-banking space, we like Tawuniya in Saudi insurance. In Frontier, our top picks are: KCB, Guaranty, MCB Group, MB Bank, MCB Pakistan and BRAC Bank.

77

Financials Sector




MENA Financials

Top picks

CIB (Egypt, Buy, TP: EGP94.9, COMI EY) is, in our view, the best way to play Egypt’s loan growth recovery, given its strong positioning in the private corporate segment. The capex cycle is not yet in full swing, but recent rate cuts and the ongoing (albeit slow) improvement in consumer demand dynamics should lead to loan growth of at least 15% p.a. over the next three years. CIB is a well-run bank, and we expect healthy earnings growth of 15% p.a. in the next two years.

ENBD (UAE, Buy, TP: AED15.6, EMIRATES UH): ENBD is well-positioned to increase its dividend in the medium term, as its capital buffer is satisfactory, internal capital generation is likely to be strong and RWA growth is likely to be moderate. Deniz will dilute returns in the ST; however, the acquisition diversifies the group’s loan book and mitigates the impact of US rates on the group’s spreads. Even if there is a sharp deterioration in any sector (e.g. real estate), we believe ENBD is well-shielded on the back of its high provision buffer (coverage of 127%) and robust loss absorption capacity: 2020e breakeven cost of risk of 360bps and diversified loan book.

KFH (Kuwait, Buy, TP: KWD0.81, KFH KK). The merger with AUB is a catalyst going into 2020. Management expects to complete the merger during 2020, and the key milestone to watch is shareholders’ approval, most likely in Jan 2020. Even assuming no synergies, on a full year of consolidation, the deal has the scope to add 20% to KFH’s EPS, on our estimates. KFH, on a standalone basis, has improved profitability strongly and is now roughly in line with NBK at c14.7% ROE in 2020e.

Credit Agricole Egypt (Egypt, Buy, TP: EGP52.6, CIEB EY) is a high dividend yield stock in Egypt, with above-sector average ROE of 42% (2019e). We expect its ROE to normalise in the next three years due to lower net interest margins (lower interest rates) and higher provisioning costs (following two years of write-backs in 2018-19e), but we expect it to remain strong at 35%. The bank is also a key beneficiary of an uptick in lending demand in Egypt after recent cuts in benchmark interest rates.

Gulf Bank (Kuwait, Buy, TP: KWD0.32, GBK KK). The main theme for next year is normalisation in the cost of risk after high provisioning costs in 2019 and as Gulf Bank has a large amount of excess provisions over IFRS 9 Expected Credit Loss (ECL). There is also room for positive earnings surprises in 2020 as provisions built against the corporate NPL, which was downgraded in 2019, may be reversed next year – GBK is confident that it will gain access to the client’s assets. We estimate GBK’s ROE will reach 10% in 2019-20e, above our 8.5% CoE estimate for Kuwait.

Tawuniya (Saudi, Buy, TP: SAR83.0, TAWUNIYA AB): Tawuniya’s scale, multi-line exposure, solid distribution channels and strong brand position it well to grab growth across the different segments. Moreover, we believe it is on track for a sustainable profit recovery. The appointments of a new CFO (1Q19) and head of medical division (2Q18), both ex-Bupa, have strengthened its underwriting capabilities, medical claims management and reserving model, in our view. It has also made a strong push for higher medical pricing and put in effort to curb high medical claims, which led to a recovery in medical margins.

Least preferred

Saudi banks – punchy valuations. We avoid Saudi banks for 2020 in view of higher valuations and headwinds to earnings. NIMs of the banks are yet to reflect the last three rate cuts by the Fed, while the banks are still early in the credit quality cycle.

Qatar banks lack positive catalysts. While credit quality has been resilient post the GCC embargo, loan growth is slowing due to lower investment spending (large planned infrastructure projects are now almost complete); the expansion of Qatar’s LNG capacity will be largely financed by international banks.

78

Financials Sector




Country themes

Egypt: 2019 has been another year of good earnings growth (19% Y-o-Y): provisioning has fallen from a high base in 2018, spreads have held up well as banks lengthened the duration of the investment book last year (ahead of rate cuts) and EGP loan growth has been solid at c20% Y-o-Y (total growth slower at c12% Y-o-Y after the appreciation of EGP vs. USD). Lower borrowing costs (rates down 650bps in 2018-19, almost back to pre-IMF deal levels) bode well for a pick-up in lending demand in the corporate and retail segments next year, and we factor in 15% loan growth. The long-awaited pick-up in capex (which we believe could take loan growth to over 30%) may shift to 2021 as, so far, there is no evidence of a pick-up in private investment. We still expect good earnings growth next year but a slowdown to c12% as margins reflect rate cuts and as the new tax law drives a higher effective tax rate.

Kuwait: Cost of risk normalisation, after several years of large precautionary provisions, was the main theme for Kuwait in 2019 and a key driver of earnings growth. Margins have come under pressure this year due to higher funding costs, with loan growth in mid-single digits, but with Islamic banks strongly outperforming sector loan growth. Looking at 2020, the earnings growth outlook for most banks will be more challenging, in our view, as there is not a lot of visibility as to whether the CBK will impose further provisioning requirements from the 2019 level. We expect margins to be under some pressure next year after the CBK’s 25bps November rate cut, but we expect margin weakness to be more contained than in 2019 as CBK skipped the July and September Fed cuts and, hence, pressure on asset yields will be lower.

Morocco: The outlook for domestic, non-agricultural economic growth, and, hence, loan growth is not particularly exciting for Morocco and has not changed much in the past few years (3-4% range). Low to mid-single digit loan growth has been the ‘new norm’ in Morocco for some time after the strong growth in 2005-09 (when loans to GDP increased by over 20ppts in just four years). But this is against a backdrop of sustained and very low inflation (real loan growth rate is c4%). The NPL cycle has stabilised and banks do not see room in the short term for a further material decline in the cost of risk (very close to pre-2013 levels, before the NPL cycle deteriorated).

Oman: Loan growth should improve marginally in 2020 as the large GRE repayments that impacted growth in 2019 are likely to fade. Loan growth will predominantly be corporate-led on the back of large gov’t-led project financing, while retail loan growth should sustain at mid-single digits, driven by mortgages. Spreads should stabilise, after rising in 2019, as funding costs remain elevated due to the domestic liquidity squeeze (LDR: 108%) and room for asset yield expansion narrows. Provisioning should remain elevated, similar to 2019, due to: i) asset quality stress in the real estate and construction sectors; and ii) higher IFRS 9 provisioning requirements, given the subdued corporate earnings outlook and the decline in the collateral value of real estate.

Qatar: The Qatar economy and banking sector have been resilient to the initial shock of the mid-2017 GCC embargo, thanks to strong government support, initially through deposit injections in Qatar banks. Funding cost pressure is no longer a concern for Qatar banks, especially given a lower loan growth environment as many of the large infrastructure projects are reaching completion. One key positive for Qatar banks going into 2020 is that banks expect broadly stable margins: funding costs started to normalise in the past few months; in addition, banks have a low share of low-cost deposits (CASA), which did not help banks in the rising cycle, but will help lower overall funding costs in the declining rate cycle.

79

Financials Sector




Saudi Arabia: The relatively stable trend in spreads for Saudi banks is not sustainable, in our view, considering the downward rates trajectory. Moreover, it is too early to call an inflection point on credit quality for corporate banks, considering the lingering risks in certain sectors. We expect loan growth to improve on the back of stronger economic growth. In terms of loan growth, it is likely that mortgages will continue to be the only game-in-town in 2020. We see a SAR400bn mortgage opportunity for banks, which is c2x the existing stock for banks. As long as rates are low, mortgages will remain a profitable growth avenue for banks, and this growth will help partially offset rates pressure on banks’ back books, in our view.

Saudi Arabia Insurance: GWP growth will likely be medical-led in 2020, fueled by: i) the enforcement on uninsured private sector Saudi workers and their dependents; ii) mandatory medical coverage on Umrah visitors and tourists; and iii) easing competitive pressure. P&C GWP growth should accelerate, driven by pilgrim enforcement and Vision 2030-related projects. Tier 1 insurers’ margins will likely improve on strong medical upward pricing in 2019 and good claims mgmt., in our view. However, pressure on smaller peers’ margins will likely sustain as they continue to struggle with higher medical utilisation and weak motor premiums. Investment yields should come down to reflect the Fed rate loosening cycle.

UAE: Banks are navigating through a soft property market, weak non-oil private sector activity and a challenging external environment (low oil prices and US-China trade tensions). There is a silver lining, though, as US rates are trending lower (negative for spreads, but positive for credit quality and growth) and Expo 2020 is next year, which should lift non-oil growth.

80

Financials Sector




Frontier Banks

Top picks

KCB (Kenya, Buy, TP: KES88.5, KNCB KN): We forecast the bank’s ROE to improve from 21.9% in FY18 to 22.5% in FY24e (and 24.9% in FY23e). Similarly, we estimate it will report earnings CAGR of 16.2% between FY18-24e. While we remain negative on the bank’s acquisition of NBK, we think the rate cap repeal will enable KCB to absorb potential restructuring costs without significantly impacting profitability.

MCB Group (Mauritius, Buy, TP: MUR432.0, MCBG MP): We forecast robust earnings CAGR of 7.0% and an average ROE of 15.5% over FY19-24e, driven by: i) continued strong loan growth (CAGR of 11.8%) as the bank continues to grow its loan book outside of Mauritius; ii) NIM expansion of 10bps to 3.3% from FY22 onwards; and iii) a 30bps reduction in the cost-to-income ratio to 36.8% by FY24e as the bank’s conservative growth strategy should ensure opex growth remains contained.

MB Bank (Vietnam, Buy, TP: VND45,819, MBB VN): We believe the market has overlooked the relative consistency of MB Bank’s return profile, which is augmented by its strong corporate governance structure. The expected capital raising (possibly up to 10%), should support the performance in its shares as it will create more flow in the name going forward. Furthermore, the proposed capital raising would allow the bank to build a more comfortable capital buffer, which would support continued asset growth and allow for future cash dividends.

BRAC Bank (Bangladesh, Buy, TP: BDT75.8, BRAC BD): BRAC bank is well positioned to address the key sectoral headwinds due to its: i) strong corporate governance practices; ii) its business mix of higher yielding assets and ability to mobilise deposits with lower funding cost (high CASA mix and investment in alternative channels); iii) strong asset quality; iv) significant capital buffer with CAR above the Basel III requirement of 12.5% by end-2019; and v) economic interest (41.5%) in bKash, which we value at cUSD1.2bn and expect to contribute 24% of group operating profit by FY24e (vs. 6% in FY18).

MCB Pakistan (Pakistan, Buy, TP: PKR255.0, MCB PA): A largely corporate-focused loan book coupled with a short-dated investment book, should support strong expansion in MCB’s net interest spreads, particularly as funding costs should stabilise. MCB is one of the more conservative lenders in the country, and we believe it should see limited asset quality deterioration. Recoveries from NIB’s non-performing loan book should also help keep credit costs contained.

Least preferred

City Bank (Bangladesh, Sell, TP: BDT23.7, CITYBA BD): Tight liquidity position, poor asset quality metrics and a challenging capital position make City Bank one of our least preferred names in the frontier coverage. City has had the second highest level of average new NPL formation over the past five years and has relied heavily on rescheduling its loans to reduce its NPL.

81

Financials Sector




Country Themes

Bangladesh: The slowdown in national savings certificate (NSC) subscriptions, improving current account balances and regulatory changes have eased liquidity pressure in the banking system, and we now expect loan growth to pick up and NIMs to expand as funding costs decline. In our opinion, these trends should continue to support a rebound in earnings growth over the coming year, unless there is a negative surprise to the current account balance. However, a potential deterioration in asset quality from legacy loans written to related parties of family-owned banks and a new NPL cycle in the apparel sector remain the key risks to earnings growth over the coming year, in our view.

Georgia: Despite the negative impact on the banking sector due to the introduction of new regulations by the National Bank of Georgia and increased political tensions with Russia (which resulted in a ban on direct flights between the two countries), the underlying profitability of our universe of banks (Bank of Georgia and TBC Group) remains robust due to continued strong loan growth, good NIR growth and a falling cost of risk. Going forward, banks believe they can sustain ROEs of +20% due to strong growth in SME and mortgage loans, a declining risk charge, strong growth in transaction volumes and improving efficiency.

Ghana: Key themes in 2020 are: i) an upward adjustment in the Energy Sector Levy (ESL) enhances the capacity for the government (via ESLA Plc) to issue a second round of energy bonds in 2020. A second energy bond issuance would bode well for our focus banks that continue to reduce their NPL ratios using the de-recognition of energy-related NPLs in exchange for ESLA bonds; and ii) a large part of Ghana’s debt sustainability (estimated to be 63% of GDP by end-2019) will be pegged to the government’s ability to successfully re-negotiate take-or-pay energy contracts that, due to 40% excess capacity, could culminate in annual fiscal energy obligations of USD1bn.

Kenya: Following the recent reversal in rate caps, for our universe of banks, we estimate a higher earnings CAGR of 17.1%, with ROE set to improve from 17.9% to 21.6% between FY19-24e, driven by: i) NIM expansion from an average of 6.7% in FY19e to 8.4% by FY23e; and ii) an uptick in loan CAGR to 19.2% between FY19-24e. Despite the recent share price rally, the sector remains attractive from historical (average P/B of 1.7x between FY11-15) and fundamental perspectives (using our average ROE estimate of 21.6%, we estimate a justified P/B of 1.6x).

Mauritius: We forecast single-digit domestic loan growth for the banks under our coverage, as GDP growth remains below 4%. However, we forecast total loan growth to remain relatively robust (average loan CAGR of 11.3% between FY19-24e), driven by continued strong growth in loans outside of Mauritius. Profitability will also be supported by a moderate improvement in NIMs (+20bps to 3.3% from FY22e onwards) as the non-Mauritian assets earn higher margins and on the back of improving cost efficiency (-130bps decline in CIR to an average of 47.9% by FY24e).

Nigeria: We think there are significant downside risks on banks’ ROE estimates (forecast average of 19.0% in FY20e) due to the negative macroeconomic and regulatory environment. Specifically, on regulations we think banks’ earnings could come under pressure in FY20 as: i) many banks will be unable to comply with the higher LDR requirements and will, therefore, be forced to deposit additional cash reserves (which do not earn any interest) at the CBN; and ii) we think the recent prevention of local non-bank institutions from participation in OMO auctions has resulted in a substantial decline in T-bill yields, which is likely to result in lower NIMs for banks.

Pakistan: A strong monetary tightening cycle, which saw benchmark policy rates rise to 13.25% from 5.75%, is filtering through and driving strong net interest spread expansion across banks. We expect spread expansion to accelerate in 2020, as the end of the monetary tightening cycle should mean that deposit re-pricing will slow down and asset book re-pricing will continue. There are initial signs of asset-quality deterioration, but we note it remains fairly small and manageable across most banks.

82

Financials Sector




Rwanda: Key themes are: i) banks will have to grapple with a punitive adjustment that applies a 70% haircut to their commercial collateral; ii) the possible merger of Equity and BPR could lead to the creation of a second systemically important player in Rwanda, in a market that has long been dominated by BK.

Sri Lanka: The resumption of government spending and revival in private sector investment cycle are critical to stabilise the asset-quality environment, in our view. Banks have become extremely cautious in lending, while the regulatory push to reduce lending rates will also likely make banks focus only on top-tier credit, further dampening the credit risk appetite of banks. We believe the worst of the asset quality deterioration cycle is behind us, and forecast credit costs to ease in 2020. However, a strong recovery in balance sheet and earnings growth momentum will remain dependent on the economic environment.

Tanzania: Key themes are: i) three waivers of existing NPL classification will now make it easier for banks to hide their NPL formation; ii) 13 banks have been closed, merged or acquired over the past two years, but the banking system remains relatively fragmented and, collectively, less profitable, which should drive further consolidation; and iii) Magufuli is likely to win a second term, and if successfully reelected, we could see more disruptive and unpredictable reforms.

Uganda: Key themes are: i) ongoing disputes between oil exploration companies (mainly Tullow Oil) and Ugandan tax authorities have pushed the FID on Uganda’s crude oil opportunity further out; ii) although still a small part of the loan book, the oil exploration sub-economy (logistics, legal, engineering) will still be a key consideration for banks that want to position themselves early enough; iii) after the passing of the “Financial institutions Amendment Act 2016” that introduced agency, bancassurance and Islamic banking, banks are positioning themselves to exploit additional revenue opportunities; and iv) growing dependence on domestic financing will continue to push yields higher.

Vietnam: In our opinion, 2020 will be a turning point for Vietnamese banks, as we believe the structural challenges in the banking system will finally be addressed. This is important, because to address these challenges, the SBV and government will have to consider opening up more bank capital to the private sector and/or foreign investors. Focusing on the key challenges facing the sector, we highlight: i) extended growth cycle – since 2013, system loans have grown 16% p.a. to 2018 (1.7x nominal GDP growth) and this has resulted in loan penetration increasing to 130% of GDP by 2018; ii) stubbornly high new NPL formation despite strong macroeconomic growth and improvements in asset impairments; iii) high levels of real estate collateral (we estimate 264% of 2018 GDP) in the banking system has overly exposed the banks to any price corrections; iv) durational mismatch between funding and credit is very wide with the bulk of deposits being ST, whilst almost half of all lending is MT/LT; and v) tight capital buffers on the back of high levels of system leverage (14x regulatory capital for the system, but 18x for SOCBs and 13x for JSCBs in 2018) and the gradual introduction of Basel II in 2020.

83

Financials Sector




Figure 1: Loan growth across our coverage (2020e)


Figure 2: NIMs across our coverage (2020e)


Figure 3: Earnings growth across our coverage (2020e)


Figure 4: ROAEs across our coverage (2020e)


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84

Consumer Sector


CCoonnssuummeerr && RReettaaiill

In Saudi Arabia, there are signs of demand bottoming out, with staples returning to growth; however, there is still no all-out recovery and some cost/competition challenges persist; prefer retailers over food producers; top picks are eXtra, Othaim and SADAFCO In Egypt, 2019 was a challenging year for consumer names, but we expect to see a recovery in revenue and margins, especially with tamer inflationary pressures; top picks are Juhayna and CIRA In Pakistan, autos offer the best value within the consumer sector, with valuations already pricing in weak ST earnings, while ignoring the bigger picture (Indus Motors is our top pick). In Bangladesh, while consumption outlook remains strong, valuations are not attractive (only Singer offers a decent mix of LT growth opportunities and value). In Vietnam, consumption spending is shifting to modern retail and lifestyle categories, food and staples are seeing lower, albeit stable single-digit growth (MWG is our top-pick, given that it has the best growth profile In SSA, we are cautious on Nigerian names, given a pressured consumer, regulations and competition; we prefer East Africa names, with our top pick being EABL

TToopp ppiicckkss

CCIIRRAA ((EEggyypptt,, BBuuyy,, TTPP EEGGPP1188..00,, CCIIRRAA EEYY)):: Egypt’s largest integrated education provider operating in K-12 and higher-education. The name has room to ramp up utilisation, in addition to capacity additions in an underserved market (we expect total number of higher education seats to reach 100k over time from c13k now). We also like CIRA’s impressive profitability profile, negative cash conversion cycle (60- 70% of tuition collected before start of academic year) and solid balance sheet.

eeXXttrraa ((SSaauuddii AArraabbiiaa,, BBuuyy,, TTPP:: SSAARR110000,, EEXXTTRRAA AABB)):: Leading electronics retailer in Saudi Arabia that should deliver 20%+ earnings growth for the coming two years, on continued market share gains in electronics (prompted by consolidation of the electronics market and a recovery in growth), as well as support from its consumer finance arm (Tas’heel launched in 2Q19, to turn profitable in 2020e).

HHuummaannssoofftt ((KKuuwwaaiitt,, BBuuyy,, TTPP KKWWDD66..33,, HHUUMMAANNSSFFTT KKKK)), Kuwait’s largest private university owner and operator, which still trades at a very compelling valuation, while boasting a best-in-class profitability profile.

IInndduuss MMoottoorrss ((PPaakkiissttaann,, BBuuyy,, TTPP:: PPKKRR11,,662277,, IINNDDUU PPAA)):: The highest quality auto manufacturer in Pakistan, which is well-positioned to benefit from the cyclical recovery in Pakistan’s consumption trends. Its strong brand equity has consistently translated into better margins, returns and cash conversion through the cycle (relative to peers).

JJuuhhaayynnaa ((EEggyypptt,, BBuuyy,, TTPP:: EEGGPP1133..55,, JJUUFFOO EEYY)):: Egypt’s leading dairy and juice producer is the best play on the country’s consumer recovery (most investible name). We expect continued volume and margin recovery, given its leading position in a fast-growing underpenetrated market with immense potential, driven by conversion from loose to packaged milk (only 45% of total).

MMoobbiillee WWoorrlldd IInnvveessttmmeenntt ((VViieettnnaamm,, BBuuyy,, TTPP:: VVNNDD220000,,990000,, MMWWGG VVNN)):: Street-level O2O retailer, primarily selling smartphones, accessories and white goods, but now investing heavily in mini-supermarkets. We estimate MWG will see its store count increase 2.9x to 6,443 (incl. 4,500 mini-grocery marts) by 2023e, driving a five-year CAGR of 22% for revenue and 28% for EBITDA.

OOtthhaaiimm ((SSaauuddii AArraabbiiaa,, BBuuyy,, TTPP:: SSAARR9988,, AAOOTTHHAAIIMM AABB)):: Second largest grocery retailer in KSA is the best play on the shift to organised players in the grocery market, due to its consistent network expansion and value-for-money positioning.

85

Consumer Sector


SSAADDAAFFCCOO ((SSaauuddii AArraabbiiaa,, BBuuyy,, TTPP:: SSAARR116666,, SSAADDAAFFCCOO AABB)):: KSA’s number one UHT milk producer is our preferred GCC food name, as valuation is attractive and ST earnings growth should remain decent, driven mainly by the recent increase in long-life milk effective prices (lesser discounts), a push to higher-margin ice cream sales, vertical integration (Mlekoma) and slightly lower AMF prices.

SSiinnggeerr BBaannggllaaddeesshh ((BBaannggllaaddeesshh,, BBuuyy,, TTPP:: BBDDTT225533,, SSIINNGGEERR BBDD)):: Home appliances retailer in Bangladesh, which is well-positioned to benefit from improving home appliance penetration rates. Singer has consistently been improving its products competitiveness through a greater proportion of local manufacturing, while continuing to expand its distribution channels (both retail and wholesale). Arcelik’s recent entry, as a majority shareholder, is also likely to benefit Singer, in terms of cost synergies, transfer of manufacturing skills and better working capital management.

LLeeaasstt pprreeffeerrrreedd nnaammeess

SSaauuddii AAiirrlliinneess CCaatteerriinngg ((SSaauuddii AArraabbiiaa,, NNeeuuttrraall,, TTPP:: SSAARR8888,, CCAATTEERRIINNGG AABB)):: Main provider of airline catering services in KSA; we are concerned over the sustainability of its profitability and would stay on the sidelines until there are more details available on its contract renewal with Saudia.

GGuuiinnnneessss NNiiggeerriiaa ((NNiiggeerriiaa,, SSeellll,, TTPP:: NNGGNN2255,, GGUUIINNNNEESSSS NNLL)):: A subsidiary of Diageo in Nigeria, producing beer, spirits and malt drinks. Its presence in the lager beer segment is now residual, while stout, spirits and malt, have been growing in low single digits. Recent results show a strong deterioration in fundamentals, and we believe the company may book losses in FY20e. Also, the stock is trading at high ST multiples, and LT strategy is unclear.

HHaallwwaannii BBrrootthheerrss ((SSaauuddii AArraabbiiaa,, SSeellll,, TTPP:: SSAARR2244,, HHBB AABB)):: Leading producer of processed meats and sesame-based products, while mostly an Egypt business (which is recovering), KSA ops are a big drag on numbers.

FFaawwaazz AAll HHookkaaiirr ((SSaauuddii AArraabbiiaa,, NNeeuuttrraall,, TTPP:: SSAARR2233,, AALLHHOOKKAAIIRR AABB)):: Clothing retailer with 50%+ market share in KSA’s mid-class branded apparel market. We remain cautious on the name: i) until we see a sustainable recovery in KSA LFL sales; ii) as there are increased promotions to drive revenues on slow discretionary spending with sizable losses in 4Q (weak sales quarter) in the past two years; and iii) until balance sheet (leverage and inventory) improves.

FFaarrmm SSuuppeerrssttoorreess ((SSaauuddii AArraabbiiaa,, NNeeuuttrraall,, TTPP:: SSAARR1144,, SSMMAARRKKEETTII AABB)):: KSA’s third largest grocery retailer that has been facing declining LFLs, on market weakness and increased competition. We also see large balance sheet risks, given relatively high inventory levels (positive cash conversion cycle – uncommon for a grocery retailer) and leverage.

FFrriieessllaannddCCaammppiinnaa EEnnggrroo FFooooddss ((PPaakkiissttaann,, SSeellll,, TTPP:: PPKKRR4400,, FFCCEEPPLL PPAA)):: Packaged dairy producer in Pakistan, which faces significant challenges in converting this top-down structural growth story (move towards packaged dairy) into profits and cash flows. Competitive environment is tough, which means margins have been squeezed, and in addition, technical fees being paid to the parent is depressing profitability further. The route to profitability is going to be much tougher than what the market anticipates.

86

Consumer Sector


SSaauuddii AArraabbiiaa:: DDeemmaanndd bboottttoommiinngg oouutt,, bbuutt pprriicciinngg aanndd ccoosstt cchhaalllleennggeess ppeerrssiisstt;; pprreeffeerr rreettaaiilleerrss

The Saudi consumer and retail space saw some relief in 2019, after being pressured by structural demand challenges over 2016-18. Headwinds to consumption over that period included: i) expat departures; ii) implementation of a levy on expat employees and their dependents; iii) higher cost of living (utilities, etc.); and iv) 5% VAT starting 1 Jan 2018 (c85% of consumer basket exposed to it). To grapple with this new reality, companies turned to trimming the fat and searched for opportunities to expand market share.

In 2019, demand trends have started to show some signs of stabilising; food categories are seeing single-digit volume growth, once again (after declining over the previous two-three years), and the electronics market has been nearly flat after seeing double-digit declines since 2016. Thematically, we continue to prefer retailers over food producers, as we still see some tailwinds from Saudisation requirements and expat departures that have been driving a shift to organised retailers.

AAllmmaarraaii ffrreesshh ddaaiirryy pprriiccee pprreemmiiuumm ssuurrpprriissiinnggllyy ppeerrssiisstteedd iinn 22001199,, bbuutt iiss lliikkeellyy nnoott ssuussttaaiinnaabbllee

Structural demand weakness was most palpable in staple food names over the past few years as volumes shrunk and competition intensified, particularly in long-life dairy (as producers shifted production from fresh to UHT milk to offset a market supply surplus, due to slower demand, Qatar embargo, etc.). Weak demand, coupled with cost pressures (expat levy and higher raw material costs), drove Almarai to raise prices of key fresh dairy SKUs by 6-8%, on average, in Jul 2018, for the first time in nearly 10 years. In 2019, we anticipated other fresh dairy players to follow suit, but they surprisingly did not, rather opting to gain market share.

However, we do not see the pricing gap (between Almarai and competitors) as being sustainable, given that the ban on local alfalfa cultivation (from 1 Jan 2019 as part of Saudi Arabia’s water conservation strategy) will gradually pressure company margins as cheaper locally-sourced stock diminishes (we note that Almarai and Nadec have relatively cheap inventory to last c2 years). Also, there are discussions of an amendment to the current feed subsidy scheme that could further pressure some players’ margins (currently, producers receive a government subsidy based on production levels that partly compensates them for feed imports’ transport costs).

FFiigguurree 11:: AAllmmaarraaii’’ss KKSSAA ccoommbbiinneedd ccaatteeggoorriieess ((aass aa pprrooxxyy ffoorr mmaarrkkeett ggrroowwtthh)) sseeeeiinngg ssiiggnnss ooff rreeccoovveerryy (MAT value growth) Y-o-Y growth

Source: The Nielsen Company, Almarai

FFiigguurree 22:: TToottaall ddaaiirryy mmaarrkkeett sshhaarree ffoorr tthhee tthhrreeee lliisstteedd ppllaayyeerrss

Source: The Nielsen Company, Almarai

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Almarai Saudia Nadec

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87

Consumer Sector


22002200 ttoo sseeee ccoonnttiinnuueedd ddeemmaanndd rreeccoovveerryy ffoorr ffoooodd nnaammeess,, bbuutt ccoosstt pprreessssuurreess wwiillll lliikkeellyy ppeerrssiisstt

2019 saw improved demand, with several food categories returning to single-digit growth, which is a trend we expect to continue in 2020e. There has also been a more tempered promotional environment in long-life dairy as supply surplus is contained and demand has begun to normalise. We also see a high likelihood of a round of price increases in the fresh dairy market by players other than Almarai (although we expect it will be implemented selectively), especially if imported feed subsidies are unfavourably changed.

Despite the improved revenue outlook, we believe earnings growth could remain challenging due to: i) Cheap locally sourced alfalfa stock by fresh dairy producers diminishing completely by 2022eii) Staff cost pressures (expat levy to peak in 2020e)iii) New sugar excise tax as of 1 Dec 2019 (50% of retail price) that will affect juice products,

pushing players to launch a new no-sugar-added product rangeiv) High prices of some raw materials (SMP +c30% Y-o-Y)

We remain Neutral on market-leader AAllmmaarraaii as the name trades at sector-high multiples, while offering a fairly muted growth outlook. We are also cautious on NNaaddeecc (M&A talks with Al Safi Danone fell through), despite market share gains and improved profitability from a low base, as we believe these trends may not sustain, as cheap locally sourced feed inventory is consumed and they raise product prices. We continue to highlight SSAADDAAFFCCOO as our top-pick, as the increase in effective prices (lower UHT milk discounts) and a push to higher-margin ice cream sales should continue to drive earnings growth, despite increasing SMP prices.

RReettaaiilleerrss ttoo bbeenneeffiitt ffrroomm mmaarrkkeett ccoonnssoolliiddaattiioonn ttaaiillwwiinnddss iinn 22002200;; ssoocciiaall cchhaannggeess aallssoo kkeeyy

Several listed retailers have been beneficiaries of market consolidation over the past few years, as the Kingdom imposed high Saudisation requirements on a number of retail segments (see table below). While the mobile sector consolidation (implemented in Sep 2016) was quick (formal players’ market share nearly doubled to c50% one year after the regulation was put in place), the pace of consolidation has been slower in other segments. Accordingly, we expect some consolidation tailwinds to drive some incremental market share gains for organised retailers in 2020. Noticeably, big-box retailers, eeXXttrraa, JJaarriirr and SSAACCOO, are all looking to add stores (after a relatively slower period for store additions), in order to continue to gain market share. However, we still see eXtra as the standout name, as we expect above-average growth, driven largely by its consumer finance business (other players doing this via third party).

Despite the lack of official regulatory changes in the grocery retail space, organised players have grown market share at the expense of smaller traditional outlets (baqalas), with AAll OOtthhaaiimm being the best play on that theme, due to consistent network expansion and its value-for-money offering, but we note that SSaavvoollaa’s grocery retail subsidiary, Panda, has been seeing a sizable reduction in losses (likely to breakeven in 2021e), while FFaarrmm SSuuppeerrssttoorreess remains challenged.

Benefits from 100% Saudisation for car rental offices, which was implemented in Mar 2018, have not been significant for BBuuddggeett SSaauuddii – we expect a more palpable impact once executive regulations governing the car rentals sector kick in by 2021e.

Another factor reshaping Saudi Arabia’s consumer landscape are the sweeping social changes. Amongst these changes were allowing fitness centres for women to operate (gym operator, LLeeeejjaamm, has been a key beneficiary of the decision) and women to drive, as well as increased cultural openness, lending to new social activities that are detracting from the traditional mall experience (need for more lifestyle destinations). Many retailers have been adapting quickly to these changes, with increased focus on e-commerce (especially for eXtra and Jarir), amongst other aspects.

88

Consumer Sector


FFiigguurree 33:: KKSSAA’’ss eelleeccttrroonniiccss mmaarrkkeett bboottttoommiinngg oouutt

Y-o-Y growth

Source: eXtra, AC Nielsen

FFiigguurree 44:: 7700%% SSaauuddiissaattiioonn rreeqquuiirreemmeenntt iinn nneeww rreettaaiill sseeccttoorrss iimmpplleemmeenntteedd oovveerr NNoovv 22001188 aanndd JJaann 22001199

Mar 2018 Car rental offices*

Sept 2018

Ready-made garments, kidswear, men's accessories

Cars & motorcycles

Home and office furniture

Houseware

Nov 2018

Watches

Glasses/sunglasses

Electronics and appliances

Jan 2019

Medical equipment and supplies

Confectionaries

Automotive spare parts

Construction materials

Carpet and Rug

*100% Saudisation requirementSource: Ministry of Labor

FFiigguurree 55:: LLaarrggee eelleeccttrriicc aapppplliiaanncceess ooffffeerr ggrreeaatteesstt ppootteennttiiaall ffoorr ccoonnssoolliiddaattiioonn aass tthheeyy aarree tthhee bbiiggggeesstt aanndd lleeaasstt oorrggaanniisseedd sseeggmmeenntt


FFiigguurree 66:: DDiiggiittaall ((5555%% ooff ttoottaall mmaarrkkeett)) aanndd eelleeccttrroonniiccss ((77%%)) hhaavvee bbeeeenn sseeeeiinngg ggrroowwtthh iinn 22001199


56%

36%

12%

-2%

-13%

1%

-20%

-10%-17%

-1%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

2010

2011

2012

2013

2014

2015

2016

2017

2018

8M19

49%

38%

19%

0%

10%

20%

30%

40%

50%

60%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Big appliances Small appliances Audio-video

Market size (SARbn) Unorganized share of the market

-8%

-2%

-6%

-1%-3%

-5%

1%

11%

-5%

-1%

-10%

-5%

0%

5%

10%

15%

Computingand gaming

Digital Electronics Whitegoods and

smallappliances

Total

2011-17 CAGR 8M19

89

Consumer Sector


EEggyypptt sseeeess aa ffaaiirrllyy ddiissaappppooiinnttiinngg yyeeaarr,, bbuutt ggrroowwtthh ddrriivveerrss aarree ssttiillll iinnttaacctt

Egyptian consumer names posted a fairly lacklustre 2019, mostly on disappointing volumes (muted volume growth for food names, with discretionary producers seeing the toughest time), margin pressure on competition and increased promotions as consumption trends are weighed down by higher cost of living. However, we expect a gradual return to growth and margin improvement, given Egypt’s low per capita consumption, an easing inflationary outlook, subsidy reforms coming to an end and recent EGP appreciation.

EEddiittaa and DDoommttyy are the best stories within the food space as both are looking to drive earnings growth by entering into new segments and categories via product innovation, with Edita being the best-in-class company in the sector; however, we highlight JJuuhhaayynnaa (strong brand name, distribution reach and diverse portfolio) as the best play on consumer recovery, as we are aware many find it the only investable food stock in Egypt, given its liquidity and size.

While EEaasstteerrnn CCoo. remains one of the world’s cheapest tobacco names, and there are signs of earnings bottoming out, the resumption of ex-factory price increases for its main brands is the key share price catalyst.

We highlight auto distributor and assembler GGBB AAuuttoo as a key beneficiary of interest rate cuts (one of the most leveraged names in Egypt), with its market price lower than the value of its fast-growing, high return finance arm, GB Capital, but a re-rating is contingent upon some signs of auto business recovery (loss-making). We are cautious on exporters OOrriieennttaall WWeeaavveerrss and DDiiccee, given EGP strength and lack of clarity on Egypt’s export subsidy programme (key bottom-line contributor).

OOtthheerr MMEENNAA ccoonnssuummeerr aanndd rreettaaiill tthheemmeess

FFuueell rreettaaiill:: After much anticipation, Saudi Arabia has finally increased fuel retail margins (to SAR0.15/L from SAR0.09 for gasoline; SAR0.05 from SAR0.035 for diesel). This drove a significant rerating in AAllddrreeeess (earnings to more than triple in 2020e). We are cautious on UAE fuel retailer, AADDNNOOCC DDiissttrriibbuuttiioonn, as it is struggling with its growth strategy (falling volumes and recent cancellation of ‘ADNOC Flex’).

EExx--KKSSAA GGCCCC ffoooodd nnaammeess (UAE’s AAggtthhiiaa, Kuwait’s MMeezzzzaann and Qatari grocery retailer, AAll MMeeeerraa) continue to face structural demand headwinds (slowing population growth and consumer spending), as well as higher cost structures, due to regulatory changes.

EEdduuccaattiioonn nnaammeess:: We still see the MENA education sector as being attractive, given that it remains significantly undersupplied and underpinned by robust growth dynamics. Egypt’s CCIIRRAA remains a top pick as an integrated player operating in both the K-12 and higher education sectors, with aggressive expansion plans that should see its higher-education seat capacity grow over eightfold over time. We also like HHuummaannssoofftt, Kuwait’s largest private university owner and operator, which still trades at a very compelling valuation, while boasting a best-in-class profitability profile.

AAiirrlliinneess had a strong 2019, on improved passenger traffic, pick-up in yields (after being pressured for almost three years) and limited cost pressures (muted oil prices). UAE’s low-cost carrier, AAiirr AArraabbiiaa, offers good value, with a high chance of dividend resumption in early 2020; it also announced a new JV with Abu Dhabi’s Etihad (to start in 2020e) and a 120-plane order book from Airbus with first delivery in 2024e. We prefer Kuwait’s LCC, JJaazzeeeerraa AAiirrwwaayyss,, despite a higher valuation, given a stronger growth outlook (a relatively underdeveloped travel market) and upside from its recently launched owned and operated airport terminal.

90

Consumer Sector


PPaakkiissttaann:: EEaarrnniinnggss lliikkeellyy ttoo bboottttoomm oouutt dduurriinngg 22002200

Pakistan’s consumption outlook will unarguably be weak over the next 12 months as FY20e GDP per capita is likely to be 20% lower than its FY18 high. Consumers’ ability to spend has been hit hard as higher inflation and interest rates, along with hikes in utility tariffs and tax rates, have all taken a bite out of their pockets. In addition, economic uncertainty and the government’s documentation drive (attempts to formalise the economy) have meant that consumption of big-ticket items has been falling off a cliff. Sales of automobiles have dropped significantly Y-o-Y over the past five months (Jul-Nov 2019), and household appliance companies, such as Pak Elektron, have also reported a double-digit revenue decline. Consumer staple companies, such as FrieslandCampina Engro Foods, have held up slightly better in terms of revenue growth, but this has been only driven by aggressive pricing; thus, this revenue momentum has not translated into better earnings.

Despite these expected earnings headwinds over the next 12 months, we think this is exactly the kind of storm, in our view, that investors should be taking advantage of. Auto vehicle companies in Pakistan have been through similar cyclical storms before, and what history teaches us is that a sharp drop in sales (FY09: -47% Y-o-Y) is usually followed by a bounce back, relatively quickly from that low base, once the excess has been washed out (FY10 auto sales: +51% Y-o-Y). Valuations are already pricing in this weak ST earnings outlook, making this an attractive entry point for LT investors.

FFiigguurree 77:: AAuuttoo eeaarrnniinnggss lliikkeellyy ttoo bboottttoomm oouutt oovveerr nneexxtt 1122 mmoonntthhss

Pakistan autos – EPS (PKR)


FFiigguurree 88:: AAuuttoo vvaalluuaattiioonnss aallrreeaaddyy ddiissccoouunnttiinngg aa lloott ooff tthhee bbaadd nneewwss

Pakistan autos – P/B (x)


In our view, investors need to keep the bigger picture in mind – Pakistan’s auto industry is really in its infancy when we look at motorisation rates (c14 vehicles/1k people in 2015 vs. 17 vehicles in India, 18 in Kenya, 33 in Vietnam, and 52 in Indonesia). Assuming that our base case holds, and Pakistan manages to work itself out of this economic downturn, we think it is fair to assume that car sales in the next five years are going to be much higher than they are today. The most interesting point here is that Pakistan auto assemblers (including Kia/Hyundai) have a total EV of only USD1.3bn now i.e. USD10/adult (compared to an estimated USD58 in India and USD210 for the world). In our opinion, as consumer incomes in Pakistan eventually recover, driving up both sales volumes and industry profits, we are likely to see some narrowing of this sharp valuation gap. Lastly, in our opinion, investors should continue to focus on quality (IInndduuss MMoottoorrss and HHoonnddaa AAttllaass CCaarrss), while avoiding companies that fundamentally have weaker franchises, even though they appear attractively valued (Pak Suzuki).

(50)

0

50

100

150

200

250

INDU HCAR PSMC

FY18 FY19a/e FY20e FY21e

2.4

3.2

1.2

3.4

5.3

1.4

2.4 2.1

0.8

0.0

1.0

2.0

3.0

4.0

5.0

6.0

INDU HCAR PSMC

13-yr avg. 5-yr avg. Current

91

Consumer Sector


FFiigguurree 99:: PPaakkiissttaann aauuttoo aasssseemmbblleerrss’’ EEVV//aadduulltt iiss aatt aa 9955%% ddiissccoouunntt ttoo tthhee gglloobbaall aavveerraaggee Auto manufacturers - EV/adult (USD)

Source: Company data, Bloomberg, EFG Hermes estimates

FFiigguurree 1100:: IInndduuss aanndd HHoonnddaa hhaavvee hhiissttoorriiccaallllyy ppuunncchheedd aabboovvee tthheeiirr wweeiigghhtt Volume and net profit market share – last 13 years (cumulative)

Source: Company data, EFG Hermes calculations

BBaannggllaaddeesshh:: RRoossyy oouuttllooookk,, bbuutt ddiiffffiiccuulltt ttoo ffiinndd ggoooodd vvaalluuee

The consumption outlook in Bangladesh is relatively robust, with IMF forecasting real GDP growth of around 7.4% for 2020 (nominal growth of c13%). However, to a large extent, this positive outlook is being priced in within our Bangladesh consumer coverage (Singer, OOllyymmppiicc, MMaarriiccoo and BBAATT BBaannggllaaddeesshh). For most of these companies, we still think investors should wait for a better entry point.

Our top pick is SSiinnggeerr BBaannggllaaddeesshh, which, in our opinion, offers an attractive LT growth story at a relatively decent valuation. Singer has proven its ability to make its product more price-competitive (through local manufacturing) and expand its market presence through its own retail stores and wholesale channels. In addition, the change in its controlling shareholder to someone who is in it for the long haul (Arcelik), gives us more confidence in its longer-term growth outlook. In our opinion, Arcelik can add significant value to Singer in the form of: i) manufacturing expertise to make the products more competitive in terms of price and quality; ii) procurement synergies; and iii) improve Singer’s cash conversion by helping it get better trade terms fromsuppliers.

Singer’s share price has taken a hit, following an unexpected slowdown in 3Q19, when revenue grew only 5% Y-o-Y, while earnings were flat due to a number of factors including: i) flooding in Bangladesh, which meant that consumers faced difficulties going to their stores; ii) high base, in terms of television sales (FIFA World Cup); and iii) some sales being pulled forward into 2Q19. In our opinion, the factors that keep us optimistic on Singer’s investment thesis, despite these ST hiccups, are: i) home appliance penetration in Bangladesh remains extremely low, which means that there is room for this growth story to play out over multiple years; ii) Arcelik being on board; iii) Singer’s management has remained focused on what has worked well for it (continue improving the product and expanding geographic presence); and iv) good working capital and cash flow management despite the slowdown in sales.

10

58

210

0

50

100

150

200

250

Auto manufacturersEV/adult (Pakistan) -

USD

Auto manufacturersEV/adult (India) - USD

Auto manufacturersEV/adult (World) - USD

64%

16%19%

29%

14%

57%

0%

10%

20%

30%

40%

50%

60%

70%

INDU HCAR PSMC

Net profit market share Volume market share

92

Consumer Sector


VViieettnnaamm:: ssttrroonngg rreettaaiill ssaalleess ccoonnttiinnuuee wwhhiillee ssttaapplleess aarree lloossiinngg mmoommeennttuumm

YTD retail sales in Vietnam are up 12.8% Y-o-Y, heading into the peak festive season (Lunar New Year) that lasts from Dec to Jan. Accordingly, we have seen strong results in the retail sector, with revenue at MMoobbiillee WWoorrlldd ((MMWWGG)) growing 18% YTD and leasing revenue at mall operator, Vincom Retail (VRE), has been growing c20% since its listing in 2017. MWG’s revenue is being driven by strong consumer electronics sales, while the arrival of several foreign fast retailing brands (incl. H&M, Zara and Uniqlo), as well as many locally developed food & beverage concepts (coffee shops and Asian BBQ grill/hot pot) and new mall openings have helped VRE. On the other hand, we still see single-digit revenue growth in consumer foods and staples, with both MMaassaann Consumer Holdings and VViinnaammiillkk delivering c5% revenue growth in 2019e.

Looking forward to early 2020, we highlight a few key retail-centric themes: i) the emergence of modern retail as urban grocery shopping moves away from wet markets to mini-grocery marts (Bach Hoa Xahn - MWG) and large format grocery chains (VinMart + VRE and VIC); ii) fresh and packaged meat ventures (Meat Deli – MSN) as the local pork market has been severely disrupted by the outbreak of African Swine Flu, resulting in a shift towards meat with traceable origins; iii) rising and intense competition in the convenience store segment (Vinmart – VIC) from multiple competitors including, 7-11 and Circle K and several other international chains.

FFiigguurree 1111:: QQuuaarrtteerrllyy rreevveennuuee bbyy ccoommppaannyy ((YY--oo--YY ggrroowwtthh))

(%)

* VRE and MSN revenues are from retail leasing and consumer foodsSource: Company data, EFG Hermes estimates

FFiigguurree 1122:: MMWWGG rreevveennuuee pprrooffiillee bbyy cchhaannnneell

VNDbn


Our favourite stock in the Vietnamese consumer sector remains Mobile World Investment (MWG VN), a street-level O2O (online-to-offline) platform primarily selling smartphones, accessories and white goods. Looking ahead, the company is now nationally scaling up its fresh food urban grocery channel and has begun planning new initiatives, such as a loyalty programmes and experimenting with a JV in pharmacies. We estimate MWG will see its store count increase 2.9x to 6,443 (incl. 4,500 mini-grocery marts) by 2023e, driving a five-year revenue CAGR of 22% (or 3.5x to VND228.3trn-cUSD10bn) and EBITDA CAGR of 28% (vs. 25% and 31% over 2015-18).

4.0%

5.2%

13.8%

20.3%

26.7%

-5%

5%

15%

25%

35%

45%

55%

1Q17

2Q17

3Q17

4Q17

1Q18

2Q18

3Q18

4Q18

1Q19

2Q19

3Q19

VNM MSN SAB MWG VRE

34,708 34,036 34,262 35,297

30,245 59,657

77,536 79,878 1,387 13,595

56,229

104,613

0

50,000

100,000

150,000

200,000

250,000

2016

2017

2018

2019

e

2020

e

2021

e

2022

e

2023

e

TGDD channel DMX channel BHX channel Others

93

Consumer Sector


SSuubb--SSaahhaarraann AAffrriiccaa ((SSSSAA)):: mmoorree ppoossiittiivvee oonn EEaasstt tthhaann WWeesstt AAffrriiccaa

We still believe that it is too early to play the Nigerian brewery sector, although we expect some recovery in earnings in 2020e (excise rates will not increase and this should benefit 2H20e earnings). IInntteerrnnaattiioonnaall BBrreewweerriieess is doing a rights issue and, as a result, the company is likely to return to the black; however, we believe ST multiples are still not low enough to turn us positive, given the risks that we see (especially on the macro/regulatory front). The VAT increase will lead to price increases (which we are already seeing), but given the fierce competition in the sector, and the fact that consumers are still under pressure (even given the expected increase in minimum wage), we expect these increases to be limited. In the medium term, we continue seeing the risk of excise rates going up, as they remain low in Nigeria, especially when compared to other regions in SSA (i.e. Tanzania and Kenya).

In the Nigerian brewery sector, despite not having any Buy ratings, we still prefer NNiiggeerriiaann BBrreewweerriieess over International Breweries as it offers a better risk/reward proposition for investors, in our view. NB : i) has a more diversified portfolio and higher market share; ii) has less leverage (even after IntBrew’s rights issue); iii) needs less capex going forward; iv) has better returns; vi) is trading at discount vs. IntBrew. In addition, we see lower risks for minorities when investing in NB vs. IntBrew. We see GGuuiinnnneessss NNiiggeerriiaa as the weakest link in the sector.

We like NNeessttllee NNiiggeerriiaa (NN), and we consider it as a core holding in the frontier consumer space, given its business model and impressive track record (in terms of growth, FCF generation and returns). However, we believe the stock is fairly valued, especially given that macro risks are skewed to the downside. We would need to see further upside potential to compensate for the macro risks that we currently anticipate in Nigeria.

EEaasstt AAffrriiccaann BBrreewweerriieess ((EEAABBLL)) is our top pick in the sector, with the stock trading below its historical average valuation, despite our relatively conservative assumptions, which provide some safety margin, in our view .On a relative basis, EABL looks attractive as: i) it trades at a discount to its Nigerian peers and has less ST competition risk (and we see larger downside risk to Nigerian peers’ estimates in the ST); ii) it has more liquidity and share price transparency than TTaannzzaanniiaa BBrreewweerriieess (though TBL is still trading at lower multiples, when considering “off-market” prices); and iii) we believe mgmt may be considering a ST increase in its dividend. All in all, while we still have concerns over EABL being a LT holding in the sector (i.e. competition risk, given the attractiveness of the beer market in Kenya, in terms of prices, margins and returns, poor track record in terms of earnings delivery, and low visibility on earnings after minorities), in the ST we see the stock as an opportunistic Buy.

We believe Tanzania Breweries (TBL) is a top-quality company that has historically proven to be defensive through the cycle. We like its: i) market dominance in Tanzania (c70-75% in beer; c50-60% in spirits); ii) strong and consistent cash generation (generated FCF every year, except FY09, since FY02); iii) returns that cover CoE & WACC (unlike some of its peers); iv) virtually debt free status; and v) position as a subsidiary of the world’s largest brewer (AB InBev, 64% stake), which provides a competitive advantage vs its main competitor, EABL. However, we have a Neutral rating on valuation grounds (based on the “on-trade” share price).

94

Healthcare Sector


MMoouuwwaassaatt MMeeddiiccaall SSeerrvviicceess 07 December 2019

Healthcare Providers & Services. Saudi Arabia

Page 3 of 13

HHeeaalltthhccaarree && pphhaarrmmaacceeuuttiiccaallss

Saudi healthcare players are well-positioned to capture the sector’s growth potential and increased gov’t business, but insurance downgrades, expat departures and slow MoH payments are still issues; Mouwasat is our only preferred exposure in the sector (best quality name; consistent earnings growth) Underpenetrated Egypt healthcare and pharma sector continues to see volume recovery; diagnostics lab operator IDH and private pharma producer EIPICO are our preferred plays Bangladesh and Pakistan offer attractive LT growth opportunities, given low healthcare penetration and as increasing access to healthcare services will likely drive higher pharma consumption; our top pick is Square Pharmaceuticals in Bangladesh

TToopp ppiicckkss

EEIIPPIICCOO ((EEggyypptt,, BBuuyy,, TTPP:: EEGGPP110044,, PPHHAARR CCAA)):: One of Egypt’s largest private pharmaceutical producers that recently saw an uptick in revenues, on new management’s strategy to recoup lost market share. The stock is trading at an unjustifiably large discount to peers, despite its strong growth prospects.

IInntteeggrraatteedd DDiiaaggnnoossttiiccss HHoollddiinnggss [[IIDDHH]] ((EEggyypptt,, BBuuyy,, TTPP:: UUSSDD66..3300,, IIDDHHCC LLNN)):: Egypt’s largest diagnostics labs operator with good earnings visibility (pick-up in volumes, while sustaining its pricing flexibility), solid return profile and FCF generation.

MMoouuwwaassaatt ((SSaauuddii AArraabbiiaa,, BBuuyy,, TTPP:: SSAARR110055,, MMOOUUWWAASSAATT AABB)):: Saudi healthcare sector’s clear stand-out, as it continues to outperform peers, given its solid management, best-in-class profitability and consistent earnings growth, despite expansions; it has a strong foothold in the Eastern region and pricing power with key clients.

SSqquuaarree PPhhaarrmmaacceeuuttiiccaallss ((BBaannggllaaddeesshh,, BBuuyy,, TTPP:: BBDDTT330011,, SSQQUUAARREE BBDD)):: Has c17% share of the Bangladeshi pharma market, a strong track record of leveraging its scale to drive growth (10YR EPS CAGR: 20%), superior returns (10YR avg. ROE of 22%), robust cash flows and a solid balance sheet. Valuation is already low to account for the recent growth slowdown and any success of its sales force restructuring efforts to reboot growth is likely to be well-rewarded by the market.

LLeeaasstt pprreeffeerrrreedd nnaammeess

DDaallllaahh HHeeaalltthhccaarree ((SSaauuddii AArraabbiiaa,, SSeellll,, TTPP:: SSAARR3388,, DDAALLLLAAHH AABB)):: Premium-priced hospital brand in Riyadh that is facing challenges from insurance policy downgrades and increase in co-pay, while still continuing to expand aggressively, which has been significantly impairing earnings.

SSPPIIMMAACCOO ((SSaauuddii AArraabbiiaa,, SSeellll,, TTPP:: SSAARR1177..55,, SSPPIIMMAACCOO AABB)):: KSA’s largest private sector drug producer that is going through an accounting clean-up process, while suffering from weak market conditions, adverse regulations (stricter enforcement of prescription drugs and downward price revisions). Also, we are wary of its long receivable days (one year) and large investment book that is deflating returns.

RReennaattaa ((BBaannggllaaddeesshh,, SSeellll,, TTPP:: BBDDTT775511,, RREENNAATTAA BBDD)):: A high quality company but the only thing not to like in the stock is its valuation. It trades at a significant premium to the market leader (Square), whereas the latter ranks much better, in terms of sustainable competitive advantages (better brand/scale/balance sheet). Renata is priced for perfection, which presents a weak risk/reward proposition, in our view.

95

Healthcare Sector




Page 4 of 13

SSaauuddii AArraabbiiaa:: DDiissccoonnnneecctt bbeettwweeeenn ttoopp--ddoowwnn aanndd bboottttoomm--uupp ddyynnaammiiccss

While top-down trends are favourable for KSA’s healthcare sector (low hospital beds per capita, government’s push for higher private sector participation, etc.), listed names tell a different story (only one out of the five listed hospital operators posted higher earnings Y-o-Y in 9M19), on a combination of: Expat departures pressuring patient numbers Insurance policy downgrades and increase in co-pay (20% of bill, up to a maximum of SAR300, from

SAR100 previously), driving patients to the more affordable B-category hospitals (Dallah was particularlyaffected by this)

Higher expat levy fees and caregiver expenses (expats account for over 95% of physicians and nurseshired in the private sector)

Fierce competition, on large capacity additions (untimely for some players), especially in Riyadh Mounting receivables on prolonged payments from the Ministry of Health’s (MoH) business with many

operators, increasing focus on MoH’s business to utilise idle capacities

FFiigguurree 11:: KKSSAA’’ss hhoossppiittaall bbeedd ppeenneettrraattiioonn bbyy rreeggiioonn

Source: World Bank

FFiigguurree 22:: RRiiyyaaddhh ssttiillll hhaass ppootteennttiiaall,, ggiivveenn hhiigghh--iinnccoommee lleevveellss aanndd llooww ppeenneettrraattiioonn

Source: GSTAT, EFG Hermes

FFiigguurree 33:: IInnssuurraannccee pprreemmiiuumm ggrroowwtthh wwaass ddeeffllaatteedd bbyy mmaaccrroo cchhaalllleennggeess ((ccoorrppoorraattee ppoolliiccyy ddoowwnnggrraaddeess,, eettcc..)) aanndd eexxppaatt ddeeppaarrttuurreess In SARbn

Source: SAMA

FFiigguurree 44:: NNuummbbeerr ooff iinnssuurreedd lliivveess ddeecclliinniinngg ssiinnccee 22001166,, mmaaiinnllyy oonn eexxppaatt eexxoodduuss

mn insured life

Source: Council of Cooperative Health Insurance (CCHI)

0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Jaza

n

Mak

kah

Mad

inah

Ase

er

Al Q

assi

m

Riya

dh

Tabu

k

Baha

East

ern

prov

ince

Hai

l

Naj

ran

Al J

ouf

Nor

ther

bor

ders

Beds/1000 Saudi average

Jazan

Mecca

Medina

Aseer

Al Qassim

Riyadh

Tabuk

Baha

Eastern Province

HailNajran

Al Jouf

Northern border

0

500

1,000

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2,000

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3,000

0.0 1.0 2.0 3.0 4.0 5.0

Ave

rage

wag

es in

SA

R

Beds/1,000

HHiigg

hh iinn

ccoomm

eeLLoo

ww

ppeennee

ttrraatt

iioonn

LLooww

iinnccoo

mmee

LLooww

ppeennee

ttrraatt

iioonn

HHiigghh iinnccoomm

eeHH

iigghh ppeenneettrraattiioonn

LLooww iinnccoomm

ee HH

iigghhppeenneettrraattiioonn

14%

22%21%

-2%

2%4%

-5%

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25%

0

5

10

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20

25

2012

2013

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GWP Growth (Y-o-Y)

7.8

9.9 9.6 11.0

12.2 12.0 11.1

-10%

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4

8

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16

2012

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Expat Saudi Growth (Y-o-Y)

96

Healthcare Sector




Page 5 of 13

FFiigguurree 55:: BBeeddss bbyy ccoommppaannyy:: DDaallllaahh ((++6677%%)) aanndd MMEEAAHHCCOO ((++6600%%)) hhaavvee llaarrggeesstt eexxppaannssiioonnss lliinneedd uupp,, ddeessppiittee cchhaalllleennggeedd ooppeerraattiioonnss


FFiigguurree 66:: CClliinniiccss bbyy ccoommppaannyy:: SSiimmiillaarrllyy,, DDaallllaahh ((++4422%%)) aanndd MMEEAAHHCCOO ((++6666%%)) hhaavvee tthhee bbiiggggeesstt ppllaannnneedd eexxppaannssiioonnss


759

571

448

300

778

1,07

9

655

598

1,32

8

987

1,35

9

784

998

1,32

8 1,58

4

0

200

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600

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Mouwasat Care Dallah Hammadi MEAHCO

2014 2019e 2024e

296

140

143

74

264

500

140

308

202

418

555

180

438

202

694

0

100

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800


2014 2019e 2024e

FFiigguurree 77:: MMoouuwwaassaatt ddeelliivveerreedd tthhee mmoosstt ccoonnssiisstteenntt rreevveennuuee ggrroowwtthh,, oonn ccaappaacciittyy rraammpp--uupp aanndd pprriicciinngg ppoowweerr;; ttoopp--lliinnee ggrroowwtthh aallssoo ssoolliidd ffoorr HHaammmmaaddii aass uuttiilliissaattiioonn hhaass bbeeeenn ppiicckkiinngg uupp ffrroomm aa llooww bbaassee aanndd oonn pphhaarrmmaa ddiissttrriibbuuttiioonn aaccqquuiissiittiioonn iinn 22001188;; iinn ccoonnttrraasstt,, CCAARREE ssuuffffeerreedd tthhee mmoosstt,, dduuee ttoo hhiigghh bblluuee--ccoollllaarr eexxppoossuurree ((mmoosstt aaffffeecctteedd bbyy eexxppaatt eexxoodduuss)) aanndd eexxppeecctt sslloowweesstt rreevveennuuee ggrroowwtthh,, oonn lliimmiitteedd ccaappaacciittyy aaddddiittiioonnss Revenue growth


19%

-5%

6%

17%

-3%

10%

-11%

6%

12%

0%

13%

7%

11% 12%9%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%


2016-18 CAGR 2019e 2020-22e CAGR

97

Healthcare Sector

THE YEAR AHEAD - 2020MMoouuwwaassaatt MMeeddiiccaall SSeerrvviicceess 07 December 2019


Page 6 of 13

FFiigguurree 1100:: GGoovveerrnnmmeenntt’’ss ccoonnttrriibbuuttiioonn ttoo rreevveennuuee aanndd rreecceeiivvaabblleess

2018

*Mouwasat's contribution to receivables is based on EFG Hermes estimates**The vast majority of pharma sales are to gov’t (pay a year later) Source: Company data, EFG Hermes estimates

FFiigguurree 1111:: CCoommppaanniieess wwiitthh hhiigghh ggoovv’’tt eexxppoossuurree ppllaagguueedd bbyy ddeellaayyeedd rreecceeiivvaabblleess ccoolllleeccttiioonn ((oovveerr 220000 ddaayyss)) Receivable days on hand


8%

65%

25%

27%

3%

20%

*

69%

80%

**

50%

10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Mouwasat Care Hammadi MEAHCO Dallah

Revenue Receivables

91

191

162 17

9

96

134

221 24

0 271

113

111

191

174

251

115

0

50

100

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300


2015 2019e 2023e

FFiigguurree 88:: MMoouuwwaassaatt ssttaannddss oouutt,, eennjjooyyiinngg tthhee bbeesstt aanndd mmoosstt ccoonnssiisstteenntt eeaarrnniinnggss ggrroowwtthh,, ddeessppiittee ccaappaacciittyy aaddddiittiioonnss;; ootthheerr nnaammeess hhaavvee bbeetttteerr ggrroowwtthh oouuttllooookk,, ggiivveenn aa ddeepprreesssseedd eeaarrnniinnggss bbaassee,, bbuutt wwee oopptt ttoo bbee ccaauuttiioouuss uunnttiill tthheerree aarree ttaannggiibbllee ssiiggnnss ooff rreeccoovveerryy Net profit growth


FFiigguurree 99:: MMoouuwwaassaatt aanndd DDaallllaahh hhaavvee tthhee lloowweesstt ggoovveerrnnmmeenntt eexxppoossuurree iinn tthhee sseeccttoorr,, wwhhiillee CCAARREE’’ss eexxppoossuurree ((iinncclluuddeess GGOOSSII aanndd NNaattiioonnaall GGuuaarrdd)) iiss,, bbyy ffaarr,, tthhee hhiigghheesstt Hospital revenue split by client*

*Based on latest available disclosures/dataSource: Company data, EFG Hermes estimates

20%

-13%-5%

-14%-24%

6%

-9%

-22%

0%

-63%

16%20%

28% 32%

19%

-80%

-60%

-40%

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0%

20%

40%


2016-18 CAGR 2019e 2020-22e CAGR

9%

65%

3%25% 27%

50%

18%

62%

70%48%

15%

6%

12%

3%18%

11% 1%

15% 11%22%

3% 5%

0%

20%

40%

60%

80%

100%


Government Insurance Cash Others Corporate

98

Healthcare Sector

THE YEAR AHEAD - 2020MMoouuwwaassaatt MMeeddiiccaall SSeerrvviicceess 07 December 2019


Page 7 of 13

FFiigguurree 1122:: MMoouuwwaassaatt tthhee cclleeaarr ssttaannddoouutt oonn rreettuurrnn mmeettrriiccss ((2200%%++)),, wwiitthh ssiinnggllee--ddiiggiitt rreettuurrnnss ffoorr ootthheerr lliisstteedd ppllaayyeerrss


FFiigguurree 1133:: CCAARREE iiss tthhee oonnllyy ppllaayyeerr wwiitthh aa nneett ccaasshh ppoossiittiioonn,, dduuee ttoo llaacckk ooff eexxppaannssiioonnss;; DDaallllaahh hhaass hhiigghheesstt lleevveerraaggee 2018 FCF (in SARmn), 9M19 net debt/equity (RHS)


EEggyypptt:: CCoommppeelllliinngg ddeemmaanndd ddyynnaammiiccss,, wwiitthh ssoommee nnaammeess mmaaiinnttaaiinniinngg sslliigghhtt pprriicciinngg fflleexxiibbiilliittyy

Egypt’s healthcare and pharma sector has shown improved performance after muted volumes in 2017 as the prices of drugs and healthcare services were increased post-EGP floatation. Egypt’s largest diagnostics labs operator, IIDDHH, is a preferred play, on the back of rising volumes (aided partly by gov’t campaigns), while it continues to have pricing power (+10-15% per year). We also like pharma producer EEIIPPIICCOO, which has also seen a pick-up in local volumes, driven by strategies adopted by new management to recoup previously lost market share. Similarly, pharma distributor IIbbnnssiinnaa continues to deliver robust earnings growth, owing to continued market share gains and better margins (mainly on economies of scale); however, we are wary of the recent uptick in working capital (receivables).

25%

24%

9% 8%

6% 6%

13%

4%

9%

7%

26%

18%

5% 6% 5% 5%

8%

3%

6% 5%

0%

5%

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30%

2018

2019

e

2018

2019

e

2018

2019

e

2018

2019

e

2018

2019

eMouwasat Care Hammadi MEAHCO Dallah

RoAE RoIC

(135)

202

(136)

(191)

(77)

0.2

(0.1)

0.5

0.5

0.6

(0.3)(0.2)(0.1)0.00.10.20.30.40.50.60.70.8

(250)

(200)

(150)

(100)

(50)

0

50

100

150

200

250


FCF Net debt/equity

FFiigguurree 1144:: WWee eexxppeecctt EEggyypptt’’ss rreettaaiill pphhaarrmmaa mmaarrkkeett ttoo ggrrooww aatt aa 22001199--2233ee CCAAGGRR ooff 1155%%,, aaiiddeedd mmaaiinnllyy bbyy ffaavvoouurraabbllee ddeemmooggrraapphhiiccss aanndd ggrraadduuaall iimmpprroovveemmeenntt iinn ppuurrcchhaassiinngg ppoowweerr aass iinnffllaattiioonnaarryy pprreessssuurreess eeaassee

Source: IMS Health, EFG Hermes estimates

8%3%

9%

-10%

9% 12% 10% 7% 7% 6% 6%

6%9%

20% 33% 18% 9%6% 8% 8% 8% 8%

1144%% 1133%%

3311%%2200%%

2299%%

2200%%1177%% 1166%% 1155%% 1144%% 1144%%

-20%

-10%

0%

10%

20%

30%

40%

2014 2015 2016 2017 2018 9M19 2019e 2020e 2021e 2022e 2023e

Total market volume growth Avg. price/SKU

99

Healthcare Sector




Page 8 of 13

BBaannggllaaddeesshh aanndd PPaakkiissttaann:: VVeerryy uunnddeerrppeenneettrraatteedd mmaarrkkeettss,, bbuutt pprreeffeerr sseelleecctt qquuaalliittyy nnaammeess

Pakistan and Bangladesh both appear quite attractive, from a top-down perspective, with significant scope for growth in pharmaceutical sales. Current healthcare expenditure is significantly lower than that of other emerging/frontier markets, and better access to healthcare services and rising incomes would continue to drive pharma sales higher over time, in our view. Given that these are largely generic markets, we believe the competitive advantages in the sector lie in: i) brand equity, since the product itself is easily replicable; ii) scale, which allows companies to better invest in their sales force and reach, while better leveraging their fixed costs; iii) strong cash conversion and balance sheets, both of which allow companies to eventually invest in moredifficult-to-manufacture products (as the disease profile in these markets evolves); and iv) a management team that has a track record of navigating regulatory pathways successfully. And, last, given that reporting standards in the sector are relatively opaque – with limited detail available on a product level, which can lead to low earnings predictability over shorter periods of time – we believe investors should be wary of buying in at punchy valuation multiples.

FFiigguurree 1155:: PPaakkiissttaann aanndd BBaannggllaaddeesshh hhaavvee ssiiggnniiffiiccaanntt ssccooppee ffoorr ggrroowwtthh iinn hheeaalltthhccaarree eexxppeennddiittuurree Healthcare expenditure per capita (PPP) - 2016

Source: WHO, EFG Hermes calculations

FFiigguurree 1166:: HHeeaalltthhccaarree eexxppeennddiittuurree aass aa %% ooff GGDDPP ssiiggnniiffiiccaannttllyy llaaggss bbeehhiinndd ootthheerr ffrroonnttiieerr//eemmeerrggiinngg mmaarrkkeettss Current healthcare expenditure as a % of GDP – 2016

Source: WHO, EFG Hermes calculations

Our two Buys within the frontier pharmaceutical space are: i) SSqquuaarree PPhhaarrmmaacceeuuttiiccaallss: It has a c17% market share of the Bangladeshi pharmaceuticals market,

a strong track record of leveraging its scale to drive growth (10YR EPS CAGR: 20%), superiorreturns (10YR avg. ROE of 22%) and robust cash flows, while boasting one of the strongestbalance sheets in the sector. Square has been losing market share, as of late, to competitors thatare either more aggressive on price or trade terms. In response, Square is in the process ofrestructuring its sales force to have more of a therapeutic focus vs. a geographic focus,previously. We also think Square has additional levers to pull to boost growth – for example,relaxing its trade terms where Square still sells everything on cash vs. peers who offer credit(balance sheet can easily afford this).

ii) TThhee SSeeaarrllee CCoommppaannyy:: The Pakistani drug producer has strong management with a solid trackrecord of growth, and, more importantly, of managing a relatively murky regulatory environmentto almost double its market share over the past five years. However, the company is facing aperfect storm during FY20 due to an FX-related hit to margins (imported raw materials) and taxrate normalisation (tax rate last year was abnormally low). Nonetheless, we believe earningsgrowth will accelerate significantly from this low base, as: i) underlying market growth remainsstrong and Searle manages to gain some market share; and ii) margins recover from the lowbase set in FY20 through CPI-linked regulated price increases and new product introductions.The pending OBS transaction is likely to put a lid on share price performance in the short termas limited details are available at this stage.

0

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lade

sh

Ken

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eria

Indi

a

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tnam

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nesi

a

Sri L

anka

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land

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100

Real Estate Sector


4499

RReeaall EEssttaattee SSeeccttoorr

TTHHEE YYEEAARR AAHHEEAADD -- 22001199

Page 49 of 8

IInn tthhee UUAAEE, we expect a slowdown that will be pressured by relatively weaker demand drivers and increased supply hitting the market; market leaders will outperform. We see a limited impact from Expo 2020 on the property market, in general, with some short-term positive implications on the hospitality and entertainment sectors

IInn EEggyypptt, price stability and muted growth in contracted sales will dominate the scene. We expect a limited number of new project launches, with developers less keen on continuing the land expansion spur that has been the trend over the past few years, until signs of recovery are seen. We expect developers to continue offering extended payment terms, in an attempt to revive sales activity

MMEENNAA pprrooppeerrttyy iiddeeaass:: Prefer Emaar Malls Group and Aldar (UAE), and Emaar Misr and Orascom Development (Egypt)

Real estate stocks, in general, have underperformned the general market indices in the UAE and Egypt, with a few exceptions. Market conditions have been challenging in both countries, with companies facing difficulties to increase their contracted sales, selling prices being, at best, stagnant, developers offering extended payment terms (if possible) to encourage sales, along with new product offerings across various projects, whether in the UAE or Egypt. A number of macro intiatives failed to reflect positively on the sector’s activity and, in turn, respective stock prices. In the UAE, there was the approval of the residency programme that entails offering a golden visa (long-term residency) to a number of investors and the formation of a higher committee to regulate new project launches that aim for a more positive long-tern sector outlook. In Egypt, a series of interest rate cuts did not encourage more activity in and demand on new launches, given the insignificance of the mortgage activity in the sector’s dynamics. Moreover, there have been extended payment terms for new projects across most developers, with a minimal positive impact seen.

Real estate stocks have underperformed their respective indices in the UAE, with Aldar being the only outperformer and EMG almost matching the DFM performance, while in Egypt only SODIC and Heliopolis Housing managed to outperform their peers and the general market index. WWee eexxppeecctt rreeaall eessttaattee ssttoocckkss,, iinn ggeenneerraall,, ttoo uunnddeerrppeerrffoorrmm tthhee ggeenneerraall mmaarrkkeett iinnddeexx iinn tthhee UUAAEE aanndd EEggyypptt iinn 22002200,, wwiitthh aa ffeeww eexxcceettppttiioonnss tthhaatt wwee tthhiinnkk wwiillll rreellaattiivveellyy oouuttppeerrffoorrmm tthheeiirr ppeeeerrss..

FFiigguurree 11:: AAllddaarr wwaass tthhee oonnllyy oouuttppeerrffoorrmmeerr aammoonnggsstt oouurr UUAAEE ssttoocckk ccoovveerraaggee,, oouuttppeerrffoorrmmiinngg bbootthh iittss ppeeeerrss aanndd tthhee ggeenneerraall mmaarrkkeett iinnddeexx,, wwhhiillee EEMMGG ((oouurr ttoopp ppiicckk iinn 22001199)) oouuttppeerrffoorrmmeedd iittss ppeeeerrss,, oonn aa rreellaattiivvee bbaassiiss aanndd ccaammee iinn aallmmoosstt iinn lliinnee wwiitthh aavveerraaggee mmaarrkkeett ((DDFFMM)) ppeerrffoorrmmaannccee

Source: Bloomberg, EFG Hermes

FFiigguurree 22:: HHFFII rreeaall eessttaattee uunnddeerrppeerrffoorrmmeedd tthhee ggeenneerraall mmaarrkkeett iinnddeexx iinn 22001199,, wwiitthh oonnllyy SSOODDIICC aanndd HHeelliiooppoolliiss HHoouussiinngg oouuttppeerrffoorrmmiinngg.. EEmmaaaarr MMiissrr wwaass hhiitt tthhee hhaarrddeesstt –– ccuurrrreennttllyy ttrraaddiinngg aatt bbeellooww tthhee vvaalluuee ooff iittss nneett ccaasshh ppoossiittiioonn

Source: Bloomberg, EFG Hermes

-60%-50%-40%-30%-20%-10%

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

DA

MA

C

EREI

T

Emaa

r D

ev.

DX

BE

Emaa

r

AD

X

EMG

DFM

Ald

ar

-30%

-20%

-10%

0%

10%

20%

30%

40%

EMFD

TMG

MN

HD

OD

E

PHD

HFI

RE

EGX

30

SOD

IC

Hel

iopo

lis

MENA propertyMENA property

101

Real Estate Sector


5500



Page 50 of 8

Although we have a cautious outlook on the real estate sector and think that stocks will tend to reflect the operating environment in various countries, we think that there will be some outperformers and underperformers, on a relative basis in 2020. We prefer exposure to companies with solid recurring income stream asset bases (hence, cash flow higher visibility) and strong balance sheets, with insignificant debt and land obligations due. OOuurr kkeeyy iiddeeaass ffoorr tthhee yyeeaarr aarree:: AAllddaarr aanndd EEmmaaaarr MMaallllss GGrroouupp iinn tthhee UUAAEE;; iinn aaddddiittiioonn ttoo OOrraassccoomm DDeevveellooppmmeenntt EEggyypptt aanndd EEmmaaaarr MMiissrr iinn EEggyypptt..

AAllddaarr PPrrooppeerrttiieess ((UUAAEE,, BBuuyy,, TTPP:: AAEEDD33..0000,, AALLDDAARR UUHH))

We prefer exposure to Aldar, despite the overall challenging UAE real estate market conditions. We see a number of emerging trends in the company’s operations, including a faster pace of land monetisation, along with its lease portfolio outperforming the general market trends across several asset classes. Aldar is a proxy on the developments in Abu Dhabi’s macro picture, in our view, given the company’s size, market share and exposure to public sector entities as a major tenant. Although we see no evident positive stock triggers in the short term, we believe the stock will continue to trade at a narrower discount to its full NAV, given the strong earnings and cash flow visibility. Aldar’s current market valuation is compelling, in our view, given the following: i) an attractive valuation call, with current market cap being almost equivalent to the company’s fair value of investment properties (as of Sep 2019), which indicates zero value to its hotel assets and abundant land bank; ii) the stock offering a decent dividend yield, with an upside potential; and iii) development business and hotel assets might surprise positively.

EEmmaaaarr MMaallllss GGrroouupp ((UUAAEE,, BBuuyy,, TTPP:: AAEEDD22..6600,, EEMMAAAARRMMLLSS UUHH))

Amongst our property coverage in the UAE, we prefer Emaar Malls Group (EMG). Although we do not see evident positive stock catalysts to drive stock prices, we think that EMG stock will outperform the general index and other property stocks in 2019. Current valuations are unjustifiably low, in our view, given the company’s ownership of prime assets and strong market positioning that allows it to outperform general market trends. EMG’s assets have been surprising positively since the slowdown in retail activity started to emerge back in 2015, with occupancy rates showing strength, despite increasing concerns emanating from the potential threat posed by e-commerce, successful lease of the Fashion Avenue expansion and base rents still showing growth (despite lower than the 7% annual increase threshold for the TDM that was communicated by management). Thus, we believe the stock price will re-rate to reflect the company’s key operating matrix. The key risk to our call is the valuation of the planned acqusitions from its parent company; however, only the Zabeel mall extension opened its doors in Oct 2019, and EMG did not acquire the asset, but rather decided to manage the property for the time being, albeit still maintaining its right of first refusal to purchase the asset within the first year (i.e., up until 4Q20). We think that management is cautious with its acquisition plan, especially amidst current operational conditions; a positive step, in our view.

TToopp ppiicckkss

102

Real Estate Sector


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Page 51 of 8

OOrraassccoomm DDeevveellooppmmeenntt EEggyypptt ((EEggyypptt,, BBuuyy,, TTPP:: EEGGPP1111..5500,, OORRHHDD EEYY))

One of our top ideas in our Egypt coverage is ODE, which we think will relatively outperform its peers in 2020, in our view, given: i) a value call; current market cap assumes no value for the existing development portfolio. Our derived valuation of residual land bank (assuming an avg. price/sqm of USD58 and an 80% discount to full value) and hotel assets (assuming 9.0x terminal EV/EBITDA multiple) are equivalent to current market cap. This implies zero value to ODE’s existing projects under construction, including already sold units, with its related receivables and land plots that will generate future sales of EGP45bn (mostly concentrated in O West); and ii) upside potential in secondary homes sales. Although we think real estate sales will tend to be slow in the short and medium terms, secondary (vacation) home sales will do better, in our view. With current restrictions on launching new projects in the North Coast, unless certain approvals are cleared, we believe Egyptians might be attracted to buy second homes along the Red Sea coast, predominantly in El Gouna (due to the increased appeal of this destination as a fully fledged, well-serviced community) and, to a lesser extent, in Ain Sokhna. We see ODE as a prime beneficiary, if such a trend materialises.

EEmmaaaarr MMiissrr ((EEggyypptt,, BBuuyy,, TTPP:: EEGGPP44..7755,, EEMMFFDD EEYY))

We prefer exposure to Emaar Misr in 2020; the stock has been hardly hit in 2019, far underperforming the general index and its peers. In addition to the stock offering an attractive investment opportunity, especially that the current market cap is lower than the value of the new cash (incl’ invetsments in T-bills) on its balance sheet, we believe the company’s recent move to sign the final agreements for the Cairo Gate land plot and acquire a new plot in Sheikh Zayed extension (West Cairo) is a positive attribute that will support the company’s growth profile. We believe such land expansion is positive, especially given Emaar Misr’s cash position (incl. investments in T bills) of EGP12.8bn (as of Sep 2019), with the IPO proceeds (back in 2015) yet to be invested. We favour the expansion mode, despite our cautious outlook on the sector over the coming two years, as: i) this marks the company’s first move in West Cairo; we expect the launch to attract demand, especially for the Cairo Gate project, given its premium location; and ii) the timing of investing the excess cash, as interest rates have witnessed a number of consecutive cuts in 2019; a trend that might continue in the short term; hence, the yield on excess cash will be lowered, compared to historical levels.

TThhee UUAAEE:: FFooccuuss wwiillll bbee oonn nneeww ssuuppppllyy nnuummbbeerrss;; aawwaaiittiinngg mmaaccrroo ttrriiggggeerrss aahheeaadd ooff EExxppoo 22002200

The Dubai property market has been relatively stable over the past three years, with 2018 witnessing a hike in activity that was led by a surge in land transactions; higher land representation in total transactions continued in 2019, albeit at a more normalised rate. As for the residential segment, the market has been relatively stable since 2015, with a peak in transaction value and number of units sold in 2017. There has been some downward pressure on pricing; yet, not major aggressive price moves that might indicate a major correction in the market. Despite the relative stability in overall sales activity in the residential resale market, there have been fewer launches from developers in general, with the exception of Emaar. We note that there have been changes in the moving parts of the sector dynamics, including:

Significant increase in Emaar’s market share, especially at the expense of Damac (used to be the second largest after Emaar back in 2015) Delays in handover of units sold with a relative slowdown in construction activity Emergence of extended payment terms that were introduced mostly by Emaar

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Real Estate Sector


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FFiigguurree 33:: 22001188 wwaass aann eexxcceeppttiioonnaallllyy ssttrroonngg yyeeaarr,, ddrriivveenn bbyy llaanndd ttrraannssaaccttiioonnss.. WWee eexxppeecctt ttoottaall mmaarrkkeett aaccttiivviittyy ttoo ssttaabbiilliissee iinn 22001199;; yyeett,, wwee hhiigghhlliigghhtt tthhaatt 22001199 wwaass aa bbeetttteerr yyeeaarr ffoorr tthhee rreessiiddeennttiiaall mmaarrkkeett aaccttiivviittyy…… In AEDbn

Source: REIDIN, EFG Hermes

FFiigguurree 44:: ……wwhheerree wwee eexxppeecctt tthhee yyeeaarr ttoo eenndd oonn aa ppoossiittiivvee nnoottee YY--oo--YY,, aallbbeeiitt sshhyy ooff 22001177 nnuummbbeerrss

In AEDbn


FFiigguurree 55:: AA hhiikkee iinn rreessiiddeennttiiaall ssaalleess aaccrroossss aallll ttyyppeess iinn 99MM1199,, eessppeecciiaallllyy ooffff--ppllaann ssaalleess,, uupp 3377%% YY--oo--YY,, ddeessppiittee aa cclleeaarr sslloowwddoowwnn iinn aaccttiivviittyy ffoorr ddeevveellooppeerrss’’ pprriimmaarryy llaauunncchheess

In AEDbn


FFiigguurree 66:: TToottaall mmaarrkkeett aaccttiivviittyy wwaass tthhee hhiigghheesstt iinn 11QQ1199,, dduuee ttoo EEmmaaaarr’’ss nneeww ssaalleess rreeaalliisseedd ((AAEEDD55..99bbnn)).. SSaalleess iinn tthhee rreessiiddeennttiiaall mmaarrkkeett hhaavvee bbeeeenn iinn tthhee rraannggee ooff AAEEDD1188bbnn ppeerr qquuaarrtteerr,, oonn aavveerraaggee,, iinn 22001199 In AEDbn


FFooccuuss wwiillll bbee oonn nneeww ssuuppppllyy iinn 22002200,, iinn oouurr vviieeww. Expected additional units supply has been on the radar screen in 2018-19, given the increased activity in 2012-15, in terms of unit sales, which indicated deliveries to start hitting the market in 2016/17. However, new supply has been somehow within its historical range, indicating delays in handover dates across several developers in the sector. Annual unit deliveries have been in the range of 28,700 units, on average, between 2016 and 2018. Although the general trend over the past few years was delays in unit handovers, we believe this trend will not be sustainable in the long term. Thus, we expect a supply glut in the market over the coming few years, with the potential handing-over of previously sold units (especially 2013-15). Market numbers indicate that future deliveries over the coming 36 months are in the range of 150,000 units. We estimate 30,000 additional units in 2020; 31,000 units in 2021; and 32,000 units in 2022, representing 15% increase vs the three-year trailing average. We believe Emaar and Damac will continue to lead the additional supply coming into the market, with both companies controlling around one-third of the additional supply.

0

50

100

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2015 2016 2017 2018 9M18 9M19

Land Residential Office Others

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

0

10

20

30

40

50

60

70

2015 2016 2017 2018 9M18 9M19

Transaction value No. of units sold

0

10

20

30

40

50

60

70

2015 2016 2017 2018 9M18 9M19

Sales Off-plan Mortgages

02468

101214161820

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

3Q17

4Q17

1Q18

2Q18

3Q18

4Q18

1Q19

2Q19

3Q19

Total market Emaar Damac

104

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FFiigguurree 77:: 115500,,000000 uunniittss aarree ppllaannnneedd ttoo hhiitt tthhee mmaarrkkeett oovveerr tthhee ccoommiinngg tthhrreeee yyeeaarrss,, wwiitthh tthhee bbuullkk ooff ppllaannnneedd ddeelliivveerriieess bbeeiinngg iinn 22002200…… Number of units


FFiigguurree 88:: ……wwhhiillee wwee eessttiimmaattee aannnnuuaall ddeelliivveerriieess ooff 3311,,000000 uunniittss,, oonn aavveerraaggee,, oovveerr tthhee ccoommiinngg tthhrreeee yyeeaarrss –– wwhhiicchh iiss aallmmoosstt ddoouubbllee tthhee ffiivvee--yyeeaarr aavveerraaggee ttrraaiilliinngg ssuuppppllyy Number of units

Source: REIDIN, EFG Hermes estimates

FFiigguurree 99:: EEmmaaaarr aanndd DDaammaacc aarree eexxppeecctteedd ttoo ddeelliivveerr oonnee--tthhiirrdd ooff ppllaannnneedd ddeelliivveerriieess


FFiigguurree 1100:: AArroouunndd 4400%% ooff ppllaannnneedd ddeelliivveerriieess oovveerr tthhee ccoommiinngg tthhrreeee wwiillll bbee iinn DDuubbaaii LLaanndd aanndd DDuubbaaii HHiillllss


WWee eexxppeecctt aa lliimmiitteedd iimmppaacctt oonn tthhee DDuubbaaii pprrooppeerrttyy mmaarrkkeett from Expo 2020 that is scheduled to start in Oct 2020. Dubai is already a well-established city globally, in our view, with international buyers contributing a significant part of its property market. Data from Dubai Land Department (DLD) indicate that in 2018, buyers from India (with investment in the range of AED8bn) came in second place just after UAE buyers (with total investments exceeding AED10bn), with buyers from the UK, China and KSA also coming in amongst the top five nationalities contributing to total transaction value during the year. Emaar, the largest property developer in the emirate, also has a diversified buyers mix, indicating that 55% of its 9M19 sales are generated by non-UAE residents. Therefore, we think that any positive implications from Expo 2020 will be indirect and will be the result of potential triggers on the macro side that will mainly encourage more business activity; hence, creating more demand for housing units.

0

20,000

40,000

60,000

80,000

100,000

120,000

2020 2021 202220,000

22,000

24,000

26,000

28,000

30,000

32,000

34,000

2017 2018 2019 2020 2021 2022

Emaar 20%

Damac 13%

Azizi 10%

MAG 5%Dubai Properties 3%

Nakheel 2%

Others 47%

Dubai land24%

Dubai Hills15%

Business Bay9%

Jumeirah Village Circle 8%

Dowtown Dubai 5%

Others 39%

105

Real Estate Sector


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FFiigguurree 1111:: 22001188 -- ttoopp 1100 nnaattiioonnaalliittiieess iinn ttoottaall rreessiiddeennttiiaall pprrooppeerrttyy ttrraannssaaccttiioonnss,, wwiitthh bbuuyyeerrss ffrroomm IInnddiiaa ccoommiinngg iinn sseeccoonndd ppllaaccee aafftteerr UUAAEE bbuuyyeerrss

Source: Dubai Land Department, EFG Hermes

FFiigguurree 1122:: EEmmaaaarr bbuuyyeerrss mmiixx iinn 99MM1199 –– BBuuyyeerrss ffrroomm CChhiinnaa aanndd KKSSAA aarree aammoonnggsstt tthhee llaarrggeesstt bbuuyyeerrss iinn tthhee ccoommppaannyy’’ss ppoorrttffoolliioo aafftteerr UUAAEE nnaattiioonnaallss

*Emaar did not publish exact numbers; rather, we deduced them from the latest published quarterly presentation Source: Emaar Development, EFG Hermes estimates

As for Abu Dhabi, we think that the new supply coming to the market between 4Q19 and 2021, estimated at 25,000 units by JLL, will continue to place pressure on overall market activity, especially should the rate of new job creation continue at the same relatively slow pace. Should such supply numbers materialise - unlikely in our view - Aldar (based on its planned handover schedule) will deliver c.11% in 4Q19, 23% in 2020 and 36% in 2021 of total annual additions. Contribution to deliveries is significantly below management’s indicated market share for the company (estimated at around 80%); hence, we expect lower annual additional supply, especially from smaller players. We forecast annual unit additions in the range of 4,000-5,000 units in 2020-21; thus, we assume a materialisation rate of c45% of the planned additional supply. The extent of pricing pressure over the coming two years will be dependent upon the additional demand that will be created from improved business activity and new job creation. We note that the developer market in Abu Dhabi is small, relative to Dubai; hence, we think that it is driven primarily by real demand, while the lease market reflects the actual supply-demand dynamics.

We believe Aldar’s various sales strategies will continue to drive market trends, given the company’s leading position (estimated market share of 80%). Decent demand for “infrastructure-enabled” land plots, especially in projects offered to non-UAE nationals, will continue to increase in significance, in our view. Moreover, we expect further project launches targeting the mid-segment, in line with the company’s previously announced strategy. On the upside, we believe that, should Aldar finalise its MoU with Emaar and start launching Saadiyat Grove, this might create a new wave of demand for properties in the emirates, with the company having access to Emaar’s wide client base that will possibly start tapping the market.

UAE

India

UK

China

KSA

Pakistan

Jordan

Egypt

CanadaIraq

UAE 15%

China 12%

KSA 11%

India 8%Pakistan 5%UK 4%

Others 45%

106

Real Estate Sector


5555



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FFiigguurree 1133:: JJLLLL eessttiimmaatteess 2255,,000000 uunniittss ooff aaddddiittiioonnaall ssuuppppllyy iinn tthhee ccoommiinngg 2277 mmoonntthhss ((uupp uunnttiill 22002211)),, iinnccrreeaassiinngg ttoottaall hhoouussiinngg ssttoocckk bbyy 99..66%% In ‘000 units

*2019 existing supply is as of Sep 2019Source: JLL, EFG Hermes

FFiigguurree 1144:: WWee eessttiimmaattee AAllddaarr ttoo ccoonnttiinnuuee ttoo uupp iittss ssaalleess lleevveell oovveerr tthhee ccoommiinngg 2244 mmoonntthhss,, wwiitthh ssaalleess ooff AAEEDD44..33bbnn iinn 22002200 aanndd AAEEDD44..88bbnn iinn 22002211 In AEDmn

Source: Aldar Properties, EFG Hermes estimates

EEggyypptt pprrooppeerrttyy mmaarrkkeett:: AAtttteemmppttss ttoo rreevviivvee ssaalleess tthhrroouugghh eexxtteennddiinngg ppaayymmeenntt tteerrmmss ccoonnttiinnuuee

Although we remain positive on long-term sector fundamentals, we expect market stability and relatively lower demand for new launches, which started to be evident in 2018 and further pressured the overall market in 2019, to continue over the coming year. Major trends that we expect to see include:

FFeewweerr nneeww pprroojjeecctt llaauunncchheess;; nneeww pprroojjeeccttss wwiitthh aattttrraaccttiivvee pprroodduucctt ooffffeerriinngg eennttiiccee hhiigghheerr ddeemmaanndd.. Market conditions, in general, remain weak, despite the series of interest rate cuts witnessed in 2019. We believe increased affordability concerns, stagnant activity in the secondary (resale) market and a pressured rental market will all lead to continued subdued demand levels. Thus, we expect developers to launch fewer new projects and/or offer a smaller number of units in launches, given such soft market conditions. Yet, demand will continue to be relatively better for new project launches with attractive product offering/prices, in our view, including the launch of SODIC’s VYE project in West Cairo and Emaar Misr’s potential new launches. Despite what we think will be relatively stronger demand for new products, we see a cannibalisation impact that will result in relatively muted growth in companies’ aggregate new contracted sales numbers

MMoorree nneeww llaauunncchheess iinn WWeesstt CCaaiirroo,, ggiivveenn ccoommppaanniieess’’ ccuurrrreenntt ddeevveellooppmmeenntt ppllaannss.. Unlike the past few years that saw demand from developers to expand their land bank in East Cairo and launch more projects in the area to cater for the demand, we see a shift in new launches to West Cairo. There are a number of new project launches in West Cairo that were introduced to the market in 2019 and/or will witness their first launch in 2020. SODIC, Palm Hills, Orascom Development and, potentially, Emaar Misr, all have strong presence in West Cairo, with a significant portion of their future contracted sales driven from the area

NNeeww llaauunncchheess iinn NNoorrtthh CCaaiirroo aarree ssttiillll hhaalltteedd;; wwee eexxppeecctt ssoommee ddeemmaanndd sshhiiffttiinngg ttoo RReedd SSeeaa pprroojjeecctt,, sshhoouulldd ssuucchh rreessttrriiccttiioonn ccoonnttiinnuuee. We note that launches for new projects in the North Coast still require certain regulatory permits, which resulted in no new launches in 2019 for SODIC and Palm Hills, along with a number of private developers. We expect no new launches in the North Coast in 2020, which may result in some shifting of demand to buy second (vacation) homes overlooking the Red Sea, primarily in El Gouna. Should this trend materialise, we see further launches by Orascom Development in its El Gouna project

220

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290

2015 2016 2017 2018 2019* 2020 2021

Existing supply Additional supply

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5,000

6,000

2015 2016 2017 2018 2019 2020 2021

107

Real Estate Sector


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SSeelllliinngg pprriiccee iinnccrreeaasseess iinn lliinnee wwiitthh iinnffllaattiioonn rraatteess.. We believe the relatively soft market conditions will continue to place pressure on the developers’ ability to increase selling prices for new launches. We expect stability in the total cost of development that will be driven primarily by relatively stable land costs, while construction costs will continue to increase in line with inflation, in our view. Thus, we think that muted increases in selling prices will not significantly burden the profitability of project launches during the year. We note that projects with high land costs (through direct acquisition or revenue-sharing agreements) will have pressured margins, given the stagnant pricing environment, especially should this trend continue in the long term

EExxtteennddeedd ppaayymmeenntt tteerrmmss,, iinn aann aatttteemmpptt ttoo rreevviivvee nneeww ddeemmaanndd.. The overall market trend of extending payment terms for new launches, which started in 2018 and was further seen in 2019, will continue over 2020-21, in our view. We expect developers to continue to make further extended payment terms available, currently offering payment up to eight-ten years, on average, to attract more demand. This will, in turn, place pressure on the companies’ cash flow, especially amidst the current land inflationary cost environment, with implied land costs representing a burden on total development costs. We believe companies with mounting land obligations and/or fixed debt payments will likely underperform in such an environment, with cash flows being pressured; hence, will typically revert to raising debt/equity raise to bridge the financing gap

AA sslloowwddoowwnn iinn ddeevveellooppeerrss’’ eexxppaannssiioonnaarryy mmooddee.. We expect current market conditions to result in developers focusing on their current development portfolios rather than expand by acquiring new land plots. An expection to this trend was Emaar Misr that has recently finalised the acquisition of a new land plot in West Cairo, planning to launch two new projects in the area over the coming two years. We expect no new land acquisitions for major develpors during the year

FFiigguurree 1155:: WWee eexxppeecctt ccoonnttrraacctteedd ssaalleess ttoo ccoommee iinn sslliigghhttllyy lloowweerr iinn 22001199,, ddeessppiittee eexxtteennddeedd ppaayymmeenntt tteerrmmss ooffffeerreedd

In EGPmn

Source: Companies’ data, EFG Hermes estimates

FFiigguurree 1166:: WWee eessttiimmaattee ssaalleess ooff EEGGPP114400bbnn oovveerr tthhee ccoommiinngg tthhrreeee yyeeaarrss ((22002200--2222)) ffoorr tthhee ffoouurr ddeevveellooppeerrss,, wwiitthh aann uuppssiiddee ttoo oouurr nnuummbbeerrss,, oonnccee EEmmaaaarr llaauunncchheess iittss nneeww pprroojjeeccttss

Source: Companies’ data, EFG Hermes estimates

0

5,000

10,000

15,000

20,000

25,000

3Q16

4Q16

1Q17

2Q17

3Q17

4Q17

1Q18

2Q18

3Q18

4Q18

1Q19

2Q19

3Q19

Emaar Misr ODE Palm Hills Porto Group SODIC TMG

0

10,000

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30,000

40,000

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2017 2018 2019 2020 2021 2022

Emaar Misr ODE Palm Hills TMG

108

Industrials Sector


FFEEMM SSttrraatteeggyy NNoottee 07 December 2019


IInndduussttrriiaallss

UUSS--CChhiinnaa ttrraaddee wwaarr iiss aann oovveerrpprriicceedd rriisskk iinn MMEENNAA llooggiissttiiccss,, while EXPO 2020 could be a strong catalyst EEggyypptt’’ss eenneerrggyy ddeerreegguullaattiioonn still offers significant growth opportunities for industrial space in Egypt with private utility players taking a more active role in the market MMEENNAA uuttiilliittyy names are targeting multiple capacity expansions in regional, as well as international markets PPaakkiissttaann uuppssttrreeaamm ooiill && ggaass EPS consolidation likely in FY20 as production growth remains mundane PPaakkiissttaann ppoowweerr sector’s outlook is brighter, due to: i) USD-PKR indexed tariffs; and ii) circular debt build-up that has slowed, with another gov’t cash injection expected soon

KKeeyy BBuuyyss

EEKK HHoollddiinngg ((EEggyypptt,, BBuuyy,, TTPP:: UUSSDD22..11,, EEKKHHOO EEYY)) has ample room to extract value and fuel further positive share price performance in 2020, in our view, on: i) setting up Egypt’s largest MDF facility; and ii) buying out minorities in Alexfert at undemanding valuations. We estimate that EKHO will enjoy a c28% EPS CAGR (2019-23), supported by: i) ramp-up in ONS’s gas production; ii) better utilisation at Sprea’s formaldehyde capacity; iii) improved urea prices; and iv) deregulation of Egypt’s utility prices. In our view, EKHO’s free call option comes from: i) potential divestment of its upstream gas concession, generating sizable cash flows that could be used for a special dividend; and ii) long-anticipated deregulation of local urea market.

AArraammeexx ((UUAAEE,, BBuuyy,, TTPP:: AAEEDD66..00,, AARRMMXX UUHH)) is well-positioned as a clear play on rising e-commerce penetration in MENA and will capitalise on volume growth in core markets. There has been a recent shift in in e-tailer’s delivery models from international cross-border express to a more domestic-focused approach, which will lead to some margin erosion for Aramex. Going into 2020, Aramex trades at all-time low P/E multiples, enjoys a c9% EPS CAGR (2019-23e) and offers a lucrative dividend yield. In our view, 2020e could see some share price catalysts: i) Expo 2020, which may drive an increase in UAE volumes; and ii) potentially increasing FOL limits, which typically generate positive share price reactions.

DDPPWW ((UUAAEE,, BBuuyy,, TTPP:: UUSSDD2255,, DDPPWW DDUU)) share price plummeted in 2019, due to the perception of a sub-optimal capital allocation strategy, risk of intensifying competition from regional ports and heightened US-China trade disputes. The stock is currently trading at nearly all-time low multiples. We think the major wave of acquisitions is likely behind us, as the balance sheet has already been utilised; hence, cash flows are likely to expand in 2020. As such, assuming only cUSD1.2bn of maintenance capex going forward, FCFF levels will comfortably come in at cUSD1.65bn in 2020.

SSWWDDYY ((EEggyypptt,, BBuuyy,, TTPP:: EEGGPP2200,, SSWWDDYY EEYY)) SWDY is entering 2020 with strategic initiatives that would offer more sustainable cash flows, such as power generation, along with expanding the turnkey segment regionally. We think that the market has assigned a significant valuation discount on SWDY and: i) carved out the turnkey business; risks seem skewed to the upside; ii) assumed contraction in cable volumes, despite volume improvements (c7.6% Y-o-Y through 9M19); and iii) assumes a c35% discount in cash margins per tonne vs a normalised mid-cycle average of cUSD1,200/t.

OOGGDDCC ((PPaakkiissttaann,, BBuuyy;; TTPP:: PPKKRR118811,, OOGGDDCC PPAA)) is our preferred E&P in Pakistan, on: i) higher exploratory efforts that may unlock significant production growth; ii) ongoing development projects at major producing fields; iii) diversified base with revenue composed of 38/54/7% from Oil/Gas/LPG, respectively, spread over a larger no. of fields (top five fields make up 60/70% of its total oil and gas flows); iv) higher reserve life vs. peers; v) strongest balance sheet within the sector, which not only ensures stable payouts, but also provides more firepower for exploratory efforts and generates interest income; and vi) attractive valuation vs. peers.

HHUUBBCCOO ((PPaakkiissttaann,, BBuuyy;; TTPP:: PPKKRR116688//sshhaarree,, HHUUBBCC PPAA EEqquuiittyy)) offers the best exposure to CPEC-related energy projects. The first phase of SECMC, the local coal mine where it owns an 8% stake, began commercial operations in Jun 2019, while CPHGC, a 1,200MW net plant, was commissioned in Aug 2019. Two more power plants are set to achieve CODs in early 2022. HUBC’s key positive is that all of its projects (including stakes in three existing plants) have guaranteed returns (ROEs/IRRs) between 17-20% that are indexed to PKR-USD parity. Cumulatively, the stock offers a USD IRR of 23.2%. We expect dividends to resume gradually as the company’s investment needs decline.

109

Industrials Sector




KKeeyy tthheemmeess ffoorr 22002200

EEnneerrggyy ddeerreegguullaattiioonn ssttiillll aa vvaalliidd tthheemmee ttoo ppllaayy iinn EEggyypptt With Egypt continuing to cut back on its energy subsidy bill (especially in power), we think players in the utilities space may stand to benefit. Not only will the deregulation of Egypt’s energy space help improve pricing, but it may also lead to more private company participation in the utilities space. Following Egypt’s significant capex cycle in power generation, we think investment in distribution is a must and will likely involve private sector participation. The two privately owned players in this space are EKHO’s Natenergy (TP: USD2.1/share) and Qalaa Holdings’ Taqa Arabia (uncovered). EKHO has already been awarded the right to distribute 60MW in a 30-year concession, likely a precursor to more distribution awards for private players in the sector, in our view.

EExxppoo 22002200 iiss uuppoonn uuss The UAE has been preparing for years to host the Expo 2020 event, which will likely bring along with it strong volumes for multiple sectors. We think one of the main beneficiaries of this event will be logistics providers, such as courier services and DPW’s Jebel Ali. For DPW, we expect Jebel Ali to close 2019 having handled c14.6mn of TEUs and will likely see a pick-up in volumes in the build-up to the event, especially considering that the venue is located within close proximity of Jebel Ali. We estimate every c100k TEUs of incremental volumes handled would generate cUSD6mn of earnings. We also estimate Aramex would see a pick-up in its domestic express business in 2020 as e-tailers shift to local fulfillment centres, and as Expo 2020 will require the support of courier services companies, such as Aramex. We estimate Aramex will see c9.2% Y-o-Y revenue growth in 2020e.

UUSS--CChhiinnaa ttrraaddee wwaarr –– aann oovveerrpprriicceedd rriisskk iinn MMEENNAA The ongoing US-China trade war is expected to have a sizable impact on global trade routes, as well as the size of trade. Based on our discussion with DPW’s management, every 10% applied on USD250bn of goods will lead to a c50bps impact on global trade growth. That said, DPW’s portfolio is more skewed to frontier and emerging markets, which should be in a relatively more defensive position, should trade disputes continue for longer than expected. We think the market has penalised DPW’s valuation because of global trade issues, and the stock could potentially see a re-rating, once an agreement is made between the US and China.

FFiigguurree 11:: GGlloobbaall tthhrroouugghhppuutt vvss.. DDPPWW’’ss mmaarrkkeett sshhaarree

LHS: in mn TEUs; RHS: in %

Source: World Bank, Company data

FFiigguurree 22:: SSWWDDYY’’ss bbaacckklloogg hhaass bbeeeenn ggrroowwiinngg,, eevveenn eexx.. TTaannzzaanniiaa

In USDbn


7.8%

8.0%

8.2%

8.4%

8.6%

8.8%

9.0%

9.2%

9.4%

0

100

200

300

400

500

600

700

800

900

2011 2012 2013 2014 2015 2016 2017 2018

Global throughput DPW share

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2017 2018 9M 19

Backlog Backlog (ex. Tanzania)

110

Industrials Sector




PPaakkiissttaann uuppssttrreeaamm ooiill && ggaass –– UUSSDD aapppprreecciiaattiioonn bbeehhiinndd uuss,, llooookk ffoorr uunnddeerrvvaalluueedd//bbeetttteerr ppllaayyss

FY19 has been a strong year for all E&Ps, owing to weaker PKR (revenue is denominated in USD) and higher interest rates (cash-rich balance sheets for most players) – revenue and earnings for our universe grew 27/41% Y-o-Y, respectively. However, concerns over mundane production growth (down at certain players) remain, and we expect this will lead to earnings growth being capped in the coming years, assuming that most of the PKR devaluation is behind us. However, if companies are able to sustain earnings, it will eventually lead to higher dividend payouts – POL and OGDC look set to have better yields than PPL as the latter struggles with its cash position, owing to its cash tied-up in receivables.

DDeepplleettiinngg rreesseerrvvee lliiffee Based on Jun 2019 numbers, Pakistan’s residual reserve life is now 8.8/15.4 years for oil and gas, respectively. Our key observation is that major gas fields such as Mari, Uch and Sui are on avg. c65 years old and production numbers tend to decline as fields approach exhaustion. Secondly, fields like Uch, Qadirpur and Zin have low-quality gas (<500btu vs. pipeline quality of 900-1k btu), which further reduces the reserve life to 12.3 years. While aggressive exploration is underway, there is no guarantee of success. With the passing of time, the depletion of reserves will become an increasingly important question to ponder on by investors and the country as a whole, as the sector awaits the next big discovery.

PPrriivvaattiissaattiioonn The IMF programme has brought back privatisation and stake sale talks. Within the E&P space, gov’t is working towards the stake sale of OGDC (7%), PPL (10%) and MARI (% is not public yet). Gov’t is planning to retain management control, and the purpose of divestment is solely to raise funds. Given that the market as a whole has had a depressing run for over two years, valuation have been overpenalised, and the transaction might face some delay, in our view.

FFiigguurree 33:: RReessiidduuaall rreesseerrvvee lliivveess ooff PPaakkiissttaann’’ss EE&&PP uunniivveerrssee

In years

Note: POL’s life is higher than PPL and OGDC, owing to weaker production flows, which result in reserves being depleted over a longer period Source: PPIS, EFG Hermes estimates

0

2

4

6

8

10

12

14

16

18

PPL OGFC POL MARI

111

Industrials Sector




PPaakkiissttaann PPoowweerr –– BBaacckk iinn aaccttiioonn

The tariff structure of Pakistan’s IPPs makes them resilient to adverse economic conditions – project debt repayments and interest are passed on, so is the impact from inflation and fuel costs. Furthermore, returns are guaranteed by the government and linked to PKR-USD movements, with impact lagging by a quarter or two, making them a good hedge against PKR weakness. The sector is transforming as past recoveries are being made, consumer tariffs are being set and notified on a regular basis, and the energy mix is shifting to cheaper fuels. The blackout on dividends, due to the circular debt problem, had kept a lid on the sector’s share price performance. However, we expect cash flows to improve as costs are being passed on via consumer tariffs on a timely basis (average tariff now at cPKR13.4/KwH vs. PKR11.95/KwH in Jan 2019 – stable PKR-USD parity means per KwH costs should remain largely constant at cPKR17.4). With all these positive developments, along with a one-time cash injection of cPKR200bn made by the government to clear some of the outstanding circular debt and another one expected soon, we see 2020 as the year when dividends catch up to their past levels.

FFiigguurree 44:: HHUUBBCC ooffffeerrss tthhee bbeesstt rreettuurrnn aammoonnggsstt ccoommppaarraabblleess

Returns in %


FFiigguurree 55:: IInnccrreemmeennttaall bbuuiilldd--uupp ooff cciirrccuullaarr ddeebbtt sslloowweedd ddoowwnn iinn tthhee wwaakkee ooff qquuiicckk ttaarriiffff iinnccrreeaasseess Overall CD in PKRbn

Source: CPPA, NTDC, News sources

0%

5%

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15%

20%

25%

30%

HUBC PKRbased

5 year PIB HUBC USDbased

PBCCertificates(USD return)

HUBC realUSD based

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FY14 FY15 FY16 FY17 FY18 FY19e 1QFY20e

112

Materials Sector




MMaatteerriiaallss

MENA petchem outlook is challenging, on substantial supply additions amidst a muted demand outlook; lower feedstock pricing is only a silver lining, but more than priced in. Fertilisers better off on supply side, but just as vulnerable on the demand side. We prefer Egyptian stocks, given attractive valuations Pakistan fertiliser demand to sustain, and higher (estimated) international urea prices to support sector earnings as they improve manufacturers’ pricing power. MENA cement recovery underway as demand picks up; prefer Saudi Northwestern players on proximity to megaprojects. MENA ceramic stocks have been on a tear in 2019, but we see more upside in 2020. Pakistan and SSA cements both have challenging times ahead in 2020 – in Pakistan, the expansionary cycle is not yet over and so margins remain under pressure, given weak pricing and cost pressures, although valuations are attractive. For SSA, overcapacity remains the theme and demand is uninspiring.

KKeeyy BBuuyyss

SSaauuddii CCeerraammiiccss ((SSaauuddii AArraabbiiaa,, BBuuyy,, TTPP:: SSAARR4400..00;; SSCCEERRCCOO AABB)):: Key beneficiary (90% revenue from the GCC) of the new tile-import policies (anti-dumping investigation and SASO quality standards), as the pricing environment is set to improve significantly, and we expect its market share to rise in KSA.

YYaannbbuu CCeemmeenntt ((SSaauuddii AArraabbiiaa,, BBuuyy,, TTPP:: SSAARR3399..88;; YYNNCCCCOO AABB)):: Based in the high-demand Western region, we believe Yanbu offers a relatively safe way to play the upcoming megaprojects (closest player after Tabuk). Furthermore, access to export markets should help relieve any prolonged local market weakness.

OOCCII NNVV ((NNeetthheerrllaannddss,, BBuuyy,, TTPP:: EEUURR2277;; OOCCII NNAA)):: OCI’s large nitrogen fertiliser exposure and elevated operating leverage make it an ideal way to play the expected structural recovery in urea prices.

FFaauujjii FFeerrttiilliizzeerr CCoommppaannyy ((PPaakkiissttaann,, BBuuyy,, TTPP:: PPKKRR112211,, FFFFCC PPAA)): We prefer FFC, backed by its strong domestic market presence (c43% urea market share), which positions it to benefit from any improvement in operating dynamics. FFC's core business is likely to provide investors with a consistent dividend stream.

LLuucckkyy CCeemmeenntt ((PPaakkiissttaann,, BBuuyy,, TTPP:: PPKKRR558899..00;; LLUUCCKK PPAA)):: Most cost-efficient producer amongst Pakistan cement producers, as all power requirements are internally generated, and it has access to Northern and Southern regions, as well as the export market. It has a relatively ungeared balance sheet, which is a competitive advantage in a high interest rate environment – its cash balance gives it a degree of comfort over its peers.

KKeeyy SSeellllss

SSAABBIICC ((SSaauuddii AArraabbiiaa,, SSeellll,, TTPP:: SSAARR9900..00,, SSAABBIICC AABB)):: Weak global demand environment and supply additions in the pipeline mean we have concerns over SABIC’s medium-term prospects, especially given the company’s stretched valuation.

MMaaaaddeenn ((SSaauuddii AArraabbiiaa,, SSeellll,, TTPP:: SSAARR4400..00,, MMAAAADDEENN AABB)):: With the large fixed costs associated with the commercial startup of the WAS phosphate complex/rolling mill, we think the company could report more losses in 2020e, not to mention the company’s expensive valuation.

SSaauuddii CCeemmeenntt ((SSaauuddii AArraabbiiaa,, SSeellll,, TTPP:: SSAARR5566..00;; SSAACCCCOO AABB)):: Expensive valuation in relation to the KSA cement sector, exacerbated by the fact that it is located in the Eastern region, which lacks any strong growth catalysts. We believe current peak cement prices will limit any further price growth

113

Materials Sector




KKeeyy tthheemmeess ffoorr 22002200

MMEENNAA CChheemmiiccaallss:: AAnnootthheerr ttoouugghh yyeeaarr aahheeaadd;; pprreeffeerr ffeerrttiilliisseerrss

DDeemmaanndd oonn vveerryy sshhaakkyy ggrroouunnddss aammiiddsstt hhiissttoorriiccaallllyy hhiigghh uunncceerrttaaiinnttyy 2019 was plagued by poor sentiment, slow demand growth, demand contraction (in certain sectors; see automotive sector) and a fall-off in global trade growth as the US-China trade war reverberated across the globe (world merchandise trade only rose 0.6% as of 1H19, in contrast to average trade growth of c3.5-4% between 2000 and 2018). The drop-off in new export orders was particularly striking, with IHS Markit calculating a 47.5 PMI globally through Aug 2019 for new export orders, the lowest level since 2012, while the WTO announced that world merchandise export growth turned negative for the first time since 2009 – albeit very marginally at only 0.1%. This has clearly been reflected in petrochemical prices, which have dropped to their lowest levels in more than a decade.

While the WTO expects some recovery in demand growth in 2020, the range of growth (1.7-3.7%) it forecast is extremely wide, underscoring current market uncertainties (the Global Economic Policy Uncertainty Index is at its highest level since 2005). Our base case assumes some demand recovery next year, but we note that this is dependent upon improved trade relations between the US and China, not giving us much conviction and leaving substantial risks to the downside.

FFiigguurree 11:: GGlloobbaall eeccoonnoommiicc ppoolliiccyy uunncceerrttaaiinnttyy

(index, average 1997-2015 = 100)

Source: policyuncertainty.com

FFiigguurree 22:: WWoorrlldd mmeerrcchhaannddiissee eexxppoorrtt ggrroowwtthh ttuurrnnss nneeggaattiivvee ffoorr ffiirrsstt ttiimmee ssiinnccee 22000099 In %

Source: UNCTAD

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50

100

150

200

250

300

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05O

ct-0

5Ju

l-06

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-07

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08O

ct-0

8Ju

l-09

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-10

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11O

ct-1

1Ju

l-12

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-13

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14O

ct-1

4Ju

l-15

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-16

Jan-

17O

ct-1

7Ju

l-18

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-19 -20%

-15%

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1Q06

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1Q12

4Q12

3Q13

2Q14

1Q15

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1Q18

4Q18

114

Materials Sector




SSuuppppllyy ssiiddee mmoossttllyy nneeggaattiivvee,, wwiitthh aa ffeeww eexxcceeppttiioonnss On the supply side, the outlook is largely negative, with most chemical products expected to see even larger supply increases than in 2019, with a few exceptions. Along with a lacklustre demand environment (even in our base case), this could pressure commodity spreads to naphtha even further or, at the least, keep them muted. Below, we take a look at the four main petrochemical commodities produced in the region and identify the expected supply dynamics for 2020:

PPEE:: We estimate that PE supply would increase c5.5-6% in 2020e, higher than the 3.5% demand growth witnessed in 2019 and well above expected demand growth of 3.5-4% in 2020e. Amongst the grades, LLDPE is the most vulnerable, given substantial capacity growth amidst limited demand growth and is likely to see the most price pressure, while LDPE is best-positioned and likely to see higher spreads next year. PPPP:: The resilience witnessed in PP in 2019 is unlikely to last, given the supply expected in the pipeline in 2020. IHS expects Asia and the Middle East alone to see capacity growth of c6.5mn tonnes in 2020 (9% of global market), much larger than expected global demand growth, which should put spreads under pressure. Overall, we see risks of PP spreads to naphtha falling 15-20% Y-o-Y in 2020. MMEEGG:: While MEG is the worst-positioned fundamentally, in our view, as capacity additions are expected to exceed demand growth by twofold in 2019 and 2020, we believe this is largely priced in at current levels, with MEG to naphtha spreads near a historical low. As such, while we do not expect MEG prices to see a meaningful improvement, we believe they have bottomed near USD500/t, as at that level, the bulk of Asian producers are not even covering variable costs. MMeetthhaannooll:: Beyond Iran, global methanol supply additions remain limited, but what could weigh on methanol prices in 2020 is MTO demand. Essentially, the fate of methanol has become highly dependent on methanol-to-olefin producers, with c23% of global methanol demand in 2018 related to MTO. Fundamentals and pricing in olefins and derivatives under stress have translated into muted methanol demand and pricing in the global market. We expect this to remain a drag in 2020 and limit any major upside to methanol prices.

PPrrooppaannee pprriicciinngg wwiillll bbee aa ppoossiittiivvee ssuuppppoorrtt ffoorr rreeggiioonnaall ppllaayyeerrss While the product outlook is uninspiring, producers should, at least, benefit from a likely weak feedstock propane environment over the coming years. Global propane production, particularly from the US, following the shale gas boom, has surged over the past decade, and production is likely to continue to accelerate, at least in the medium term, which should keep prices low, from a historical perspective. This should help support regional petchem producers, given the currently large dependence on propane feedstock, particularly in KSA.

FFiigguurree 33:: SSuuppppllyy ggrroowwtthh lliikkeellyy ttoo eexxcceeeedd ddeemmaanndd ggrroowwtthh,, wwiitthh aa ffeeww eexxcceeppttiioonnss

In %

Source: IHS, Fertecon, ICIS, Methanex, OCI NV, EFG Hermes estimates

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

PE PP MEG Methanol

Supply 10 year average demand growth

115

Materials Sector

THE YEAR AHEAD - 2020FFEEMM SSttrraatteeggyy NNoottee 07 December 2019


FFiigguurree 44:: GGlloobbaall pprrooppaannee pprroodduuccttiioonn oonn tthhee rriissee

In mn tonnes

Source: IHS Markit, EFG Hermes estimates

FFiigguurree 55:: UUSS pprrooppaannee eexxppoorrttss ccoonnttiinnuuee ttoo ggrrooww ssttrroonnggllyy

In mbpd

Source: EIA

FFeerrttiilliisseerrss aarree bbeetttteerr--ppoossiittiioonneedd ffrroomm tthhee ssuuppppllyy ssiiddee,, tthhoouugghh ddeemmaanndd iiss ssiimmiillaarrllyy vvuullnneerraabbllee Fertiliser producers are currently in a better situation than petchem producers, in our view, as the trough of the fertiliser market was reached a couple of years back, and supply additions expected in the coming two to three years are very minimal, in contrast to petchems. However, the demand side of the equation has not been supportive in 2019, with bad weather and concerns surrounding the US-China trade war dragging down sentiment and resulting in a muted demand environment. We believe the demand weakness seen this year is unlikely to continue, especially as some of it was due to difficult weather conditions that could reverse in 2020. As such, we believe urea prices should resume their recovery in 2020, and that 2019 was just a short-term dip amidst a longer-term recovery.

FFiigguurree 66:: UUrreeaa ssuuppppllyy ggrroowwtthh iiss lliimmiitteedd

In mn tonnes

Source: OCI NV, CRU, Fertecon, EFG Hermes estimates

FFiigguurree 77:: CChhiinneessee uurreeaa eexxppoorrttss rriissee iinn 22001199,, bbuutt rreemmaaiinn mmiinniimmaall

In mn tonnes


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2022

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1.0

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Jan-

14

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14

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-14

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-15

Sep-

15

Feb-

16

Jul-1

6

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-17

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19

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Jan-

13

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13

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15

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5

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-16

Oct

-16

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-17

Aug

-17

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18

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18

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19

2014-19 CAGR of 25%

116

Materials Sector




PPootteennttiiaall ffrreeeezzee iinn KKSSAA’’ss ffeeeeddssttoocckk pprriicceess sseeeemmss lliikkeellyy There have been several reports in KSA in the past few months indicating that the government is studying a potential freeze on feedstock prices at current levels for five years. While our forecasts conservatively assume some feedstock price increases in 2020, we believe the government will most likely decide to keep prices as is, given that: i) methane prices have globally fallen to very low levels (below USD3/mmBtu in the US and below USD4/mmBtu in Europe), so passing on any major increases to Saudi producers today will make them much less competitive; and ii) LPG prices in Europe are almost at parity with Saudi Arabia’s discounted prices, as cheap US propane exports have weighed on European prices. Overall, with global energy prices having fallen so much over the past 12 months, we do not believe now is the right time for KSA to push through price increases to producers.

MMaarrkkeett vvaalluuaattiioonnss ddoo nnoott yyeett ffuullllyy rreefflleecctt ttrroouugghh vvaalluuaattiioonnss;; ssttaayy uunnddeerrwweeiigghhtt ffoorr nnooww With all that said, we believe stock prices remain too elevated – despite the correction witnessed in 2019 (stocks are down 15-20% YTD) – with our 2020 forecasts implying that stocks are generally expensive even for a trough year. Even if we assume no feedstock price increases, we think this is already priced in to current stock levels, with the sector, as a whole, trading at a very high P/E, implying minimal upside, even if the government keeps prices unchanged.

As such, we believe current stock prices are already implying a solid improvement in product prices next year, as well as no change in feedstock pricing, not leaving much room for upside, in our view, and potentially substantial downside risks if prices do not recover. As mentioned, we prefer exposure to fertilisers; our top picks are OOCCII NNVV,, MMOOPPCCOO and AAbbuu QQiirr in Egypt.

117

Materials Sector




PPaakkiissttaann ffeerrttiilliisseerrss -- RReellaattiivveellyy ssaaffee ppllaayy

During 2019, ECC allocated subsidised RLNG to LNG-based plants – expected until the end of Nov 2019 – which has kept domestic urea production higher. However, post conclusion of subsidised gas, we expect production to normalise in 2020e further supporting our positive view on manufacturers’ pricing power. Going forward, we estimate a stable demand outlook of c5.7mn tpa and expect a urea price CAGR of c7% over our forecast horizon. As we expect better pricing power for manufacturers, they should be able to pass on higher expected gas tariffs to consumers. We estimate sector earnings will be driven by a better pricing environment and a stable demand outlook going forward.

FFiigguurree 88:: SSttaabbllee uurreeaa ddeemmaanndd oouuttllooookk ttoo ssuussttaaiinn aanndd……

000’s tonnes

Source: NFDC, EFG Hermes estimates

FFiigguurree 99:: ……pprriicceess ttoo ssuuppppoorrtt eeaarrnniinnggss mmoommeennttuumm

Urea price change Y-o-Y %

Source: NFDC, EFG Hermes estimates

The ongoing GIDC settlement discussions, which will be resolved in the Supreme Court (post withdrawal of the proposed GIDC amendment), could either play out in favour of producers or result in the full payment to the government as it has already been collected from consumers. Furthermore, on the pricing front, we believe the prospective GIDC rate cut and subsequent lower urea price would be neutral for non-concessionary players (passed on to consumers in terms of lower urea prices). However, in the case of a GIDC rate cut, it would negatively affect concessionary players’ margins by reducing the cost differential they enjoy over non-concessionary players.

Within our Pakistan fertiliser universe, we maintain our preference for FFC, backed by its strong domestic market presence (c43% urea market share). This means it is well-positioned to benefit from any improvement in operating dynamics, backed by its strong pricing power and the stable demand outlook. Furthermore, in the event of any potential GIDC settlement, the company has limited downside risk, in our view. In addition to its improving core business, we estimate earnings from investments will report a CAGR of c14% over our forecast horizon and support earnings momentum. Going forward, we believe FFC's core business is likely to provide investors with a consistent dividend stream.

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2014 2015 2016 2017 2018 2019e 2020e

Production Demand

(0.3)

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2014 2015 2016 2017 2018 2019e 2020e

118

Materials Sector




SSaauuddii cceemmeenntt sseeccttoorr:: RReeccoovveerryy iiss uunnddeerrwwaayy,, bbuutt hhaass aa lloonngg wwaayy ttoo ggoo

CCeemmeenntt vvoolluummeess ttuurrnneedd aarroouunndd iinn 22001199;; eexxppeecctt ggrroowwtthh ttoo ccoonnttiinnuuee iinn 22002200:: After three years of falling demand, the Saudi cement sector has seen a recovery over the past four months (combined growth of 12% Y-o-Y), and YTD sales volumes are flat Y-o-Y. Construction activity has picked up, on the back of more project awards over the past three quarters. Moreover, a pick-up in mortgage loans (+120% Y-o-Y on average) was another contributing factor, supported by the government’s Sakani programme. We expect KSA’s megaprojects to move to the implementation phase over the coming months, which will substantially improve cement demand in the Kingdom; hence, we expect cement demand growth to remain positive over 2020 (up 8-10% Y-o-Y).

CCeemmeenntt pprriicceess hhaavvee rreeccoovveerreedd ttoo SSAARR220000//ttoonnnnee;; eexxppeecctt ttoo rreemmaaiinn ssttaabbllee oovveerr 22002200:: Cement prices in Saudi Arabia recovered significantly to SAR200/tonne, after they had fallen to an all-time low of SAR135/tonne in 3Q18, as cement players shifted focus to profitability rather than gaining market share. Moreover, the increase in export activities (16% of sales volume YTD) has partially alleviated liquidity issues for a few companies, taking some pressure off the market. Although we do not see any further catalysts for price growth, we do not expect any significant correction either.

FFiigguurree 1100:: PPrroojjeecctt aawwaarrddss hhaavvee rreeccoovveerreedd ssttrroonnggllyy iinn rreecceenntt qquuaarrtteerrss

KSA project awards in USDmn


FFiigguurree 1111:: MMoorrttggaaggee lleennddiinngg hhaass mmoorree tthhaann ddoouubblleedd rreecceennttllyy

KSA mortgage finance by banks in SARmn

Source: SAMA

0

5,000

10,000

15,000

20,000

25,000

30,000

1Q 2

014

2Q 2

014

3Q 2

014

4Q 2

014

1Q 2

015

2Q 2

015

3Q 2

015

4Q 2

015

1Q 2

016

2Q 2

016

3Q 2

016

4Q 2

016

1Q 2

017

2Q 2

017

3Q 2

017

4Q 2

017

1Q 2

018

2Q 2

018

3Q 2

018

4Q 2

018

1Q 2

019

2Q 2

019

3Q 2

019

Chemical Construction Gas IndustrialOil Power Transport Water

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

1Q 2

016

2Q 2

016

3Q 2

016

4Q 2

016

1Q 2

017

2Q 2

017

3Q 2

017

4Q 2

017

1Q 2

018

2Q 2

018

3Q 2

018

4Q 2

018

1Q 2

019

2Q 2

019

119

Materials Sector




EExxppoorrtt ggrroowwtthh ppootteennttiiaall ssttiillll eexxiissttss:: Export activities have more than doubled Y-o-Y and touched 6mt as of end-October, making up c16% of total sector sales volumes. We expect further growth potential in export activities, on the back of: i) a potential Yemen ceasefire; if this materialises, it could open up strong export potential, as Yemen will require substantial cement volumes for reconstruction, and Saudi producers (especially Southern-based companies) are best-positioned to take advantage of this due to their close proximity to the country; and ii) targeting other regional countries that are currently in a reconstruction phase (potentially Iraq and Syria).

PPrreeffeerr NNoorrtthhwweesstteerrnn ppllaayyeerrss,, wwhheerree ggrroowwtthh iiss ssttrroonnggeesstt:: Cement sector stocks have rallied strongly after robust earnings growth over the past three quarters, and the sector valuation is now stretched. However, we remain positive on a few Northwestern regional players, due to the growth potential there. Our key picks are: ii)) YYaannbbuu CCeemmeenntt (access to three key markets – high-demand Western region, direct beneficiary of NEOM project, and the exports market; and a decent valuation with a strong balance sheet); iiii)) AArraabbiiaann CCeemmeenntt (Western market, beneficiary of Jordan market improvement and attractive valuation); and iiiiii)) TTaabbuukk CCeemmeenntt (closest cement plant to megaprojects in Northern region; operational and financial leverage will help in a growing market).

RRiisskkss –– cclliinnkkeerr iinnvveennttoorryy aanndd ffeeeeddssttoocckk pprriicceess:: The key hurdles we see in the cement sector over the short term lie in the high level of clinker inventory (43mn tonnes; equivalent to 14 months of inventory). As inventory becomes too large to simply work down, we see two potential scenarios: i) aggressively selling the inventory by undercutting prices; and/or ii) writing down inventories, which will provide downside to our forecasts. On the positive side, there have been unconfirmed reports that the government could fix feedstock prices in the coming period, which will provide upside to our numbers, as we assume fuel prices will triple by 2023e in our earnings forecasts.

120

Materials Sector




EEggyypptt cceemmeenntt sseeccttoorr:: SSttiillll aa ttoouugghh rrooaadd aahheeaadd,, ddeessppiittee ppootteennttiiaall ddeemmaanndd rreevviivvaall

We expect the market to remain challenging in 2020, on the current oversupply situation and higher energy prices, as the government cut fuel subsidies further in 2019. The new capacity added to the market in the past 18 months (c12mtpa capacity) continues to put pressure on an already historically low cement price, which is currently at an uneconomical level of EGP675/tonne (cUSD40/tonne). Moreover, the current inflationary environment, from electricity/energy price hikes, has pressured margins further, with a few companies on the verge of closure. On the positive side, we expect demand to re-emerge in 2020, following c450bps in interest rate cuts in 2019, which should translate into increased private/government sector investments. This, along with more permanent shutdowns (which we expect to accelerate in 2020 amidst weak economics), should start to drive improved pricing in 2H20 and beyond.

MMaaiinnttaaiinn ppoossiittiivvee vviieeww oonn AARRCCCC: We expect cement prices to improve gradually starting 2020 and reach a normalised level of USD56/tonne. We maintain our positive view on Arabian Cement, as: i) the company is the most efficient cement producer in Egypt; ii) its valuation remains compelling (2020e EV/EBITDA of 5.7x, EV/tonne of USD25); and iii) it offers a strong earnings CAGR of c106% over 2023.

121

Materials Sector




GGCCCC cceerraammiiccss sseeccttoorr:: SSeett ttoo tthhrriivvee uunnddeerr nneeww ppoolliicciieess

TTiillee--iimmppoorrtt ccuutt iimmmmiinneenntt:: While, at the time of writing, there has been no official confirmation when the recently announced anti-dumping duty (up to 106% for Indian and Chinese producers) will be implemented, we believe the ceramic tile sector is on the verge of a transformation as the strict compliance requirements to SASO quality standards, active since Sep 2019, seem to have already had a large negative impact on the largest exporters to Saudi Arabia (lengthy process and only a few exporters have secured licences so far). This should reduce import volumes significantly and bring about a better pricing environment for regional players, in our view, even before the implementation of the anti-dumping duty. Moreover, the banning of coal gasifiers in the Indian tile industry (largest exporter to the GCC) and the potential increase in production costs will also support GCC tile prices, in our view.

SSCCEERRCCOO aanndd AAAACCTT aarree pprreeffeerrrreedd ppiicckkss:: With more than 90% of its tile revenue generated from the Saudi market, SCERCO is the major beneficiary of the new import policies, in our view. Moreover, its operational and financial leverage should allow for a substantial improvement in operating margins in the medium term, making it the ideal play and our preferred pick in the sector. Despite a sizeable rally in 2019, AACT’s (30% revenue from KSA) valuation remains attractive. RAK Ceramics would only benefit marginally from the new policies, but its valuation and dividend yield are very compelling.

122

Materials Sector




PPaakkiissttaann cceemmeenntt –– CChhaalllleennggeess hhaavvee nnoott eennddeedd;; qquuaalliittyy wwiillll ssppeeaakk ffoorr iittsseellff

Pakistan cement witnessed 8mn tpa capacity increase in FY19, on top of c8mn tpa during FY17-18. The process has been painful, as it has led players to oversupply to achieve higher utilisation, most of which has come at the cost of margins. We believe this indicates more uncertainty over the next 6 to 12 months as there is another c7.5mn tpa to come online (LUCK, KOHC and PIOC) and confidence on pricing will only return once the sector has finished its capacity expansion. Given the considerable increase in capacities, we believe a 4% rise in dispatches (during FY4M20) is insufficient to help cement manufacturers improve their earnings profiles. Cement stocks have been severely punished at the exchange on weaker core operations, and valuations have become more attractive; but an uptick in demand is necessary to turn the tables, as we believe industry utilisation has yet to hit the bottom.

MMaarrggiinnss wwiillll bbee wweeaakk ffoorr aa wwhhiillee –– RReeccoovveerryy ttoo ttaakkee ttiimmee In addition to weaker pricing, cost pressure has led to significant margin deterioration. Until expansions are completed, cement prices will continue to be bumpy. Additionally, costs are also expected to remain high for another year, on: i) higher transportation costs (potential reapplication of axle load limit, expensive fuel); ii) potential hike in coal prices over the winter season; iii) higher power costs; and iv) expensive packaging.We believe these trends will continue for most of FY20, and margins will only recover once a pricing consensus is reached or there is a favourable change in the operating environment.

FFiigguurree 1122:: SSTT ddeemmaanndd oouuttllooookk iiss nnoott vveerryy pprroommiissiinngg,, ssoo rriissiinngg ccaappaacciittyy wwiillll bbrriinngg uuttiilliissaattiioonn ddoowwnn

Dispatches and capacity in mn tonnes


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123

Materials Sector




SSSSAA cceemmeenntt ddyynnaammiiccss rreemmaaiinn hhaarrsshh

Analysing the markets in which our covered companies operate, we note similar underlying themes: i) excess capacity – for 2019e and 2020e, we calculate 49.3% and 48.6% in Morocco, 57% and 60% in ECOWAS region, and 42% and 40% in the EAC, respectively; ii) generally slower demand growth – we calculate -2.2% CAGR (2013-18) due to delayed gov’t formation in 2017 and expect a recovery to 1.6% CAGR in Morocco (2018-23e), the EAC to report 4.1% CAGR (2018-23e) vs. 8.1% CAGR (2013-18) and the ECOWAS region to improve to 5.9% CAGR (2018-23e) vs. 3.5% CAGR (2013-18), driven by Senegal (2018-23e 10.5% CAGR) and Togo (2018-23e 9.5% CAGR); iii) muted utilisation as we compute 59.1% and 59% in Morocco, 59.2% and 62% in ECOWAS and 58.9% and 61.3% in EAC in 2019e and 2020e, respectively. Additionally, several players have announced capacity build out during such tough trading environments.

TTaannzzaanniiaa ooffffeerrss tthhee bbeesstt ggrroowwtthh ppootteennttiiaall iinn EEAACC Tanzania’s growth outlook is the strongest in EAC (7% CAGR 2018-23e), supported by public spending (SGR, Dodoma City developments, etc.). We expect 7% avg. annual growth over the near term. In Kenya, although we anticipate some demand recovery (1.6% CAGR 2018-23e) it will be at a slower pace due to a slowdown in public demand. Rwanda is an important market (7.1% CAGR 2018-23e) that largely depends on exports. There are an increasing number of players exporting to Rwanda and other inland markets – DRC and South Sudan.

NNiiggeerriiaa,, EECCOOWWAASS’’ llaarrggeesstt mmaarrkkeett,, iiss vveerryy cchhaalllleennggiinngg There is no risk to Nigeria’s dominance (c44.6% of demand, c55.7% supply over 2019-20e in ECOWAS) over our forecast period. When we exclude Nigeria, we note higher utilisation rates (70.6% and 72.7% in 2019 and 2020e) and stronger demand CAGR of 6.2% for 2018-23e. Nigeria is facing macro headwinds (IMF forecasts 2019e and 2020e GDP growth of 2.3% and 2.5%, respectively) that have slowed demand (2019e 21.8mt +5.7% Y-o-Y and 23.26mt +6.3% Y-o-Y in 2020e). Competition has intensified, with new capacity aggressively pushing volumes, resulting in price erosion (cUSD119/tonne in 9M19 vs. cUSD131/tonne in FY17). We believe this is the new norm and see the real possibility of further downside on prices. Additionally, there is c9mtpa capacity increases expected in 2020/21. Further headwinds in Nigeria are negative for the ECOWAS region as a whole.

124

Telecom Sector




Telecom

5G emerges, but not everyone is on it yet. GCC operators launched 5G, but required investment is unlikely to be as sizeable as was expected initially. Other markets in our FEM space are unlikely to deploy 5G before 2021. We see a pick-up in capex in the coming few years, but no major spikes in capital intensity Data growth very much in play; digital payments growing. The driving force in the sector remains data, and this will be aided by 5G rollouts. Digital payments and mobile money will gain more importance in 2020, particularly in African markets. This is all good news for towercos (Helios Towers) KSA and Egypt will be all about digitisation. Governments in these two markets are accelerating projects that aim to digitise many sectors in the economy UAE growth will remain slow; Expo 2020 impact will be short-lived. Economic slowdown will continue to be the main issue pressuring the mobile market, despite potential one-off boost from Expo 2020 Kuwait: Improvement in competitive dynamics will continue. We think the more rational environment is sustainable, backed by the newly-established regulator Qatar returning to growth? Mobile subscriber base stabilised, helped by a recovery in population growth; we expect this to translate into better revenue performance in 2020

Key Buys

Telecom Egypt (Egypt, Buy, TP: EGP18.00, ETEL EY): At current price, the market is valuing TE at cEGP20bn, the same as our valuation for its stake in VFE; this means the market’s implied valuation of TE’s businesses, excluding the VFE stake, is nil. We see this as unwarranted, given: i) the emergence of a solid equity story after TE’s strategy had become much clearer; ii) strong performance in 2019; iii) better profitability starting FY20 because of ERP efforts; and iv) ongoing interest rate cuts in Egypt. TE is the best-positioned operator to capitalise on Egypt’s digital transformation.

Ooredoo Group (Qatar, Buy, TP: QAR9.7; ORDS QD): We recently turned Buyers on Ooredoo as operating performance stabilised in 2019 and valuations became attractive vs. GCC peers, with the stock trading at a sizeable discount to our wider MENA coverage. In addition, Ooredoo’s deleveraging has been steady, providing room for potential DPS hikes as the company ends the year on a positive note. We forecast a 20% Y-o-Y increase in DPS to QAR0.30, which yields c4%, an attractive return for a quasi-sovereign entity, in our view.

Helios Towers (Africa, Buy, TP: GBP1.60; HTWS QD): We believe HT is well-positioned to capture lucrative opportunities from growing demand for wireless networks in Africa. Current valuations look attractive, given HT’s: i) diversified market exposure; ii) varied currency exposure; iii) unique positioning (sole independent player in its largest markets); iv) solid growth outlook, with more potential from lower market penetration; and v) ongoing consolidation in Africa at rich valuations.

Wild Cards

du (UAE, Buy, TP: AED6.5, DU UH): We still hold the view that FOL will be raised eventually, resulting in significant rerating of the stock, although we have no visibility on this currently. We believe the market is overpricing risks associated with further slowdown in UAE’s economy. Despite current market weakness, emanating particularly from the prepaid segment, UAE’s competitive dynamics are likely to remain the least aggressive across our covered markets, giving us some confidence in the long-term prospects of the company. du trades at attractive valuations compared to its MENA peers and its competitor, Etisalat.

125

Telecom Sector




Key Sector Themes for 2020

5G: The picture is getting clearer, but still at early stages Our FEM space, and more specifically GCC countries in MENA, saw several commercial launches of 5G services in 2019, with the strategic aims of: i) maintaining market leadership; ii) improving quality of service and speed to meet customers’ expectations; and iii) keeping up with technological developments to address markets’ future needs. In 2020, we see a significant pick-up in the pace of 5G network rollouts and service uptake by customers in GCC countries. However, we think 5G usage will constitute a negligible part of the telcos’ businesses in 2020 and the few years that follow, given how young the ecosystem remains, in addition to the unclear use cases for the service as of yet. Moreover, we think 5G is unlikely to see the light in North and Sub-Saharan Africa in 2020, or even 2021, as 4G is still young and growing in these markets.

Figure 1: MEA mobile subscriptions by technology

Source: Ericsson mobility report (Nov 2019)

Figure 2: 5G uptake in MENA

In mn, unless otherwise stated

Source: UAE TRA, Statista

We note that capex intensity has, so far, remained within moderate levels (capex-to-sales across our GCC coverage averaged 13% in 9M19, down from 14% in 9M18), as most operators started rolling out their networks in 2H19 and on a relatively small scale, targeting urban areas or micro markets. Although 5G beats 4G on all fronts – speed, connection-handling capacity and latency – its commercial use-cases and economic viability remain unclear, especially with the need for more densified networks (higher number of cell sites) for high-band coverage. A countrywide high-band rollout will be very costly, in our view; hence, operators will likely deploy their networks selectively, we believe. Therefore, we do not expect any abrupt surges in capex spending related to 5G in 2020 or the near term, but a pick-up in capex over the longer run could take place, as we think operators will upgrade their networks, in preparation for the development of the 5G ecosystem. Visibility on longer-term capex levels is very unclear for now, in our view.

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126

Telecom Sector



Figure 3: Y-o-Y growth in capex spending, 9M19


Figure 4: Capex-to-sales ratio


Figure 5: Y-o-Y* growth in capex spending, 2020e

*Using annualised 9M19 capex figuresSource: Company data, EFG Hermes estimates

Figure 6: Capex-to-sales ratio

*AnnualisedSource: Company data, EFG Hermes estimates

Data still a core theme, and 5G will boost data growth further Over the past years, data has remained the largest umbrella theme in our sector, from which other sub-themes emerged. We expect the start of the 5G network rollouts across our space (with varying degrees between GCC, North Africa, Sub-Saharan Africa and other frontier markets) to accelerate data growth further in 2020 and beyond. Data traffic per smartphone in the MEA region is expected to grow at a 2019-25e CAGR of 29%, driven primarily by a 33% CAGR in Sub-Saharan Africa. This is a major opportunity, not only for MNOs, but also businesses that serve this industry, such as towercos. In our coverage, we see Helios Towers as a major beneficiary of the promising growth we expect in demand across Africa.

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127

Telecom Sector



Figure 7: Data traffic per smartphone – MEA is one of the fastest-growing regions in the world In GB/month, unless otherwise stated


Figure 8: Data traffic per smartphone in MEA and SSA (the latter is part of the wider MEA region) In GB/month, unless otherwise stated


Digital payments and mobile money: A great opportunity for telcos in our space Another theme we expect to pick up in 2020 and thereafter is digital payments. We already have a clear leader in our space, namely Safaricom, which has pioneered mobile money solutions in SSA over the past few years. North African and GCC markets have lagged on that front, partly because banking penetration is higher in those markets. However, we are already seeing a pick-up in momentum in some of these markets, particularly Egypt and KSA. In Egypt, TE became the fourth player to launch a mobile payment solution, WE Pay, while in KSA, STC launched STC Pay.

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128

Telecom Sector




Select country themes

Saudi Arabia Revenue growth for the market came in at 7.9% Y-o-Y in 9M19, supported by improving macro conditions, such as shrinking expat departures and faster economic growth. On the other hand, price rationalisation trends seem to be waning, as most operators had reported recently that growth has been least affected by price hikes. Looking ahead, we expect the enterprise segment to play a major role in driving revenues and supporting margins, with both Mobily and Zain shifting more focus towards this business to capitalise on the government’s digitisation initiatives coming as part of NTP2020 and Vision 2030. We remain cautious, from a valuation perspective, as the MSCI upgrade left the sector trading at punchy multiples, compared to the region.

Figure 9: Mobily’s new revenue breakdown provides insight into the pace of growth in the enterprise segment in KSA

As % of total revenue


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129

Telecom Sector




UAE Market weakness is unlikely to fade in the near term, considering the ongoing macroeconomic slowdown. We expect operators to ramp up operating and capital spending in the run-up to Expo 2020, but see limited and short-lived return potential; hence, we expect some pressure on margins, particularly for du, which is highly exposed to volatility in the prepaid market. From a valuation standpoint, the UAE trades at fair levels, and we do not see much upside in both names. However, two events could surprise positively, namely the share buyback programme for Etisalat and the FOL increase for du.

Figure 10: Revenue growth for both Etisalat and du has slowed down because of slower macroeconomic activity in UAE

In AEDmn, unless otherwise stated

*Domestic operations only**Annualised Source: Company data, IMF, EFG Hermes estimates

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130

Telecom Sector




Kuwait Market dynamics continue to improve in Kuwait, with signs of abating competition and a shift in focus away from aggressive price-based competition, towards service quality and customer experience. For instance, device sales accounted for 21% of Viva’s 9M19 total revenue, down from 24% last year. Postpaid customers for Zain and Ooredoo now represent 36% and 28% of their subscriber bases, respectively, up from 26% and 20% in 2016. This led to higher blended ARPUs, roughly 12% above their 2016 levels, owing mainly to the establishment of an independent regulator, as well as more focus on customer value management (CVM) by operators. In 2020, we expect more involvement from the regulator in the form of interventions to maintain a rational competition environment.

Figure 11: A recovery in blended ARPUs in Kuwait indicates a healthier market after years of value destruction

In USD/month, unless otherwise stated

*Annualised Source: Company data, EFG Hermes estimates

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131

Telecom Sector




Qatar The sharp slowdown in population growth, which began in 2015-16 and was later exacerbated by the diplomatic dispute with GCC neighbours (mid-2017), has dragged down the country’s mobile market, with both operators (Ooredoo and Vodafone) seeing consistent declines in revenues, despite relatively stable ARPUs. However, we expect Ooredoo’s revenue performance to stabilise in 2020, supported by: i) a recovery in population growth, which is already reflecting on reported subscriber figures; ii) CVM efforts (focus on postpaid customers), which currently represent over one-quarter of Ooredoo’s subscribers base, up from just 14% in early 2017; and iii) higher pricing environment, on the back of 5G services.

Figure 12: Qatar mobile subscriber growth is almost back in positive territory in 2019, supported by a recovery in population growth In QARmn, unless otherwise stated

*Ooredoo Qatar and Vodafone Qatar**Annualised revenue Source: Company data, Ministry of Planning and Statistics, EFG Hermes estimates

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2020

Coverage Tables

THE YEAR AHEAD20

Egypt

KuwaitUAE

Jordan

Oman

Qatar

Saudi Arabia

Lebanon

Morocco

Pakistan

Vietnam

Kenya

Nigeria

Tanzania

Bangladesh

Botswana

Georgia

Mauritius

Rwanda

Uganda

Ghana

Sri LankaOthers

Egypt

Jordan

Kuwait

Lebanon

Morocco

Oman

Qatar

Saudi Arabia

UAE

Bangladesh

Botswana

Georgia

Ghana

Kenya

Mauritius

Nigeria

Pakistan

Rwanda

Tanzania

Sri Lanka

Uganda

Vietnam

Others

133

EFG Hermes Coverage


133

FFiigguurree 11:: EEggyypptt


CCoommppaannyy PPrriiccee TTPP RRaattiinngg YYTTDD PPeerrff.. AADDVVTT MM CCaapp PP//EE ((xx)) PP//BB ((xx)) DDYY ((%%)) ((EEGGPP)) ((%%)) ((UUSSDDmmnn)) ((UUSSDDbbnn)) 22001188 22001199 22002200 22001199 22001199

CCoonnssuummeerr

Arab Cotton Ginning 1.6 3.1 Buy (9.9) 0.0 0.0 2.5 N/M 8.1 0.3 6.3

Domty 9.0 13.3 Buy (16.7) 0.0 0.2 20.5 20.1 12.9 3.6 2.8

CIRA 12.0 18.0 Buy 33.3 0.3 0.4 56.2 37.3 30.8 9.1 0.4

Dice Sport & Casual Wear 1.7 4.15 Buy (35.4) 0.2 0.0 3.0 2.5 2.0 1.0 17.2

Eastern Company 14.7 22.5 Buy (9.3) 1.8 2.1 8.4 9.4 8.2 4.3 6.8

Edita Food Industries 13.8 24.5 Buy (1.4) 0.4 0.6 31.7 21.5 15.3 6.8 2.5

GB Auto 3.8 6.4 Buy (26.3) 0.3 0.3 8.1 N/M 9.2 1.1 0.0

Juhayna 8.4 13.5 Buy (25.3) 0.2 0.5 21.1 23.5 15.6 3.1 2.4

Obour Land For Food Industries 5.3 9.7 Buy (31.1) 0.1 0.1 9.9 10.7 9.1 3.2 5.6

Oriental Weavers 10.3 11.0 Neutral (1.1) 0.2 0.3 8.6 9.4 8.9 0.7 14.5

EEnneerrggyy

ADES International Holding* 11.9 28.0 Buy (14.1) 0.2 0.5 11.7 5.8 4.6 1.0 0.0

Maridive* 0.2 0.55 Buy (29.5) 0.1 0.1 7.2 4.6 4.1 0.2 0.0

FFiinnaanncciiaallss

Abu Dhabi Islamic Bank - Egypt 12.4 18.1 Buy 8.4 0.2 0.2 2.9 2.0 1.8 0.6 0.0

Al Baraka Bank Egypt 9.5 18.1 Buy (13.9) 0.0 0.1 2.1 1.9 1.7 0.5 8.4

CIB 78.5 94.9 Buy 32.5 9.1 7.1 13.5 11.2 9.6 2.5 1.6

Credit Agricole Egypt 43.0 52.6 Buy 4.9 1.0 0.8 6.7 6.2 6.6 2.4 9.9

Egyptian Gulf Bank 0.5 0.7 Neutral (20.9) 0.0 0.2 6.1 5.5 5.2 0.8 2.2

EK Holding 1.4 2.1 Buy 26.8 0.7 1.4 14.7 11.4 7.2 2.4 4.4

Faisal Islamic Bank of Egypt 1.0 1.1 Buy 17.9 0.1 0.4 3.0 2.8 2.6 0.5 7.9

Fawry 8.4 10.4 Neutral N/A 0.2 0.4 N/M 58.0 39.4 10.7 0.5

Housing & Dev. Bank 41.5 74.5 Buy (5.2) 0.0 0.3 3.0 2.5 2.4 0.8 13.2

Qatar National Bank AlAhli 45.0 57.5 Buy 12.5 0.1 2.7 6.5 5.5 5.0 1.3 2.9

HHeeaalltthhccaarree

EIPICO 69.0 104.0 Buy (19.1) 0.1 0.4 11.6 10.5 9.0 2.7 6.5

Ibnsina Pharma 9.4 12.7 Buy 4.8 0.1 0.5 26.5 22.2 16.8 6.6 0.9

Integrated Diagnostics Holdings* 4.6 6.3 Buy 9.4 0.1 0.7 21.5 18.3 15.2 5.9 5.2


Canal Shipping 12.5 19.5 Buy 3.1 0.3 0.2 9.2 11.1 7.0 3.4 9.2

Elsewedy Electric 11.3 20.0 Buy (37.0) 2.6 1.5 5.0 6.7 6.0 1.4 8.8

General Silos 37.9 65.0 Buy (5.2) 0.0 0.0 4.1 4.7 4.2 1.2 8.4

Orascom Construction PLC 99.0 170.0 Buy (16.1) 0.6 0.7 5.2 4.7 4.6 1.2 5.5

MMaatteerriiaallss

Abu Qir Fertilizers 21.6 27.0 Buy (5.8) 0.1 1.7 12.9 9.9 10.5 4.4 6.0

Arabian Cement (Egypt) 4.1 7.4 Buy (18.6) 0.1 0.1 6.6 N/M 42.2 1.1 0.0

EFIC 12.2 15.0 Buy 29.7 0.1 0.1 7.8 5.1 8.0 0.7 9.8

Egyptian Chemical Industries 5.5 4.5 Sell (17.3) 0.2 0.3 48.6 N/M N/M 0.9 0.0

MOPCO 65.3 97.5 Buy (15.4) 0.0 0.9 4.7 9.1 6.6 1.0 3.8

OCI NV** 18.1 27.0 Buy 1.7 7.1 4.2 N/M N/M 15.8 5.0 0.0

Sidi Kerir 11.4 16.0 Buy (33.4) 1.2 0.4 5.1 9.1 8.8 1.6 5.7

South Valley Cement 1.6 1.4 Sell (33.1) 0.0 0.0 75.0 N/M N/M 0.3 0.0

*Currency in USD ** Currency in EUR Source: Company data, EFG Hermes estimates

134

EFG Hermes Coverage


FFiigguurree 22:: EEggyypptt ((ccoonnttiinnuueedd))


CCoommppaannyy PPrriiccee TTPP RRaattiinngg YYTTDD PPeerrff.. AADDVVTT MM CCaapp PP//EE ((xx)) PP//BB ((xx)) DDYY ((%%))

((EEGGPP)) ((%%)) ((UUSSDDmmnn)) ((UUSSDDbbnn)) 22001188 22001199 22002200 22001199 22001199

RReeaall EEssttaattee && HHoossppiittaalliittyy

Emaar Misr for Development 2.7 4.8 Buy (16.5) 0.4 0.8 3.6 13.5 6.7 0.8 0.0

Heliopolis Housing 24.4 40.0 Buy 34.3 0.8 0.7 40.9 43.2 42.4 12.2 0.0

Orascom Development Egypt 6.3 11.5 Buy (10.4) 0.2 0.4 17.4 11.6 7.2 2.7 3.5

Palm Hills 1.9 2.8 Buy (11.0) 0.7 0.4 5.5 9.0 8.0 0.6 0.0

TMG Holding 8.5 18.0 Buy (13.8) 1.9 1.1 10.3 12.8 10.4 0.6 2.1

TTeelleeccoomm SSeerrvviicceess

OIH 0.6 0.5 Sell (1.7) 0.5 0.2 6.8 7.9 9.9 0.5 0.0

Telecom Egypt 10.4 18.0 Buy (18.1) 0.5 1.1 6.5 4.7 3.9 0.5 2.4

IInnffoorrmmaattiioonn TTeecchhnnoollooggyy

Raya Contact Center 6.0 12.0 Buy (45.5) 0.0 0.0 3.8 6.1 5.6 1.3 9.2


FFiigguurree 33:: KKuuwwaaiitt



((KKWWDD)) ((%%)) ((UUSSDDmmnn)) ((UUSSDDbbnn)) 22001188 22001199 22002200 22001199 22001199

CCoonnssuummeerr

Humansoft 3.08 6.30 Buy (6.1) 1.8 1.2 12.0 11.3 10.3 7.0 6.3

Integrated Holding Company 0.51 0.60 Buy (39.8) 1.0 0.4 6.5 12.6 10.1 1.4 4.8

Mezzan Holding 0.55 0.56 Buy 10.0 0.1 0.6 18.5 13.9 12.4 1.5 4.5


Boubyan Bank 0.59 0.55 Neutral 10.8 1.5 5.6 29.1 30.2 26.8 3.0 1.4

Burgan Bank 0.31 0.34 Neutral 17.1 2.6 2.7 10.8 10.4 10.1 1.1 4.0

Commercial Bank of Kuwait 0.50 0.45 Neutral 10.9 0.0 3.3 19.3 16.7 14.8 1.4 4.0

Gulf Bank 0.28 0.32 Buy 12.7 5.4 2.9 14.5 12.8 12.4 1.2 3.9

Kuwait Finance House 0.77 0.81 Buy 38.1 21.4 17.6 23.5 21.3 19.0 2.8 2.6

Kuwait International Bank 0.28 0.29 Neutral 8.7 4.1 1.0 12.8 18.0 17.0 0.9 4.0

National Bank of Kuwait 1.02 1.05 Buy 28.4 24.3 21.9 18.7 17.1 16.1 2.1 3.4

Warba Bank 0.28 0.24 Sell 31.4 2.5 0.1 39.1 33.0 29.2 2.0 0.0


Jazeera Airways Co 1.08 1.30 Buy 47.9 0.2 0.7 32.4 13.7 11.4 6.6 6.5


Ooredoo Kuwait 0.75 1.00 Buy 4.5 0.1 1.2 15.8 12.5 10.4 0.6 6.7

Zain Group 0.58 0.46 Neutral 29.2 7.6 8.3 15.9 16.4 15.1 1.7 5.2


134

135

EFG Hermes Coverage


FFiigguurree 44:: UUAAEE



((AAEEDD)) ((%%)) ((UUSSDDmmnn)) ((UUSSDDbbnn)) 22001188 22001199 22002200 22001199 22001199

CCoonnssuummeerr

Agthia 3.5 3.9 Neutral (29.1) 0.2 0.6 10.0 13.3 12.9 1.1 4.3

EEnneerrggyy

ADNOC Distribution 2.7 2.9 Neutral 16.8 1.0 9.2 18.0 17.0 14.9 13.4 7.0


AD Commercial Bank 7.6 9.5 Buy (7.5) 9.8 14.3 9.1 10.0 10.6 1.1 5.0

AD Islamic Bank 5.1 6.5 Buy 31.3 1.0 5.1 8.0 8.6 8.5 1.4 5.4

Commercial Bank of Dubai 3.9 5.0 Buy (3.5) 0.0 2.9 9.3 8.1 7.0 1.2 6.5

Dubai Islamic Bank 5.3 6.9 Buy 6.8 7.7 9.6 8.6 8.2 8.2 1.5 6.6

Emirates NBD 12.0 15.6 Buy 35.0 8.9 18.2 7.1 5.3 6.7 1.1 3.3

First Abu Dhabi Bank 15.2 14.9 Neutral 7.8 25.5 45.1 14.4 13.8 13.2 1.9 5.1

RAK Bank 4.6 5.8 Buy 9.5 0.1 2.1 8.4 7.6 7.0 1.1 7.2


Air Arabia 1.5 1.85 Buy 44.1 4.0 1.9 14.1 8.9 9.1 1.4 5.4

Aramex 3.7 6.0 Buy (13.8) 2.4 1.5 11.0 9.2 8.5 2.0 6.0

DP World* 12.5 25.0 Buy (26.9) 15.1 10.4 8.2 8.2 8.0 0.8 3.4

RAK Ceramics 1.6 2.4 Buy (8.3) 0.1 0.4 8.2 8.8 7.9 0.5 8.5


2.2 3.0 Buy 37.5 5.4 4.7 9.3 10.4 9.3 0.7 6.8

0.8 0.85 Neutral (44.9) 1.0 1.4 4.2 27.3 52.2 0.4 0.0

0.2 0.2 Sell (10.3) 0.2 0.5 N/M N/M N/M 0.6 0.0

4.1 5.75 Buy (1.0) 20.7 8.0 4.8 5.0 4.8 0.6 3.7

3.5 5.7 Buy (20.2) 16.9 3.8 3.6 5.2 4.5 1.6 14.8

1.9 2.6 Buy 7.8 1.8 6.8 11.4 10.9 11.2 1.4 5.2

Aldar Properties

DAMAC Properties

DXB Entertainments

Emaar

Emaar Development

Emaar Malls Group

Emirates REIT Limited* 0.6 0.8 Buy (36.0) 0.1 0.2 8.0 21.4 12.9 0.4 6.7


du 5.5 6.5 Buy 8.7 0.2 6.8 12.8 12.6 12.7 2.8 6.4

Etisalat 16.5 18.1 Neutral (2.9) 9.3 39.0 17.2 17.0 16.8 3.1 4.9

UUttiilliittiieess

Tabreed 1.9 2.4 Buy 7.5 0.3 1.4 11.8 12.4 11.6 1.0 4.8

* Currency in USDSource: Company data, EFG Hermes estimates

135

136

EFG Hermes Coverage


FFiigguurree 55:: JJoorrddaann



((JJOODD)) ((%%)) ((UUSSDDmmnn)) ((UUSSDDbbnn)) 22001188 22001199 22002200 22001199 22001199


Arab Bank 5.7 7.2 Buy (8.1) 0.3 5.2 6.5 5.9 5.5 0.5 7.0

Bank of Jordan 2.1 2.5 Neutral (15.1) 0.1 0.6 8.3 7.9 7.6 1.1 9.6

Cairo Amman Bank 1.0 2.0 Neutral (19.0) 0.0 0.3 4.5 4.2 3.9 0.5 15.3

Housing Bank For Trading & Finance 5.4 5.0 Sell (35.5) 0.0 2.4 12.4 11.4 10.8 1.7 7.8

Jordan Ahli Bank 1.0 1.1 Neutral (8.5) 0.0 0.3 7.3 6.8 6.2 0.6 7.4

MMaatteerriiaallss

Jordan Phosphate Mines 3.0 2.9 Neutral 4.6 0.1 0.3 71.7 10.9 6.2 0.3 0.0


FFiigguurree 66:: OOmmaann



((OOMMRR)) ((%%)) ((UUSSDDmmnn)) ((UUSSDDbbnn)) 22001188 22001199 22002200 22001199 22001199

EEnneerrggyy

Renaissance Services 0.34 0.37 Buy (7.0) 0.6 0.3 18.6 12.5 14.8 2.8 0.0

Shell Oman Marketing Co 1.19 1.63 Neutral (20.2) 0.0 0.3 10.3 9.5 8.8 2.2 7.4


Bank Dhofar 0.12 0.09 Sell (28.1) 0.0 0.9 8.4 15.0 13.7 0.7 5.3

Bank Muscat 0.43 0.53 Buy 8.5 1.0 3.5 7.8 7.2 6.8 0.7 6.9

Bank Sohar 0.11 0.11 Neutral (0.6) 0.0 0.7 10.2 16.3 10.7 0.8 4.4

National Bank Of Oman 0.19 0.20 Neutral 5.7 0.1 0.8 7.6 7.1 6.6 0.7 8.7


Al Anwar Ceramics 0.15 0.17 Buy 106.9 0.2 0.1 59.0 24.4 13.1 1.2 5.1

Galfar Engineering & Contracting 0.08 0.07 Sell (2.5) 0.1 0.1 N/M 11.2 4.3 0.5 0.0

Oman Cables Industry 0.63 1.28 Neutral (35.7) 0.1 0.1 8.0 6.6 5.5 0.5 10.6

MMaatteerriiaallss

Al Jazeera Steel Products 0.13 0.31 Neutral (52.3) 0.1 0.0 3.7 3.8 3.5 0.4 17.2

Oman Cement 0.25 0.33 Neutral (18.0) 0.3 0.2 10.9 10.6 9.7 0.5 7.1

Raysut Cement 0.49 0.47 Buy 33.7 3.0 0.3 N/M 37.8 23.0 0.7 2.0


Omantel 0.61 0.98 Neutral (23.1) 0.1 1.2 6.0 4.0 3.9 0.7 8.2

UUttiilliittiieess

Dhofar Generating Company 0.20 0.31 Buy (7.8) 0.0 0.1 N/M 32.4 19.4 0.9 9.0


136

137

EFG Hermes Coverage


FFiigguurree 77:: QQaattaarr



((QQAARR)) ((%%)) ((UUSSDDmmnn)) ((UUSSDDbbnn)) 22001188 22001199 22002200 22001199 22001199

CCoonnssuummeerr

Al Meera Consumer Goods 15.3 16.0 Neutral 3.6 0.8 0.8 16.8 16.9 16.3 2.5 5.9


Commercial Bank of Qatar 4.4 5.1 Buy 12.5 4.2 4.9 12.6 11.1 9.4 1.1 3.4

Doha Bank 2.5 2.8 Neutral 14.0 1.0 2.2 12.9 11.2 9.9 0.9 5.9

Masraf Al Rayan 3.9 4.2 Neutral (7.1) 3.7 8.0 13.6 13.2 12.6 2.4 5.7

Qatar Insurance Co 3.1 4.3 Buy (14.5) 0.7 2.7 14.7 9.5 9.1 1.2 5.7

Qatar Islamic Bank 14.8 15.9 Neutral (2.6) 6.1 9.6 13.7 12.9 12.2 2.4 3.7

Qatar National Bank 19.6 18.6 Neutral 0.4 23.6 49.7 13.6 13.4 12.6 2.6 3.1

MMaatteerriiaallss

Industries Qatar 10.4 12.0 Neutral (22.5) 3.7 17.2 12.4 20.3 13.9 1.8 4.3


Ooredoo Group 7.1 9.7 Buy (4.8) 4.1 6.3 14.6 12.4 11.7 0.8 4.2

UUttiilliittiieess

Qatar Electricity & Water 16.2 20.0 Buy (12.4) 1.7 4.9 11.6 14.2 13.8 1.8 4.8


138

EFG Hermes Coverage


FFiigguurree 88:: SSaauuddii AArraabbiiaa



((SSAARR)) ((%%)) ((UUSSDDmmnn)) ((UUSSDDbbnn)) 22001188 22001199 22002200 22001199 22001199

CCoonnssuummeerr

Al Hassan Ghazi Ibrahim Shaker 9.3 9.5 Neutral 8.7 1.8 0.2 N/M N/M N/M 0.9 0.0

Al Hokair 22.3 23.0 Neutral 1.4 1.5 1.2 32.7 39.4 34.9 1.9 0.0

Al Othaim 77.0 98.0 Buy 9.7 1.3 1.8 20.1 19.4 17.6 4.7 3.9

Almarai 48.2 50.0 Neutral 0.4 4.6 12.9 23.1 25.1 24.2 3.4 1.8

Budget Saudi 34.4 38.0 Neutral 30.6 1.1 0.7 14.2 13.8 13.5 2.2 4.4

Halwani Brothers 29.2 24.0 Sell (29.1) 0.7 0.2 23.8 N/M 51.2 2.0 0.0

Herfy 53.5 61.0 Buy 17.3 0.7 0.9 17.0 17.5 16.5 3.7 3.9

Jarir Marketing Co 158.2 198.0 Buy 4.1 9.6 5.1 19.8 18.9 17.1 13.1 5.2

Leejam Sports Co 70.1 88.0 Buy 19.2 2.0 1.0 19.6 18.3 15.8 4.8 3.1

NADEC 25.7 27.0 Neutral (12.7) 0.4 0.6 26.5 18.3 17.0 1.5 0.8

SACO 49.3 57.0 Neutral (25.6) 2.4 0.5 18.1 19.5 16.3 2.9 4.1

SADAFCO 130.8 166.0 Buy 30.3 1.5 1.1 16.2 19.3 17.4 3.3 3.1

Saudi Airlines Catering 89.5 88.0 Neutral 10.5 3.3 2.0 16.0 16.0 14.9 6.1 6.2

Saudi Marketing (Farm Superstores) 14.6 14.0 Neutral (10.5) 0.1 0.2 N/M 38.8 17.9 1.1 0.0

Savola 30.9 33.0 Neutral 15.1 4.1 4.4 N/M 34.6 23.8 2.2 0.0

United Electronics Company 70.0 100.0 Buy 9.4 1.5 0.9 21.6 17.6 14.9 5.3 3.6

EEnneerrggyy

Aldrees Petroleum & Transport Serv. 56.1 64.0 Buy 81.9 2.2 0.9 39.8 45.8 14.2 5.2 1.5


AL Rajhi Bank 63.0 63.0 Neutral 10.8 107.5 42.0 16.9 15.1 15.6 3.3 4.8

Al Rajhi Insurance 57.8 60.0 Neutral (13.6) 1.1 0.6 14.1 23.2 19.1 2.6 0.0

Arab National Bank 27.0 23.0 Neutral 26.7 41.2 10.8 14.2 12.6 13.7 1.5 4.4

AXA Cooperative Insurance 27.0 31.0 Buy 17.5 0.6 0.3 20.6 14.6 13.0 1.7 0.0

Bank Albilad 25.9 20.0 Sell 18.6 2.8 5.2 19.3 16.1 15.3 2.3 3.1

Bank Aljazira 13.8 12.0 Neutral (3.6) 7.4 3.0 12.1 12.3 12.0 1.0 4.1

Banque Saudi Fransi 33.3 31.0 Neutral 6.1 63.6 10.7 13.7 11.8 12.4 1.3 5.5

Bupa 101.0 125.0 Buy 24.7 4.3 3.2 27.8 18.9 15.2 3.9 2.1

Buruj Cooperative Insurance Co 17.4 30.0 Neutral (32.1) 1.1 0.1 6.6 6.2 5.4 0.9 4.9

Malath Insurance 8.6 8.0 Neutral (29.6) 0.8 0.1 N/M N/M 20.2 1.0 0.0

National Commercial Bank 45.3 47.0 Neutral (5.4) 14.4 36.2 14.5 13.7 14.1 2.3 5.0

Riyad Bank 22.2 24.0 Neutral 12.0 9.3 17.8 15.5 11.7 12.2 1.7 4.7

SAIB 16.2 14.0 Neutral (5.3) 0.9 3.2 9.2 8.2 7.6 0.8 4.0

Samba Financial Group 29.8 27.0 Neutral (5.3) 12.2 15.9 12.2 13.4 13.4 1.4 4.8

Saudi British Bank 33.1 38.0 Buy 1.4 38.5 18.1 12.9 17.9 13.2 1.2 3.6

Tawuniya 68.5 83.0 Buy 13.6 4.4 2.3 N/M 52.5 26.0 3.8 0.0

Wala'a Insurance 14.6 11.0 Sell (18.7) 0.4 0.2 9.0 N/M N/M 1.0 0.0


Al Hammadi Co. 19.3 24.0 Neutral (22.9) 1.7 0.6 25.8 26.0 19.6 1.5 0.0

Dallah Healthcare Holding Company 43.0 38.0 Sell (2.8) 0.8 0.9 22.7 29.1 26.7 2.2 2.3

MEAHCO 28.0 24.0 Neutral (13.7) 3.3 0.7 15.0 39.9 36.1 1.7 0.0

Mouwasat 82.4 105.0 Buy 2.4 2.3 2.2 22.9 21.7 19.2 4.8 2.4

National Medical Care Company 48.4 55.0 Neutral (3.8) 0.4 0.6 24.9 27.3 21.5 2.2 2.1

SPIMACO 26.1 17.5 Sell (11.4) 0.4 0.8 30.4 N/M N/M 1.4 0.0


139

EFG Hermes Coverage


FFiigguurree 99:: SSaauuddii AArraabbiiaa ((ccoonnttiinnuueedd))



((SSAARR)) ((%%)) ((UUSSDDmmnn)) ((UUSSDDbbnn)) 22001188 22001199 22002200 22001199 22001199


National Industrialization Company 11.4 16.5 Buy (21.0) 12.6 2.1 6.3 14.0 21.0 0.8 0.0

Saudi Ceramics 31.4 40.0 Buy 61.3 4.6 0.5 N/M N/M 15.5 1.2 0.0

MMaatteerriiaallss

Advanced Petrochemicals 47.3 56.5 Buy 3.0 2.7 2.7 14.3 14.1 24.3 3.0 5.4

Al Jouf Cement Company 8.5 6.5 Sell 9.2 2.3 0.3 N/M N/M 21.4 0.8 0.0

Arabian Cement Company (Saudi) 35.2 35.4 Buy 56.9 1.5 0.9 N/M 21.8 16.1 1.2 4.4

Chemanol 7.3 7.0 Sell (21.5) 1.0 0.2 19.0 N/M N/M 0.8 0.0

City Cement Company 17.1 16.8 Neutral 85.2 1.8 0.9 29.1 21.3 17.9 1.5 3.5

Eastern Province Cement Company 34.0 33.2 Neutral 64.1 0.7 0.8 41.9 17.4 16.0 1.4 5.2

Maaden 41.9 40.0 Sell (15.1) 4.9 13.7 27.9 N/M N/M 1.6 0.0

Northern Region Cement Company 10.9 8.2 Neutral 31.2 1.1 0.5 N/M 28.1 14.6 0.9 0.9

Qassim Cement Company 61.0 51.1 Neutral 81.5 1.8 1.5 45.4 19.4 17.9 3.3 5.0

SABIC 90.8 90.0 Sell (21.9) 51.1 72.6 12.7 26.5 21.8 1.6 4.6

SAFCO 73.5 85.0 Neutral (4.7) 8.2 8.2 17.6 15.1 12.9 3.6 5.4

Saudi Cement Company 69.9 56.0 Sell 44.0 2.0 2.9 26.7 21.7 18.5 3.9 4.7

SIPCHEM 14.9 22.0 Buy (25.2) 6.9 2.9 9.4 19.0 17.6 0.7 4.0

Southern Province Cement Company 59.2 53.2 Neutral 60.7 1.1 2.2 42.6 18.8 16.1 2.6 4.8

Tabuk Cement Company 14.0 17.5 Buy 26.3 0.6 0.3 N/M 59.2 25.2 1.0 0.0

Yamama Cement Company 22.9 20.9 Neutral 79.5 1.2 1.2 N/M 17.3 17.7 1.3 0.0

Yanbu Cement Company 37.5 39.8 Buy 56.0 1.9 1.6 64.7 25.8 18.6 1.9 3.9

YANSAB 48.9 58.0 Neutral (23.4) 7.0 7.3 11.4 19.6 20.4 1.6 7.2


Arabian Centres Co Ltd 27.7 31.5 Neutral N/A 4.3 3.5 14.7 15.4 14.2 2.4 0.0


Etihad Etisalat 22.4 15.4 Sell 35.2 5.1 4.6 N/M N/M N/M 1.3 0.0

Saudi Telecom Company 93.0 92.5 Neutral 1.3 21.2 49.6 16.5 16.5 16.5 3.1 6.5

Zain KSA 11.2 11.4 Buy 34.9 5.5 1.7 19.6 10.7 8.9 1.4 0.0


FFiigguurree 1100:: LLeebbaannoonn



((UUSSDD)) ((%%)) ((UUSSDDmmnn)) ((UUSSDDbbnn)) 22001188 22001199 22002200 22001199 22001199


Bank Audi GDR 3.5 7.2 Buy (27.5) 0.0 1.4 2.7 2.4 2.1 0.4 14.0

BLOM Bank 6.1 14.7 Buy (34.8) 0.0 1.3 2.1 1.9 1.9 0.4 18.8

Byblos Bank 1.1 1.6 Neutral (20.4) 0.0 0.6 4.4 3.6 2.6 0.4 13.9


140

EFG Hermes Coverage


FFiigguurree 1111:: MMoorrooccccoo



((MMAADD)) ((%%)) ((UUSSDDmmnn)) ((UUSSDDbbnn)) 22001188 22001199 22002200 22001199 22001199


Attijariwafa Bank 478.3 529.0 Buy 5.6 1.5 10.4 17.6 16.9 16.2 2.2 2.9

BCP 270.1 231.0 Neutral (3.5) 1.2 5.7 15.8 14.6 13.6 1.5 2.2

BMCE Bank 192.0 226.0 Neutral 9.1 0.9 3.8 11.0 9.9 9.0 1.5 3.1

MMaatteerriiaallss

Ciments du Maroc 1,560.0 1,395.0 Sell (5.5) 0.5 2.3 22.3 22.3 21.7 4.9 4.3


141

EFG Hermes Coverage


FFiigguurree 1122:: PPaakkiissttaann


CCoommppaannyy PPrriiccee TTPP RRaattiinngg YYTTDD PPeerrff.. AADDVVTT MM CCaapp PP//EE ((xx)) PP//BB ((xx)) DDYY ((%%)) ((PPKKRR)) ((%%)) ((UUSSDDmmnn)) ((UUSSDDbbnn)) 22001188 22001199 22002200 22001199 22001199

CCoonnssuummeerr

FrieslandCampina Engro 81.3 40.0 Sell 2.0 0.2 0.4 N/M N/M N/M 7.8 0.0

Honda Atlas Cars 224.5 244.0 Buy 27.2 0.6 0.2 4.9 8.3 16.8 1.8 5.4

Indus Motor Company 1,219.8 1,627.0 Buy 0.0 0.2 0.6 6.1 7.6 14.0 2.4 9.4

Pak Suzuki Motor Co 276.4 156.0 Neutral 58.7 0.2 0.1 17.1 N/M 39.4 0.9 0.0

EEnneerrggyy

Mari Petroleum Company Limited

1,262.4 1,401.0 Neutral 12.4 0.3 1.1 11.0 6.9 6.3 2.4 0.5

Oil & Gas Development Co 128.4 181.0 Buy 0.3 2.5 3.6 7.0 5.0 5.0 0.9 9.3

Pakistan Oilfields 415.5 447.0 Neutral (2.2) 0.4 0.8 10.4 7.0 6.2 3.1 12.0

Pakistan Petroleum 119.1 162.0 Neutral (4.5) 1.6 2.1 6.2 5.8 5.9 1.1 4.2

Pakistan State Oil Co 197.6 352.0 Buy (12.3) 3.8 0.5 3.9 4.2 4.0 0.6 8.4


Allied Bank 98.0 132.0 Buy (8.8) 0.1 0.7 8.5 8.5 6.7 1.0 8.2

Bank Alfalah 48.1 61.0 Buy 18.6 0.6 0.6 7.8 6.3 5.3 1.0 5.2

Habib Bank 154.7 185.0 Buy 28.4 1.6 1.5 18.8 16.9 8.0 1.1 3.2

MCB Bank 216.2 255.0 Buy 11.7 1.2 1.7 12.6 11.6 8.4 1.7 7.4

Meezan Bank 90.4 105.0 Buy 7.6 0.8 0.8 13.0 7.4 5.8 2.2 4.3

National Bank Of Pakistan 44.2 51.0 Buy 5.1 0.9 0.6 4.7 3.7 3.2 0.4 0.0

United Bank 171.4 205.0 Buy 39.7 1.7 1.4 13.6 10.9 6.9 1.2 6.4


The Searle Company 206.3 196.0 Buy (16.0) 2.8 0.3 16.3 21.9 23.8 3.6 2.1


Pak Elektron 28.0 16.0 Neutral 12.2 2.9 0.1 10.5 42.5 20.5 0.5 0.0

MMaatteerriiaallss

Cherat Cement Co 52.2 35.0 Sell (25.1) 0.8 0.1 4.3 3.3 N/M 0.7 2.9

D.G. Khan Cement 76.8 81.0 Neutral (4.2) 3.5 0.2 3.8 10.3 16.5 0.4 5.2

Engro Fertilizers 70.6 88.0 Buy 2.2 1.3 0.6 5.4 6.3 5.6 2.1 15.6

Fauji Cement Co 16.3 14.0 Sell (22.4) 0.9 0.1 6.5 9.6 17.0 1.1 9.2

Fauji Fertilizer Bin Qasim 23.9 31.0 Buy (35.9) 0.7 0.1 14.2 25.9 14.6 1.4 0.0

Fauji Fertilizer Company 104.6 121.0 Buy 12.7 1.7 0.9 8.1 7.5 7.1 2.1 9.7

Kohat Cement Co 80.2 102.0 Buy (5.6) 0.2 0.1 4.2 4.8 4.1 0.8 3.7

Lucky Cement 427.7 589.0 Buy (1.6) 3.4 0.9 9.3 12.1 10.4 1.3 2.3

Maple Leaf Cement Factory 24.3 50.0 Buy (40.2) 1.3 0.1 3.1 2.7 5.9 0.4 5.1

Pioneer Cement 34.1 34.0 Buy (18.7) 1.1 0.1 4.7 7.6 3.2 0.6 2.9

UUttiilliittiieess

Hub Power Company 93.1 168.0 Buy 12.9 1.7 0.8 10.9 10.3 4.0 2.1 0.0

Kot Addu Power Company 33.6 60.2 Buy (32.3) 0.4 0.2 2.8 2.3 1.7 0.7 13.4


142

EFG Hermes Coverage


FFiigguurree 1133:: VViieettnnaamm



((VVNNDD)) ((%%)) ((UUSSDDmmnn)) ((UUSSDDbbnn)) 22001188 22001199 22002200 22001199 22001199

CCoonnssuummeerr

Masan Group Corp 62,500.0 96,200.0 Buy (19.4) 3.3 3.1 19.6 15.4 12.0 2.1 0.0 Mobile World Investment Corp

113,000.0 200,900.0 Buy 29.9 3.6 2.2 20.3 14.8 11.6 4.2 1.5

Vietnam Dairy Products 118,800.0 120,900.0 Neutral (1.0) 4.9 8.9 23.5 22.0 20.1 8.3 4.2


Asia Commercial Bank 23,100.0 40,832.0 Buy 1.5 1.6 1.6 11.2 6.4 6.4 1.4 0.0

Bank For Foreign Trade 84,700.0 79,230.0 Neutral 58.3 2.7 13.6 23.6 17.8 15.4 3.7 0.0

MB Bank 22,200.0 45,819.0 Buy 17.2 3.3 2.0 9.5 6.4 5.9 1.4 0.0

Vietnam Prosperity Jsc Bank 19,750.0 72,805.0 Buy (1.0) 1.3 2.1 7.1 5.5 4.1 1.1 0.0 Vietnam Technological & Commercial Bank

23,450.0 35,692.0 Buy (9.3) 1.5 3.5 9.6 8.5 7.9 1.3 0.0


Vietjet Aviation 145,500.0 121,100.0 Neutral 22.3 2.8 3.3 30.0 27.0 20.1 4.6 2.1

IInnffoorrmmaattiioonn TTeecchhnnoollooggyy

FPT Corp 55,400.0 78,400.0 Buy 44.4 3.5 1.6 16.3 12.4 10.6 2.7 4.5


FFiigguurree 1144:: KKeennyyaa



((KKEESS)) ((%%)) ((UUSSDDmmnn)) ((UUSSDDbbnn)) 22001188 22001199 22002200 22001199 22001199

CCoonnssuummeerr

East African Breweries 196.0 240.0 Buy 12.2 0.4 1.5 27.2 17.4 17.0 4.7 4.1

EEnneerrggyy

Total Kenya 28.8 31.2 Neutral 4.7 0.0 0.0 7.8 6.9 6.0 0.2 4.4


Co-operative Bank of Kenya 16.0 18.5 Buy 11.5 0.1 0.9 7.3 7.5 7.3 1.2 6.3

Equity Group Holdings 51.8 73.7 Buy 48.5 1.8 1.9 9.9 9.6 7.4 1.8 3.9

KCB Group 51.5 88.5 Buy 37.5 0.6 1.5 6.6 6.8 6.0 1.2 6.7

Stanbic Holdings Limited 105.0 184.0 Buy 15.7 0.0 0.4 6.6 6.0 4.9 0.8 6.0

MMaatteerriiaallss

Bamburi Cement Co 84.8 75.9 Sell (36.0) 0.0 0.3 34.6 N/M 64.4 1.0 0.4

East African Portland Cement 14.5 4.8 Sell (9.4) 0.0 0.0 0.2 N/M N/M 0.1 0.0


Safaricom 29.4 29.3 Neutral 32.4 1.9 11.6 21.3 18.9 17.1 8.2 4.2

UUttiilliittiieess

Kenya Electricity Generating 5.9 8.3 Buy (15.1) 0.0 0.4 5.0 5.7 3.6 0.2 6.2


143

EFG Hermes Coverage


FFiigguurree 1155:: NNiiggeerriiaa


CCoommppaannyy PPrriiccee TTPP RRaattiinngg YYTTDD PPeerrff.. AADDVVTT MM CCaapp PP//EE ((xx)) PP//BB ((xx)) DDYY ((%%)) ((NNGGNN)) ((%%)) ((UUSSDDmmnn)) ((UUSSDDbbnn)) 22001188 22001199 22002200 22001199 22001199

CCoonnssuummeerr

Guinness Nigeria 29.0 25.0 Sell (59.7) 0.0 0.2 8.8 11.6 88.1 0.7 6.3

International Breweries 10.1 20.0 Sell (66.9) 0.0 0.3 N/M N/M 21.6 2.8 0.0

Nestle Nigeria 1,350.0 1,485.0 Neutral (9.1) 0.7 3.5 24.9 22.3 21.9 22.3 4.7

Nigerian Breweries 51.1 55.0 Neutral (40.3) 0.8 1.3 20.9 26.1 21.3 2.5 4.5


Access Bank 9.3 15.1 Buy 36.8 0.4 0.9 2.9 3.7 4.8 0.6 5.3

FBN Holdings 6.8 13.0 Buy (14.5) 0.4 0.8 4.1 6.3 3.1 0.4 3.9

Guaranty Trust Bank 30.3 44.8 Buy (12.2) 1.4 2.9 4.8 4.7 4.1 1.3 9.9

Stanbic IBTC Holdings 36.8 41.8 Neutral (23.3) 0.1 1.2 5.2 5.4 5.3 1.4 6.8

United Bank for Africa 7.0 10.7 Buy (9.7) 0.3 0.8 3.2 3.3 3.0 0.5 12.2

Zenith Bank 18.7 33.8 Buy (18.9) 1.3 1.9 3.0 3.0 2.8 0.7 15.5

MMaatteerriiaallss

Dangote Cement 143.0 157.0 Neutral (24.6) 0.7 8.0 6.3 10.5 10.6 2.6 7.1

Lafarge Africa 13.9 19.0 Buy 11.6 0.1 0.7 N/M 9.2 5.2 0.6 5.4


FFiigguurree 1166:: TTaannzzaanniiaa


CCoommppaannyy PPrriiccee TTPP RRaattiinngg YYTTDD PPeerrff.. AADDVVTT MM CCaapp PP//EE ((xx)) PP//BB ((xx)) DDYY ((%%)) ((TTZZSS)) ((%%)) ((UUSSDDmmnn)) ((UUSSDDbbnn)) 22001188 22001199 22002200 22001199 22001199

CCoonnssuummeerr

Tanzania Breweries 10,900.0 12,000.0 Neutral (15.5) 0.0 1.4 26.0 18.0 16.3 5.4 4.2


CRDB Bank 95.0 220.0 Buy (36.7) 0.0 0.1 3.9 2.0 1.5 0.3 15.8

National Microfinance Bank 2,340.0 1,219.0 Sell 0.0 0.0 0.5 11.5 10.8 7.5 1.3 3.1

MMaatteerriiaallss

Tanga Cement Co 600.0 452.0 Sell (6.3) 0.0 0.0 N/M N/M N/M 0.3 0.0

Tanzania Portland Cement Co 2,000.0 2,413.0 Buy (2.9) 0.0 0.2 6.3 6.5 6.7 1.6 13.8


144

EFG Hermes Coverage


FFiigguurree 1177:: BBaannggllaaddeesshh



((BBDDTT)) ((%%)) ((UUSSDDmmnn)) ((UUSSDDbbnn)) 22001188 22001199 22002200 22001199 22001199

CCoonnssuummeerr

British American Tobacco 1,071.7 1,201.0 Neutral (9.2) 0.3 2.3 19.3 19.8 17.1 5.3 2.0

Marico Bangladesh Ltd 1,715.2 1,572.0 Neutral 42.9 0.0 0.6 32.9 26.7 20.1 41.5 3.8

Olympic Industries 165.7 205.0 Neutral (23.4) 0.1 0.4 18.5 17.7 15.7 4.6 3.1

Singer Bangladesh 181.6 253.0 Buy 6.7 0.2 0.2 19.6 15.7 12.7 5.5 3.2


BRAC Bank 58.5 75.8 Buy (7.5) 0.5 0.9 11.0 12.5 10.6 1.8 1.2

Eastern Bank Ltd 34.9 39.7 Buy 6.6 0.2 0.3 8.3 8.8 8.0 1.1 3.4

Prime Bank Ltd 19.0 13.0 Sell 5.0 0.1 0.3 9.5 12.0 12.4 0.8 4.2

The City Bank 22.7 23.7 Sell (21.1) 0.7 0.3 9.9 8.3 8.2 0.8 1.8


Beximco Pharmaceuticals 79.7 95.0 Neutral 0.8 0.3 0.4 12.7 10.7 10.7 1.1 2.0

Renata 1,163.5 751.0 Sell 12.1 0.2 1.2 33.2 29.0 24.0 5.6 0.8

Square Pharmaceuticals 201.4 301.0 Buy (15.2) 1.0 2.0 14.7 13.4 11.3 2.5 2.1


FFiigguurree 1188:: BBoottsswwaannaa



((BBWWPP)) ((%%)) ((UUSSDDmmnn)) ((UUSSDDbbnn)) 22001188 22001199 22002200 22001199 22001199

CCoonnssuummeerr

Choppies 0.7 2.2 Sell 0.0 0.0 0.1 10.6 9.8 6.7 0.5 3.2


FFiigguurree 1199:: GGeeoorrggiiaa



((GGBBPP)) ((%%)) ((UUSSDDmmnn)) ((UUSSDDbbnn)) 22001188 22001199 22002200 22001199 22001199


Bank Of Georgia Group Plc 14.9 22.6 Buy 8.3 0.8 1.0 6.0 6.6 5.9 1.3 4.4

TBC Bank Georgia 12.4 19.1 Buy (17.6) 0.2 0.9 6.0 5.3 4.9 1.0 4.1


FFiigguurree 2200:: MMaauurriittiiuuss



((MMUURR)) ((%%)) ((UUSSDDmmnn)) ((UUSSDDbbnn)) 22001188 22001199 22002200 22001199 22001199


MCB Group 285.0 432.0 Buy 4.3 0.0 1.9 9.4 7.2 6.9 1.2 4.6

SBM Holdings 5.5 8.6 Buy (7.4) 0.0 0.5 11.4 8.7 6.0 0.6 7.3


145

EFG Hermes Coverage


FFiigguurree 2211:: RRwwaannddaa


CCoommppaannyy PPrriiccee TTPP RRaattiinngg YYTTDD PPeerrff.. AADDVVTT MM CCaapp PP//EE ((xx)) PP//BB ((xx)) DDYY ((%%)) ((RRWWFF)) ((%%)) ((UUSSDDmmnn)) ((UUSSDDbbnn)) 22001188 22001199 22002200 22001199 22001199


BK Group Plc 265.0 319.0 Buy (4.7) 0.0 0.2 8.7 8.1 6.9 1.1 3.7


FFiigguurree 2222:: UUggaannddaa


CCoommppaannyy PPrriiccee TTPP RRaattiinngg YYTTDD PPeerrff.. AADDVVTT MM CCaapp PP//EE ((xx)) PP//BB ((xx)) DDYY ((%%)) ((UUGGXX)) ((%%)) ((UUSSDDmmnn)) ((UUSSDDbbnn)) 22001188 22001199 22002200 22001199 22001199


Development Finance Co. 650.0 1,089.0 Buy (21.0) 0.0 0.1 4.6 4.1 3.4 0.6 7.3

Stanbic Bank Uganda 23.5 37.3 Buy (24.1) 0.3 0.3 6.0 5.2 4.1 1.1 8.7

UUttiilliittiieess

Umeme (Uganda) 272.0 404.0 Buy (15.0) 0.0 0.1 3.3 2.9 2.5 0.5 6.8


FFiigguurree 2233:: GGhhaannaa


CCoommppaannyy PPrriiccee TTPP RRaattiinngg YYTTDD PPeerrff.. AADDVVTT MM CCaapp PP//EE ((xx)) PP//BB ((xx)) DDYY ((%%)) ((GGHHSS)) ((%%)) ((UUSSDDmmnn)) ((UUSSDDbbnn)) 22001188 22001199 22002200 22001199 22001199


Ecobank Ghana 7.9 6.8 Neutral 5.3 0.0 0.5 7.2 6.2 5.3 1.6 8.0

Ghana Commercial Bank 4.9 5.8 Buy 6.5 0.0 0.2 4.0 3.2 2.8 0.7 6.3

Standard Chartered Bank 13.0 11.1 Sell (38.1) 0.1 0.3 8.4 6.5 5.1 1.5 7.7


146

EFG Hermes Coverage


FFiigguurree 2244:: SSrrii LLaannkkaa



((LLKKRR)) ((%%)) ((UUSSDDmmnn)) ((UUSSDDbbnn)) 22001188 22001199 22002200 22001199 22001199

CCoonnssuummeerr

Ceylon Tobacco 1,130.0 1,362.0 Buy (20.1) 0.0 1.2 12.4 11.5 10.6 31.1 8.5


Commercial Bank of Ceylon 98.0 110.0 Neutral (13.4) 0.3 0.5 5.6 7.0 6.2 0.8 4.6

Hatton National Bank 177.0 235.0 Buy (16.1) 0.1 0.4 5.0 6.6 5.0 0.6 2.8

Sampath Bank 171.3 214.0 Buy (23.4) 0.3 0.4 3.6 6.4 5.2 0.6 2.9


FFiigguurree 2255:: OOtthheerr



((GGBBPP)) ((%%)) ((UUSSDDmmnn)) ((UUSSDDbbnn)) 22001188 22001199 22002200 22001199 22001199


ASA International Group Plc 2.9 4.2 Buy (31.1) 0.0 0.4 15.8 9.7 8.5 3.5 3.1

Finablr Plc 2.1 2.3 Buy N/A 0.7 1.9 N/M 29.9 20.7 3.6 0.0


Helios Towers 1.4 1.6 Buy N/A 0.2 1.8 N/M N/M N/M 8.6 0.0


2020

Contacts & Disclaimer

THE YEAR AHEAD20

Research Contacts

Sales Contacts

Disclaimer

Research Contacts 148

Sales Contacts 150

Disclaimer 151

148

NAME POSITION E-MAIL DIRECT NUMBER

Ahmed Shams El Din Managing Director, Head of Research [email protected] +20 2 35356143

Macroeconomic

Mohamed Abu Basha Director, Head of Macroeconomic Analysis [email protected] +20 2 36361157

Mostafa El Bakly Analyst, Macroeconomic Analysis [email protected] +20 235356259

Strategy

Simon Kitchen Managing Director, Head of Strategy [email protected] +44 (0)20 7062 2163

Mohamed Al Hajj Vice President, Head of MENA Strategy [email protected] +971 4 364 1903

Farah Hamza Associate, Strategy [email protected] +20 2 35356289

Vinita Kotedia Associate, Strategy [email protected] +25 4713713242

Chemicals & Materials

Yousef Husseini Associate Director, Chemicals [email protected] +20 2 35356013

Sameer Kattiparambil Vice President, Materials [email protected] +968 2476 0023

Dina Hicham Associate, Materials [email protected] +20 2 35356049

Salma El-Feqy Analyst, Chemicals [email protected] +20 2 35356322

Consumer & Healthcare

Hatem Alaa, CFA Deputy Head Of Research & Head of Consumer Sector [email protected] +20 2 35356156

Nada Amin Associate Director, Consumer & Healthcare [email protected] +20 2 35356385

Ahmed Moataz Associate, Consumer & Healthcare [email protected] +20 2 35356515

Mirna Maher Associate, Consumer & Healthcare [email protected] +20 2 35356141

Financials

Elena Sanchez-Cabezudo, CFA Managing Director, Head of Financials [email protected] +971 4 363 4007

Shabbir Malik Director, Financials [email protected] +971 4 363 4009

Rajae Aadel Vice President, Financials [email protected] +971 4 363 4003

Ahmed El Shazly Associate, Financials [email protected] +20 2 35356570

Industrials / Small & Mid-Caps

Ahmed Hazem Maher Vice President, Industrials / Small & Mid-Caps [email protected] +20 2 35356137

Alaa Saleh Aly Analyst, Industrials / Small & Mid-Caps [email protected] +20 2 35356562

Menna Khafaga Analyst, Industrials / Small & Mid-Caps [email protected] +20 2 35356387

Real Estate & Construction

Mai Attia Managing Director, Head of Real Estate & Construction [email protected] +20 2 35356434

Shaza Shaker Analyst, Real Estate & Construction [email protected] +20 2 35356070

Telecommunications

Omar Maher Associate Director, Telecommunications [email protected] +20 2 35356388

Karim Sherif Associate, Telecommunications [email protected] +20 2 35356152

Frontier

Kato Mukuru Managing Director, Head of Frontier [email protected] +971 4 364 1904

Murad Ansari Managing Director, Head of Asia [email protected] +971 4 363 4010

Fahad Shaikh, CFA Vice President, South Asian Consumer [email protected] +971 4 363 4005

CONTACTSRE

SEAR

CH T

EAM

149

NAME POSITION E-MAIL DIRECT NUMBER

Adrian Cundy Director, Vietnam Country analyst [email protected] +971 4 363 4042

Jawad Shamim, CFA Associate VP, Cement / Bank support [email protected] +92 21 35141104

Muammar Ismaily Associate VP, Financials [email protected] +254 20 374 3036

Moses Waireri Njuguna, CFA Associate VP, Cement /Consumer [email protected] +254 20 374 3038

Rebia Qadri Associate, Fertilizers / Conglo. / Consumer [email protected] +92 21 35141104

Saleem John Associate, Data Management [email protected] +92 21 35141104

Haris Imtiaz Associate [email protected] +92 21 35141104

Muhammad Daniyal Kanani Associate, Power Utilities [email protected] +92 21 35141104

Silha Rasugu Associate VP, Utilities / Telcos / Oil and Gas [email protected] +254 20 374 3037

Luis Colaco, CFA Director, Sub-Saharan Consumers [email protected] +44 7500 515721

Ronak Gadhia, CFA Director, Sub-Saharan Banks [email protected] +44 20 7518 2905

Farah Tasnim Huque Associate, Bangladesh Consumer [email protected] +88 0173 0727 913

Kazi Raquib, CFA Associate, Bangladesh Pharmaceuticals [email protected] +88 0173 0727 931

Koyinsola Gbenro Analyst, Financials Nigeria [email protected] +234 906 281 4928

Oyinkansola Fagbulu Analyst, Non-financials coverage in West Africa [email protected] +234 809 435 6973

Editing Team

Russell Curtis Director, Supervisory Analyst [email protected] +971 4 364 1902

Rehab El Kobtan Associate Director, Editor [email protected] +20 2 35356311

Amr Shehata Vice President, Editor [email protected] +20 2 35356284

Production & Distribution

Haidy Samir Director, Head of Production & Distribution [email protected] +20 2 35352180

David Nasr Associate VP, Production & Distribution [email protected] +20 2 35356500

Sandra Azer Associate, Production & Distribution [email protected] +20 2 35356469

Reem Sakr Analyst, Production & Distribution [email protected] +20 2 35356392

Quantitative Research

Ahmed Difrawy Director, Head of Quantitative research [email protected] +20 2 35356144

Refaat Mahmoud Vice President, Quantitative research [email protected] +20 2 35356095

Yousef Mourad, CFA Associate VP, Quantitative research [email protected] +20 2 35356572

Ahmed Abdelmeged Associate, Quantitative research [email protected] +20 2 35356065

Mohamed El Kholy Associate, Quantitative research [email protected] +20 2 35356179

Retail

Sandra Raef Vice President, Retail [email protected] +20 2 35356059

Ahmed Nabil Sarhan Retail Strategist [email protected] +20 2 35356442

Boulos Berzy Analyst [email protected] +20 2 35356597

Shaimaa El Sarky Associate VP [email protected] +20 2 35356163

Mohamed El Gebaly Translator [email protected] +20 2 35356000

Admin

Fuyumi Archer Senior Executive Support Manager, Research [email protected] +9714 363 4008

Nermeen Abdel Khalek MiFID Operational & Administrative Manager, Research [email protected] +20 2 35356684

Sherouq Abdelsalam Department Assistant, Research [email protected] +20 2 35356107

RESE

ARCH

TEA

M

CONTACTS

150

NAME E-MAIL DIRECT NUMBER

Institutional Sales

Cairo Office

Mohamed Aly [email protected] +20 2 35356052

Wael El Tahawy [email protected] +20 2 35356359

Yasser Waly [email protected] +20 2 35356339

Ahmed Hashem [email protected] +20 2 35356286

Carol Aziz [email protected] +20 2 35356312

Dubai Office

Ramy El Essawy [email protected] +971 43634093

Ayah Abou Steit [email protected] +971 43634091

London Office

Sruti Patel [email protected] +44 2075182903

Claire te Riele [email protected] +44 207 518 2907

New York Office

Karim Baghdady [email protected] +1 2123151292

Miljana Asanovic [email protected] +1 2123151373

Srikanth Ramanathan [email protected] +1 2015546005

Nairobi Office

Muathi Kilonzo [email protected] +254 2037433032

Joram Ongura [email protected] +2540791691010

Karachi Office

Saad Iqbal [email protected] +92 2135141140

Lagos Office

Olamide Shonekan [email protected] +234 7086457441

GCC High Net Worth Sales

Hatem Adnan [email protected] +20 2 35351083

Hany Ghandour [email protected] +20 2 35356007

Rami Samy [email protected] +971 43634099

Individual Sales

Bassam Nour [email protected] +20 2 35356069

SALE

S TE

AM

CONTACTS

151

DISCLAIMERBangladesh Banks 09 December 2019

Financials Bangladesh

Page 1 of 2

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152

DISCLAIMERBangladesh Banks 09 December 2019

Financials Bangladesh

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Rating Potential Upside (Downside) %

Buy Above 15%

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Sustainability and Responsible Investment EFG Hermes believes that there can be no long-term prosperity without responsible investment and a long-term commitment to sustainable practices at all levels of operation. From our initial commitment to the United Nations Global Compact and the articulation of our social purpose in 2014 to our signing of the United Nations Principles for Responsible Investment (PRI) in 2018, we have been taking measured but determined steps to align our business with environmental, social and governance (ESG) factors. In 2019, we submitted our first report as signatories of the United Nations PRI, and we are proud to have assembled an investment portfolio that includes initiatives that directly feed into the Sustainable Development Goals (SDGs) in areas ranging from education and clean energy to microfinance and technology. Our journey to sustainability over the past eight years has provided us with a solid base that allows us to identify ESG-related value and risk with the same diligence as any other business threat, particularly in areas that relate to Climate Change. As market leaders, we also recognize that it is our duty to act as catalysts for wider change within our industry and within the communities where we do business. We believe that the partnerships we have forged and continue to initiate can help realize the SDGs and actively contribute to the future health and prosperity of both business and society.

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