out of africa - Old Mutual Investment Group

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Let me start by saying that visiting Cairo in December makes a lot of sense: • You get to find out how the listed comp
OLD MUTUAL EQUITIES

OUT OF AFRICA EGYPT | DECEMBER 2017

INVESTORS AND TOURISTS RETURN TO EGYPT Cavan Osborne, Fund Manager

When I visit Egypt I come away questioning why I spend so much

FAST FACTS 92 MILLION

time researching and analysing companies in the many illiquid

Total population. World’s largest Arab population1 (2016)

African stock exchanges, when Egypt seems to always offer such interesting investment opportunities – both to buy and sell shares! It is one of the few places in Africa where you can invest in the manufacturing sector outside of traditional food and beverages. The

Cairo is the largest city in Africa (2015)

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Egyptian Exchange (EGX) has over 200 listed companies.

95%

Population living along the Nile River2

For the second time, I travelled solo after the Egyptian embassy

30%

Working population in agriculture and 12% in tourism (2016 est)2

issued me with a visa, but declined my Moroccan-born colleague Sanaa Zarif a visa. Once again, no reasons were given. With the team’s only Arabic speaker sitting in Cape Town, company

Sudan has more pyramids than Egypt1

management meetings were more of a challenge. Fortunately, many of the people I met with spoke English. Let me start by saying that visiting Cairo in December makes a lot of

The Statue of Liberty was intended for Egypt

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sense: • You get to find out how the listed companies have performed going into the close of the year, and discuss the prospects

Cairo’s annual average rainfall is 26 mm (1 in)3

for 2018. • The winter weather is perfect. Temperatures varied from around 12°C in the morning to 25°C in afternoon.

No Egyptian president has left office without being arrested or dying4 Cleopatra, the last Pharaoh of Egypt, was actually Greek, not Egyptian1 Alexandria library has a copy of all the web pages on every website on the internet since it started in 19965

• Traffic is tolerable, but maybe I have finally acclimatised to traffic volumes in a city of more than 20 million people. Apparently, I did get a little lucky as some roads coming in from the east of Cairo were closed because of mist. • And, finally, if your timing is right, you can catch five days of festivities. Ancient Egyptians used 12 months of exactly 30 days each, with five days of festivities at the end to make up 365 days.

IS THE TIDE FINALLY TURNING FOR THE TOURIST INDUSTRY Tourist Arrivals (millions) 14.7 12.8

12.5

11.5

11.1 8.6

9.1

9.8

9.5

9.9

9.3 6.7 5.3

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 to Oct Source: Campas, as at 31 October 2017

TOLERABLE TRAFFIC While in Cairo, I met with companies from a variety of industries: • Our analysis shows the banks continue to make record Ever since I have been investing in Egypt, it seems to have been

profits as they benefit from the high interest rates. However,

going through difficult times. There was the Arab Spring in 2011

the government is looking to charge a levy of 5% on banks’

and then a military takeover (and don’t call it a coup!) that

net profits. • The cement industry is expected to remain under pressure

displaced the first democratically elected president after Hosni Mubarak was unseated. This followed a period where we could not

in the short and medium term, as the Egyptian army is set

get money out of the country. Ultimately, it culminated in the currency

to open a 12-million tonne plant (adding around 15% new

being massively devalued in late 2016. Fast forward to today, and

capacity).

Egypt is now looking the most attractive of all the larger African

• Our research of the fertiliser businesses shows they are

markets in which we invest. The reasons for this are:

performing well. The weak currency means that export profits

• We expect the currency to be stable.

are strong.

• The EGX 30 Index is looking reasonable at a price:earnings (PE) ratio of around 10 times. • We estimate company earnings to grow at around 15% in 2018. • The economy is back on track, with a GDP growth outlook of around 5% in 2018. • Tourism, an important foreign revenue generator, is picking up again. For the first time in five years, I had to share my row of seats on the EgyptAir flight from Johannesburg to

• The food producers have been through a difficult time, as consumers are faced with high inflation. However, this is now in the base and we expect volumes to start recovering. Interestingly, the past two years have been a great exercise in seeing which consumer categories are defensive and which are discretionary – also known as elasticity of demand. The clear winner as the “defender of the year” is tobacco! The near-monopoly cigarette producer (or as SABMiller used to term it… the “temporary sole supplier”) Eastern Tobacco Company has been one of the

Cairo.

best performers this year, up nearly 200%. I am always fascinated by how little consumer goods cost in Egypt. Cigarette prices have

EGYPT IS LOOKING MORE ATTRACTIVE EGX 30 Index PE Ratio 20

PE – NTM (9.9)

just been hiked, but the local brands (like Cleopatra) still sell for

Average (9.9)

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less than US$1 per pack. I bought a bottle of cough syrup, which

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cost 5 Egyptian pounds (EGP) − less than US30c. A Twinkies cake

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retails for EGP1.5, which is less than US10c. Despite the low selling

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prices, somehow the whole value chain is making a margin along

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the way!

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Our portfolio has a variety of investments in Egypt. The largest

6 4 2005

single holding is in Commercial International Bank. The bank has 2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Source: FactSet, 30 September 2017

a history of delivering strong returns, has low costs and has been

tucking away excess provisions wherever possible. The bank’s current strategy is to gather deposits at very cheap rates and reinvest this money in government securities. This means paying people as little as possible on their deposits and then lending this money to the government for somewhere in the range of 15% to 20%! The great thing about lending to the government is that the bank doesn’t have the cost of non-performing loans and customers defaulting. We also have exposure to some of the consumer companies where we expect earnings to recover. Our portfolio delivered strong returns in 2017. A large part of this came from its exposure to Egypt – in particular, our investments in cheese producer Obour Land and Eastern Tobacco Company. We

GRAND OLD BUILDING ALONG THE NILE RIVER

expect our Egyptian positions to continue to generate good returns during 2018.

BLACK IS SEEN AS SAD – INSTEAD, THEY HAVE A WHITE FRIDAY

EGYPTIAN KIT KAT

REFERENCES 1 wikipedia.org 2 Egypt. CIA—The World Factbook. 3 www.cairo.climatemps.com 4 www.npr.org 5 www.bibalex.org

FIRST STOP ON ANY TRIP IS A LOCAL SIM CARD. AT THESE RATES, MTN MIGHT BE BUY OF THE YEAR.

CAVAN OSBORNE

PORTFOLIO MANAGER, OLD MUTUAL EQUITIES Cavan is passionate about Africa and spends as much time on the ground as possible, getting a real sense of what is happening socially, politically and economically in each of the countries in which he invests. He manages Old Mutual’s Africa capabilities. Cavan has 18 years’ investment industry experience, including portfolio management and investment and company research. OLD MUTUAL INVESTMENT GROUP: 2016 SINGLE MANAGER AWARDS Best Actively Managed Equity Fund (1 Year): African Frontiers Fund & Best African Domiciled Asset Manager 2016

CONTACT DETAILS: Old Mutual Investment Group (Pty) Ltd, PO Box 878, Cape Town 8000. Tel: +27 21 509 5022 Fax: +27 21 509 4663 www.oldmutualinvest.com Old Mutual Investment Group (Pty) Ltd (Reg No 1993/003023/07) (FSP 604) and each of its separately incorporated boutiques (jointly referred to as Old Mutual Investment Group) are licensed financial services providers, approved by the Registrar of Financial Services Providers (www.fsb.co.za) to provide advisory and/or intermediary services and advice in terms of the Financial Advisory and Intermediary Services Act 37, 2002. Old Mutual Investment Group (Pty) Ltd is a wholly owned subsidiary of Old Mutual Investment Group Holdings (Pty) Ltd and is a member of the Old Mutual Investment Group. Market fluctuations and changes in rates of exchange or taxation may have an effect on the value, price or income of investments. Since the performance of financial markets fluctuates, an investor may not get back the full amount invested. Past performance is not necessarily a guide to future investment performance. The investment portfolios may be market-linked or policy based. Investors’ rights and obligations are set out in the relevant contracts. Unlisted investments have short-term to long-term liquidity risks and there are no guarantees on the investment capital nor on performance. It should be noted that investments within the fund may not be readily marketable. It may therefore be difficult for an investor to withdraw from the fund or to obtain reliable information about its value and the extent of the risks to which it is exposed. The value of the investment may fluctuate as the value of the underlying investments change. In respect of pooled, life wrapped products, the underlying assets are owned by Old Mutual Life Assurance Company (South Africa) Ltd, who may elect to exercise any votes on these underlying assets independently of the Old Mutual Investment Group. In respect of these products, no fees or charges will be deducted if the policy is terminated within the first 30 days. Returns on these products depend on the performance of the underlying assets. Disclosures: Personal trading by staff is restricted to ensure that there is no conflict of interest. All directors and those staff who are likely to have access to price sensitive and unpublished information in relation to the Old Mutual Group are further restricted in their dealings in Old Mutual shares. All employees of the Old Mutual Investment Group are remunerated with salaries and standard incentives. Unless disclosed to the client, no commission or incentives are paid by the Old Mutual Investment Group to any persons other than its representatives. All intra-group transactions are done on an arm’s length basis. We outsource investment administration of our local funds to Curo Fund Services (Pty) Ltd, 35% of which is owned by Old Mutual Investment Group Holdings (Pty) Ltd. Disclaimer: The contents of this document, and to the extent applicable, the comments by presenters do not constitute advice and the information is being distributed to you at your request. This document is not an advertisement and is not intended for general public distribution. The information does not constitute an offer or a solicitation of an offer to buy any securities or use any of the Old Mutual Investment Group’s services in particular where such an offer or invitation is not lawful, nor has it been prepared in connection with any such offer or invitation. The Old Mutual Investment Group has comprehensive crime and professional indemnity insurance. For more detail, as well as for information on how to contact us and on how to access information, please visit www.oldmutualinvest.com