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MARKET WATCH	REGIONAL SOUKS

…And a rally it is

The period from August 16 to September 15 saw the market continue to surge with several shares setting 52-week and all-time highs. Both the broad-based Hermes Financial Index and the broader CIBC Index advanced higher, up 22 percent and 2 percent to 19969.03 and 100.13 respectively. The two indices have now climbed 72 percent and 26 percent respectively since the start of the year. The bottom line is: it’s a rally!

Supporting the overall rally is news of yet two more macroeconomic stimuli: reduced customs tariffs and proposed reductions of both personal and corporate income tax rates. The former was effected early September, whereas the latter will be introduced into a new draft law to be submitted for approval by the People’s Assembly in its upcoming session in November. These two stimuli clicked with foreign investors in particular as some of them stood on the sidelines waiting to see what changes would come out of the new government. The changes came quicker than expected, which partially helped contribute to the outstanding performance in the previous period. Foreign investors’ trading volumes increased noticeably over the period as the changes were shown to be “real.” The Euromoney conference held towards the end of the period (Sep 14-15) helped shed some light on the new government’s agenda, which will probably lead to more foreign investors putting Egypt on their radar screens.

While only companies that import their needs will benefit from the reduction of customs tariffs, almost all companies will benefit from the lower corporate tax rate. With companies paying either 40 percent or 32 percent (depending on the type of their business), a 20-percent flat tax rate is a direct increase in those companies’ bottom line. Yet, share prices were somewhat pulled lower after the period as the market began digesting the new draft law. Uncertainty surrounding the elimination of other tax exemptions overshadowed the positive news of lower corporate tax rates. Two major exemptions are yet to be confirmed in the new draft law: (1) deduction of approximately 10 percent of all listed companies’ paid-in capital from their taxable income and (2) levying taxes on income from listed securities (interest and dividend). Whether or not a capital gains tax will be imposed is yet unknown. However, imposing further taxes is probably unlikely as it contradicts with what the new government has been doing so far in terms of turning the economic environment into a more investor-friendly one.

Two listed companies that stand to benefit tremendously from the reduction of customs and tax rates are Egypt’s local mobile operators, MobiNil and Vodafone Egypt (VE). Their share prices leapt to £E 117.43 and £E 44.73, or 24 percent and 18 percent, respectively. For MobiNil, the share price crossed the psychological £E 100 level and hit a 52-week high of £E 122.50. Meanwhile, VE saw its share price advance to the higher £E 40s. This was due in part to Mobile Systems International (MSI) concluding the sale of its stakes in VE, hence taking out of the market the oversupply that was pushing the share price lower whenever it crept up.

Orascom Telecom Holding (OTH), on the other hand, climbed higher on the back of its road show in the US, which raised investors’ hopes for OTH as an acquisition target, especially with the growth rates it is showing in terms of subscribers and profitability. The share price fell just shy of touching the £E 200 mark, recording a lifetime and 52-week high of £E 196.

Another star performer was Egyptian American Bank (EAB), the board of which agreed early September to merge with American Express Bank. The deal is expected to be finalized some time in the first quarter of 2005. In light of this merger, EAB will increase its paid-in capital from £E 500 million to £E 750 million. Moreover, EAB’s 2004 bottom line is expected to double to around £E 200 million. Interestingly enough, EAB’s share price continued to advance even higher to a 52-week high of £E 140, bringing a year-to-date performance in excess of 200 percent.

Also, OCI, the construction/cement Sawiris conglomerate, saw its share price advance 24 percent to £E 141.90. OCI had reported its first-half results, in which it doubled profits to £E 503 million, thanks in part to improved export prices in Egypt and strong cement sales in Algeria. EBITDA, a proxy for operating cash flow, also doubled to over £E 1 billion, coupled with a margin expansion to 28 percent. The share price also hit a lifetime high of 144.25.

In layman’s terms, the new government has already had a significant, positive impact on Egypt’s economic picture and is setting the scene for a better future. Whether this will mark an “economic revolution” or not, only time will tell.

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