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Big Business in Egypt struggles to reach pre-revolution profit margins

Labour unrest, graft probes, infrastructure vandalism and cost hikes are among the highlights of a very unusual 6 months of business operation in Egypt

Ahmed Feteha, Saturday 27 Aug 2011
Construction
Real estate is one major sector that fully experienced the venom of Egypt's unrest (Photo: Reuters)
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It has been over six months since the outbreak of the uprising in Egypt; the one event that some claim changed everything, or at least dropped a few pebbles in the water. Just a splash, then it is gone?

The business community seems to be undecided.

There isn’t one answer to determine the full implication of the uprising on Egypt's businesses; bar the easy blame game some company executives engage in either concealing their own shortcomings or promoting some other political agenda.

Nonetheless, bottomlines remain to be the ultimate barometer of business performance and the most consequential to almost all stakeholders in any given venture.

A quick glance at major companies' net profit is not, however, sufficient to realize the full scale of the toll the uprising has taken on business in Egypt, if any.

Even so, a significant decline in profit margins is the one common trait seen across almost all reported income statements in the second half of 2011, according to Hamed Hesham, analyst at Beltone Financial.

"There have been hikes in operational costs of many companies, namely in raw materials and wages, bringing down their profit margins," Hesham explains.

Labour action, empowered and exhilarated in post uprising Egypt, has mushroomed across the business community in Egypt and extended past its traditional realm of  blue collar labour to white collar professionals in banks as well as multinationals.

Accordingly, many companies' gave in and fulfilled their labour's demands; inflicting the profit margin slash Hesham describes.

In response to such a wave, Egypt's military rulers issued their loosely enforced anti-strike law last March; with little resonance amongst workers who are still effectively demonstrating. 

Five months later, workers seem to be undeterred from milking their employers through striking and protesting.

In July, the NGO Children of the Earth for Human Rights counted 22 sit-ins, 19 strikes, 20 demonstrations, 10 protests and 4 short-term sit-ins in Egypt.

One major labour action was in Lecico, a leading ceramics maker. Workers had first struck back in February, and again in July, halting production of 30 per cent of the firm's output.

The tile maker reported net profit of LE5.1 million (US$855,597) in the second quarter of 2011, a 59 per cent drop from the first quarter 2011, and an 80 per cent plunge year on year.

The company said that margin on earnings before interest and tax slipped 8.1 percentage points to 11.7 per cent in 2Q2011 down from 19.8 per cent in 2Q2010.

The latest major strike was in Egypt's El Nasr Clothing & Textile Co (Kabo); where the company said on Thursday a labour strike since 17 August had lost the company production worth LE4 million (US$672,300) and disrupted exports worth LE3 million. 

The other chief reason why margins have deteriorated, according to Hesham, is the surge in raw materials prices for some sectors.

"A company such as Oriental Weavers has surpassed our expectations in terms of sales, but its net profit turned out to be disappointing," he adds.

In mid-August, the world's largest carpet making firm posted a 4.4 per cent drop in second-quarter profits, falling to LE58 million (US$9.7m) from LE60.7 the year before.

Some sectors, such as food manufacturing and pharmaceuticals, were able to post more or less normal results; overlooking the events of the past 6 months and their repercussions to a great extent.

Egyptian dairy product and juice maker Juhayna Food Industries Co. reported a 12 per cent rise in first-half net profit to LE112.2 million (US$18.8m).

Observers assert that Juhayna's profit growth is attributed to increase in sales volume as well as in prices.

Similarly, Egyptian drug maker EIPICO's 2011 first-half net profit rose 1.8 per cent year-on-year to LE182 million (US$30.5 million).

On the other hand, companies in Egypt's vibrant Telecom sector suffered direct adversities due to the uprising.

On 28 January, Egypt's three mobile carriers were ordered to cut off all communication services for almost a week on back of mass antigovernment protests that eventually toppled former President Mubarak.

Egypt's oldest mobile operator, Mobinil, posted a disappointing 94 per cent drop in its first quarter profits; which the company was nippy to blame on the political turmoil and service cutoff.

NTRA, Egypt's telecom regulator, promised reparations to the companies, but they have not disbursed any yet.

During 2Q2011, Mobinil saw its revenues increase 3.5 per cent on 2Q2010, reaching LE2.6 billion.  

However, it reported earnings before interest, tax and depreciation (EBITDA) at LE952 million, a 13 per cent decline on last year, indicating unusual growth in operating expenses.

Mobinil was then negatively impacted by a change in tax regime; booking almost LE188 million as a one off. The company eventually posted a first half losses of LE86m, a 111 per cent plunge on H12010 figures.

"Telecoms witnessed their strongest drops during the first quarter of 2011; any declines afterwards are simply a result of normal market competition," says Amr El-Alfy, co-head of research at CI Capital.

Telecom Egypt (TE), the second largest listed company in the Egyptian Bourse, posted a 15 per cent annual drop in its second-quarter results, to reach LE826m (US$138.8m).

"TE's results were not considerably hit by the unrest in Egypt; on the contrary, it coped well with the events," El-Alfy indicates "The profits dip is merely due to regular loss of market share to competition,"

Nevertheless, the landline monopoly announced total losses of LE85.56 million from network related damages and thefts to its infrastructure in the period from 1 January to 31 May 2011. 

Other companies were able to compensate the drop in local demand through their operations abroad.

GB auto, Egypt's only listed auto maker has seen its Iraq revenues surge as car sales in Egypt slowed down in the first half.

Its Egypt operation is underway for a partial recovery; however, a full recovery is yet to be expected.

"Personal cars sales and motorcycles are already recovering. The problem still lies with trucks, construction machinery and tourist buses which haven’t picked up as fast; as they are linked to other struggling sectors" Hesham explains.

Similarly -- global developments, like the rising price of oil, have meant the few Egyptian firms working in support roles have benefited.

Egypt's Maridive and Oil Services, the biggest oil services firm by fleet size in the Middle East, posted a 37 per cent increase in 2011 first-half bottom line.

The firm posted net profit of US$36.2 million before minority interests, versus $26.4 million a year earlier. 

Real Estate remains dubuious

Real estate is the one sector that has fully experienced the venom of Egypt's unrest.

In addition to the falls in demand, stoppage in construction and cancellations of existing unit reservations; this sector was stigmatized by corruption charges namely in land deals linked to officials in Mubarak's regime.

Palm Hills Development, a blue-chip developer facing widening graft probes, posted a first half net loss of LE81.4 million.

Same goes for TMG, Egypt's biggest listed developer, which saw first-half net profit slide 44 percent as its $3 billion Madinaty project is caught in a legal dispute since September.

The full financial toll the uprising will take on real estate firms, however, hasn't yet been seen, according to Jan Pawel Hasman, real estate analyst with the leading investment bank EFG Hermes. 

"Companies have definitely been impacted by the economic and political instability; however, this impact was mitigated by their past performance,"

Hasman indicates that real estate firms realize their revenues on delivery of units, which means that revenues of units sold 3 or 4 years ago appear on this year's financials.

Accordingly, the impact seen on companies 2011 financials could be attributed to other factors rather than the drop in demand.

"Financial results have taken a blow as the rate of cancellation is higher, companies are facing liquidity shortages and there are delays in delivery of units due to the long work stoppage at the beginning of the year,"

He also adds that while revenues of units sold are realized on delivery, land value of these units is recorded right away. Such revenues have diminished in 2011 due to lower sales volumes.

"In real estate, everything is delayed. The real effect of the drop in unit sales might be witnessed a couple of years to come, at the time of delivery of units," Hasman concludes.

 Amer Group, another listed real estate conglomerate, has recently been embattled over its land bank.

Last June the allocation of 2.8 million square meters of land in Fayoum governorate to Amer Group for building a luxury resort was disputed in court.

Earlier in May, Amer Group returned 588 feddans (2.6 million square metres) to the governorate of Matrouh following the termination of a buying agreement.

The company, however, says it returned the land to reduce the size of its land bank and cope with a foreseen decline in demand.

The real estate giant reported a first-half net profit decline of 13 per cent to LE201.4 million ($33.7 million).

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