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Egypt: Putting off sale of IPOs

Fluctuations in international markets mean the present may not be the best time to offer shares in Egyptian public companies experts explain

Safeya Mounir , Thursday 25 Oct 2018
Egypt
Egypt's finance ministry (Al-Ahram)
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The Higher Committee for Share Offerings has put off plans to sell 4.5 per cent of Eastern Tobacco due to fluctuations in international markets, the Finance Ministry said on Friday.

The delay, explained in a statement from the Ministry of Public Enterprises to which Eastern Tobacco is affiliated, is the result of ups and downs sweeping the financial markets that have coincided with international factors including an increase in protectionist policies worldwide and the trade war between the US and China.

In addition, emerging markets are facing challenges caused by the US Federal Reserve raising US interest rates and thereby strengthening the US dollar.

The fluctuations, said the ministry statement, had “contributed to the increase in investment outflows from emerging markets, which have negatively affected Egypt’s stock exchange and resulted in a decrease in the prices of some listed shares and a reduction in daily trading value.”

The Higher Committee for Share Offerings, the statement continued, had therefore decided to shelve its share offerings because the current trading price of Eastern Tobacco shares had fallen below the range stated in Cabinet Decree 926/2018 governing the programme to divest publicly owned shares.

However, according to Eissa Fathi, vice-president of the Securities Division at the Egyptian Chamber of Commerce, this pricing policy was wrong since it evaluates an actively traded company according to the average price of stock over the past three months.

The shares’ calculated fair value should have been used instead, he said, if that price was higher.

Applying the three-month average price, and in the light of the decline in stock-market indices since the outbreak of the emerging markets crisis, would make the value of initial public offerings (IPOs) of listed companies very low.

Moreover, the slump in the market would affect the price of the shares once they started trading.

Shares in Tharwa Capital were heavily oversubscribed when the company was put up for sale, for example, but its shares retreated drastically in the first four sessions of trading on the stock exchange.

They fell by 12 per cent, recording LE6.51 per share, down from LE7.36 on 16 October when the first trading session was heavily oversubscribed.

According to phase one of the government’s plan to sell shares in public-sector companies announced in mid-July, five companies have been slated for public offerings, including the Alexandria Mineral Oil Company (AMOC), Eastern Tobacco, the Alexandria Container and Cargo Handling Company, the Abu Qir Fertilisers Company and the Heliopolis Company for Housing and Development.

Eastern Tobacco has a good financial portfolio and largely monopolises the tobacco industry in Egypt. The company’s net profit in the past fiscal year stood at LE4.2 billion, up from LE3 billion the year before.

The total revenues of Eastern Tobacco in the last fiscal year increased by 27 per cent, or LE2.8 billion, reaching LE13.4 billion at the end of June this year.

Hani Helmi, chairman of the board of Shorouk Securities, a financial firm, said “it would be better if the government had evaluated the companies by doubling earnings per share [EPS]. This is the way the profits of a share are usually determined and show how solid a company really is.”

“Had the Eastern Tobacco shares been offered for sale at the predetermined date from 21 to 25 October, they would have met the same fate as Tharwa Capital’s which fell in value since trading on day one. World stock markets usually see drops in October, and the government should not have picked this date as a result,” he added.

* The writer is a freelance journalist.

* A version of this article appears in print in the 25 October, 2018 edition of Al-Ahram Weekly under the headline: Putting off IPOs

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