Three currency devaluations in a year, runaway inflation, and a severe foreign currency crunch have been some of the features of the economic scene since the outbreak of the Russia-Ukraine conflict.
The Egyptian pound is currently trading at LE31 against the dollar compared to an average of LE15 on the eve of the war. The multiple devaluations have also pushed inflation rates to above the 30 per cent threshold to reach 32.7 per cent in May, with the Central Bank of Egypt (CBE) having had to intervene and increase interest rates by 10 per cent over the year with the aim of reining in inflation.
The grievances of millions of Egyptian families who are struggling to make ends meet amid the record high inflation rates are only matched by the complaints of businessmen unable to get the finance they need from the banks because of high interest rates or to get the dollars they need to pay for imports.
However, this is not the whole story. It is now earnings season when all listed companies are obliged to submit their earnings for the first quarter of the year before 30 June, and these figures show there are winners.
The quarter was very good for a lot of blue-chip stocks, according to Amr Elalfy, head of research at investment house Prime Holding.
The main reason is the increase in the dollar/pound exchange rate as most of the companies have opted to increase the selling prices of their products and thus inflate their sales figures.
Another factor is the improvement in profit margins mainly due to the relatively low cost of the inventories the companies accumulated when prices were cheaper when compared to revenues.
Companies that have inflows in foreign currency through exports have had a good first quarter as well.
Reading through the figures, it is obvious that companies belonging to sectors like the food industries, education, and pharmaceuticals have not been negatively affected by the economic challenges. The demand for the services and commodities produced by these companies will not wane no matter how the economy performs.
Main players in the food industries like Edita and Juhayna had good third quarters as well with both recording jumps in sales figures, by 78 per cent for the former and 42 per cent for the latter, when compared to the first quarter of 2022.
Both companies opted to increase the prices of their products to cover for increased costs. Sales volumes for Edita, the producer of a wide array of snacks, the most famous being Hohos cakes, rose 34 per cent to more than one billion packs even though the company raised the average price per pack by more than 40 per cent, according to Al-Ahly Pharos, an investment house.
The surge in sales also came partly due to the addition late last year of a second production line for Twinkies cakes at Edita’s Moroccan facility.
Likewise for Juhayna growth was driven mainly by a 60 per cent price increase implemented throughout 2022. “The cheap inventory of raw materials purchased at a lower foreign-exchange rate had a positive effect on margins and profitability as well,” wrote Al-Ahly Pharos researchers.
Across the board, the banks ended the quarter in the green. The CBE has raised interest rates by an overall 10 per cent since February with the aim of reining in runaway inflation. An increase in rates usually pushes up the profitability of the banks as it increases the income they realise from extending loans.
The sector leader, the Commercial International Bank (CIB), recorded a 43 per cent surge in net profits to LE6.1 billion. This came on the back of a 62 per cent jump in its interest income to LE10.9 billion. Loans increased to LE244 billion, 10 per cent higher than for the first quarter of 2022.
While the sector faces fierce competition from the two largest state-owned banks, the National Bank of Egypt and Banque Misr, each time they complement the CBE’s decision to increase interest rates by offering high-yield certificates of deposit (CDs) the CIB is able to circumvent this by “by offering attractive products to the market, introducing new unique products like CDs in Gulf Cooperation Council currencies,” according to a Prime Securities note.
The CIB remains the biggest gateway for foreign investors interested in Egyptian equities and the Egyptian banking sector, it said.
Companies that target export markets were also among the gainers. Abu Kir Fertilisers, the leading fertilisers producer, was hit by a decline in urea prices during the quarter as compared to the previous one.
Urea’s global prices averaged $432 per ton, which is 32 per cent lower than its level in the previous quarter. However, the company’s losses have been offset by the 30 per cent increase in the dollar value against the Egyptian pound.
Elsewedy Electric witnessed a 282 per cent increase in earnings to LE2.9 billion on revenues of LE33.3 billion, 80 per cent higher than the first quarter of 2022. The exceptionally good results stemmed from the company benefiting from the stronger dollar driven by its export-oriented business model.
According to a Prime analysis of the company’s points of strength, 70 to 80 per cent of its business is in a foreign currency, which acts as a natural hedge against the weakness of the local currency. Elsewedy is also expanding capacities through a new industrial complex in Tanzania and several acquisitions in Egypt, Pakistan, and Indonesia.
The outlook for the company is good as it is expanding in green projects and renewable energy.
Meanwhile, Egypt’s listed real-estate companies, the most actively traded during the quarter, have been affected by an increase in costs on the back of a hike in construction materials as well as increases in financing costs.
The 6 October Development and Investment Company (SODIC) witnessed a 17 per cent decline in its net profits to reach LE187 million on a 25 per cent decrease in sales as the surge in construction material prices pushed the company to temporarily halt sales at the beginning of the year and change its pricing strategy.
“Going forward, SODIC will periodically review its selling prices as it seeks to balance maximising sales with managing cost inflation risk in the current inflationary environment,” the company noted in the statement it issued to announce its results.
But Palm Hills Developments (PHD) realised a 22 per cent increase in its sales to reach LE3.5 billion due to a rise in new sales at its Badya and the Crown projects. However, its net profits dived by 14 per cent on the back of an almost 145 per cent increase in borrowing costs to LE252.7 million.
New sales grew 22 per cent year-on-year to LE6.8 billion, driven by sales in PHD’s West Cairo locations, including residential developments Badya and the Crown.
One of the companies that bucked the trend was GB Auto, with its revenues dropping by 39.5 per cent to reach LE4.7 billion. This came on the back of an almost 60 per cent drop in sales of passenger cars despite sharp increases in prices.
“The company’s auto arm reported a net loss of LE81 million versus a net profit of LE108 million a year earlier on a combination of lower revenues, a foreign-exchange loss of LE264 million, and higher financing costs,” according to Al-Ahly Pharos.
Excluding foreign exchange, GB Auto would have reported a pre-tax profit of LE236 million in the quarter, which is 42 per cent less than its level in the corresponding period of 2022.
In general, the industry had a tough quarter, with March alone seeing a 72 per cent decline in passenger cars sales, according to figures released by the Automotive Marketing Information Council (AMIC). Total auto sales volumes fell more than a third in 2022 after the CBE imposed regulations that put a pause on the imports of cars and components.
* A version of this article appears in print in the 15 June, 2023 edition of Al-Ahram Weekly
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