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Pharos Investor Conference: Meeting Minutes – Non-Food Consumer Segment

    Mariam Wael
    Farida Salama
    Al Ahly Pharos Securities Brokerage
    24 June 2019

    Cairo Investment and Real Estate Development (CIRA): Expansion plans on track Market


    • The Egyptian middle class is c30mn with a household income between EGP7,000-60,000.
    • Number of students between K-12 and higher education is c24mn. The share of the private sector for the K-12 is 10% (which grew from 5% seven years ago) and the share of the private education sector for higher education is 2%.
    • Currently, grade 12 volumes in Egypt stands at 860,000 students, while kindergarten is 2.5mn. This growing population creates demand and an opportunity for CIRA. 

    CIRA is the largest player in private education. The company was established in 1992 with the aim to bring quality education to the middle-income sector. CIRA currently operates 21 schools and a university (Badr University) with nine faculties. Its total capacity for higher education is 13,000 seats and 29,000 for the K-12 segment. Currently the student volume stands at 32,000 for both segments and will increase to 36,000 (2000 for K-12 and 2000 for higher education) in the next academic year.

    Expansion plans

    • New Campus in Assiut over 81feddans including 16 faculties and four community colleges. The aim of the new campus is to bring quality education to the middle class sector in upper Egypt. The land was allocated by NUCA (largest allocation for a private university), and construction process will start in 2020, with a target to operate the first set of faculties (four) by September 2021. The company targets to operate four new faculties every year. The new campus will hold a total of 16 faculties of which eight are medical. 
    • Capacity expansion plan is to expand the K-12 to 40,000 seats and higher education segment to 60,000 to reach a total of 100,000 seats by end-2023. 
    • Currently, the company is in a discussion with a real-estate developer for a joint third university, which will need EGP1bn capital increase to finance the construction.  


    • CIRA has been previously using its internal cash and the proceeds of the recent capital increase to finance its growth plans. However, the company received its first debt in June of EGP100mn from QNB to support Badr’s University expansion plans (with an interest rate of 1% above Libor).
    • A new debt will be signed soon with EBRD to finance the Assiut University initiation. The debt will be obtained in EGP over a 10-year tenor. 
    • Debt ceiling will stand at EGP800mn and all debt will be obtained in EGP to avoid FX exposure.  

    Capex Plan

    • EGP1.2bn for seven new schools plus, Badr University expansion and the initiation of Assiut. The plan is to borrow EGP600mn and the remaining will be financed through internal cash. 
    • Assiut campus will require another EGP1.6bn (EGP200mn in debt and the remaining through internal cash).
    • The total capex amounts to EGP2.8bn, EGP2bn for the new Assiut campus and EGP800mn for the schools and BUC’s expansion. 
    • Capex plan is planned to be implemented over seven years.  

    FY 19 guidance

    • EBITDA: EGP300mn
    • EBITDA margin: c40%
    • Net profit: EGP200mn 

    Eastern Tobacco (FV:EGP19.80,Overweight): Stable FY 19 performance; ongoing corporate restructuring to lift profitability 

    Corporate restructuring

    • Chemical Industries Company currently owns 50.5% of Eastern Tobacco following the 4.5% share sale. EAST is currently under Law 159 instead of Law 203, where it is categorised as a private company rather than government-owned. This came from the appointment of a new board of directors (less governmental intervention in decision making, ie more aggressive approach for expansion). The board of director representatives are all from the private sector.
    • New CEO, Hany Aman, joined EAST in January 2019 to oversee the transition. He has top management experience in multinationals such as Coca-Cola and Henkel. Aman’s mandate is to modernise EAST along international standards through current product portfolio quality, better utilisation of current assets, improve employee standards as well as gain market share in under-penetrated markets such as flavoured molasses, cigars and electronic cigarettes (vape).
    • EAST currently employs c14,000 employees. Management plans to cut this figure to 8,000 employees within the coming four-to-five years through the introduction of an early-retirement scheme.
    • Management is finalising an agreement with a German consultant to assess the company's current state of affairs as well as handle the implementation of the transformational plan. c30% of total fees will be tied to actual results. 


    • EAST currently dominates the ‘C-level’ cigarettes category in Egypt, which constitutes over 60% of total net profit, whereas 40% is attributed to toll-manufacturing contracts.
    • Illicit cigarette products constitute c3-4% of total cigarette sales in Egypt. Management hopes that with increased border security, these figures should drop in the coming period.
    • Management stressed on multinational companies’ satisfaction with EAST’s performance and are currently negotiating to renew their toll-manufacturing contracts, which should expire in 2021.
    • Management ensures that their toll-manufacturing fees are attractive for multinationals to maintain their successful relationship. Multinationals can opt to import their products as the ‘Egyptian Monopoly’ law does not restrict the monopolisation of tobacco sales, only on tobacco manufacturing.
    • Cigarettes sales contribute 80% of total sales, whereas molasses contribute 20%.
    • Management stressed that EAST has the capability to produce higher quality cigarettes, but lacks a qualified sales team that can actively market and distribute the products in the Egyptian market. This is mainly due to the lack of competition in the ‘C-level’ category.
    • Management is currently in negotiations with the Ministry of Finance to discuss the impending price increase to be implemented on tobacco products, following the change in the current tax brackets.
    • Currently, price increase is the name of the game. EAST has not witnessed increased volume in FY 18/19 so far. In FY 19/20, the price increase to be implemented will greatly impact the top line, however the introduction of new products is part of management’s plan to boost revenues.
    • Number of sticks sold in Egypt has lowered by 2.7% yoy, mainly for highly priced tobacco products. Also, numbers of sticks sold globally has lowered, but at a higher rate to Egypt.
    • ‘C-level’ products consist of 14 products. 

    Expectations: Management is targeting a net profit of EGP3.7bn in FY 18/19, EGP500mn less than FY 17/18, on the back of lower interest income as well as EGP strengthening against EAST’s US$ cash deposits.

    MM Group For Industry And International Trade (MTIE): A successful turnaround, challenged by global trade tensions 

    Company Overview: MTIE is currently considered one of Egypt’s largest distribution companies by geographic coverage and population reach with 90% geographic footprint, 95% population reach and more than 40,000 accessible points of sale across Egypt. MTIE enjoys a diversified product portfolio with significant growth potential through partnership with leading global brands. 

    Operations: MTIE operates through several business lines, namely consumer and electronics, telecom, automotive, and pipes and tractors. MTIE supports its core operations with a Non-Banking Financial Services arm through its investment in Ebtikar (49.9% stake), which invests mainly in e-payments, micro-finance, mortgage and leasing, through Bee, Masary, Vitas and Tamweel.

    Consumer and electronics – mobile and electric appliances

    • Mobile: MTIE distributes Samsung and Huawei smart phones, where both brands currently enjoy leading market shares. MTIE has recently consolidated Qanwat, which has been a distributor of Samsung mobiles since 2016 and started distributing Nokia in December 2018. Qanwat is expected to add EGP3.0bn to MTIE’s revenues in 2019.
    • Electric Appliances: MTIE’s favourable electric appliances product mix offers a significant growth potential and enhances profitability; mainly on competitively priced and high margin products, MTIE distributes Samsung TVs, Carrier Air Conditioners and has recently added BOSCH to its electric appliances business line. 

    Telecom includes the operations of Vodafone-branded retail franchises and distribution of mobile services and accessories to individual and business customers.

    Automotive is focused on the distribution of Luxury cars, namely Jaguar, Land Rover, Bentley and Maserati. MTIE has added Ducati and Victory motorcycles to its product line-up. It expects the auto business to report a significant set up in volumes sold, mainly from lifted custom tariffs on European products. MTIE targets a growth of 100% in number of cars sold to reach c700 cars in 2019.

    Pipes and tractors: MTI distributes seamless pipes used in large-scale infrastructure and oil and gas projects, as well as the assembly and distribution of agricultural tractors. The pipes and tractors business line is the lowest revenue contributor.

    MTIE supports its core operations with an NBFS arm through its investment in Ebtikar, which is jointly owned by B Investments and MM Group. It invests mainly in:

    • E-Payments: (1) Masary – an e-payment company with 80,0000 points of sale. MTI has a blended ownership of 33.5%. (1) Bee – a pioneering tech company in payment solutions with 70,000 points of sale. MTIE owns an indirect stake of 29.9%.
    • Microfinance: Vita, which received its license in January 2019 and aims to capitalise on Egypt’s unbanked population. MTIE owns an indirect 25%.
    • Mortgage finance and leasing: Tamweel – a platform of four companies operating in leasing, mortgage finance, factoring, insurance brokerage and collection. MTIE owns an indirect stake of 22.5%.

    Financial overview: MTIE plans to increase the contribution of high margin products to enhance profitability and targets EGP11bn of sales in 2019, including the expected EGP3bn from Qanwat.

    Gross profit margins:

    • Samsung Mobile: 6%
    • Huawei Mobile: 8%
    • Qanawat: 7%
    • Bosch: 15% (contribution to revenues should increase going forward, as MTIE targets a 5% market share)
    • Telecom: 4.2%-4.6% (GPM increases as number of shops increase)
    • Auto: 15% (contribution to revenues should increase going forward, mainly due to lifted custom tariffs on the European goods)
    • Pipes and Tractor: More than 30% (a mere contribution to revenues) 


    • MTIE plans to focus on enhancing profitability by increasing contribution of its high margin business lines. 
    • MTIE  believes that the impact of Huawei-US tension will be resolved soon and will have a minimal impact on operations, since high-end sales will be reallocated to Samsung mobiles.
    • MTIE  plans to replicate MTI’s business model to its recently consolidated subsidiary Qanawat.
    • MTIE plans to merge its e-payments platforms Bee and Masary by 2020.
    • Ebtikar is to be listed in 2-3 years.
    • Ebtikar is working to establish its consumer finance arm and capitalises on MTIE’s huge consumer data base. After that, the consumer finance arm could increase sales by an average of 25%.

    Oriental Weavers (FV: EGP14.60, Overweight): Awaiting the New subsidy programme, reversal of free-zone fees could boost Q2 19 margins 

    Export subsidy programme:

    • Backlog currently stands at EGP530mn.
    • Collected EGP92mn this year and expected to collect cEGP120mn in FY 19.
    • Export subsidy programme is 5% out of the company export sales (calculated based on the production location and raw materials). 
    • New export programme will be launched in July, which includes 40% cash subsidy and 60% non-cash (30% government settlements and 30% logistical support). The mechanism of the new programme not announced yet.  

    Free-zone case

    • According to the investment law, companies paid a fee of 1% of value added (revenues and raw materials) for the production in free-zone areas. 
    • In 2017, the law required free-zone companies to pay 2% of local sales and 1% of export sales. 
    • The free-zone companies then won a case to reverse the fees to 1% of local and export sales. Therefore, EGP70-90mn will be reversed during Q2 19, and going forward the company will pay an average of EGP24mn annually instead of EGP80mn. 

    Local market updates

    • Showrooms recorded sales growth of 10% up to Jun19 and wholesalers recorded 1% growth. Total local sales recorded 6% growth up to 2Q19 and is expected to increase in 3Q19 due to seasonal factors.
    • 4 new showrooms opened, and a total of 10-12 will open during the year.
    • Launched new customised products at attractive prices to fight Turkish competition (8% of the market).
    • The company holds a market share of 80-85%.
    • Utilisation rates currently stands at 80%.
    • Prices slightly increased in April 2-3%.
    • MAC and EFCO are concentrating on mid to high quality products, hence prices are currently higher and volumes are lower. 
    • New Capital is an opportunity for ORWE’s local market during the upcoming period (hospitality and rugs segment).
    • Local market is expected to record 7-8% sales growth in FY 19. 

    Export market updates

    • US: demand is improving (38% of the revenues and the largest market for ORWE). Tariffs imposed on China created an opportunity for ORWE in the tufted and non-tufted segments. 
    • Europe: Volumes in Ikea, the biggest client in Europe, dropped 16% in Q1 19 due to a slowdown in the demand and delay in shipments. However, there was a recovery in June, which saw a drop of 1% compared with 16% in Q1 19. The company is expected to record revenues of US$54-55mn in FY 19 (+7% yoy). Meanwhile, NK sales in France recorded US$600,000 and is expected to reach US$1mn in FY 19.
    • Africa recorded 20% growth in revenues up to Q2 19. Export sales is expected to record 4-5% growth in FY 19. 

    FY 19 guidance

    • Topline: EGP10.8bn
    • EBITDA margin :10.8% 
    • Net Profit: EGP600mn
    • NPM: 5.5%
    • Dividend distribution expectations: EGP1.5/share