MARKET WATCH: Recovery
MARKET WATCH: Recovery
STOCK ANALYSIS: Ezz Steel (ESRS)
Written for Business Monthly - May 2023 Issue
MARKET WATCH
When the market panicked in mid-March after the failure of a few U.S. banks, like Silicon Valley Bank, the local indices registered double-digit negative returns. Soon, the market realized what seemed to be the start of yet another global financial crisis contained within the United States. The period from March. 15 to Apr. 15 saw the two major indices recover, with the EGX 30 (up 20%, 21% year-to-date) more than offsetting its losses. The EGX 70 EWI (up 15.8%, 6% year-to-date) almost pared all its losses. Advances outnumbered declines 4 to 1.
That was led by large-cap stocks linked to commodities with U.S. dollar-based revenues. The Sidi Kerir Petrochemicals (SKPC, up 60.1%) board recently gave an initial nod to its independent financial adviser’s valuation for the company, ahead of the proposed acquisition of its 20% owned Ethydco. Market participants may have bid the stock price higher in anticipation of a higher-than-market valuation. Meanwhile, steel prices have risen over the past 12 months, jumping almost 77% in March. As for Ezz Steel (ESRS, up 60%), its steel prices by mid-April had nearly doubled year-on-year, which might explain its positive stock performance as investors shrugged off potential FX losses because of a stronger U.S. dollar. Also, Elsewedy Electric (SWDY, up 49.7%) has been on a roll, hitting a four-year high as investors began to appreciate its dollar-linked revenue stream.
It was also dividend season, when companies that end their financial years in December began sending checks to shareholders. SKPC’s EGP0.9 a share and SWDY’s EGP0.4 a share cash dividends implied payout ratios of 55% and 33%, respectively. Elsewhere, the bidding war over PACHIN (PACH) went on, with two remaining suitors: Egypt-based Eagle Chemicals and UAE-based National Paints. The latter recently raised its bid to EGP39.8 a share, surpassing the former’s EGP39 bid. Interestingly, PACH’s stock price traded as high as EGP41.89 a share, which suggests the market might expect the bidding war to continue.
From a macro point of view, the Central Bank of Egypt (CBE) boosted interest rates another 200 basis points in late March, raising the corridor to 18.25%-19.25% and extending its total increase since Mar. 21, 2022, to 10 percentage points. Higher interest rates do not usually bode well for stocks, but in this case, it is not just about interest rates. When market participants expect devaluations of the Egyptian pound, they usually look for places to preserve the value of their wealth, the most convenient of which are gold and stocks.
STOCK ANALYSIS
Ezz Steel (ESRS)
If Ezz Steel (ESRS) were a food and beverage producer, investors would expect the company to raise its prices frequently, despite rampant food inflation. Ironically, ESRS increased its rebar prices twice in March alone, reflecting a stronger U.S. dollar. ESRS said it suffered a net foreign currency loss of EGP 5.3 billion in the year's first two months. Still, the stock jumped 60% during the period to EGP 41.54, with more than 22 million shares worth EGP 780 million changing hands, hitting a multi-year high along the way.
