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Business monthly April 10
 
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STOCK ANALYSIS

The power of gravity

The period from February 15 to March 15 was down over the previous period. The EGX 30 and EGX 70 indices lost almost all their year-to-date gains. The former dropped 9.5 percent to 6,353.1 and the latter dove 19 percent to 647.9. The EGX 30 broke the 7,000-mark after a wave of profit taking undermined market performance, cutting average daily volume and turnover by 16 percent and 31 percent to 89 million and LE 802 million, respectively. Declines outnumbered advances during the period by a ratio of 10-to-1.

Market investors seemed to view positive earnings performance as normal, only budging in light of negative corporate earnings as seen after EGX 30 heavyweights Telecom Egypt (TE) and Orascom Telecom (OT) released their earnings on March 15. TE’s stock plummeted to LE 16 after it released its earnings. Overall, TE and OT saw their shares slip by 11 percent and 18 percent to LE 18.11 and  LE 5.68, respectively.

The gainers this period included Oriental Weavers Carpets (OWC) and GB Auto, both of which ended 7.1 percent higher, at LE 36.49 and LE 29.89, respectively. OWC posted stable earnings of LE 312.3 million in 2009, mostly in line with analysts’ estimates. Revenue growth came on the back of local sales, a result of the company shifting its focus inwards to fight off last year’s global slowdown. EBITDA margins declined given OWC’s expansion into mid- to low-priced products. Meanwhile, GB Auto reported earnings of LE 201 million in 2009, 52 percent lower than the previous year. Revenues slipped by 18 percent to LE 4.26 billion. According to CI Capital, domestic auto sales in 2009 fell by 22 percent to 205,521 units versus 261,954 the year before, with passenger car and commercial vehicle sales falling by 20 percent and 25 percent, respectively.

El-Sewedy Cables (now called El-Sewedy Electric) saw its shares slip by 9 percent to LE 72.12. Going green has become one of main themes of El-Sewedy, which has meant a strategic positioning of all its business lines.

As commodity prices recover, sugar has been rising and leading the pack. However, Delta Sugar underwent a spate of profit taking after rising to a high of LE 23.86 in the previous period to drop by 22 percent to LE 18.68.

In the financial arena, Pioneers Holding continued to suffer from both the market’s downturn and internal issues. The company’s alliance with Beltone Financial was saved at the last minute, after investigations into Pioneers’ brokerage business, specifically trading in certain stocks, tarnished the company’s image.

Typically at this time of year investors have high hopes for dividend payments. Consequently, it appears investors regard dividend yields highly, especially after a market downtrend. Dividends may then make up for some of the losses investors suffered during the previous year; when they fall short of expectations, investor hope is undercut and shares are likely to be oversold. Could the early bull market that investors thought was building up in early 2010 have just given way to a short-term bear market?

 

IN THE SPOTLIGHT

Telecom Egypt (TE) made headlines as competition in its home market began eating into its margins. After reporting a few quarters of high EBITDA margins in the 50s, TE’s management cut its guidance for 2010 to the mid-40s. Furthermore, 2010 revenue growth is only expected to be saved by the company’s submarine cable, TE North, which should be operational before mid-year. Additionally, the company may consider purchasing a fourth mobile license by the government if made available, explaining why TE’s board opted for a dividend cut from its high yields. It appears TE must become as integrated a telecom operator as possible or face competition with even lower margins and narrower growth.

 

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