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The ongoing political disturbances raised countless questions to investors today, wondering which sectors of the Egyptian economy are set for a safe investment. Our sentiment on different sectors has changed, wheresome of these sectors have taken an opposite direction to what we saw prior to the incidents of January, 25,2011.In our perspective, the one sector that we believe still has real foundation is the Oil and Gas sector. The Oand Gas sector is expected to boom in the coming period mainly driven by higher crude oil prices

which have reached a high of US$103/barrel amid fears of shutting down the Suez Canal due to the politicaluncertainties. In addition, as a result of hiking oil prices, the stretching of exploration and production pro-

jects worldwide is expected to increase coupled with oil supply dependent companies benefiting from soaringoil prices. Despite our expectation for a significant slow down/shrinking of most sectors, we expect the current po-litical and economic disturbances to have a m inimal effect on industries such as pharmaceuti-cals, fertilizers, telecom and food due to their defensive nature (i.e. necessary goods) . Moreovemost of the government subsides are directed to serve the above mentioned sectors curbing selling pricefluctuation. Accordingly, we havent revised our assumptions on demand, supply, prices and margins forthose sectors.Regarding the Pharmaceutical sector, given the inelasticity to systematic risk, pharmaceuticals consumptionis not expected to be negatively impacted. We anticipate that people will continue to consume, if not at anincreased rate. Hence, given that per capita pharmaceutical expenditure for Egypt is estimated at US$34 inFY10, we maintain our estimates of per capita pharmaceutical expenditures at US$37.40, up by 10% Y-o-Y.Furthermore, Telecom sector will lose traffic from roaming activities as tourists influx drop, however this dropwill be offset by strong network usage coupled with large population base and promotions offered by opera-tors.For the food sector, we have maintained our consumption assumptions forecasting that the aggregate con-sumption and per capita consumption are projected to culminate at LE228 billion and LE2,800, respectively,during 2011.We have a neutral sentiment on the banking sector as we expect financial performance to be sup-ported by income from high yield treasuries, in addition to service charges and fees. On the other hand, weexpect revaluation losses from financial investments and increased provisioning to weigh negatively on in-come.We believe that the prevailing circumstances w ill have a significant negative effect on cyclicalindustries. Therefore, we suppose that Tourism, Real Estate and Building Materials sectors will be hinderedin terms of demand, supply, prices and margins throughout 2011. Moreover, one of our major concerns re-

garding the real estate sector remains in the legal aspect associated with the validity of land purchase con-tracts and the fair value of previously obtained land. This will add more pressure on Real Estate and Tourismsectors as most of those companies are predicted to be charged with additional costs and penalties given theaccused allegations. In terms of Tourism, outbound tourism receipts are expected to be slashed to US$7.5 billion compared toUS$11.6 billion in 2010 backed by the tendency of some countries to deport Egyptians back to their mothercountries. Occupancy rates have also slumped severely below the normal levels of 65%-100% to a stagger-ing 0%-15%.Last but not least, government spending on infrastructure projects is forecasted to plummet by 30% directlyaffecting building materials sector dynamics (demand, supply, prices and margins) which are accordinglypredicted to shrink.

P OST R EVOLUTION SECTORS OUTLOOK February 21, 2011

Phone +202 3300 5728

Email [email protected]

Prime Research Team

Sector Outlook

Oil & Gas Positive

Banking Neutral

Pharmaceuticals Neutral

Building Materials

Cement Negative

Steel Negative

Contracting Negative

Automotive Negative

Fertilizers Neutral

Telecommunication Neutral

Food Neutral

Real Estate Negative

Tourism Negative

Sector Demand Supply Prices Revenues Margins

Oil & Gas Higher Higher Higher Higher Higher

Pharmaceuticals Constant Constant Constant Constant Constant

Fertilizers Constant Constant Constant Constant Constanttelecommunication Constant Constant Constant Constant Constant

Food Constant Constant Constant Constant Constant

Real Estate Lower Lower Lower Lower LowerTourism Lower Lower Lower Lower LowerBuilding Materials

Cement Lower Lower Lower Lower LowerSteel Lower Lower Lower Lower LowerContracting Lower Lower Lower Lower Lower

Automotive Lower Lower Lower Lower

Sector Loans Deposits Interest Rate Revenues Margins

Banking Lower Constant Higher Lower Lower

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E&P companies are expected to continue stretching their

projects worldwide to benefit from soaring prices

Oil & Gas companies are expected to witness higher selling prices and margins

We expect deposits to grow at a subdued rate of 5% over the course of 2011, compared to our earlier estimate of 15%

Average NPL ratio for large cap banks under coverage stands at 3.5% expected to reach 5.5%

ENERGY AND B ANKING SECTORS February 21, 2011

Energy Outlook-PositiveGenerally speaking, oil leads all commodities and hence when talking about energy, were mainly concernedabout oil price, supply and demand.Brent crude oil price has hiked to US$103/bbl amid fears of Suez Canal shutting down due to political instability

in Egypt. However, after fears have gone, it went down again to the current level of US$100.6/bbl. Similarly,OPEC basket price has surged up this month to US$96.12/bbl then eased to stand at US$91.12.Considering this recent progression in price, E&P companies are expected to continue and further stretch theirprojects worldwide to benefit from soaring prices and thus achieving higher margins. According to OPEC, totalsupply stands currently at 89.3 million barrels up from 88.1 million barrels in the previous month. On the otherhand, total demand is 89.9 million barrels versus 87.9 million barrels a month earlier. Furthermore, local de-mand is seen to grow steadily unaffected by Egypt turmoil backed by sound consumption of a great population.Consequently, oil supply dependant companies in Egypt are expected to proceed their business activities andbenefit from soaring oil prices by imposing higher selling prices in attempt of attaining higher sales but nothigher margins as cost rises.

Banking Sector Outlook-N eutralThe loans to deposits ratio averaged 55% over the past 5 years, hence a strong liquidity position. Even though

a panicking attitude by savers is expected to lead to outflow of funds, we believe that high interest rate givenby Egyptian banks will help in maintaining funds. Accordingly, we expect deposits to grow at a subdued rate of 5% over the course of 2011, compared to our earlier estimate of 15%. Similarly, loans are expected to grow ata lower rate, as investors and consumers alike, gradually regain confidence. Hence, we expect loans to show3% growth over the course of 2011 from our earlier estimate of 11%. Accordingly, L/D to stand at 51%.

At the current moment, we identify areas of risk as follows; Loans given to companies led by specific entrepreneurs, namely Ezz Group, TMG and Palm Hills. Total

loans given to the 3 companies amount to LE13.6 billion or 3% of total loans in Egypt. Hence, limited risk,especially that these loans are guaranteed by the corporation, rather than the entrepreneur;

Retail loans, due to the risk of lay offs. Currently, retail loans constitute 22% of total non-governmentloans. We expect this area to face difficulty in repayment;

Tourism sector, is another area of concern at the moment. Tourism comes under the services sector whichconstitutes 27% of total non-government loans. We, also, expect this area to face difficulty in repayment.

Large cap banks under our coverage enjoy coverage ratio higher than 100%. Accordingly, we believe that pos-sible increase in NPLs will not lead to devastating increases in provision expenses. Currently, average NPL ratiofor large cap banks under coverage stands at 3.5% expected to reach 5.5%, given the above mentioned risks.

Exposure to Treasuries, Egyptian Stock Mark et & Bank s Abroad Egyptian banks continue to maintain huge investments in government t-bills amounting to LE328 billion as

at November 2010 and representing 35% of total deposits, hence, a considerable portion of the govern-ment sovereign risk is transferred to the banking sector;

Exposure to the Egyptian stock market is limited where financial investments stand at LE42 billion, or 4.5%of total deposits;

Due to banks abroad stood at LE24.8 billion or 2% of total assets as of November 2011. Hence, very lowexposure and limited risk from outflow of funds.

We expect financial performance to be supported by income from high yield treasuries, in addition to main-tained momentum from service charges and fees. Over the coming period, we expect to see growing exporta-tion activities, hence, boosting service charges and fees. On the other hand, we expect revaluation losses fromfinancial investments to weigh negatively on non-interest income. Another negative is expected to come fromhigher provisioning charges.

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we maintain our estimates of per capita Pharmaceuti- cal expenditures at US$37.40 up by 10% Y-o-Y

Government price restrictions set on cost plus method

Maintained margins due to government restrictions on prices

Nitrogen fertilizers selling prices and feedstock are subsidized maintaining margins

Phosphate fertilizers sector has no government intervention and is directly affected by changes in international prices and hence higher exports and lower local sales are ex-

pected in 2011

Food is necessary good and is protected against any

political disturbance

P HARMACEUTICAL, F ERTILIZERS AND FOOD SECTORS OUTLOOK

February 21, 2011

Pharmaceutical sector-NeutralWe have a neutral sentiment on Pharmaceutical sector; thus, we havent revised our previous assumptions forthis sector. During the coming period of 2011, the Egyptian drug making business is poised to see a moderateincrease in demand. Given that pharmaceutics are inelastic in demand, people will remain consumers, yet at anincreased rate of consumption. Moreover, given that the per capita Pharmaceutical expenditure for Egypt isestimated at US$34 in FY10, we maintain our estimates of per capita Pharmaceutical expenditures atUS$37.40, up by 10% Y-o-Y.

Governments restrictions on pricing pharmaceuticals, achieved through a cost plus method, allows the govern-ment to set the price of the drug after reviewing all the costs incurred by the company. Therefore, due to thepharmaceutical industrys structure and government restrictions on pricing, prices are expected to remain un-changed. We expect the companies to witness an increase in its COGS backed by two factors: 1) 85% of rawmaterials used in the manufacturing of drugs are imported 2) Depreciation of the Egyptian pound against US$to reach approximately LE6.2/US$, which represents a burden on companies in the sector. Consequently, cus-toms for pharmaceutical raw materials have been dropped by the government from 10% to 2%; reducing pres-sures of higher costs.

Given that demand is expected to increase, producers are expected to increase production to accommodatecustomers demands. Thus, it is expected that revenues will increase; resulting from the sale of a larger numberof pharmaceutical drugs.

Although revenues and sales are expected to witness growth, margins for pharmaceuticals are expected to besustained at 40% and 30% for EBITDA and NI margins respectively; due to governments aim at calming andsustaining the public and not raising prices.

Fertilizers Sector Outlook-N eutralThe fertilizers production industry depends on the agricultural sector which produces food and thus protectedfrom any political disturbance. Therefore, local demand is seen constant as well as local supply for no new ex-pansions to come online in 2011. However, we are concerned about both phosphate and nitrogen based fertil-izers.Nitrogen based fertilizers, which the Egyptian farmers use the most, are subsidized by the government which isreluctant to liberalize prices in the foreseeable future. Nevertheless, natural gas, the main feedstock and source

of energy for all nitrogen based fertilizers producers, is also subsidized and provided at the fixed rate of US$3/mbtu. Moreover, producers are allowed to export only after governmental approval which usually comes aftersufficing the local market. International urea and ammonia prices currently reached all time highs since 2009 toUS$395/ton and US$445/ton respectively. Accordingly, local producers might achieve better sales volume andhence higher revenues but are not expected to witness any change in margins.Phosphate based fertilizers sector has no government intervention and is directly affected by changes in inter-national prices. Producers mainly depend on phosphate rock and sulfur as feedstock. Sulfur price followed thehike in oil price reaching US$180/ton. The said increase in cost is usually added to the selling price maintainingmargins. However, local sales volume is expected to decline slightly as some farmers may not apply phosphatefertilizers but given the facts that producers are able to export their production without governmental approvalin addition to global recovery and soaring wheat and corn prices, export sales will more likely increase signifi-cantly on higher sales volume and selling prices.It is worth mentioning that Egypt is a net exporter of fertilizers with an export value of US$725 million and atotal imports value of US$257 million in FY10.

Food Sector Outlook-NeutralConsumption in the food sector has been witnessing steady growth for the past few years and is expected toremain strong during the coming period. This is due to the fact that food consumption is mainly driven by therobust Egyptian population. Therefore, we have maintained our assumptions on consumption and per capitaconsumption of food at LE228 billion and LE2,800 during 2011, respectively.

Most of food prices in the local market have followed an upward trend since the beginning of 2010 associatedwith the increase in international prices driven by the decline in global production and increase in internationaldemand. Most of food companies were able to pass the increases to consumers, however the government willexert more efforts to reduce further increases in some prices.


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The sector will lose some of the traffic from roaming activities as tourists influx drop, however this drop will be offset by strong network usage coupled with the large population base and promotions offered by operators.

Profit margins are expect to decline by 1%-2% backed by increasing competition

Outbound tourism receipts are ex-

pected to be slashed to US$7.5 billion compared to US$11.6 billion in 2010 backed by the tendency of some countries to deport citizens of Egypt

High income level is assumed to follow wait and see strategy. On the other hand, the real demand which steam from middle and low income level is sup-

posed to decline by 17% Y-o-Y to 345,757 units.

Selling prices are predicted to decline by 10%-20%

Developers will face a declining margins and sales.

TELECOM, T OURISM AND R EA L ESTATE SEC-TORS OUTLOOK

February 21, 2011

Telecom Sector Outlook-N eutralThe government suspended mobile services in Cairo and some large metropolitan areas on January 28 and theservices returned back in the next day, however, SMSs and internet ban continued almost 5 days. Organizationfor Economic Co-operation and Development (OECD) estimates that the sector lost revenues of US$91 millionduring the suspension of the services. In addition, some branches of TE Data, Mobinil, Vodafone and telecomservices companies such as Ring, were looted. The sector will lose some of the traffic from roaming activitiesas tourists influx drop, however this drop will be offset by strong network usage coupled with the large popula-tion base and promotions offered by operators.

Mobile operators have also offered free minutes for clients as the market suffered a lack of scratch chargecards which negatively affected usage for a short time. We expect that further drops in calling prices will bemotivated by normal market competition and will be offset through more network usage.

Telecom operators sales are not expected to slump in 2011 due to intensive network usage and more internetaccess through mobiles in addition to the new facilities offered by operators such as e-finance.

We expect margins to witness a slight decline ranging between 1% and 2% due to the increased market com-petition across operators.

Tourism Sector Outlook-NegativeTourism sector, which is one of the most important financial resources of the Egyptian economy, has plum-meted significantly since the outbreak of the revolution. Total losses have reached US$1,600 million since thebeginning of the events till now. On the other hand, Occupancy rate dropped below the normal levels from65%-100% to 0%-15%. We believe that the current situation will continue during 2011, hence the sector out-bound tourism receipts are expected to be slashed to US$7.5 billion compared to US$11.6 billion in 2010backed by the tendency of some countries to deport citizens of Egypt. Tourism activities are assumed to focuson inbound tourism which will be enhanced by lower average rate per room. We expect the sharp decline intourism demand to create a downward pressure on average rate per room and profit margin.

Real Estate Sector Outlook-N egativeThe Egyptian real estate developers witnessed increasing legal risks which raised from facing court case allega-tions over their land bank. We believe that the uncertainty regarding the legality of land purchase contracts willcreate a negative sentiment on the Egyptian real estate market. Total demand on real estate was expected toreach 432,197 units, of which 61% is concentrated among low income, 6% high income level and 33% middleincome level. After 25 January 2011, we suppose that the demand for real estate will not be speculative butwill reflect a real demand. Therefore, high income level is assumed to follow The wait and see strategy. Onthe other hand, the real demand which stems from middle and low income levels is supposed to decline by17% Y-o-Y to 345,757 units. We also expect the developers to postpone launching of new projects. Therefore,we have reduced our supply estimates to 162,598 units, down by 4%.

Developers who target high income level were reluctant to reduce their prices in 2010. They chose to easetheir selling strategy in terms of payment facilities and extended payment periods. We expect those developersto reduce their selling prices by 10%-15% in 2011 with the decline in demand. Developers who target middleand low income levels reduced their selling prices by 15%-20% in 2010. As a consequence of the slowdown inreal demand from middle and low income levels, we expect a further decline in prices by 10%-20% in 2011 toattract new buyers. We believe that the developers will focus of speeding up constructions of the currently heldprojects to match their delivery schedules. All developers are expected to witness a slowdown in sales figuresin 2011 by approximately 20%-30%. Accordingly, they are facing a decline in their advance payment accountswhich represents the major sources of financing for real estate developers.

Furthermore, the Egyptian real estate companies are forecasted to face a declining margin pattern associatedwith the decline in selling prices and the expected additional charges driven from acquiring land bank at lowerthan fair value.


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Government spending on infrastructure

projects is expected to decline by 30% in FY11

We anticipate that local demand will

plummet by approximately 13% (to reach 5.6 million tons by the end of the current year.

The forecasted dwindle in local demand and supply after the current chaos will subsequently lead to a slump in sales volumes, local prices and profit margins.

In our perspective,all steel producers are to witness slowdowns in sales due to expected decline in their key revenue driver.

A decline in total cement production and consumption by 12% and 14%

Local companies will focus on the export market

CONTRACTING, S TEEL AND CEMENT SECTORS OUTLOOK

February 21, 2011

Contracting Sector Outlook-NegativeWith a temporary government currently managing the country and amid growing concerns over political stabil-ity, the government will focus on subsidies and inflation curbing. In addition, the government may postponenew mega infrastructure projects till a new president is elected and a new government policy is initiated. Thismeans that current temporary ministers will not be able to formulate plans to long term projects and will onlyfocus on completing previously scheduled projects at a slowing rate. The private sector will be reluctant to initi-ate mega projects in 2011 for political and economic concerns. Consequently, the current government will tryto stimulate projects under the system of PPP during the next months of the year. Accordingly, it is predictableto see contractors accepting low margins in 2011 to obtain contracts from the private sector.

Steel Sector Outlook-NegativeThe prevailing circumstances in the Egyptian steel market specifically definitely leaves a lot of question marksfor many investors today, given both the political allegations and operational risks the sector may be facing. Interms of the local steel dynamics, we have previously expected that the total local consumption and productionfigures would reach 6.2 million tons and 6.89 million tons respectively by the end of FY11. However, after theincidents witnessed on January 25, 2011, we have accordingly revised our projections expecting a more pessi-mistic outlook in general, if not a total change in the market dynamics. The slowdown of construction and in-frastructure activities will have a major effect of the demand for the basic building materials involved . Hence,

we anticipate that local demand will plummet by approximately 13% to reach 5.6 million tons by the end of thecurrent year. This will directly impact the local supply which will pretty much follow the lead also slumping byan estimated 7% to 6.2 million tons in FY11.

Local steel prices as of January 2011 had shot up to LE4,500/ton driven by the substantial increase in the inter-national raw material and steel prices which reached US$800/ton. Given that the global raw material pricesaccount for 40% of the total COGS, steel producers chose to maintain their margins by rising local prices inattempt of passing on the hike to end consumers . At present, we don't believe that January price levels will bemaintained. The forecasted dwindle in local demand and supply after the current chaos will subsequently leadto a slump in local prices to an average LE4,000 ton for FY11, down by 11%. Our main concern yet remains inhow steel producers will be able to sustain margins given the hiking international raw material prices but alsocope with the declining market in Egypt.

In our perspective, all steel producers are to witness slowdowns in sales volumes, average selling prices and

margins . Focusing more on margin forecasts, in the so called growth period, the average market gross profitmargins ranged between 15%-25%. Given that we are now to encounter a declining phase, we anticipate thatthe margins will decline to range between 10%-14%. Furthermore, we expect the steel companies to recordnet losses in 2011.

Cement Sector Outlook-N egativeFollowing the steel industry, the slowdown of construction and infrastructure activities will have a major effecton the supply and demand of the cement sector. The new 12 licenses that were expected to be launched thisyear to meet local demand will be postponed. We have previously anticipated that the total local consumptionand production figures would reach 53.4 million tons and 52.2 million tons respectively by the end of FY11.However, after the current situation, we have accordingly reduced our forecasts for the production and con-sumption in FY11 to register 45.7 million tons and 45.7 million tons respectively, a decline of 12% and 10.7%respectively from the previously forecasted figures.

We believe that companies will focus on the export market to offset the decline in the domestic salesand benefit from the depreciation of EGP against US$. Meanwhile, any further deterioration in EGP/USD shouldencourage the foreign importers to buy Egyptian cement which will be equivalent to approximately US$88/tonsin FY11. Consequently, we increased our assumption of exports from 10% to 20% of total production to capi-talize on high export margins.


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